The increase, which will apply to its entire domestic product line, comes on the back of a “significant” rise in input costs, including raw materials, packaging materials, fuel and transportation.
Higher costs have caused problems for food manufacturers across the industry. They are a result of the rising cost of oil, poor harvests, growing populations and competition from emerging markets and diverting of grains for use in biofuels.
Implementing price increases is one of the methods used by companies to try and cope with the changing economy. However, regulators and retailers are opposed to the idea. For example, last November, German retailer metro pulled all Kellogg products from its shelves because of price hikes.
Such a strategy is also viewed with caution by shareholders. Shares in Hershey fell nearly 10 per cent following Hershey’s announcement on price increases. However, the same day Hershey also said its full-year profit would be at the lower end of its predictions.
“Chocolate sales are unlikely to be affected by this sort of announcement,” Christopher Shanahan, analyst for Frost & Sullivan, told ConfectioneryNews.com.
“Consumers are still going to want chocolate. However, Hershey will find it hard to compete with other major confectionery companies if this strategy continued, particularly considering the strength of Mars following its recent merger with Wrigley.”
Economic effect on chocolate industry
David West, president and chief executive officer of for Hershey, said: "Commodity costs have been volatile over the last several years and continue to remain at levels that are well above historical averages. Market prices for ingredients such as cocoa, corn sweeteners, sugar and peanuts are up 20 to 45 per cent since the beginning of the year. As such, in 2009 we expect our commodity cost increase to be more than double the 2008 increase.”
Companies have moved manufacturing facilities to cheaper areas amid the challenging economic environment. Hershey, for example, closed plants in the US and Canada in 2007 and moved the operations to Mexico to save costs.
Despite changes in the economy, chocolate sales remain strong in both the US and Europe. According to Mintel, sales of chocolate confectionery in the US amounted to $16.3bn in 2007, a very small increase from the $16bn recorded in 2006, and a 22 per cent increase since 2002.
It said the market is predicted to increase at a rate of about 4 per cent per year during the next six years.
However, Shanahan said that interest in premium products may start to drop if large price increases were to be applied. However, given that the products are already more expensive, he said changes in cost are unlikely to be considerable.
Mintel added that “premium chocolate has driven interest in the mature chocolate market since 2002, and it continues to be a strong force” but premium is “not as strong as manufacturers may have hoped”.
West said: “Consumers are likely to see higher every day and promotional retail prices as we implement the price increase and, as a result, we expect volume in the fourth quarter and next year to be lower than previously estimated. In 2009, we expect net sales growth of 2-3 percent versus our previous projection of 3-5 per cent.”
Still, the company expects its full-year results will show net sales growth of between 3 and 4 per cent.
The company said it will now focus on productivity and other initiatives to offset a portion of the higher input costs and increased consumer investment.