Global Food

Hershey is changing the way it sells products in China, which is the US-based snacks major says will hit sales in 2021 before they bounce back in 2022.

The Reese's maker has decided to more often use local distributors to try to improve the profitability of its operations in the country, with the switch to take place after Chinese New Year next week.

Hershey saw the combined sales from its four key markets outside the US and Canada fall by 23.8% in 2020, or by 14.8% on a constant-currency basis, hit by lower sales from its owned retail outlets.

Hershey said "consumer mobility and economic security" also weighed on its international sales. The steepest decline in Hershey's sales in its four principal international markets came in China, although the company said the changes it is undertaking in how it operates in the country dampened sales in that market in the last quarter of the year.

"The shift is relying less on a large, own, retail sales force and instead really focusing more on a master distributor type of arrangement, which is just more efficient and more effective," Hershey CEO Michele Buck said on February 4th. "Clearly, we will give up some level of sales. There will be some slippage in taking that approach but we think it is the most efficient and effective way for us to get our product to consumers."

In 2020, China accounted for 0.6% of Hershey's net sales, which stood at US$8.15bn for the company as a whole. At the start of 2020, China generated 1% of Hershey's net sales.

China has, at times over the last decade, proved a challenging market for Hershey. In 2013, the company struck a deal to buy an 80% stake in Shanghai Golden Monkey, a move that doubled the size of the US confectioner's then business in China. Within 18 months, Hershey was moderating its expectations for the performance of its new Chinese asset. In August 2015, Hershey booked an impairment charge of US$100m on the business amid "disappointing" results.

In February 2016, Hershey acquired Shanghai Golden Monkey outright. However, Hershey made four downgrades to its sales forecasts throughout 2016 and China was a central factor for both internal reasons and challenges in the wider market. In July 2018, the company offloaded the business to local firm Henan Yuxiang Food Technology Co. Ltd.

This year, Hershey is expecting sales from its international markets to grow. "We do expect modest international sales growth, which ex-China would be even higher," Buck told analysts on a conference call to discuss the company's 2002 financial results. "As we discussed, we will be living through the impact of some of the changes in the model but we do expect modest growth internationally."

Buck sought to emphasise the variations in each of Hershey's four main markets, which, alongside China, are Brazil, India and Mexico.

"Each market is a little bit different. We continue to feel good on long term basis about international. It's an important part of our business. It's an incremental source of growth for us and then as I said, each market's a bit different," she said.

"India we saw some nice rebound and a strong finish to the year, while certainly earlier in the year India suffered through a lot of Covid-related pressure. In Brazil, constant-currency sales were good, they were double digit, but FX has been a challenge. Mexico really is the market's that contended or has tended to have continued Covid pressure, where the category sales have remained soft, even though they are improving and a lot of that is driven by two factors – store declines, traditional-trade store closures and less of those family celebrations where chocolate has traditionally played such an important role.

"It's a little bit of a tale with multiple cities as we look at each piece around the world, but in totality will lead to modest growth."

Hershey's group net sales rose 2% in 2020, with an identical increase in its organic sales on a constant-currency basis. The company's reported net income was up 11.9% at $1.28bn.

This year, Hershey expects its net sales to rise by 2-4% and its earnings per share by 6-8%, results the company said would be in line with its "long-term growth algorithm".

AllianceBernstein analyst Alexia Howard said: "Overall, we believe that Hershey continues to execute well and is set up for continued steady performance in 2021: The company does not face particularly tough comparables on the top or bottom line for the full year and will continue to invest in marketing spend to preserve as much of the share gain made in 2020 as the company laps the onset of the pandemic. 

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