BMI on the Hershey European Vision

December 14/Hershey, Pa./Business Monitor International Ltd. (BMI) -- Hershey has announced plans for a push into Europe as it seeks to reduce its reliance on the mature U.S. market. Hershey has said it will build on its extensive relationship with U.S. retailer Wal-Mart to push its products into the European market, and as part of this process, Wal-Mart owned Asda will start selling Hershey products on an exclusive basis in the U.K. from 2011. Hershey's revenue growth has underperformed its peers over the last five years, and BMI has consistently said that it needs to do more in countries outside of the U.S., including in emerging markets. However, BMI believes that the firm's inability to take part in the consolidation within the confectionery sector will hinder progress in this direction

Hershey is the market leader in the U.S. but operates in a mature domestic market and has failed to use its size advantages to capitalise on the tremendous growth opportunities in emerging markets. It derives just over 14% of its revenues from outside the U.S., and this lack of international progress has led to stagnating revenues and an underperforming share price since 2005.

BMI partly attributes this lack of progress to the firm's unwieldy management structure. Hershey is controlled by the charitable Hershey Trust which owns 78% of the firm's voting stock. The trust has made it clear that the trust will not sell its stake even if the company's performance continues to be lackluster. While this position prevents Hershey being taken over, the trust's unwillingness to dilute its equity stake also limits the firm's ability to raise funds for expansion and acquisitions -- a key reason why it was unable to mount a serious challenge to acquire U.K.-based Cadbury, which would have been an ideal partner thanks to its large emerging market operation.

With Hershey's main domestic rival Mars strengthened after its acquisition of chewing gum maker Wrigley and its other principal rival Kraft bolstered by the acquisition of Cadbury, its U.S. sales look likely to be squeezed as these two firms call on their increased resources to secure greater shelf space.

With Hershey only generating 14% of its sales outside of the U.S., it currently has no other sizeable markets to fall back on and international expansion is a clear priority. However, the firm's previous attempts to expand its international base have limited success due to the distinct flavor of Hershey's chocolate products, which appeal to U.S. consumers but have proven to be difficult to sell to consumers in other markets, and the entrenched position of existing operators.

One possible move that could circumvent the problem of limited financial resources would be to forge a tie-up with a multinational confectionery company that is exposed to emerging markets. However, with the position of the Hershey Trust complicating any such deal that involved giving up an equity stake, this move would be difficult to formulate.

Instead, the firm looks intent on building its international base organically, and its close relationship with U.S. retailer Wal-Mart may well be a way to kick start this process. The firm has said it will adjust its products to exclude genetically modified ingredients to cater to the European market, but it is the more fundamental issue of taste that could be a deciding factor in the firm's European rollout. BMI sees the new exclusive deal with Asda as a key test of the potential of the firm's portfolio, with another failure perhaps requiring a complete rethink of its international products and an acceptance of the fact that consumers outside of the U.S. are never going to be fully enamoured with U.S.-style chocolate.

From the December 20, 2010, Prepared Foods E-dition