The Hershey Co.’s road to $10 billion in net sales by 2017 still leads through Shanghai, China, despite “significant business issues” and slowing sales this year in the chocolate manufacturer’s Chinese subsidiary.
Projections from the Derry Township-based candy-maker suggest sales from Shanghai Golden Monkey Food Joint Stock Co. Ltd. — an acquisition Hershey announced at the end of 2013 — will be around $90 million this year, despite initial expectations of $200 million.
“Results have been disappointing,” John Bilbrey, the company’s president and CEO, said in a second-quarter earnings call. He cited challenges with accounts receivable and an unstable distribution network within Shanghai Golden Monkey, which makes candy, chocolates, protein-based products and snack foods.
Despite the dip in international sales, primarily in China, Hershey remains committed to growth overseas, Bilbrey said. “We’re taking steps to build a strong foundation for future success, including the appointment of a new chairman and general manager for Golden Monkey with solid China consumer packaged goods experience.”
Analysts are treading lightly in the short term.
“The bulk of the performance still results from business that is operating in the U.S.,” said Erin Lash, senior equity analyst with Chicago-based Morningstar Inc. “They’ve faced some challenges with the (Shanghai Golden Monkey) acquisition.”
International sales accounted for nearly $1.1 billion, or about 14.4 percent, of Hershey’s total sales last year. The company’s scaled-back forecast calls for about $1 billion in international sales this year, with Mexico, Brazil and India remaining priority areas.
Hershey does not break out sales by region, though in March it had been projecting $450 million in Chinese sales. No specific guidance has been provided for China in light of sluggish quarterly sales figures. But Morningstar pegs Shanghai Golden Monkey as accounting for about 25 percent of Hershey sales in China, Lash said.
That puts China at about 5 percent of Hershey’s total sales, which were more than $7.4 billion last year.
“We’ve long thought Hershey may be challenged as it extends abroad, and while we view efforts to improve its competitive positioning as prudent, we don’t expect these initiatives will drive a material acceleration in the firm’s international sales,” Morningstar said of its near-term expectations.
Hershey acquired an 80 percent majority interest in Shanghai Golden Monkey last September for about $394 million.
Hershey expects to buy the remaining 20 percent in the fourth quarter, but Bilbrey said the timing and terms will be “informed by the results of our ongoing assessment.”
“None of us are happy with the developments around the Golden Monkey acquisition and integration,” CFO Patricia Little said during the Q2 earnings call. “Our latest outlook for the business is obviously different than the acquisition model.”
Hershey has been focused on a broader rollout of its Brookside chocolates in China, as well as distribution into smaller stores and continued focus and acceleration of its e-commerce business.
Consumer products companies such as Hershey also are competing for more space and better positioning in retail stores, including under or near checkout counters.
‘Prudence’ and partnerships
Revised sales guidance this summer from Hershey clearly signaled that “prudence and diligence was lacking with regard to the acquisition when it was signed,” Lash said.
She expects “prudence in the pursuit” of additional acquisitions and sees value in joint ventures with local firms abroad.
“Partnering with local firms that understand the consumer and local routes is a means by which to lessen inherent risks,” she said.
Local tastes are equally important, she said. “Hershey just can’t make a product that sells well in the U.S. or other markets and assume it will resonate. Maintaining partners can be a prudent means to expand.”
Hershey also is competing against global players such as Virginia-based Mars Inc., Illinois-based Mondelez International and Switzerland-based Nestlé.
“There are a number of companies in the space looking to extend their geographic footprint,” Lash said. “That is a challenge. It’s not to say they can’t make inroads, but that is a challenge.”
Hershey cites a chocolate share of nearly 10 percent in China, 14 percent in Mexico and 5 percent in Brazil.
“We think there are excellent long-term prospects in China, particularly with the margin benefits to come from the commissioning of the Malaysia facility,” Jonathan Feeney, an analyst with Athlos Research in Delaware County, said in a June report about Hershey.
Hershey announced a $250 million confectionary manufacturing plant in Malaysia in October 2013.