The Sweet Truth: Hershey's Price Increase Boosts Revenues
The company signaled that last quarter's 7.7% price increase could be its last.
Some companies are okay with losing volume if it means higher prices for the category.
Last quarter, Hershey was one of those companies.
It may not last.
For the second quarter of 2023, the Pennsylvania-based chocolate giant used a 7.7% price increase to boost total revenues to $2.4 billion. When asked by analysts if the corresponding 2.7% decline in unit volume could be attributed to the price increase, CEO Michelle Beck was clear. "Volume impact is driven by the extra price impact as we look at the back half."
Hershey seems content with that reality, probably because gross margins are expanding.
Despite selling less, the company is now back to pre-pandemic levels in terms of profitability. Input costs are dropping on the eve of a series of price increases. "We've seen less inflation in things like packaging and logistics and even some material costs," CFO Steve Voskuil said.Â
The company boosted advertising and consumer marketing by 15% in Q2 to support the price increases. Despite this influx, the operating margin increased to 22.5% from 19.2% last year.Â
Price increases have limits; the company is looking to RGM to manage the future.
Cocoa and sugar prices are historically high, with cocoa reaching a 12-year high on the New York Exchange.
Management stressed that the company would use productivity, and revenue management to offset the inflation.
This means smaller pack-sizes, less promotions, etc.
Salty Snacks are facing more private-label competition.
Private label competition has increased in the Salty Snacks segment leading to potentially more promotions in the future.
Hershey's North America Salty Snacks segment net sales reached $272.4 million in Q2 2023, up by 6.3%, driven by price increases.
Key brands include Dots Pretzels and SkinnyPop, both acquired by the company.
SkinnyPop has faced production constraints, so the Hershey spent $165 million on a popcorn manufacturing facility from Weaver Popcorn Inc.
The company shifted some promotions from Q2 to Q3—because of IT issues.
Innovation and Renewables
After a lackluster pandemic, competitors are increasing their innovation efforts, prompting Hershey to refocus on this area.
Hershey completed a sizeable renewable energy project that will give them an adjusted effective tax rate of 8.3% (after accounting for tax credits.)
They said it:
CEO Michelle Buck on rational competition:
Yes. I mean, I'd say the categories that we are in have always been very competitive. But the good thing is we have rational competitors. And what we're seeing overall, I'd say, is pretty consistent with what we've seen historically. We have seen some higher levels of innovation as supply chains have gotten stronger and people have been able to support innovation. We have seen some increases in private label, I think, with the economic environment in both Confection and in Salty. But frankly, the results of those entries have been somewhat mixed. And certainly, our brands have held up really well.
We continue to focus on driving sustainable profitable growth. As it relates to Confection and promotional activity, display has always been important for that impulse-driven category. And so we didn't see as much of the change in promotion as perhaps some other categories have seen. So that's been much more stable for us, and we anticipate we'll continue to going forward. So we'll continue to invest robustly to drive our brands with innovation, marketing support, what we think is the right level of promotion.