Hershey's profits plummet

By Charlotte Eyre

- Last updated on GMT

Related tags: Hershey, Investment, Chocolate, Profit

Hershey said yesterday that third quarter margins fell a massive 13
percentage points from the same period in 2006, as a result of
tough competition in the premium chocolate market and rising milk
costs.

For the third quarter of 2007, which ended 30 September, consolidated net sales for dropped by 1.2 per cent to $1.39bn compared to $1.41bn, according to the chocolate company. Margins dropped from 22.7 per cent during the same period in 2006 to 902 per cent, while operating profit went down to $129m from $322m. Sales of Hershey's top four brands - Hershey's, Reese's, Kisses and Kit Kats - grew eight per cent, but overall sales were dragged down by a poor performance of premium chocolate bars. "Third quarter profitability was curtailed by lower sales, including increased trade promotion, as well as the impact of higher dairy costs,"​ said chief executive officer Richard Lenny. The company also lost 1.1 per cent of its market share. The finger of blame was also pointed at the rising cost of milk, which "impacted profitability",​ he added. Lenny said that the company is now focused on improving margins in the long term, which it hopes to achieve by investing in consumer marketing, greater retail coverage, and broadening its range of premium brands. "Throughout 2007, our top priority has been to restore momentum within theU.S.,"​ Lenny said. "Against a backdrop of severe commodity cost pressures and strong competitive activity, we are maintaining this focus." ​Product focus will be on Hershey's "iconic"​ brands, as well as expanding the range of premium and dark chocolate products, such as the Cacao Reserve, Scharffen Berger and Starbucks bars, with its new Hershey's Bliss bar. Hershey will increase marketing and promotion spend on these products, compared to the third quarter 2007 as well as the same period in 2006. The company also hopes to reduce operating costs through its new global supply chain transformation, announced in February, which will eliminate about 1,500 suppliers, Lenny said. "This effort remains on track and is scheduled to deliver savings of about $15m by the end of the year with a significant step-up in 2008,"​ he added. "These funds will provide the necessary means for investment in our brands and selling capabilities." ​However, net sales for total year 2007 are still predicted to decrease about one per cent, the company said. According to the Financial Times, the assets of the Hershey Trust, Hershey's largest shareholder, have lost more than $1bn in market value. With the trust holding about 30 per cent of Hershey's shares, the fall on Thursday of 4 per cent in the company's share price will have reduced the market asset value of its investment by well over $100m, the FT said. Hershey's third quarter results have reignited media rumours that the company will join forces with Cadbury-Scweppes, after the UK chocolate company demerges its beverages arm later this year.

Related topics: Markets, Hershey

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