The global this time theme is making life very difficult for the board members of the Hershey Trust. From this point forward, with every passing day life becomes increasingly more difficult for the trust to sit and do nothing. It's clear that the changes in the competitive landscape, rationale for the InBev/BUD merger, the decline in the dollar and commodity trends are making the board look like they are out of touch with reality. The Hershey Co. has operated in its own little world and has remained (mismanaged) and independent through the years of corporate raiders, shareholders activists and the lure of the private equity bubble.
- Relative Shareholder Returns have been disastrous.......Hershey's two-year decline in market share and profitability is catching up with the company. As a consequence, in July 2007, Hershey announced that it will be closing multiple plants, cutting its workforce by 11.5% and moving jobs to a new plant in Monterey, Mexico. Shortly after this announcement, the company announced 2Q07 earnings, in which the company saw a 700 basis point decline in EBIT margins. The largest decline in the company's history! With this announcement it became clear that LeRoy Zimmerman, Chairman of the Hershey Trust, is out of touch with the realities of the business and has lost control over the operational issues facing the company. As you can imagine, the response to the free fall in profitability was predictable! The company announced the retirement of the current Chairman and CEO Richard H. Lenny. Filling his shoes was a Hershey insider David West - I guess there was no thought to looking outside the company to bring in some new blood! The bloodletting continued as six independent directors resigned from the Board at the request of the Hershey Trust. I guess shareholders should take heart in the fact that LeRoy still has his job!
- The Hershey Co. is a strong company with great brands, a strong market position and significant cash flow. Where did things go wrong? Management has underinvested in the business. Over the past five years, the company reinvested less than 40% of its operating cash flow back into the business. Second, the company has been lowering advertising expenditures as a percentage of total sales to keep margins stable, resulting in an extended period of market share declines and trying to compete in the international market. In addition, the company failed to diversify from the slow growth mainstream U.S. chocolate market into the fast growing dark and premium segment of the industry.
- In an extremely difficult operating environment, the company is forced to right size the organization and look to the international markets for growth. Unfortunately, given the value of the dollar this could not be a worse time to be looking at trying to grow overseas. In fact, it is the primary reason why they should sell to Cadbury.