Hershey Craves Protein Kick

Candy giant looks to ride the new snacking trend to offset dwindling chocolate revenues

Iconic 122-year-old chocolate maker, The Hershey Company (NYSE: HSY), popularly known as Hershey’s, is looking to cash in on the growing trend of healthy snacking among sugar wary consumers who are shunning chocolates and candy. With a backdrop made of health-conscious consumers giving up on sweets to embrace protein bars and other nutritional eats, Hershey’s reported plunging sales in 2015 for first time in more than a decade. Consumers in general prefer to have smaller snacks through the day rather than three full meals.

Snacks are the new manna

Source: Hershey
Source: Hershey

To beat slowing sales and tap opportunities in the booming snacks market, Hershey’s is diversifying into dried meat with the launch of Hershey beef jerky. The company is launching snack bars with super foods such as acai berries, trail mixes with pieces of Reese’s Peanut Butter Cups, and protein coated jalapeno almonds and pumpkin seeds. Hershey’s is aiming for revenue of $2 billion in the snacks segment as a means to offset the dip in chocolate consumption. A quarter of the snacks revenue is expected to come from jerky and other meat products.

Carbs make way for protein

As a first step in its diversification into the snacks category, Hershey acquired Krave Pure Foods, a maker of premium beef jerky with about $35 million in sales, in 2015. With the Krave acquisition, Hershey gained access to Whole Foods customers in the fast-growing meat-snack category. Hershey aims to grow Krave into a $500-million brand.

The consumer perception of jerky as a salty, over-processed snack has changed in recent times; health-conscious people now see jerky as an in-between high-protein nibble. Keeping with this trend, Hershey has doubled Krave sales and plans to launch a line of meat bars later in 2016.

Dip in chocolate sales

Hershey’s generates most of its revenue from chocolate sales in the U.S. It is the largest chocolate candy seller in the U.S., controlling nearly a third of the market. Snacks accounted for only about 2% of Hershey’s U.S. revenue of $7,386 million in 2015, leading industry experts to speculate whether the Company’s snacks strategy could indeed fill the gap left by chocolates. To increase its portfolio of dark chocolate products, which are perceived to be healthier than milk chocolate, Hershey’s acquired Brookside to boost its premium chocolate offerings. This did not help Hershey’s buck the trend since chocolate consumption in the U.S. plunged in 2015, and has continued dropping so far in 2016, according to IRI, and as reported by Bloomberg.

Source: Bloomberg
Source: Bloomberg

What’s more, Hershey’s faced many headwinds in its Chinese expansion, amassing $98 million of losses in its international unit in 2015. These losses are expected to continue in 2016 as well. In the crowded U.S. chocolate candy market, Hershey’s faces intense competition from its top rival, Mars Inc., which makes M&Ms, Snickers, and Milky Way. All these negative factors have led to speculation that Hershey’s could be a takeover target in the ongoing consolidation among U.S. food producers.

Ripple acquisition strengthens diversification plans

To strengthen its push into the snacks segment, Hershey’s announced the acquisition of Ripple Brand Collective LLC, which owns the barkTHINS mass premium chocolate snacking brand, on April 26th, 2016. barkTHINS was launched in 2013, and has since grown to emerge as a popular snack brand in the niche chocolate thins category.

Q1 FY16 sales disappoints

Hershey’s Q1 FY16 results resonated with the declining global consumption trend for chocolates. The Company’s consolidated Q1 net sales fell to $1,828.8 million, compared with $1,937.8 million in the year-ago quarter. Reported net income in Q1 declined to $229.8 million, or $1.06 per share-diluted, compared with $244.7 million, or $1.10 per share-diluted, in the comparable period last year. Over the past two years, Hershey’s has been witnessing lower retail store traffic, intense competition in the snacks segment, and a dip in international growth. On the bright side, margins were driven by price and productivity gains, as well as supply chain savings.

Hershey’s China push meets roadblock

Hershey’s has been unable to make inroads into the high-growth Chinese market, which makes up about 2% of global chocolate consumption. Hershey’s used the acquisition of candy company Shanghai Golden Monkey as a launch pad to expand into China in 2014. However, it failed to cater to the fast-changing customer trends in the world’s second biggest economy, and has been reporting huge losses since then, dragging down its international income.

Source: Bloomberg
Source: Bloomberg

On a positive note, Hershey’s became the first corporate occupant at the University of Pennsylvania’s Pennovation Center on May 27th, 2016, at the school’s business-and-technology incubator. Hershey’s 1,500- square-feet Advanced Technology & Foresight Lab at the center will focus on innovations in manufacturing, packaging, food production, and consumer science.

With its future set on new snack segments, Hershey’s could be on to a sweet ride yet again.

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