Hershey Company Financial and competitive analysis

Hershey financial health and performance

The financial ratios indicate that Hershey indicates a decline in revenues at the close of the year 2015 after experiencing growth in revenue between 2011 and 2014. Even though the percentage growth margins for the company improved from 41.6 % to 45.9 % between 2011 and 2012, and remained a bit constant in 2014 and 2015, the performance does not offer very good prospect of growth. This is because the net margin ratios show that earnings per share did not impress. The growth in operating cash flow also remained low between 2011 and 2015, reaching its lowest in operating ash flow ratio in 2014 at -29.47 The slow company growth was also experienced in return on total assets which remained largely constant between 2011 and 2012 and later declined to a low of 9.35 % in for 2015. Another decline was observed in return on capital ratio which reached a low of 15.85 % in 2015.  In addition, the current ratio remained quite low over the 5 year period and this measurement shows that financial health of the firm is not very good as per the indicated period. The current ratio remained at low of 1.72 % to 0.83 % in 2011- 2015 period. 

This analysis presents a perception that Hershey has been seeing a slow growth which may not present a good buy out option for investors. The change in the rate of revenue growth is not encouraging and seems to indicate that Hershey is experiencing stagnant growth in sales which will eventually be reflected in the earnings per share and return on investment. The slow growth can also be as a result increased competition from larger rivals such as Mondelez International Inc. which has been experiencing better growth in revenue and operating income. However, this should not prevent investors from considering this buy out since it may perform better in the long-run, but it does not offer a short- run investment.

Hershey resource and capabilities for competitiveness

Introduction

Hershey Company prides itself as the largest producer of confectionary products and chocolate in the whole of North America. The firm operates as one reportable segement through the manufacturing, marketing, selling and the distribution of different package kinds of confectionery products, chocolate, food and beverage, mint and gum refreshment products using over 80 brands.  It has five operating segments that comprising of geographical regions of United States, Brazil, Mexico and Canada and some other international locations like China, India and Korea (The Hershey Company, 2015). The company’s confectionery products are market in about 50 countries around the globe.  The company’s marketing strategy is focused on utilizing various resources and capabilities to build a competitive advantage over its competitors in a very dynamic environment. The strategy adopted by the firm aims at leveraging a marketing and sales leadership in Canada and United States, focusing on major global markets fir strategic growth and building capabilities that capitalizes on unique consumer and customer trends. Many of the company’s brands enjoy a broad acceptance by consumers and have become among the leading brands found in the market place (The Hershey Company, 2015). These brands are sold in a market that is highly competitive where other local, regional, national and multinational firms some which are way bigger and having more resources and larger international operations. To build a competitive advantage, the firm has had to engage its resources in building capabilities in an environment that is highly competitive and dynamic. These resources includes the capital , high quality production machines and equipments, highly qualified and competent human resources , research and development, trademarks  and service marks.

Financial resources 

	Are there substitutes	Is it rare	Is it valuable
	No	No	Yes

 

The firm’s competitiveness can be related to its working capital structure which has seen it enjoy a fair financial strength. This strength has enabled the firm to adopt a business level strategy whose focus is on combined strategy which integrates overall differentiation and low cost.  The focus has seen the firm perform an overhaul of its supply chain, a reduction on production lines, outsourcing production of parts of its products and setting up its operations in new markets such in Mexico where it built a manufacturing plant so as to offset rising production costs and pass on the savings on costs to consumers (The Hershey Company, 2015). The firm has also utilized its financial strength to make build on its distribution capability by making its supply chain efficient and thereby rising its global footprint. The firm has also been able to outsource production of products that are value added. To achieve this, the firm has sought to outsource operations and therefore, reduce the number of production lines by more than a third.

Increase competition in the market has had significant effects on Hershey’s business and this has forced the firm to utilize its financial resources to raise its expenditures in advertising and promotions of its products in existing and new markets (Kash, 2012).  This has been enabled by the strong brand capability which is seen in its innovation and superiority, features that are enhanced by distribution capabilities and manufacturing expertise. The firm is also focused on improving its margins over the long-run by investing in huge retail coverage, consumer marketing and broad premium brands’ range. 

Distribution networks (value chain)

Easily copied	Are there substitutes	Is it unique	Is it valuable
no	no	Yes	Yes

 

The value chain capability has been enhanced by the company’s efficient distribution network of its products. The efficiency in distribution network has given the firm a competitive advantage since it has assisted in maintaining sales growth and providing superior services to its customers. The Hershey Company engage in planning optimum levels of stock and working with it customers so as to come up with reasonable times of products’ delivery. In addition, this efficiency in distribution network enables for better shipments of products from the manufacturing plants to the various distribution centers situated throughout Canada, Mexico and United States. The common careers are primarily used in delivering the company’s products from the distribution centers to the many customers (The Hershey Company, 2015). Due to the efficiency in value chain, Hershey has full-time food brokers and sales representatives that provide its products to its customers. This is necessary given that the firm’s major customers includes the wholesale distributors , mass merchandisers , grocery stores , drug stores , wholesale clubs , vending machines , dollar stores departmental stores , stores of natural food and vending machines. These Hershey customers then resell products to consumers in more than 2 million business outlets across North America and other global locations. For instance , Hershey sales to Mc Company has previously accounted for a large portion of the profits , and this firm has been a primary distributer to major retail stores like Wal-Mart Stores Inc(The Hershey Company, 2015).

Advanced production equipments

Easily copied	Are there substitutes	Is it unique	Is it valuable
No	No	Yes	Yes

 

The company’s resources also includes highly technologically advanced facilities such as the chocolate manufacturing facility introduced in 2012, an acquisition that was enabled by the financial strengths enjoyed by the firm. Such acquisitions have made it possible for the firm to position itself for the next decades of global growth and thus enhancing a competitive advantage of the firm over its competitors. These facilities have state-of-the-art technology, proprietary features that have not been used before in confectionery manufacturing. The chocolate facility has technology that was developed specifically for this plant and includes high automation and large-scale operations for Kisses Chocolate produced by Hershey. The technology enables smooth operations to run in 24 hours a day (Business Wire, 2012).

The introduction of such huge capital investments has enabled the firm to expand its business globally while at the same time maintaining its values and heritage which is founded on more than mere production of consumer products and innovation of confectionary. With such expanded global reach, the firm improves on its brand capability and its products continue growing in popularity in the global markets. The continuous investment in technology that is productive and in combination with great employees makes it possible for customers to always enjoy the iconic products (Kash, 2012). The latest manufacturing equipment for proprietary candy and manufacturing technology speeds up the production process, offers high quality that is consistent and provides chance for future production of new products.  This high speed, new lines of production that are high-tech improves the capability or capacity for the company to boost its growth in business presently and in the future.  In fact, the Kisses Chocolate production lines have the capability to produce over 70 million chocolates bars each day (Business Wire, 2012).  This investment brings significant economic benefits to Hershey and enables it to stand tall among its competitors in production of high quality products. The introduction of such manufacturing efficiency indicates a relationship between an organization resources and capability which assist in coming up with the right marketing strategy for products in a global market that is highly competitive.

 

Strong Brands as capability

Easily copied	Are there substitutes	Is it unique	Is it valuable
No	Yes	No	Yes

 

In addition, the basis of the company’s marketing strategy is the brand equities that are strong, production innovation and constantly products of superior quality which are informed by expertise in manufacturing , high tech facilities and capabilities for mass distribution.  The firm also utilizes its strength in form of large amount of resources to identify, develop, test, produce and market its new products. Various promotions enhance this capability, which is carried out through promotion programs to its customers, and advertising programs or the consumers of such products. The promotion programs are used to stimulate sales of various products at specific periods in a year, which helps in maintaining the firm’s market share (Kash, 2012).  These capabilities enables the firm to change products’ weights and prices when it is necessary in order to accommodate changes in costs , profit objectives and competitive nature of the environment while maintaining consumer value.  The changes in weight and prices increment assist in offsetting the rise in cost of input which includes packaging materials, raw materials, utilities and transportation costs. These changes are important to ensure that, even though the firm will have to continue with its marketing strategies it does not experience losses or poor growth. However, the impact of these prices increment is delayed most of the time since the firm has to honor commitments made previously to customer promotions and planned consumer and events of merchandising following effective price increment date (The Hershey Company, 2015).

Trademarks and Service Marks

Easily copied	Are there substitutes	Is it unique	Is it valuable
No	No	Yes	Yes

 

Hershey’s trademarks and service marks are used under rights offered by various licenses and they are of material importance to the company.  The firm has various license agreements with some companies to produce and less specific products so that the products of the firm can reach wider markets. This goes a long way in popularizing the company’s brands in the market and improving competitiveness and market share of the firm. Another important capability for Hershey Company is the accessibility to raw materials. The firm is able to purchase cocoa from many producers, processors and exporters globally, which is enhanced through direct interaction with them.  The company partners with producers of coca to establish sustainable programs where it shares a common goal with producers so as to encourage their efforts. Through programs such as capacity building and farmer organization the firm engages the community in sensitization of farmer skills and training directed towards productivity hence improvement on income level and even ethical labor practices(The Hershey Company, 2015).

Strategic partnership

Easily copied	Are there substitutes	Is it unique	Is it valuable
No	Yes	No	Yes

 

The firm also forms partnerships with subsidiary companies like Scharffen Berger Chocolate Marker whose source the raw produces from farmers directly. The establishment of the partnerships ensures that raw materials produced are of high quality and can be obtained as needed and this translates to high quality end-products (The Hershey Company, 2015). The firm is able to maintain its competitive advantage by ensuring a constant supply of its quality products to its consumers. In addition, Hershey’s capability is indicated in hedging practices and forward purchases when it comes to raw materials. These practices ensure that the company’s costs will are not necessarily reflected in the fluctuations in materials prices. This fact is also indicated in that discounts and premiums are not necessarily affected by times of delivery or demand and supply for grades and varieties of cocoa butter, liquor and powder. Through forward purchasing the company minimizes the impacts of fluctuations in future prices which relate to purchase energy requirements and main raw materials’ purchases, and this covers future production requirements. Hence the company is able to maintain the costs of raw materials at minimum and hence, provide the savings on costs in consumer products prices (The Hershey Company, 2015).

 The company has also involved Information Technology as a resources and capability that will enhance its position in the global market. The firm has embraced the partnership with IT firms like Infosys in building Predictive Analytics Capability using the Open Source Information platform, which enables it to obtain quick insights into data while at the same time taking advantage of flexibility and reduced costs of a platform that is cloud-based.  The firm is able to analyze data from retail stores and hence, gaining insights that are valuable and revenue-generating more rapidly than could be delivered by implementation of a conventional analytics (Infosys, 2016).

 

Human resources

Easily copied	Are there substitutes	Is it unique	Is it valuable
Yes	Yes	No	Yes

 

 

Human resources competence is another aspect that the firm has utilized to gain competitive advantage in the global market.  To accelerate growth and preserve the legacy if the firm, it has resulted to re-investing in its employees since they form part of the exceptional culture that fuels performance and greater success. To maintain quality products, effective management and effective marketing strategy, the company needs highly skilled and motivated human resources which will serve the customer right. The macro-economic trends have become a challenge to consumers and hence the firm has to respond with innovations, marketing and distribution strategies that are new to the market. Developing people’s capabilities has been at the centre of these efforts and hence, the company has focused more on identifying, attracting and developing the best employees (The Hershey Company, 2015).

 A commitment to shared goodness is assisting in attraction of the appropriate workers who are talented and determined to bring change.  The capability of the firm to achieve a leading rate of employee retention has been informed by this commitment to develop and reward workers for their efforts and skills that they offer for the good of the company’s performance. The company upholds inclusiveness, diversity and engagement translate to high performance culture and this becomes part of the competitive advantages that assist in a continuous winning in the global market place (The Hershey Company, 2015).. This idea of talented employees is reflected in the global footprint of the firm.

Innovation capability

Easily copied	Are there substitutes	Is it unique	Is it valuable
No	Yes	Yes	Yes

 

Innovation has been a strong capability to Hershey Company, and it has been developed through various research and development practices.  This has seen the development of new products, improvement on the existing products’ quality, modernizing the production processes to improve them, development and implementation of new technologies (The Hershey Company, 2014). This has enabled the company to enhance quality and therefore, value of production lines. Hershey leverages its capability in developing, manufacturing and distributing its products to explore other opportunities that can allow for meeting consumer demands outside the traditional lines of confectionary product.

Research and development 

Easily copied	Are there substitutes	Is it unique	Is it valuable
No	Yes	Yes	Yes

 

The research and development has seen the expansion into newer categories that promise to offer portable nutrition and wholesome snacking through various products like Soft Soya Milk. This innovation has extended into the marketing function, with an aim of growing and maintaining traditional sales .The firm is able to identify opportunities that can build on its brands, assess the potential in a realistic setting and change strategies before they are executed.

 

Conclusion

Hershey has put in place various strategies based on its resources and capabilities to gain an edge in a competitive environment. These include high quality production machines and equipments, highly qualified and competent human resources, research and development, trademarks and service marks and technology driven innovation. The capabilities arising from these resources have helped the firm in expanding its operations and market reach while remaining among the market leader in the industry. However, the analysis on financial ratios indicates that these capabilities and resources have not improved substantially the firm’s performance and its competitiveness.

 

Reference

The Hershey Company,(2015).FORM 10-K. Annual and Transition Report. Retrieved from: http://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_HSY_2015.pdf

 Kash, R., (2012).The Hershey Company: Aligning inside to win on the outside. Retrieved from: http://iveybusinessjournal.com/publication/the-hershey-company-aligning-inside-to-win-on-the-outside-2/

Business Wire, (2012).Hershey Unveils World’s Most Modern Chocolate Plant in Birthplace of the Hershey’s® Milk Chocolate Bar. Retrieved from: http://www.businesswire.com/news/home/20120918006008/en/Hershey-Unveils-World%E2%80%99s-Modern-Chocolate-Plant-Birthplace

The Hershey Company,(2014).CORPORATE SOCIAL RESPONSIBILITY REPORT. Retrieved from: https://www.thehersheycompany.com/content/dam/corporate-us/documents/csr-reports/2014-hershey-csr-report.pdf

 

The Hershey Company, (2015). CORPORATE SOCIAL RESPONSIBILITY REPORT. SHARED GOODNESS. Retrieved from: https://www.thehersheycompany.com/content/dam/corporate-us/documents/csr-reports/hershey-2015-csr-report.pdf

Infosys, (2016).Press Releases. The Hershey Company Partners with Infosys to Build Predictive Analytics Capability using Open Source Information Platform on Amazon Web Services. Retrieved from: https://www.infosys.com/newsroom/press-releases/Pages/build-predictive-analytics-capability.aspx

 

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Appendix

Hershey Financial ratios

Ratios  %	2011	2012	2013	2014	2015
Revenue	6,081	6,644	7,146	7,422	7,387
Revenue change	7.2	9.3	7.6	3.86	0.47
Gross margin	41.6	43.0	45.9	45.0	45.8
Operating margin	17.4	16.7	18.7	18.8	14
Growth in operating cash flow	-35.56	88.48	8.55	-29.47	44.88
Net margin	10.34	9.95	11.48	11.41	6.94
Total Assets	100	100	100	100	100
Total liabilities	26.60	30.94	26.30	34.40	41.50
Return on Assets	14.48	14.42	16.23	15.42	9.35
Return on Equity	71.8	70.10	62.12	55.35	41.82
Return on Capital Invested	25.2	25.46	27.0	25.01	15.85
Current ratio	1.74	1.44	1.80	1.16	0.83
Debt equity ratio	2.10	1.48	1.12	1.10	1.60
P/E	13.6	15.0	18.6	18.60	19.0
Market cap ( B Dollars)	13.90	16.12	21.74	22.54	19.35
Revenue Growth					3.2
MDLZ					2
Industry					29.64
Operating income growth					16.19
MDLZ					20.9
Industry					-29.15