Hershey Co. $HSY

A Chocolate Empire Facing New Realities

Notice: I have no positions in any companies mentioned in this article, and this piece is not investment advice. It is essential to conduct your own thorough research before making any investment decisions. As always, this is for educational purposes only.

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From Caramels to Snacking Powerhouse

The story of Hershey is inexorably intertwined with the life and vision of its founder, Milton S. Hershey. His journey, far from a tale of overnight success, exemplifies the qualities of persistence, innovation, and social responsibility that have come to define the company. It's a story that deserves to be told not just in neatly wrapped squares of milk chocolate but in the annals of American entrepreneurial history.

Early Struggles and the Birth of a Candy King:

Milton Hershey’s entry into the world of confectionery was anything but auspicious. Born in 1857 in Derry Township, Pennsylvania, he embarked on his first candy-making venture in Philadelphia at the tender age of 19 after a four-year apprenticeship. This venture, like his subsequent attempt in Chicago, ended in failure. Undeterred, Hershey returned to his roots in Pennsylvania, establishing the Lancaster Caramel Company in 1883. This time, success was within reach. His caramels, made with fresh milk, were a hit with consumers, laying the foundation for his future empire.

The Pivotal Bet on Chocolate:

Hershey’s destiny shifted dramatically after attending the 1893 World’s Columbian Exposition (aka “World’s Fair) in Chicago. It was there that he encountered chocolate-making machines for the first time, igniting a passion that would change the course of his life and the confectionery industry itself. In a move that must have seemed audacious at the time, Hershey sold his thriving caramel business in 1900 for a cool $1 million (a staggering sum in those days) to focus entirely on chocolate. To skeptics who questioned his decision, he remarked, "Caramels are just a fad, but chocolate is a permanent thing". This conviction would prove to be as insightful as it was bold.

Little did Milton know the future success of his creations… and acne, oh the acne! (actually, chocolate does not create or worsen acne…)

Building a Chocolate Town and a Legacy:

Hershey's ambition extended far beyond merely manufacturing chocolate. He envisioned an entire community built around his factory, a place where workers and their families could thrive. In 1903, construction began on a chocolate plant in his hometown of Derry Church, Pennsylvania, a town that would soon become synonymous with the Hershey name. The town of Hershey was designed to be an affordable and pleasant place to live, though early iterations of the factory lacked windows, purportedly to minimize distractions for workers. Recognizing the importance of employee morale, Hershey invested in leisure activities, establishing the foundations of what would eventually evolve into the beloved Hersheypark.

Iconic Innovations and a Commitment to Community:

With his chocolate factory up and running, Hershey's genius for innovation was unleashed. The now-iconic Hershey’s Milk Chocolate Bar hit the market in 1900, capturing the taste buds of a nation and establishing Hershey as a household name. Hershey's Kisses, those ingeniously simple yet irresistible chocolate drops, followed in 1907, forever changing the landscape of bite-sized treats. Other innovations followed in quick succession: Mr. Goodbar (1925), Hershey's Syrup (1926), semi-sweet chocolate chips (1928), and the Krackel bar (1938), cementing Hershey's dominance in the confectionery aisle.

Hershey's commitment to his employees and community was unwavering. During the Great Depression, while many businesses faltered, Hershey initiated a massive construction program known as "The Great Building Campaign", providing jobs for over 600 workers and resulting in the construction of the Hotel Hershey, the Hershey Community Theatre, and other landmarks that stand to this day. His dedication to his workers, whom he considered family, extended to providing housing, a bank, a hotel, public schools, churches, parks, a zoo, and even a trolley system in his model town. This focus on community well-being was not merely altruism; it was a core element of Hershey’s business philosophy, fostering loyalty and productivity among his workforce.

A School for Disadvantaged Children: The Sweetest Legacy:

Perhaps Milton Hershey’s most enduring legacy is not a chocolate bar but an institution: the Milton Hershey School. Unable to have children of their own, Milton and his wife, Catherine “Kitty” Sweeney, whom he married in 1898, founded the Hershey Industrial School in 1909 with the aim of providing a home and education for orphaned boys. This act of extraordinary generosity, rooted in a deep-seated belief in the power of education to transform lives, showcased a different side of the confectionery magnate – a compassionate philanthropist who understood that true success went beyond profits and balance sheets.

The Hershey Company Today: Navigating a New World of Sweetness:

Milton Hershey passed away in 1945 at the age of 88, leaving behind a company and a legacy as impactful as any in American history. The Hershey Company he founded has grown into a global confectionery behemoth, but it faces new challenges in a rapidly evolving market. The rise of digitally native brands like MrBeast's Feastables, leveraging the power of social media and direct-to-consumer marketing, has upended traditional models and forced legacy companies like Hershey to adapt.

The company's recent strategic acquisitions, expanding its portfolio beyond chocolate into the broader snacking market, indicate an awareness of these shifting dynamics. Whether Hershey can replicate its founder's success in navigating the complexities of a new era remains to be seen. However, one thing is certain: the spirit of innovation, social responsibility, and unwavering commitment to quality that Milton S. Hershey instilled in his company will continue to shape its destiny for generations to come.

Hershey's business model centers on the production and distribution of confectionery and snack products. Their revenue streams include:

• Chocolate and Non-Chocolate Confectionery: This core segment, anchored by iconic brands like Hershey's, Reese's, Kisses, and Twizzlers, remains their primary revenue driver.

• Salty Snacks: Recognizing the growing consumer appetite for savory snacks, Hershey's strategically diversified into this market by acquiring brands like Dot's Pretzels, SkinnyPop, and Pirate's Booty.

• Pantry Items: Hershey's leverages its brand strength to offer pantry staples like baking ingredients, toppings, and beverages, further diversifying its revenue base.

• International Sales: While North America remains their stronghold, Hershey's continues to expand its global footprint, generating revenue from roughly 80 countries.

• Licensing and Owned Retail: Licensing agreements allow third-party manufacturers to utilize Hershey's brands, while owned retail operations, like Hershey's Chocolate World, provide alternative revenue channels.

Sweet Profits, But Margin Pressures Loom

Historically, Hershey's has enjoyed strong financial performance, consistently rewarding shareholders through dividends and share repurchases. However, recent years have seen pressure on their operating margins due to:

• Rising Input Costs: Hershey's, like many in the food industry, has faced significant inflationary pressures, particularly on key inputs like cocoa.

• Increased Investment in Growth: Strategic acquisitions and expansion into new product categories require substantial capital outlays, impacting short-term profitability.

Despite these challenges, Hershey's has maintained a healthy gross profit margin (44.8% in 2023), demonstrating its ability to manage costs and strategically implement price increases. However, their operating profit margin has yet to fully recover to pre-2022 levels, highlighting the tightrope walk between profitability and growth investments.

Hershey doesn’t initially seem like a gangbusters success of a stock, until you consider the dividends received along the way…

A Century-Old Legacy of Sweet Success and Strategic Evolution

1894: Milton S. Hershey establishes the Hershey Chocolate Company, laying the foundation for a chocolate empire.

Early 1900s: Hershey's Kisses are introduced, quickly becoming a flagship product, and the company goes public on the New York Stock Exchange.

Mid-20th Century: Hershey's navigates challenging economic times, even supplying the military with Field Ration D bars during World War II.

Late 20th Century: The company embarks on a period of acquisitions, expanding its product portfolio and market reach, but also experiences some setbacks with diversification efforts (e.g., pasta and restaurants)

Early 21st Century: Hershey's acquires Krave Jerky, signaling a more focused move into the savory snack market.

Mid-2010s - Present: Under CEO Michele Buck, Hershey's doubles down on its "snacking powerhouse" strategy, acquiring brands like SkinnyPop, Pirate's Booty, and Pretzels.

From Candy Aisles to the Broader Snacking Landscape

Hershey's primarily targets the North American market, where it holds a dominant position in the confectionery sector. However, the company's push into salty snacks and pantry items broadens its reach into the more extensive and rapidly growing global snacking market.

The snack food aisle has ballooned since ol’ Milton’s days

This expansion brings new competitive challenges. While Hershey's enjoys a strong brand moat and extensive distribution network, it faces increasing competition from:

• Established Confectionery Players: Long-standing rivals like Mars Wrigley and Ferrero continue to innovate and vie for market share.

• Digitally Native Brands: New entrants like MrBeast's Feastables, leveraging social media and direct-to-consumer marketing, pose a unique challenge, particularly among younger demographics.

Hershey's must adapt to this evolving landscape by continuing to innovate its product offerings, invest in digital marketing capabilities, and effectively communicate its brand value to a new generation of consumers.

Strong Brand Equity and Distribution Prowess, But Can They Adapt?

Hershey's possesses several competitive advantages:

• Iconic Brand Portfolio: Their brands are deeply ingrained in consumer consciousness, evoking nostalgia and driving habitual purchases.

• Extensive Distribution Network: Their reach across various retail channels ensures product accessibility and facilitates rapid scaling of new offerings.

• History of Innovation: Hershey's has demonstrated an ability to adapt to changing consumer preferences, as evidenced by its successful forays into sugar-free and better-for-you segments.

However, certain aspects of Hershey's business model warrant scrutiny:

• Reliance on Price Increases: While effective in the short term, frequent price hikes to combat inflation could lead to consumer pushback and volume decline, especially in the face of value-oriented competitors.

• Digital Marketing Gap: Compared to digitally-native brands, Hershey's has lagged in leveraging social media and influencer marketing to engage younger consumers.

• Integration of Acquisitions: Successfully integrating acquired brands, particularly in new product categories, requires careful planning and execution to ensure brand consistency and capture synergies.

Balancing Growth and Shareholder Returns

Hershey's has historically maintained a debt-reliant capital structure, utilizing a combination of revolving credit facilities and bank lines of credit to fund operations and acquisitions. This approach provides access to capital but requires careful debt management to mitigate financial risk.

Going forward, Hershey's capital allocation decisions will be critical. Balancing investments in:

• Core Business Growth: Maintaining dominance in the confectionery market requires ongoing innovation and marketing support for established brands.

• Strategic Acquisitions: Continuing to diversify into new snacking categories could fuel long-term growth, but acquisitions must be carefully chosen and integrated.

• Shareholder Returns: Maintaining their history of dividends and share repurchases is essential for attracting income-oriented investors.

Can Hershey's Stay Sweet in a Changing World?

Hershey's faces a future marked by both opportunities and challenges. The growing global snacking market presents significant growth potential, but competition is intensifying, and consumer preferences are evolving rapidly.

Success will depend on Hershey's ability to:

• Innovate and Premiumize: Expanding its portfolio of better-for-you, premium, and indulgent offerings will be crucial to capturing evolving consumer tastes.

• Embrace Digital Transformation: Hershey's must enhance its digital marketing capabilities to connect with younger, digitally-savvy consumers.

• Navigate Input Cost Volatility: Effectively managing commodity price fluctuations through hedging and sourcing strategies will be essential for protecting margins.

• Maintain Capital Allocation Discipline: Balancing investments in growth, acquisitions, and shareholder returns will be key to long-term value creation.

Hershey's legacy is undoubtedly impressive, but their future success hinges on adapting to a new era in the snacking industry. Whether they can retain their crown as a snacking powerhouse remains to be seen. However, their willingness to evolve and confront these challenges head-on suggests that Hershey's is determined to keep its story sweet for generations to come.