Only 15% of Hersheys sales are outside US

Only 15% of Hershey's sales are outside US

A piece of US chocolate heritage is set to pass into the history books.

Hershey, the confectionery giant behind brands like Reese's and Kisses, plans to end production at its 19 E. Chocolate Avenue plant in its namesake town – the original factory built in 1905 by the company's founder Milton Hershey.

On Friday (4 June), union members at the plant approved Hershey's proposals, which will see the facility remain in use – but only for administrative purposes. 

Production will move to a second factory in Hershey and, while the chocolate maker is said to have lined up an investment of US$200m, the reorganisation will ultimately lead to around 450 job cuts, according to reports.

Hershey's decision seems to have passed without much comment in the US (one can only wonder at the reaction if Kraft Foods decided to end production at Cadbury's founding Bournville site in the UK) and, although some workers have expressed dismay at the decision, there has been a reluctant acceptance that, in order to keep production in Hershey in some form, the company's plans had to be waved through.

One employee told The Patriot-News that Hershey would have likely moved production to Mexico (as it has done in the past) if its plans were blocked.

The Hershey board meets in the coming weeks to, as is expected, approve the revamp, which the company believes will improve efficiency from its US manufacturing operations.

As such, the decision to end production at the E. Chocolate Avenue plant after 105 years is a continuation of Hershey's long-running moves to streamline its manufacturing and supply chain, increase efficiency and drive down costs to free up cash to breathe fresh life into its brands.

Hershey's Global Supply Chain Transformation programme started in 2007 and has seen the company build that site in Mexico, cut production lines by a third and reduce its workforce.

With the company still over-dependent on a stagnant US chocolate market for over 80% of its sales, such “transformation” is needed to boost sales and to keep Hershey's bottom line ticking over.

True, the company had a bumper start to the year, with the group reporting a near-doubling in profits and seeing a strong Easter and higher spending on marketing driving sales.

However, some have warned that the rest of the year will be challenging for Hershey. Sanford Bernstein analyst Alexia Howard warned that pressure on commodity costs and the fact that Hershey's moves to increase prices over the last 18 months had had its impact on results meant that the company's performance during the rest of the year was likely to be more "modest".

There are also concerns that Hershey will face stiff competition in the US premium chocolate category as the country's economy improves. "We ... worry about the company's ability to sustain top-line growth once the consumer begins to trade up again in the chocolate category, since Hershey has exited many of its premium products over the past year," Howard wrote to clients after Hershey's first-quarter numbers.

So, with Hershey facing pressure on its top line, and with the company coming to the end of its three-year plan to restructure its supply chain, where can the business go?

The answer, at least for Hershey watchers, is a familiar one: abroad.

The company has long been criticised for being too dependent on its home market and, although it has fledgling ventures in markets like India and China, it needs to pick up the pace of its expansion into fast-growing markets.

"The market is overly optimistic regarding Hershey’s prospects as more than 85% of sales stem from the mature domestic market," Morningstar analyst Erin Swanson tells just-food.

Earlier this year, Hershey president and CEO Dave West defended the company's international strategy and said organic growth was "enough" to keep the business competitive outside the US.

However, he indicated that the company was "actively" looking at deals overseas. "Our willingness to partner, where it makes sense, in the face of a category undergoing global change will give rise to many options," West said.

This week, Hershey's partner in India, local firm Godrej Beverages & Foods, confirmed to just-food that one of the US firm's flagship brands, Kisses, was set to be launched in the country.

It is a necessary beginning in India for Hershey, although Cadbury dominates the country's chocolate market.

However, as the company waves goodbye to its past in its hometown, it needs to more forcefully embrace the future to thrive in the world's chocolate business.