The Hershey Company continues to enjoy an exceptional level of success and domination over the entirety of the snacking market in the United States, from milk chocolate to chewing gum to healthier, chocolate-free snacks. Hershey has invested its money wisely in order to acquire several snacking companies, which have become increasingly popular as they have appealed to a few of the increasingly niche segments of the snacking markets. However, despite these smart acquisitions and the success that Hershey has enjoyed in previous years and continue to enjoy at the present moment, Hershey has failed to capitalize on recently emerging snacking segments, which are growing at a far greater rate than Hershey’s revenues and profits are increasing.
Although Hershey continues to experience a positive growth rate year on year, the rate of growth is substantially lower than some of the snacking markets that Hershey have yet to become involved in. As such, Hershey stands to lose some of its market share and domination over the snacking market as a whole in the United States of America. As such, we propose the introduction of two new Hershey products: A ready-to-drink protein shake and a gourmet dark chocolate bar. These two products will appeal to two of the fastest growing snacking segments that Hershey have yet to partake in and will ensure that the company is able to continue its phenomenal level of market share in the country, whilst simultaneously ensuring that the slowing level of profit growth experienced by the company will begin to match the booming growth of niche snacking segments.
Market and Firm Overview:
The Hershey Company is a global producer of chocolate and non-chocolate snacking confectionaries. Hershey has two reportable segments: North American and International and Other. Although Hershey serves these two segments, the company is set up to primarily cater towards the North American market – a market segment in which Hershey is the largest producer of chocolate snacks in North America – which generates the vast majority of Hershey’s revenue (approximately 88% according to the the 10k report for 2017).
In January 2018, Hershey fully acquired Amplify Snack Brands, the owner of several better-for-you snacking brands, to further diversify their assortment of snacks available to consumers within North America. These healthier options now accompany Hershey’s wide variety of chocolate products that include Hershey’s, Kisses, Kit Kat®, Reese’s and barkTHINS to name but a few. Additionally, Hershey offers a large assortment of products in the ‘Mint and Gum’ market, such as Ice Breakers and Breathsavers, as well Krave meat snack products and PopWell and SkinnyPop corn snacks. Recently Hershey sold its International brand, Golden Monkey Snacking Company, following a period of lowered sales and amidst a new drive to focus primarily on the North American market. The vast majority of Hershey’s sales are made to wholesalers, with nearly 30% of their sales in North America being made to McLane Company Inc., who in turn distribute the product around the United States and America through sales to convenience stores, drug stores and mass merchandisers (such as Wal-Mart Stores, Inc).
Hershey receives its broad array of ingredients from a huge number of different suppliers, however, the largest and most crucial ingredient in a lot of their products is cocoa beans. Hershey receives nearly 90% of their cocoa beans from Western Africa. (Hirsch, 2018) The company have come into criticism in recent years for their failure to instigate measures to make the harvesting of these cocoa beans Fair Trade compliant, and as such, premium retailers – such as Whole Foods – have refused to stock any Hershey products until the company becomes properly licensed. However, the company put the ‘Learn to Grow’ into practice in 2015 and by 2020 the company will be fully Fair Trade approved. Additionally, through this project, Hershey will ensure that their supply of cocoa beans will become less susceptible to the wild ranges in price that have typified the cocoa bean supply in recent years.
By making use of their broad variety of products and brands, Hershey is able to successfully cater towards almost every demographic within North America. Their highest selling products (Hershey’s, Kisses, Kit Kat® and Reese’s) are well known, loved and bought by all age groups and demographics within all regions of North America. Non-chocolate treats, such as Jolly Ranchers, are primarily marketed towards children, whilst their higher end dark chocolate Hershey’s chocolate bar is marketed towards wealthier individuals in the age bracket 45-64. There is truly no demographic within America that at least one Hershey’s owned product isn’t targeted towards. Although Hershey offers such a diverse range of products in North America, the greatest challenge faced by the company at the moment, and the challenge we have chosen to focus on for our project, is the increasingly diversifying tastes of Hershey’s consumers as taste amongst different consumer segments begin to splinter as different groups are searching for different types of snacks.
Financial Analysis of Firm:
An analysis of the year-end financial statements supplied by Hershey tells the story of a company, on surface value at the very least, that is in a sound financial state (Table 1). The company has enjoyed an increase in sales and profits yearly, whilst costs of manufacturing and otherwise have remained fairly constant. An analysis of the first three quarterly reports for 2018 has shown that the firm is on track to enjoy yet another year of profit growth. However, the level of growth that the company is experiencing is disproportionately lower than the rate of growth of several snacking markets. We anticipate to counterattack this disproportionality by introducing two new products to cater to two separate markets that are growing at a substantial rate in order to prevent Hershey’s growth from stagnating.
The first product we will launch is a Gourmet Dark Chocolate bar to cater to a demand amongst individuals aged 45 and older and the projected launch costs for Hershey’s Gourmet Dark Chocolate Bar are as follows:
Manufacturing costs will be 92 cents ($0.92) per bar. This number is derived from the cost of producing Hershey’s existing dark chocolate bar, which has a much lower cacao content than ours will entail and as such can be produced at a lower price.
Our first year estimate of sales of numbers of bars is a conservative one, though we expect to sell 120 million bars. This is estimate is based off of the 384 million milk chocolate Hershey’s bars and the 214 million dark chocolate Hershey bars (these bars only contain 37% cocoa and as such don’t cater to the rapidly expanding demand for dark chocolate product) sold annually. We will produce 150 million bars of our new product the first year, in case the bar proves more popular than we are anticipating.
In order to successfully launch this new product we will spend an extra $1,000,000 to make the Gourmet Dark Chocolate bar the headline of the “Big Chocolate Show”, the premier chocolate show in America and a great launching pad for our new product.
This brings the total launch cost for the Gourmet Dark Chocolate bar to $139,000,000.
The pricing of the product will be $3.19, this number is based on the price for Hershey’s existing dark chocolate bar being set at $2.19, however, the near doubling of the cacao content per bar will increase price substantially. We anticipate selling 80% of the chocolate bars we produce the first year, as a very conservative estimate, and as such expect to make a net income of $382,800,000. This will be offset by manufacturing costs of $139,000,000 which culminates in a first year gross profit of nearly $243,000,000.
Secondly, we will introduce a ready-to-drink Hershey’s Protein Shake in order to cater to the rapid market growth of that specific snacking segment driven by the millennial generation. The projected launch cost for the Hershey’s Protein Shake is as follows:
Hershey’s regular milkshake (to which we will add protein to create our product) costs $1.08 per bottle to produce and the addition of 25 grams of protein per bottle will bring the total cost per bottle to $1.49. Our first year we will produce 120 million bottles, which will cost the company $178,800,000.
We will make use of Hershey’s annual $541,000,00 advertising budget in order to run adverts for the product and the tournament which will run for 30 seconds and five times a day on the three main channels used to televise the tournament for two weeks leading up to the tournament and for the four weeks of the tournament. This advertising campaign will cost a little over $17,000,000 (based off the cost of every ad costing $123,000 to broadcast nationally) and is in line with the advertising costs that Hershey paid for the release of the Hershey’s Gold Bar in the summer of 2016.
We will sponsor the National Collegiate Athletic Association men’s basketball tournament held every year in March (a tournament that Hershey is already the main sponsor of) and will hand out free Protein Shakes to the first 2,000 fans in attendance for every one of the 63 games at the tournament. This distribution will incur a cost of slightly less than $200,000 for the company.
This brings the total launch cost of the product to $196,000,000.
We have based the pricing of the new product on the cost of a regular Hershey’s milkshake ($2.89) and the average price of the most popular 12 ounce ready-to-drink protein shakes in America ($3.81) and as such will sell the product at $3.49. We anticipate selling 100 million bottles of our Protein Shake during the first year and after deducting costs, we will make a gross profit of $153,000,000.
Although the introduction of the two new products will be very costly, we believe that because we will catering to two markets that, currently, have little competition and are growing very quickly that we will make, even with our conservative first year estimates, an additional $398,000,000 gross profit for the company, which would have represented an additional 8% increase fin gross profits for 2017 and would have ensured that profit growth for the company is more in line with the growth rate of booming snacking markets, rather than the slightly stagnant growth rate Hershey have experienced recently.
Identified Business Challenge:
Hershey has enjoyed a majority share of the overall snacking market in Northern America (the main of Hershey’s two reportable segments), which in recent years has hovered around 44%. However, their growth in market share has stagnated in recent years (with an increase of just 0.8% per annum since 2012) and their primary products – chocolate snacks and sugar-based confectionery – are part of a market segment that is experiencing very little growth in comparison to some alternative snacking markets. (Hirsch, 2018) Hershey is failing to take advantage of the niche segments developing within the snacking market that actually are experiencing significant growth: segments like ‘ready-to-drink protein shakes’ (which has experienced an average of approximately 8% growth over the past three years), dark chocolates (7.4% annual growth from 2015-2017) and chocolates that incorporate evolving trends, such as adding in nuts, fruits and flavors (7.2% annual growth from 2015-2017). (Wohl, 2018) The growth being experienced by these markets seem to be attributed to the health benefits perceived by the consumers for each of these products, as people become more aware of the health benefit of cocoa consumption and others search for ways to incorporate more protein into their active lifestyles.
The slowing growth of traditional snacking market segments, which are still Hershey’s primary source of income, coupled with the comparatively massive growth of markets that Hershey is yet to engage with, means that the company may begin to experience a decrease in its dominance over the entirety of the snacking markets in North America. Already, it is evident that Hershey’s annual increase in sales and gross profit is proportionate to the slowing growth of the products and traditional markets that Hershey caters for. However, we believe that should Hershey be able to capitalize on the newfound and rapidly growing markets of ‘ready-to-drink protein shakes’ and dark chocolate, then the company will be able to replicate profit growth that more closely resembles the growth of these markets.
Additionally, we have decided on pursuing this challenge as these identified markets, despite Hershey not engaging with them so far, make it obvious to see that a simple expansion of their existing products will easily cater for the growing demand of these developing tastes and preferences amongst the North American consumers. As we shall elaborate upon, we propose that the development of two new products will help rectify Hershey’s neglect of these two markets and will help the company enjoy a substantial increase in yearly revenue and profits. The two products that we intend on introducing to the American snacking markets will be able to easily share in the distribution channels that Hershey has established already as they aren’t too dissimilar from existing products. Additionally, the similarities between the two new products and existing products already produced by Hershey ensure that consumers will be able to feel confident that the new products will be a simple continuation of Hershey’s famed excellent tastes and will encourage them to more readily adopt the product.
Recommended Response:
In order to address Hershey’s growing challenge of failing to adapt to changing consumer tastes and preferences, we have identified two unique responses to two separate target markets. The first of these target markets is the millennial generation. Millennials are the most health-conscious generation, and they are also the most active (Gustafson, 2017) and as such they are looking for alternatives to traditional snacks to help supplement their busy lives. Bearing this in my, we plan to launch a name brand Hershey’s ready-to-drink protein shake that will offer 25 grams of protein per serving. We aim to incorporate the famous and loved flavor people have grown accustomed to expect from Hershey, whilst adding the serving of protein to appeal to the more active generation.
The market for ‘ready-to-drink protein beverages’ is growing at a far greater rate than the vast majority of snacking markets (an average rate of 6.8% over the past 3 years) and is expected to grow by about $720 million between 2018 and 2025 (Graph 1). This level of growth reveals the possibility for our product to fulfil a newly recognisable need and be highly successful. We plan to launch the new product during the 2020 National Collegiate Athletic Association Men’s Basketball tournament and make it the official drink of the event, as the tournament is one of the highest rated programs on television every year, with the championship and semi-final games alone receiving 9 million viewers each and the demographic of these viewers are dominated by younger, health-conscious consumers who happen to be our target market. (Porter, 2017) Hershey is already a partner with the NCAA and the official candy partner of the Men’s Basketball Tournament, so we will not incur any additional costs from the partnership. We will fund television advertisements starting two weeks prior to the beginning of the tournament and continue to air them until the national championship game. The advertisement campaign will consist of highlight reels from previous tournaments and be directed towards the millennial and college-aged generations.
The other portion of our costs will be from the manufacturing of the drink. We plan to have beverages provided for the players on all 64 teams, as well as give free drinks to the first 2000 attendants at every one of the 63 total games. We will also use this platform to track the popularity of the beverage and view the type of consumer that it is being purchased by. Based on this and the success of the drink, we plan to expand out from the original flavor of classic milk chocolate, and develop new flavors based on our tracked consumer tastes and preferences.
The second target market we have decided to target is individuals aged 45 years and older and in order to target these consumers we intend to introduce a new Hershey’s Gourmet Dark Chocolate Bar with a cacao content of 65%. We have decided on targeting this segment as the market for dark chocolate is growing a rate of nearly 8.5%, which eclipses the comparatively stagnant growth rate of 1.7% for milk chocolate products. Additionally, this segment of consumers accounts for nearly 58% of all dark chocolate consumption in the United States (River, 2017).
The main reason this segment of the market is interested in dark chocolate is directly attributable to the health benefits that come from the consumption of cacao. In comparison to what will be our competitors in the dark chocolate market, Lindt and Ghirardelli hold the largest amount of market share at the current time. Fortunately for Hershey, however, neither of these companies have as strong of a grasp on the U.S. chocolate confectionery market as Hershey does.
Whilst we hope to eventually dominate the dark chocolate market as Hershey does milk chocolate products, we are aware that consumer may initially be hesitant to engage with a dark chocolate product aimed at a more sophisticated market from a company that has historically catered to a milk chocolate and cheaper desire and as such we hope to receive an indication of how consumers will react to our new dark chocolate, by showcasing our new product at The 2019 Big Chocolate Show – New York’s largest chocolate expo. This show has an attendance demographic that directly correlates to the segment we intend on targeting with this new product, and as such we hope to use the show to receive feedback on the new product and gain an understanding into how these people will interact with the chocolate bar.
Should the new chocolate bar be received well, we will continue with our plan to distribute the bar widely and eventually we will look into expanding the product line by including dried fruits (such as raspberries, cranberries and blueberries), nuts (such as almonds and walnuts) and possibly even new flavors such as lavender or ginger. This flavors and additions were chosen based on current statistics that show them as being the most popular additions to a plain dark chocolate bar.