No. of Recommendations: 9
Hershey might work out fine; but the bear case is worth understanding.
I think one bear case might work like this:
The growing and supply chain for raw cacao is problematic. It is simply too labour intensive, the world has only so many poor people willing to do it, and that number seems to be falling. This may cap volumes and drive up prices over time.
That isn't a huge problem for a super premium business, but a volume business it could be an issue.
It's relatively easy to raise prices a bit at the top end of the market, and the cost of cacao is not a large fraction of the selling price in any case. But at the bottom end of the market it's all about volume, and the raw ingredients are a not-inconsequential cost of doing business. So...a bit of squeeze on volumes and/or margins might be foreseeable. I see that as far from fatal, but I could see it as a mild headwind over time. And to be fair, Hershey is extremely aware of the issue and is trying to improve their supply chain both to eliminate risks and to reduce the bad parts.
The good news is that maintaining brand recognition and perception is not nearly as big an issue at the bottom/volume end of the market. It's not the brand perception that is supporting the price, merely supporting which of several equivalently-priced things you reach for.
They're certainly not fading away yet. #1 in US confectionery and #2 in US snacks.
Their #1 customer is McLane Company (sound familiar?), at 28% of sales.
One potential risk factor is the overwhelming US concentration. Mr Buffett would love that, I guess. Only 12.5% of their revenue is ex-US, and to my surprise that number is on a falling trend. It seems to be the "See's brand doesn't travel" problem at a bigger scale. Their brands are things you seem to have to have grown up with to appreciate.
Jim
