Tag / Hershey

by Frank Maduri

Rebuffed: Hershey – Mondelez Merger Proposal Rejected

The proposed merger between Hershey and Mondelez at the end of last week was quickly rebuffed by The Hershey Trust which represents 81% of the voting power in the company. The trading of Hershey stock continued to climb due to an increased perception that, although the Mondelez deal was rejected, the chocolate giant would be acquired by another entity.

In my initial piece on this proposed deal last week, I was skeptical of the Mondelez offer for Hershey because it was being initiated because Mondelez had no room to grow, needed a branding makeover, and needed to grow market share in North America in their confectionary division. These three rationales are usually indicators which portend a poorly conceived merger of two organizations which generally ends badly.

Mondelez is now left to search for another potential partner so that they can attempt to gain a more stable foothold into the North American confection and snack marketplace. The former division of Kraft Foods has the cash to spend to make this acquisition eventually take place with the right suitor.

The merger proposal rebuffed by Hershey had some definite hurdles via the Pennsylvania state level regulatory bodies and through federal anti-trust regulations. Hershey remains an attractive target for another food company to pursue, and those suitors could line up in the weeks and months to come before the close of the calendar year.

However, that being stated, The Hershey Trust and the Pennsylvania Attorney General’s Office both have the ability to block the potential sale of Hershey and have done so in the past. The successful acquisition of Hershey would have to be a well-structured deal that accounts for all of the political and business implications involved; therefore that type of bid would have to be navigated by investment banks and M&A executives who have been involved in similar scenarios.

The way forward for Mondelez at this point is unclear, the executives and others there most probably felt that they put together an impressive offer to obtain Hershey. It now appears that the deal will never materialize.

In my view, the potential for a Mondelez bid for a company such as Mars Candy is not too far a stretch. That potential acquisition would provide the expanded market share in North America in strategic markets, it would provide a branding image makeover for Mondelez, and it would allow for the consolidation of resources to aggressively deal with rising commodity prices for cocoa as well as other staple ingredients in the confectionary industry.

In the case of Hershey, my opinion is that they could be merged with a larger food conglomerate such as ConAgra, which made news earlier this year with the announcement that they were moving their corporate headquarters from Omaha to downtown Chicago in order to be a more desirable employment destination for younger generations who desire to live and work in cities. They have an eye towards growth and Hershey could be a bold move into new territory for them.

In the end, the Mondelez – Hershey deal was a non-starter because Hershey did not want to sell to them and be merged with a company that has some other rather daunting issues. The right deal will come along for both companies to chart their respective future strategic growth and that is going to be interesting to see unfold in the months ahead.

by Frank Maduri

Mega Makeover: Mondelez / Hershey Merger Proposal

The news this morning that sent the stock market surging was a proposed merger between the top two candy and snack manufacturing companies in the United States: Mondelez and Hershey. The news sent shares of Hershey dramatically upward, and shocked others in the food and beverage industry space.

The Wall Street Journal reports that the proposed deal is for $23 billion and the financial markets have responded with shares of Hershey at a 52 week high. The proposal, if approved by regulators, would create one company under the Hershey brand umbrella.

Mondelez split from Kraft Foods about four years ago and has largely struggled to gain brand recognition. The name, Mondelez, has been problematic for the company because the American consumer believes that the products are made in Mexico and other countries and shipped in to the U.S. marketplace (which is true in some cases and not true in others). This merger represents a potential makeover for Mondelez to set a whole new branding message around one of the quintessential American brands: Hershey. The fact that they are willing to pay megabucks for this acquisition represents the desperation they have in reinventing themselves.

I believe that what fascinates me and so many others who have worked in the food industry space and also have knowledge of the financial markets is that this deal is indicative of the nationalistic agenda that has been sweeping the world. The markets have been struggling due to the “Brexit” decision that many see as nationalism gaining a victory with Great Britain separating from the E.U. last week.

This proposed merger is all about nationalism as much as it is about consolidation of two large corporations to cut costs and maximize profit margins. The guys at Mondelez have an opportunity to market their brands with a whole new strategic shift under the Hershey name. They can tout that the company headquarters is now in Hershey, PA which is an iconic American destination, especially now in the height of the summer vacation season.

Mondelez International is headquartered in Deerfield, IL and employs over 100,000 people. They hold the brand rights to Oreo, Nabisco, Cadbury, Chips Ahoy, and Triscuit just to name a few of their billion dollar brand lines. The company generates tens of billions of dollars a year in revenue and this merger would make the combined entity a significant competitor to Nestle in the marketplace.

The branding and P.R. aspects of this merger are just one component of the scenario. Mondelez had grown essentially to their capacity and so M&A activity is the only other pathway to getting larger. The synergies between both companies are evident, as the combined entity would conceivable grow the confectionary brand lines through shared intellectual property and manufacturing technology techniques.

The new combined entity would have significant power in the negotiations for retail shelf space and most likely see cost savings from streamlined distribution operations as well. The combined company will most likely look to grow their market share in the cookie and cracker industry segment.

The cascading effect will be for the other food companies in the next tier beneath Nestle and the newly proposed Hershey, companies like ConAgra, Kellogg, and Campbell Soup. Those companies will be key players for the purchase of brands that both Mondelez and Hershey will potentially have to divest in order to satisfy regulatory boards for anti-trust reasons.

The proposed combination of Mondelez and Hershey would also have more sway over suppliers of food ingredients and could command a whole new system for doing business which would have a direct impact on the food ingredients market place in the way of cost cutting and potential consolidation of product submissions.

In the end analysis, the hurdles remain for this combined company to become a reality, but if it does gain approval it will be yet another example of American corporate largesse. It also represents the lengths a company will go in order to makeover their image in the court of public opinion. The impact on consumer perception is hard to tell until it occurs, but perception is reality and that concept is at the center of this latest merger in the American food industry landscape.

by Frank Maduri

Hershey’s Chocolate Takes Steps To Remove GMOs

The Hershey Chocolate Company announced that they will be taking steps to manufacture certain products free of any GMO containing ingredients by the end of 2015. The specific products mentioned in the press release are the original Hershey’s Chocolate bars, and the Hershey’s Kisses product line.

 

This is the next step in a series of production changes made by the company in the past several months to focus on the manufacturing of their products with an emphasis on more natural ingredients. This shift is part of a larger food industry trend to satisfy the increasing demand by a more informed consumer base for products that are made from components of natural origin.

 

The Hershey Company had previously announced the removal of high fructose corn syrup from certain product formulations by replacing it with sugar. The company has been focused internally on a review of all of their product lines with the focal point being the replacement, when feasible, of certain ingredients with their natural counterparts. The basis for these formulaic changes is not just strictly along the lines of cost effectiveness. The ingredient substitutions have to make sense from a variety of perspectives in order to be instituted.

 

Saying No To GMO

 

The food industry has been much maligned within the mainstream media for their use of GMO containing ingredients in their respective products. The move today by Hershey has been met with praise by many groups with vested interest in the fight against GMOs in our food supply.

 

However, some reports mentioned that certain groups are pressing Hershey about whether they will stop using GMOs in more products. The three main areas were genetically modified sugar beets, milk from cows that has not been modified, and modified forms of vanilla. Hershey will also be removing the lactose present from these two product lines which is great news for Americans who are intolerant to that naturally occurring sugar present in milk derived products. I have written about this controversial topic in the past based upon my professional experience in the food industry for an ingredients supplier.

 

The main issue here for large multinational food producing companies is that the non-GM supply of certain ingredients is not large enough globally to meet the demand for the product. Therefore, the formula cannot be “scaled up” to meet the required amounts in order to be produced GMO free. It is what they would term in the food industry as a “production reality”.

 

Nevertheless, in my view, I think the Hershey Company should get credit for their announcement today and for taking steps to move toward producing some of their iconic confectionary products in a GMO free manner. Only a handful of companies in the industry have taken such a pro-active stance towards the potential revision of product formulations with the goal of removing GMO containing components. Hershey is an industry giant and this action will push others in the confectionary segment to follow suit.

 

The public perception of GMOs is a hot button topic. I have covered the debate on this issue for a couple of years now and it is only intensifying in the forum of American public opinion. The end of 2014 featured the latest chapter in the public backlash against agricultural chemical giant, Monsanto, which won a court decision in Hawaii. The people of the island of Maui had voted in a referendum measure on Election Day to have the use of any GMO products for farming banned from use on that island.

 

Monsanto appealed the results of the referendum measure by arguing that the law of the State of Hawaii super ceded the public voting mechanism on the island of Maui, and they won the decision. The people in Maui and in other parts of Hawaii remain divided on the issue. Some feel that the GMO ban would have caused the end of farming jobs in an already slow economy in the island state. The converse side of the debate was the belief by some that the use of GMO agricultural chemical products is harmful to the land, water, and environment in Hawaii and there is a growing sentiment there in the public that these products should be eliminated.

 

Hitting The Wallet

 

The public backlash against GMOs, hormones, and artificial ingredients in food products coupled with the trend toward health and wellness is forcing more and more food companies to review their supply chain sourcing methods as well as their product formulations. The objective of those reviews being to determine if alternative natural and/or GMO free ingredients could be substituted into the formulation and scaled up effectively.

 

This anti-GMO sentiment and the emphasis on wellness, what I refer to as the “natural foods” phenomenon, is also shaping the methodology for the research and development of new product line offerings for food companies. The recent product line announcements by General Mills are a good example of this response by a major food manufacturer to these trend lines.

 

The company announced new products in 2015 which focus on the incorporation of ancient grains and protein into their cereal lines. They also will roll out gluten free cereal formulations, and other products with a focus on wellness and natural ingredients.

 

The American consumer has been very vocal about their opposition to GMO products and artificial ingredients. The consumer public is much more informed than it was even 10-15 years ago because of the increased amounts of information available via the internet, and the rate in which that information spreads via social media platforms is unparalleled. Consequently, that same American consumer has to be prepared to face the facts that they will have to most likely face higher costs for those food products when they are made with healthier ingredients. The long and short of the matter is that these healthier products or GMO free versions of products will be more costly for the manufacturer and they will pass along that increase to the consumer.

 

In the case of the Hershey Company, they have most certainly studied the impact of the costs of making this formulation change with the products I mentioned earlier. In my experience, some commodity products, especially items like cocoa and vanilla, are highly sensitive to cost fluctuations based on a variety of factors. In the case of confectionary products in general, there are other key ingredients that must be sourced very carefully to avoid further cost increases for the finished consumer product. In my view, these factors drove the decision to phase in the GMO free production change at Hershey in a limited fashion to those two product areas.

 

The confection industry just recently completed a program to increase prices based on the changes in the market price of key ingredients such as cocoa. The Hershey Company specifically used a very intelligent approach by phasing in the cost increase to the consumer in stages over a period of several months instead of giving the consumer “sticker shock” by introducing the price increases in one large jump. I have written previously about this strategy, and all consumer feedback being considered, it was a successful method by Hershey to employ these increases in the pricing of their products.

 

Whether or not the American public will continue to pay higher prices for healthier food product choices remains to be seen. In the short term, it appears that it is not slowing down anytime soon. I would look for other food companies to follow Hershey and their lead from their announcement regarding the removal of GMOs from certain products where it is feasible. The continuation of that trend will lead to potentially higher prices, but in the end it is a “win-win” both for the food companies and for the consumer when it comes to this trend toward healthier or more natural food products.