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Hershey facing new challenges

Posted: Thursday, April 20, 2000

HERSHEY, Pa. -- When caramel maker Milton S. Hershey created his now-famous milk chocolate bar 100 years ago, he had little doubt about the key to his product's success.

''Give them quality,'' he said. ''That's the best kind of advertising in the world.''

In 1905, Hershey opened the world's largest chocolate manufacturing plant and built a strong brand name by mass-producing quality chocolates. First there were Hershey's milk chocolate, Hershey's Kisses and Hershey's syrup; later came Reese's Peanut Butter Cups, Cadbury's and many more products.

A century later, Hershey Foods Corp. has found that making good chocolate is not enough. The company's earnings fell after delays with a new automation system hampered delivery of Halloween and Christmas candies last year.

Now, having shipped its products for the busy Easter season, the nation's largest candymaker says its problems are largely behind it. Delivery times, it says, have improved, and the company is now hiring workers for a new distribution center set to begin operating soon.

The measure of how well the company has recovered from its troubles will come April 24, the day after Easter, when Hershey's first-quarter earnings are scheduled to be released.

''Easter is very important for Hershey this year,'' said Ann Gurkin, an analyst with Davenport & Co. in Richmond, Va. ''They've missed earnings for several quarters. It would certainly be refreshing for them to beat or exceed expectations. It also would help instill confidence with customers that their orders are back on track.''

The holiday ranks second only to Halloween in candy sales, with $1.8 billion expected to be spent nationwide this year on items such as chocolate creme eggs, jelly beans, chocolate bunnies and marshmallow treats, said the Chocolate Manufacturers Association, an industry trade group.

Hershey dominates the Easter market, with about one-third of total sales. Its products, such as its Cadbury Creme Egg, have spawned imitations from competitors.

But the company's focus right now is staying abreast of technological changes and promising new Internet markets, said Susan Fussell of the chocolate manufacturers group.

''Keeping up with technology is probably the greatest challenge,'' she said. ''Imagine how different it is now to make chocolate than when Milton Hershey was making his first caramel. From the time chocolate is made to the time it reaches the consumer, it's dealing with new technology the whole way.''

Technology turned out to be more of a hindrance than a help last year. Delays in completing a $112 million automated ordering and distribution system snarled deliveries, caused spot shortages of Hershey's candy and inflated operating costs during the Halloween and Christmas seasons.

The company's earnings fell in the third and fourth quarters as it scrambled to get the system running and smooth relations with retailers.

This year, retailers reported better turnaround times and plenty of chocolate by Valentine's Day. Analysts say Easter shipments for this year appeared to be on time. And the new 1.2 million square-foot distribution center near the Hershey factory is set to be fully operational by fall and is expected to help unclog delivery.

''The problems seem to be behind us, and it's business as usual,'' spokesman John Long said, adding that the next Halloween season may be the most meaningful test.

The company, meanwhile, is introducing several new products such as Twizzlers Twist-n-Fill licorice, Big Kat chocolate wafers and Jolly Rancher ChewMongus. It also is stepping up its e-commerce efforts, in hope of continuing the tenfold increase in Internet sales it enjoyed last year.

''While no one knows for sure what the commercial potential will be, the Internet and e-commerce are here to stay and Hershey Foods must participate through business-to-business, direct-to-consumer and brand-building opportunities that create value,'' Mike Pasquale, chief operating officer, said in the company's 1999 annual report.

Despite Hershey's recent challenges, analysts remain optimistic about the company's long-term prospects.

''Are they keeping up in terms of modernization efforts? Absolutely,'' said Leonard Teitelbaum of New York-based Merrill Lynch. ''Their capital expenditures have gone through productively, as well as their unique way of making chocolate.''

But visitors at Hershey's Chocolate World, where tourists can buy custom-made candy and other Hershey souvenirs, said their reasons for purchasing Hershey's candy had less to do with modernization than quality.

''Is there any other kind of chocolate?'' asked Marie Rodichok, 57, of Annville, as she loaded a basket with several king size boxes of Hershey's milk chocolate with almonds, Krackel, Twizzlers and Fifth Avenue. ''It's creamy; it's smooth; it's consistent. When it's Hershey's, I never have to worry that it's stale.''

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