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Hershey's chocolate spreadHershey Co. pursues ambitious global growth strategy on several fronts

By , - Last modified: July 5, 2012 at 5:22 PM
Countries with a large Hershey presence — indicated by the banners — are the U.S., Canada, Mexico, Brazil, India, China, Korea and Japan. For a breakdown of facilities, partnerships and subsidiaries in those countries, see “Chocolate globe trekker,” below.
Countries with a large Hershey presence — indicated by the banners — are the U.S., Canada, Mexico, Brazil, India, China, Korea and Japan. For a breakdown of facilities, partnerships and subsidiaries in those countries, see “Chocolate globe trekker,” below.

When The Hershey Co. outlined its five-year strategy to bulk up revenues to $10 billion by making significant inroads on the international stage, the company set out on a path that analysts find necessary for it to grow.

But analysts also caution that it will include an uphill slog in some markets.

On June 25, the Dauphin County-based company outlined its new global strategy. It includes a revenue increase goal of 54 percent by 2017, with a keen focus on expanding its global presence through mergers and acquisitions, as well as bolstering its five global brands.

Basically, Hershey plans to use the Hershey's, Reese's, Ice Breakers, Kisses and Jolly Rancher candies to grow abroad, according to its presentation to investors. The company also plans to use what it's learned in the U.S. about consumer satisfaction, process improvement and marketing to better approach international markets.

"This process was started in our North American businesses, and we're rolling out these best practices to our international businesses as well," Hershey President and CEO John P. Bilbrey said during the presentation.

Finding partners

Key in its global expansion will be new deals with companies to be acquired or to partner with so Hershey can get a foot on the global ledge that's dominated by Cadbury parent Illinois-based Kraft Foods Inc., Virginia-based Mars Inc. and Switzerland-based Nestlé.

But Hershey isn't venturing overseas alone, analysts said.

"They, like other consumer companies, are seeing slow growth in the U.S., and they're looking for more international opportunities," said Jack Russo, an analyst with St. Louis-based financial adviser firm Edward Jones.

In the near term, it's good to be a North American-centric company such as Hershey because of the problems in Europe, Russo said. But that's going to last only so long, and Hershey needs a better way to expand its business beyond available sales in North America.

"Long term, you want to be in some of these foreign markets," he said.

However, Hershey hasn't always been good at making those inroads, said Erin Lash, an analyst with Chicago-based Morningstar Inc. In that respect, its revenue goals are well above what analysts initially expected during the next several years, even though everyone has been watching and waiting for Hershey to make a big global push, she said.

"We expected growth in international markets to be a priority since last year," she said. However, the company didn't move as quickly as some thought it would.

Although Hershey sells its products in more than 70 countries, its share of the international market is just

4.7 percent, well behind Kraft, Mars and Nestlé, according to Hershey.

"We're a confectionary leader in the largest and most profitable country," Bilbrey said in his presentation. "However, growth for us is even greater outside this market."

That's why Hershey could be expected to embrace acquisitions, mergers, joint ventures and

partnerships that mirror some of its previous deals, Lash said.

For example, Hershey entered a joint venture in 2007 with Pandurata Netherlands B.V., a Brazilian baked-goods company known for its Bauducco brand. Hershey owns 51 percent of the company, Hershey do Brasil.

"These local firms are more familiar with tastes and markets," Lash said. That familiarity allows Hershey to learn the ins and outs of the foreign market, while sharing the expansion risk with its partners.

Hershey counts Brazil alongside the Middle East, North Africa and Southeast Asia as markets where it can expand in the near future.

Hershey also has a joint venture — Godrej Hershey Ltd. — with India's Godrej Group, a diversified manufacturer of everything from appliances to food. However, Indian media outlets have been reporting that the relationship is on the rocks and that Hershey plans a buyout so it can go it alone.

Hershey has no announcements pending on India, and it doesn't comment on market speculation, company spokesman Jeff Beckman said recently.

However, Hershey has been clear that it isn't happy with the progress of the joint venture that's existed since 2007. In its strategy announcement to investors, Hershey noted there's been underinvestment in brand building, lack of a differentiated portfolio and high sugar costs in India.

Hershey counts India alongside emerging markets in West and South Africa and Eastern Europe that it is targeting for future growth.

"India is a huge market, but one of the things is that Cadbury maintains a large presence there already," Lash said. "To unseat a large and established player is time-consuming and costly."

Initial focus: China, Canada, Mexico

More important to Hershey in the immediate future is expanding its market share in Canada and Mexico, as well as growing in China, according to the company's presentation.

China is going to be huge for Hershey, Russo said. It has a growing middle class with expendable income, and Hershey is already seeing success there with a limited footprint.

Hershey pointed to net sales of Kisses in China, which have grown 97 percent since 2007, with a massive spike in 2011. Packaging redesigns and promotions have played a big part, and Hershey is looking to bring some of those lessons to its other products for greater diversity in China and other Asian markets.

How exactly Hershey expands in China remains to be seen, Russo said. It could mean more manufacturing and distribution there, but organic growth is probably more likely compared with an acquisition because of the barriers the Chinese government places on such deals.

"You just attack it one year at a time, and sometimes it'll surprise you how big your presence can get," Russo said.

Both analysts said Hershey's direction is decidedly different from the past, when the company rarely talked about its acquisitions, particularly international ones. But a few things have changed, including the company's CEO. Bilbrey took over last year.

"It reflects the new leadership at the company," Russo said, "and the change in direction."

Chocolate globe trekker

The Hershey Co. is one of Central Pennsylvania's largest and most iconic companies, but traditionally it has lagged behind competitors on the world market.

Its latest strategy looks to expand sales to $10 billion in five years by aggressively growing that international presence to compete with the likes of Mars Inc., Nestlé and Kraft Foods Inc., which owns Europe's well-known chocolate maker Cadbury. Hershey is the fourth-largest confectioner with 4.7 percent of the global market share, behind Kraft's controlling 14.8 percent, Mars's 14.1 and Nestlé's 7.9 percent, according to Hershey's latest global strategy presentation.

Hershey sells its products in more than 70 countries, manufactures in 14 countries and has joint ventures and partnerships with other companies that could expand in time. Here's a look at significant locations and partnerships in Hershey's global footprint:

Sources: U.S. Securities and Exchange Commission, The Hershey Co.

Hershey's plan

Here's a breakdown of The Hershey Co.'s new global strategy:

The goal

Increase revenue 54 percent to $10 billion by 2017, with a balance of 50 percent of its sales growth coming from international markets. The company's revenue for 2011 was $6.5 billion, with about 70 percent of its growth coming from the U.S. and Canada.

The strategy

1. Focus on five brands: Hershey's, Reese's, Ice Breakers, Kisses and Jolly Ranchers.

2. Create partners: Could be through mergers, acquisitions or joint ventures with foreign companies that better know local markets around the globe.

3. Select growth areas:

• Expand immediately in China, Mexico and Canada to win over those markets.

• In the mid-term, expand presence in the Middle East, North Africa, Brazil and Southeast Asia.

• West and South Africa, India and Eastern Europe are long-term growth goals with near-term market participation.

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