Opportunity for All Food Players May Be a Ripple Effect of the Hershey Sale

In a once-in-a-lifetime opportunity, Hershey Foods Corp. landed on the sale block when the charitable trust that controls the company decided it wanted to diversify its holdings. One lucky buyer will gain control of an American candy-making icon. The losing bidders will be left to figure out how to compete with a rival whose growth will mushroom overnight. But for the winner and losers alike, the sale could spark a convergence of nutritional and snack products, which would create growth opportunities for all food manufacturers, industry experts note. Hershey Foods is a unique organization in many respects, says Bruce Cohen, a Principal and Regional Director of Strategy Services at Swander Pace & Co., a member of Kurt Salmon Associates. With its stable of well-known brands, the goodwill it has developed in its community, a relatively narrow geographic focus, and licensing agreements with competitors and potential purchasers of its products, the company is a choice target for a large, multinational food company, he says. International business for Hershey Foods outside of North America is less than 5% of the company’s total sales, so there are great opportunities for expansion abroad, notes Ben Buettell, a Managing Director at Houlihan Lokey Howard & Zukin. If manufacturing were to be moved overseas, he adds, the new owner would be able to save on labor and materials costs. In an intriguing take on the deal, Peter Hsia, a Principal at Swander Pace, says that considering the product offerings of Nestle SA, a company at the top of the bidding list, there may be a continuing confluence of nutritional and snack foods as a result of the sale, especially if Nestle were to end up as the buyer. That would create growth opportunities for all food companies, he says. “If I’m Nestle, owner of PowerBar and other powerful nutrition products worldwide, being able to bridge nutritional products with the giant candy industry is the way to create growth because there would be all kinds of new health products that you could add on. Nestle alone lacks the scale and clout in candy to push nutritional bars, but the addition of Hershey would create enormous distribution clout. That clout combined with PowerBar’s nutrition heritage could help build an enormous healthy snacking business,” notes Hsia. Complexity surrounding the sale hinges on the goodwill that Hershey Foods has created as a result of its community involvement and the close ties it has with other properties in its hometown of Hershey, Pa. The Milton Hershey School Trust, which controls Hershey Foods, governs the Milton Hershey School for disadvantaged youth. Hershey Foods also is closely linked with the Hotel Hershey, which offers chocolate-themed spa treatments, and Hershey Park amusement park. Yet all recreation and tourism facilities in Hershey are owned by Hershey Entertainment & Resort Co., a separate company owned by the Milton Hershey School Trust. Hershey’s Chocolate World, however, is owned by Hershey Foods. While the hotel and amusement park operations are not included in the sale, Cohen notes that “maintaining the goodwill and brand essence of the company would be a valuable part of the deal.” “The buyer should be particularly thoughtful about maintaining what Hershey has done for the community and for the stakeholders in the area. And if the buyer is smart, I think it could preserve the goodwill between the food operations and the related Hershey properties,” he states. Hsia likens the Hershey sale to the sale of Ben & Jerry’s Homemade Inc. to Unilever in 2000. “So much of Hershey’s image is tied to the community and other properties, like the amusement park, but I don’t think that Ben & Jerry’s image was tarnished by the sale and my guess is that there is not really enough here to affect consumers’ perception of Hershey,” he says. While the acquisition of Hershey Foods will open many doors for the new owner, the losing bidders will have just as much to digest as the buyer, says Cohen. The implications for the companies that don’t win the business are significant. The buyer may be forced by regulators to unload some great businesses or brands to other industry players, he adds, and they may acquire valuable assets without taking on billions in risk. “Who gets what and how it reshapes the industry will be a keen topic for every board and executive group in the industry. I think that a company that might be greatly hurt by this is Masterfoods, formerly Mars Inc. Hershey has been a healthy competitor to Masterfoods but hasn’t really been threatening. Now we are talking about catapulting Nestle or Kraft, most likely, to the leadership spot in the marketplace by 10 share points. If I’m Masterfoods, I don’t want either of those companies to buy Hershey, but I know that I’m likely precluded from winning,” he states. In any event, the sale of Hershey will be the next big step in the evolution of the industry into one dominated by three or four mega food companies that have the size and scale to absorb the smaller players. Most of the growth in the industry would be generated by smaller businesses that create new products and new product categories. But those firms eventually would be acquired once they reach a certain size.