US confectionery giant Hershey has a vision for growth. The company, which has long faced questions about its US-centric focus, is now looking to overseas markets to fuel sales expansion. Michelle Russell caught up with Thomas Joyce, vice president of customer and industry affairs for Hershey, to find out more about the challenges and opportunities presented by international markets.
Around 90% of Hershey’s sales are domestic and the company has a long history of driving sales in the US without looking overseas for growth. At home, Hershey has built up a stable of well-invested iconic brands that have been childhood favourites for generations of Americans. But this strategy has its limitations. The US chocolate market is marked by intense competition and lacklustre growth. There is little room to drive sales gains here.
As a consequence, Hershey has turned its attention outward and is focusing in on what it has identified as the key markets of Brazil, Mexico, India and China. Currently, the group generates sales in the region of US$700m overseas and it hopes to grow this figure by 30% over the next two years.
It is perhaps telling, then, that VP of consumer and industry affairs Thomas Joyce is representing Hershey at ISM, a global trade show for the confectionery sector held in Cologne.
“We have a strategy. It is a global strategy. It is to grow our presence and our business in North America, expand our core brands and focus on global markets,” Joyce tells just-food. “We are US-centric but we also have selected focus markets: China, Mexico, India and Brazil. But with all that said, we still have to make sure the US continues to be successful.”
Indeed, Hershey has outlined ambitious plans to increase distribution and build its brands overseas. Speaking on the group’s earnings conference call yesterday (31 January), CEO John Bilbrey reiterated plans to grow sales outside of the US and Canada to US$1bn by 2014.
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In China, the company has already made its mark. Hershey operates a joint venture in the country with Korean firm Lotte Confectionery. Formed in 2007, the JV manufactures Lotte and Hershey products for the Chinese market.
The venture was formed to enable Hershey to expand its business in China as well as increase its presence in high-potential Asian markets, including Korea, Japan, Taiwan, the Philippines and other markets. “What we make in China, we are selling some of that in the Middle East,” Joyce adds.
Another key market for Hershey is India, and recently more so, since it took full control of a joint venture it held in the country with Indian conglomerate Godrej Industries last year.
Joyce explains the rationale behind the decision to buy out the business.
“When you have a partner, it’s no longer your decision, it’s our decision. Godrej was a great partner but our decision was made that we were going to take advantage of an opportunity and purchase the whole thing.
“You come to a point in an agreement when you have to continue and either they take it or you take it, and we took it. Godrej was tremendous in getting us started and helping us into the marketplace. Infrastructure is relative to retail and it dictates the growth of chocolate in some countries. It does in China and India, so as populations are paid more disposable income and retailers like Carrefour and Wal-Mart make investments in those countries, you have some opportunities to grow into these markets and grow products there.”
But Joyce is quick to point out that while most companies have taken an interest in China and India “in quadrants”, that Hershey is not solely focused on opportunities in the BRIC markets.
Aside from Africa, Joyce does not expand on where the Kisses maker is targetting. However, he insists that Hershey is in it for the long-haul: “We have a very solid, conservative approach to growing our business globally and we are not looking for a quick win, we want to make progress and people in our organisation all know where we are heading as a company.”
One market that Hershey is keen to have a greater presence in, but that has presented numerous challenges for the company, is Europe. Its venture here has proved less successful than its foray into countries elsewhere.
Hershey began it European attempts in 1977 when it acquired a 16% interest in Swedish confectionery firm AB Marabou. It didn’t make another purchase until 1991 when it acquired German chocolate maker Gubor Schokoladen. The takeover, however, failed to meet Hershey’s expectations. A year later, it scooped an 18.6% interest in Norwegian confectioner Freia Marabou, but then promptly sold the stake the following year after it was outbid for majority control by Philip Morris.
Hershey continued to struggle to make an impact in Europe: In 1993 the group acquired Italian confectionery business of Heinz Italia, which primarily gave it the Sperlari brand, a leader in non-chocolate confectionery products in Italy. Shortly after, it bought Dutch confectionery firm Oversprecht. Three years later, however, Sperlari was sold.
“It’s not like we haven’t tried,” Joyce says. “We have tried to acquire and develop our business in Europe but we have had little success because it is so well-developed.”
Nonetheless, the confectioner has kept its eyes on the prize in Europe and now appears to have developed a plan focusing on its strengths.
“We have developed a strategy which will allow us to not take our entire portfolio but five brands to focus on: Kisses, Reese’s, Hershey, Ice Breakers and Jolly Rancher.”
These brands, Joyce says, are the key brands Hershey will take into new markets. But this growth may also come through mergers or acquisitions, he points out.
“Godrej is a good example of how we do that. It does exist and it has to. We certainly have an objective that we are going to grow our business. We call it H20 and in that is organic growth, as well as growth through M&A and innovation.”
Innovation, Joyce suggests, is a key pillar supporting that growth. For Hershey, he says, the innovation focus is now “fewer, bigger, better and it’s sustainable”.
“We are pursuing innovation not only in chocolate but sweets and refreshments, some of that might be through M&A. It’s about producing dark chocolate, using maybe fresh fruit and meeting consumer demand for these types of products.
“It takes a lot for companies to choose innovation. Consumers want innovation. Health and nutrition, we see that as a trend. We are aware that the consumer is looking for a healthier lifestyle and better-for-you foods and we try to make the best products we can. We allow the consumer to make the decision on what they are going to enjoy.”
For some companies in the global confectionery market, the innovation drive has been hampered by rising raw material prices.
Joyce says this is not exclusive to the food and confectionery industry but is a problem all industries are facing.
“It’s a serious problem, but consumers don’t think about that. They want it now, they want it fresh. You are seeing a lot of investment by companies growing raw materials in Africa right now.”
Nevertheless, Joyce suggests Hershey has a handle on this challenge. “Our strategy is solid and it is working for us,” he insists.
While downbeat consumer sentiment has proven problematic for many operating in the FMCG space, Hershey has benefited from the tough economic conditions, Joyce suggests.
“When the economy is down our business is usually very good and when there is a robust economy our business softens a little. Candy is an affordable snack and when the economy is soft, consumers are looking for something they can buy for their family and our products fall into that category. We have been very successful throughout the soft economy. It’s not like we haven’t seen an impact but our business is more solid right now.”
Indeed, in its full-year results, Hershey booked a 5% increase in profit to $660.9m, while sales were up 9.3% to $6.64bn.
“We have a well-run company with great leadership and a great strategic plan where people are working very hard to make sure we execute that strategy.”