Washington IV

The Hershey Company
Introducing the World of Chocolate

The Hershey Company Introducing the World of Chocolate examines the remarkable successes and failures of The Hershey Company, the largest North American manufacturer of chocolate and sugar confectionery products, in its constant pursuit to maintain growth and profitability in a competitive industry dominated by only a few giant confectionery corporations. Through careful analysis and thorough research, The Hershey Company Introducing the World of Chocolate will provide a clear and concise assessment of how The Hershey Company came to be a global corporate giant, how it has maintained its dominant position in the industry, and where the company is going in the near future.

Copyright © 2007 by the authors of this book Michael Ellis, Markesha McCants, Nicole Frye, Jessica Miller, Manon Polk, and George Rogers.

The book authors retain sole copyright to his or her contributions to this book.

ISBN 978-1-60585-999-6

This report is in association to the capstone project issued by The University of Tennessee’s MBA program satisfying credit for the Management/Accounting 790, Strategic Management & Business Policy course.The Hershey Company - Introducing the World of Chocolate

Table of Contents

Introduction
History
Microenvironment
Macroenvironment
SWOT Bullet
Industry Analysis
Strategy
Social Responsibility
Ethics
Culture
Leadership
Financial Analysis
Recommendations
References
Student Biographies
Appendices A-E

INTRODUCTION

The Hershey Company prides itself as being the largest manufacturer of chocolate and confectionery products in North America. Hershey employs over 15,000 employees worldwide. Hershey also exports to ninety different countries. Below are some of the company’s popular brands.

* Hershey’s Chocolate Bar
* Almond Joy
* Kit Kat
* Hershey’s Kisses
* Mounds
* Reese’s
* Payday
* York Peppermint Pattie
* Milk Duds
* Mr. Goodbar
* Rolo
* Skor
* Whatchamacallit
* Whoppers
* Krackle Bar

These legendary brands have contributed to the success of having sales that reach well over four billion dollars. The Hershey Company also enjoys being the leader of the dark and premium chocolate segment. The top brands in this category include Hershey’s Special Dark, Hershey’s Extra Dark, and Cacao Reserve. Expansion has also lead to the development of different snacks.
Hershey’s chocolate has been used to enhance cookies, brownies, and cakes.

The Hershey Company lives by their mission statement: “Undisputed Marketplace Leadership” (www.hersheys.com). They strive to maintain a superior standing by having continual creation of value, developing a diverse portfolio of brands, and by successfully transforming consumer and customer desires into reality. Today, the Hershey Company remains committed to fulfilling the mission of Milton Hershey, the founder who started it all.

HISTORY

Founder History:
Milton Hershey grew up in rural Pennsylvania and left his legacy as Hershey’s chocolate. Milton was an entrepreneur who completed a four-year apprenticeship with a candy maker prior to venturing out to start his own business. Hershey made three attempts at starting his own company before successfully starting the Lancaster Caramel Company. It wasn’t until 1893 that Milton Hershey became interested in the art of chocolate making. While attending the World’s Columbian Exposition, Hershey purchased machinery and thus began producing chocolate that covered his caramel creations. Soon after this discovery, Hershey started the Hershey Chocolate Company in 1894. After many trials and errors, he finally stumbled upon the famous recipe that would become his legacy.
In 1900, Milton Hershey sold his caramel business for one million dollars. He then focused solely on making chocolate. In 1903, Hershey decided to build his company at a new location in Derry Township. This location had a larger population, easy access to port cities that would supply sugar and cocoa beans, and plenty of dairy farms. Milton Hershey sought not only to build a company, but also to build a community. He believed that workers worked better under pleasant working conditions and pleasant surroundings. For this reason, Hershey built an infrastructure to take care of his workers. This infrastructure was accompanied with a department store, convention hall, and lots of schools. “In a long and useful life, Milton S. Hershey proved himself to be a courageous entrepreneur, a determined builder and a compassionate humanitarian” (www.hersheys.com).

Chocolate and Cocoa Industry History / Development:
The chocolate industry relies heavily on fluctuations in demand. The demand for these products increases drastically during the holiday season. For this reason, sales increase during the third and fourth quarters of the calendar year. Several consumer trends such as the rising sales of premium-priced chocolates and the growing concern about the health risks associated with the consumption of such high-fat foods affect the chocolate industry (www.answers.com). There were 995 establishments that produced chocolate in 2000 (www.answers.com). California and Pennsylvania were the two states that had the majority of these establishments. The total consumption of chocolate in a year is about 3.1 billion pounds with a total of retails sales reaching about $13 billion.
The chocolate industry dates back to 1765. At that time, growers in the West Indies supplied cocoa. The first chocolate factory was established in England. During the First World War, chocolate was used as a morale booster and for nourishment. From 1989 to 1991 the chocolate/cocoa industry experienced 50 acquisitions, mergers, licensing agreements, or joint ventures (www.answers.com).
During the mid 1990’s, the industry catered toward new consumer trends. The development of lite chocolate and lite desserts increased drastically with the creation of fat-free chocolate items.

Manufacturing Process:

In order for U.S. manufacturers to use cocoa beans, the beans must be imported by direct purchase or through a broker. The growers of these beans are paid market price. Once the beans are obtained, they are then processed to make chocolate liquor. This liquor is then used to manufacture cocoa, syrup, and solid chocolate chips. It can also be used to enhance confections, bakery items, and other dairy products.

The manufacturing process includes roasting, shelling, and grinding of the beans to produce the unsweetened chocolate liquor. Additional processing will yield one of two products, cocoa or chocolate. Cocoa is produced by extracting fat from the liquor. The remaining cocoa cake is crushed to form a powder and may be sweetened or left unsweetened. The fat that is extracted is known as
cocoa butter which can be used in sweetened chocolate or as moisturizers. The production of chocolate requires the addition of sugar and cocoa butter to the liquor. Milk solids are also needed when manufacturing milk chocolate. Chocolate manufacturers typically sell the semi-processed products to other firms that use them when producing confectionery goods. “Exports of chocolate products consist of confectionery items rather than semi-processed chocolate”(www.answers.com).

Hershey’s Mission

Company Mission Statement/ Corporate Philosophy:

The Hershey Company’s mission statement reads as follows, “Our mission is to be a focused food company in North America and selected international markets and a leader in every aspect of our business. Our goal is to enhance our #1 position in the North American confectionery market, be the leader in U.S. chocolate-related grocery products, and to build leadership positions in selected international markets” (www.answers.com).

The company further breaks this statement down into five categories that will ensure leadership in the marketplace. Hershey would like to have value creation from the top tier throughout the entire business system. The company also strives to have organizational capabilities that not only compete in the present but are also able to build on in the future. The Hershey Company also encourages and promotes healthy living. Keeping a diverse portfolio of brands that delight and deliver superior growth worldwide is also important in sustaining leadership. Hershey must also continuously transform consumer desires into a product that they would want to purchase time and time again.

Corporately, The Hershey Company strives to maintain a high level of ethics and conduct. It is also important that the company develops a strong “people” orientation and has employees genuinely care about each other. Hershey will also advance only if they are able to attract customers and consumers with products of high quality and excellence. Lastly, Hershey has pledged to, “Sustain a strong ‘results’ orientation coupled with a prudent approach to business” (www.hersheys.com).

Hershey’s Expansion

Sales and Acquisitions:

In 1968, the company was renamed Hershey Foods Corporation. At this time, the company expanded its confectionery product lines, acquired related companies and even diversified into other food products (www.hersheys.com). Some of the several acquisitions included: San Giorgio Macaroni and Delmonico Foods (1966); manufacturing and marketing rights to English candy company Rowntree MacKintosh’s products (1970); Y&S Candies, makers of Twizzlers licorice (1977); Dietrich Corp.’s confectionery operations (1986); Peter Paul/Cadbury’s U.S. confectionery operations (1988); and Ronzoni Foods (1990) (www.hersheys.com). Hershey Foods was the industry leader at the end of the twentieth century.

The company continued to expand and diversify. In 1986, Hershey acquired
Luden’s cough drop brand. In 2001, Hershey sold this brand to Pharmacia. Remaining in the same industry, Hershey acquired Cadbury-branded products in the United States in 1988. Hershey acquired Scharffen Berger out of Berkeley, California in July of 2005. In November of the same year, Hershey acquired Joseph Schmidt Confections. One year later in November of 2006, Hershey acquired Dagoba Organic Chocolate.

Hershey’s Timeline

Hershey’s Timeline: (Information retrieved from www.hersheys.com)
1887: Milton Hershey establishes the Lancaster Caramel Company.
1895: The Company begins to sell chocolate.
1900: Hershey sells his caramel company to focus on chocolate
1905: Milton Hershey established an independent trust company to provide the town’s financial services and manage the assets that were to fund his many philanthropic endeavors.
1906: The Village of Derry Church is renamed Hershey
1907: Hershey Kiss was introduced.
1927: The firm incorporates as Hershey Chocolate Company and is listed on the New York Stock Exchange.
1940: Hershey’s chocolate plant is unionized.
1963: H.B. Reese Candy Company is acquired.
1968: The firm adopts the name Hershey Foods Corporation.
1970: Hershey’s first consumer advertisement appears in 114 newspapers.
1988: Hershey Purchases the operating assets and manufacturing assets of Peter Paul/ Cadbury brands.
1996: Hershey launches its first hard candy line, TasteTations, and the reduced-fat Sweet Escapes Line.
1999: The firm sells its pasta business to New World Pasta, LLC.
2002: The Milton Hershey Trust School announces plans to sell Hershey, but withdraws offer.

MICROENVIRONMENT

Strengths

The Hershey Company has many positive attributes that solidify the company as a powerhouse among chocolate producing companies in the world. Hershey has a rich history full of tradition, philanthropic service, brand innovation, mass-production technology, customer service, and strategic alliances. Hershey’s organizational capabilities and passion for premier chocolates enables the company to offer top-tier value creation and undisputed marketplace leadership (www.thehersheycompany.com). These superior traits combine to give The Hershey Company a winning edge and provide a strong tradition for the company to grow and expand well into the future.

The Hershey Tradition
The Hershey Company is one of the oldest chocolate companies in the United States and has become an American icon. The company, which was founded in 1894, has been in business for over a hundred years and has built its base and following in a place once known as Derry Church, Pennsylvania. In 1906, it was renamed Hershey, Pennsylvania, after the growing popularity of Hershey’s Chocolate. Today, it is popularly called Chocolatetown, USA. Because of Milton Hershey’s strong philosophy, “One is only happy in proportion as he makes others feel happy,” the foundation was laid for Chocolatetown, USA. Further, the chocolate philanthropist opened HERSHEYPARK picnic and pleasure grounds in 1907 (www.hersheypa.com). HERSHEYPARK has recently celebrated its 100th anniversary and features such amusements as twisting steel coasters, interactive live entertainment, and mouthwatering food selections. This long standing tradition in the community reverberates in every person that works and lives in Hershey, Pennsylvania, as well as the numerous visitors and tourists who embrace the American Dream that is Milton S. Hershey. (D’Antonio, 4)

The Hershey Tradition was even further solidified during World War II when The Hershey Company produced “Field Ration D” bars as well as Hershey’s “Tropical Chocolate” bars for the troops engaged in the global war. The new government-approved chocolate bars were so successful that by the end of 1945, approximately 24 million bars were being produced every week (www.hersheys.com). This strong support of the U.S. soldiers in combat helped paint and shape what American “ideals” were and branded The Hershey Company forever in the minds of GI’s and further defined what the Hershey tradition came to be known as today. This support and unwavering loyalty to improve the lives of U.S. soldiers carried over into the “baby boomer” generation. The soldiers and their families readily supported The Hershey Company in the purchasing of their chocolate candies. They further supported the newly manufactured pantry items line that included items such as Hershey’s Syrup and their newly acquired pasta manufacturing line (www.hersheys.com).

The Chocolate Manufacturing Renaissance

In 1905, Milton S. Hershey completed the world’s largest chocolate manufacturing plant in the world, manufacturing chocolate using the latest mass production techniques (www.hersheys.com). Hershey’s milk chocolate quickly became the first nationally marketed product of its kind. Because he had chosen to erect his factory on 40,000 acres near dairy farmland at his birthplace of Derry Church, Pennsylvania, Hershey could readily obtain large quantities of fresh milk needed to perfect and produce fine milk chocolate. This novel approach of producing chocolate, which was once only reserved as a Swiss luxury product, enabled the company to deliver top-quality and exciting products to the market place.

Today, the Hershey Company is the largest North American manufacturer of quality chocolate, holding forty-four percent of the chocolate market (www.hersheys.com). They have also become a leader in the growth of dark and premium chocolate (www.hersheys.com). One reason for climbing to the top was Hershey’s opening of the largest chocolate factory in the world. On May 22, 1965, The Hershey Company opened a factory that covered two million square feet of manufacturing space in Oakdale, California. With the added space and the Hershey technology, growth was imminent. Still today, Hershey’s relies on their high grade of chocolate experience in chocolate manufacturing industry to help propel their chocolate businesses to the next level.

Strong Brand Name and Brand Image

Hershey’s products have long been well known and well respected. With over one hundred years of experience in the chocolate industry, the company has their two original goals. First, the company strives to bring a high-grade product to its customers. Secondly, Hershey’s wants its products to be available everywhere. Both of these goals began with Milton Hershey’s idea to provide the delicacy of chocolate to the common consumer (www.thehersheycompany.com). Today, Hershey’s continues to uphold Mr. Hershey’s mission with quality consistency and diversity.

Diversified Products

Over the years, The Hershey Company has strived to provide innovative and designer chocolate choices for the avid consumer. Some of these innovative choices have turned into premiere products known worldwide. Examples of these products include Hershey’s Kisses, Hershey’s Milk Duds, Hershey’s Mr. Goodbar, Reese’s Peanut Butter Cups, YORK Peppermint Patties and Hershey’s 5th Avenue candy bar (www.thehersheycompany.com). In addition to having a successful launch of in-house products, Hershey Foods holds a license to manufacture Cadbury chocolates, Rolo Chewy caramels in milk chocolate, and the KitKat wafer bar. Hershey enjoys strong brand recognition for each of their product line divisions. Recently, The Hershey Company has addressed the health conscious consumer and has added a number of products to aid in theassistance of a weight aware populace. The introduction of the 100 Calorie Chocolate, Pretzel, and Wafer Bars are a first step in the direction to combat the adverse effects of weight gain associated with chocolate candies. Hershey’s has addressed the health benefits of chocolate and has issued a new product line that addresses the healthy aspects of whole bean chocolate and new cacao additives that have more antioxidant capacity to ward off heart disease and slow the degeneration of the brain and eyes. Hershey has established itself as the world leader in the fast-growing dark and premium chocolate segment. With its foundation firmly in place, Hershey can offer a great breadth of products that enables the company to reach a large customer segment (www.hersheys.com).

Powerful Partnerships

Another one of Hershey’s strengths is their recent alliance with Starbucks. Starbucks, a well known beverage company known for its unique experience, provides coffees, teas, fruits, herbs and spices to be paired with premium chocolates from Artisan Confections Company, a wholly owned subsidiary of Hershey, to create “delicious and distinct” chocolate products. Hershey’s senior vice president, president of North American commercial group, Christopher J. Baldwin, explains the pairing as: “Starbucks is one of the world’s leading brands among consumers. Hershey’s chocolate expertise, distribution and selling capabilities combined with the strength of the Starbucks brand will help transform the high-growth premium chocolate segment” (www.thehersheycompany.com).
In the July 19, 2007, press release announcing the agreement, Baldwin goes on to explain that both Starbucks and Hershey will continue to maintain and share their sustainable growth and farmer’s equity practices.

Other partnerships that have allowed Hershey to advertise and market products together have been the Nabisco, Kraft and Coca-Cola companies. Nabisco Honey Maid Graham Crackers and Kraft Jet-Puffed Marshmallows each allow Hershey to market their products with the classic Hershey Chocolate Bar to make the ever-popular S’more campfire dessert (www.hersheys.com). Coca-Cola has also teamed up with the Hershey’s product Reese’s Peanut Butter Cup to market their products together as a buy one get one free deal (www.hersheys.com).

Strong Customer Relationships

The main customers of Hershey are wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires, department stores and natural food stores. The relationship that Hershey maintains with these customers has been essential to the growing success of the company. Hershey strives to provide great customer service and inventory in a timely manner with efficient and effective inventory controls. What makes The Hershey Company successful with their customers is the strong customer service department. Over the years, the company continues to make progress in implementing improvements to customer service. These improvements add value to the fulfillment of orders placed and shipped throughout the world. In addition to the ever-improving customer service department, Hershey is currently revamping their supply chain technology to be more competitive in a world of high demand and quick access.

Making a Difference

Hershey is devoted to helping make a difference in the lives of others. One way that Hershey illustrates this commitment is by supporting a wide variety of community organizations. Corporate financial donations as well as employee time and talents are given wholeheartedly. Such organizations include the American Red Cross, UNICEF, the YMCA , Habitat for Humanity, the Partnership for a Drug-Free America, Children’s Miracle Network, the United Way, various AIDS funds, a number of environmental conservation and protection groups and the Young Survivor Coalition; an international, non-profit network of breast cancer survivors and supporters (www.thehersheycompany.com). Minority based groups such as the NAACP, the Urban League and La Raza are also important factions that Hershey enjoys supporting (www.thehersheycompany.com).

Environmental stewardship is also an area that Hershey supports. They describe their support as an array of practices from emphasizing, “recycling to reducing emissions to working to protect tropical forests” (www.thehersheycompany.com). Locally, Hershey recycles 90% of their waste and in turn uses recycled paper and cardboard in their packaging process. Both in their U.S. facilities and abroad the company uses efficient water systems and energy saving lighting and appliances in everyday operations. Lastly, Hershey is conscious of the practices of their suppliers and vendors and asks that they meet strict standards in order to do business with Hershey.

The Hershey Family

The Hershey family of employees has a work environment that is positive, where employees are consistently focused, passionate, and hard working. Hershey promotes high ethical standards and has an outstanding reputation for honesty, fairness, and for consistently doing the right thing. The Hershey Company has established itself as a diverse company that openly welcomes and embraces different viewpoints. The company has established a practice of promoting from within, which acknowledges the people who understand the business. For the Hershey business family, The Hershey Company tries to reward their common stockholders by offering annual dividends. In the last ten years, Hershey has been able to offer dividends ranging from $0.42 per share to $1.13 per share. Each year, the dividends have increased at least $0.04 per share (www.thehersheycompany.com).

Weaknesses

Although The Hershey Company is a strong company based on high standards of quality, diversity, and customer service, weaknesses do exist. With a company as old as Hershey, legacy procedures, processes, and culture can arise as weaknesses and need to be improved and/or changed. Also, time-tested thought processes and decision-making units can sometimes hinder companies into moving into the future. As time goes by, customer preferences change, partnerships develop and dissolve, and technology advances.

Borrowings

Hershey recently entered into a credit agreement that will allow them to borrow up to $300 million. The company describes the agreement as a “new short-term credit agreement to establish an unsecured revolving credit facility to borrow up to $300 million. This agreement will expire on August 22, 2008. Funds may be used for general corporate purposes,” (www.thehersheycompany.com). In recent history, Hershey managed their long-term investments poorly. For instance, Hershey entered a long-term debt agreement in 1998 for the restructuring of their supply-chain technology. Sales were lost and profits dropped by a large percentage. Therefore, unless management practices have significantly changed, Hershey will repeat their past mistakes and lose money from their investment.

Poor International Performance

The world today is considered globally flattened. This is defined by borderless nations in which products are easily produced and distributed around the world and competition is not limited to local companies. As the largest North American producer of chocolate, Hershey performs poorly in the international community. Currently, the company’s presence is limited to Brazil, Canada, Mexico, and the United States (www.investopedia.com). The Hershey Company’s infrastructure has weakened considerably in the past decade. The company has experienced a weak connection between Mexican operations and U.S. operations. This is further fueled by the fact that Hershey has become increasingly dependent on Mexican production. This is primarily due to the increasing production costs associated with U.S. production.

Decision Making

The Hershey Company has relied on brand loyalty and has reduced advertising spending through the first part of the 21st century. As rising competition has put the once favorite chocolate company on the ropes for company survival, the cut back has proved to be a poor managerial decision. Further, through ineffective management and poor managerial decisions, The Hershey Company has been forced to close plants, implement layoffs, and forced to pay the severance packages of its long term employees. This has been fueled by the investment of nearly a half a billion dollars in new technologies to aid in supply chain management. In addition, outsourcing has also been an issue because of the increasing costs of dairy products (www.forbes.com).

Company Control

The Hershey Trust became the largest shareholder of Hershey after the company’s founder gave his entire fortune to the Milton Hershey School in 1918. The Milton Hershey Trust owns approximately 33% of The Hershey Company’s total equity. In addition, it has over 74% of the voting control (www.hersheytrust.com). Since so much of the voting power has been given to the Trust, there is concern that this power could promote unilateral decision-making and get in the way of good decision-making.

MACROENVIRONMENT

SOCIOCULTURAL/DEMOGRAPHIC SEGMENT

Opportunities

Consumers constantly change their preferences for products. It is no surprise that consumers’ wants for chocolate products have changed to a desire for richer products, which has resulted in commercial bakeries using higher quality chocolate and cocoa product industry to produce its goods. Further, consumers also want a greater variety of chocolate products. This enables the industry to expand their product lines to meet the new needs of customers and provides an opportunity for greater sales of the new products.

The chocolate and cocoa product industry has an opportunity to establish joint ventures with other retail companies in other industries. Examples of this are coffee and chocolate manufacturers partnering to produce new chocolate flavored coffee products and chocolate and food manufacturers partnering to enhance their products. For instance, consumers’ consumption of coffee has increased in recent years resulting in a surge of flavored coffee products. This provides multiple opportunities to the chocolate and cocoa industry. First, they are able to market to new segments and participate in new trends through their partners. Second, they are able to gain added revenue and increase visibility of their products.

It has been a trend in recent decades for consumers to desire healthy alternatives to traditional foods. In recent years, studies have shown that dark chocolate provides several health benefits. “The latest research indicates that the flavonoid-rich substance could have a protective effect on the cardiovascular system, at least in the three hours immediately following consumption” (Chocolate Trading Co., 2005). This recent revelation adds to studies that have noted dark chocolate can reduce an adult’s chance of cancer. A team from Georgetown University recently revealed “a compound in chocolate called pentameric procyanidin which is believed to activate a number of proteins responsible for the continual division of cancer cells, thereby thwarting the progression of breast cancer” (Chocolate Trading Co., 2005). Further, decreases in blood pressure can also be obtained from dark chocolate because of increased glucose metabolism (Chocolate Trading Co., 2005). These new discoveries provide a great opportunity for the chocolate and cocoa industry to increase the sales of their dark chocolate segment.

An increase in the importance of commercialized non-traditional holidays (e.g. sweetie days, grandparents day, boss’s day) and traditional holidays (e.g. Christmas, Valentine’s Day, Mother’s Day, Halloween) presents an industry opportunity to market specialized products tailored for the holidays. The commercialization of these holidays encourages consumers to purchase more chocolate products than they would in an average day. This provides an opportunity for specialized gift products to increase sales.

Threats

A growing number of peanut allergies can have a negative affect on the chocolate and cocoa product industry because most chocolate manufacturers produce chocolate products that include some form of peanut or peanut oil. Due to the health risks, individuals with peanut allergies are very sensitive to peanut products; and therefore, they cannot eat anything that could have potentially encountered peanuts or other assorted nut products. As more people develop these allergies, it will negatively impact sales of peanut products and therefore negatively affect chocolate products made with or made around chocolate products.

The obesity epidemic has resulted in an increasing number of individuals becoming more health conscious and thus abstaining from high calorie and sugar products. This recent health food movement has adversely affected the chocolate and cocoa product industry by causing consumers to decrease their consumption of traditional high fat chocolate products. Further, consumers may search for healthier substitutes, such as fruits, health bars, and other health-conscious snacks. This potentially will lower sales of many product segments in the chocolate and cocoa industry.

Greater concern for the environment has presented another threat to the chocolate and cocoa industry. Conservationists continue to support sustainable agriculture, which limits the industry’s ability to grow cocoa plants in extreme conditions. These limitations prevent the plants from producing at their maximum yield (Whinney, 2007).

POLITICAL/LEGAL SEGMENT

Opportunities

Chocolate producers from some areas of the world have been unable to distribute their goods to some industrialized countries because of controversial issues. One issue that has received a great deal of attention in the chocolate industry is the use of child labor to work on farms that produce cocoa. Currently, some countries do not allow cocoa to be traded from African countries because these countries believe children are being used for labor in an extremely unethical manner. Further, some industrialized countries who have not stopped buying the cocoa presently are threatening to reduce or eliminate purchases from these African countries. This has put the offending countries on the defensive because they believe their use of child labor is similar to the way children of American farmers are used on farms to help out a family. Western governments, however, believe that this is not true. Therefore, the Chocolate Manufacturers Association (CMA) and the World Cocoa Foundation (WCF) developed the Harkin-Engel Protocol, which is an agreement that addresses instances of abusive child labor practices on cocoa farms in West Africa and ways to eliminate the worst forms of child labor in the cocoa sector (U.S. Labor, 2006). The Harkin-Engel Protocol initiative has produced results that will have a positive effect on the cocoa and chocolate industries. One such result is the creation of the International Cocoa Initiative foundation partnered with non-governmental organizations (NGOs) to provide social protection programs in West Africa. This project, along with other small pilot projects yet to be implemented, will ultimately be used to develop a child labor monitoring system and mend fractured relationships between certain countries in the chocolate and cocoa industry. This will open new channels for distribution of cocoa to the international community who currently restrict or prohibit purchases of cocoa from African countries. Further, countries who are on the border of creating restrictions will ultimately reconsider if these proper labor monitoring practices are in place. Ultimately, the chocolate industry will see increased sales to new markets.

State governments have been under pressure in recent years to provide tax breaks to favor the low-income brackets. This has led many states to approve a reduction or elimination of sales tax for many food items. In future years, many states will continue with this trend and many people hope for tax on all food products to be completely eliminated someday. As these tax reductions occur, the chocolate and cocoa industry will see an increase in sales to the lower income demographic.

Threats

In recent years, the industrialized world has begun to focus more heavily on healthy eating habits. This is a direct result to the increased instances of diseases linked to poor eating habits, such as cancer, diabetes, and heart disease. This poses a great threat to the chocolate and cocoa industry. This trend has caused recent laws to be passed by the Food and Drug Administration (FDA) that forces food manufacturers to post ingredient and health information for consumable items. These laws force food manufacturers to provide customers with previously unknown health information therefore discouraging sales of many unhealthy products, such as chocolate. Further, as new ingredients are found to be a health risk, the FDA will require food manufacturers to post the new information to the public. With these new laws in place, the manufacturer has two options. They either have to expand their product lines in order to recover some of their current sales numbers and offer new healthy alternatives, which increase many costs, or the manufacturer does not offer a healthier alternative and takes a greater loss in sales. Both of these alternatives negatively impact the manufacturer financially. This combined with some unrecoverable loss in sales from those who dismiss chocolate altogether poses a significant threat to the industry.

In many cases, legislation can be passed in order to protect working class personnel. This happens regularly in the farming industry where sale price floors are set on various crops that farmers sell. For instance, “The Farm Security and Rural Investment Act of 2002, which is a six-year farm bill, impacts the prices of sugar, corn, peanuts and milk because it sets price support levels for these commodities” (Hershey’s 10-K, 2006). Sugar, which is one of the chocolate and cocoa industry’s most important ingredients, can be priced adversely for the chocolate and cocoa industry in order to support this legislation. This act also poses “import quotas and duties to support the price of sugar.” This requires the United States to pay a higher price than other countries in the market. As a result, the chocolate and cocoa industry must pay elevated prices for their highly used resource. This either causes companies in the chocolate and cocoa industry to lower their prices and profit margin so that chocolate product sales will increase, or to increase their prices and potentially lose sales.

TECHNOLOGICAL SEGMENT

Opportunities

The chocolate and cocoa industry relies heavily on milk for their products. The modern milking machine is a technology that is used to milk cows efficiently, safely, and satisfies all milk hygiene requirements. The main benefit for the chocolate and cocoa industry is the ability to reduce time spent on traditional milking routines, which in turn reduces labor costs. The expectation is that the chocolate and cocoa industry will reap financial benefits by reducing manufacturing costs through additional mechanical improvements and innovations.

A large cost realized in many industries is distribution costs. Packing and shipping costs can be reduced through technological advancements that focus on less waste and more efficient distribution and logistic channels. For instance, programs such as Six Sigma, lean manufacturing, and 5s are constantly making improvements in these areas to increase efficiency. In many industries, these improvement programs have implemented technologies such as Radio Frequency Identification (RFID) to better track inventory and equipment. Similar technological advancements could improve efficiency of tracking and transfer operations for the chocolate and cocoa industry and reduce labor costs in these areas.

Telecommunications innovations present an opportunity to the chocolate and cocoa industry. Recent advances in the telecommunication industry and the introduction of telecommunications technologies to less developed regions, such Ghana and the Ivory Coast, has allowed the cocoa industry to expand its distribution chain and customers outside of developed regions. For instance, the Internet has expanded a great deal in the past decades. As it continues to expand, more individuals will gain access to chocolate product advertising and be able to attain chocolate products without visiting retail stores.

Threats

The chocolate and cocoa industry lacks support of Non Governmental Organizations (NGO) and Local Government Support, which limits the farmers’ access to business guidance, funding, and continuing education. Due to the lack of resources, support, and education opportunities, farmers are unable to learn how to use new technologies (Whinney, 2007). This results in the farmers being less efficient when collecting and distributing cocoa. This hinders the industry from attaining additional cocoa to create more chocolate.

Manufacturing processes have changed immensely over the past several decades. As new technologies are introduced, their predecessors quickly become outdated and less efficient. In order to keep pace with these new innovations, companies within the chocolate and cocoa industry will have to invest significant capital in order to remain competitive. This can carry other cost burdens as well, such as training and installation costs.

ECONOMIC SEGMENT

Opportunities

The chocolate and cocoa industry purchases a mix of cocoa beans and cocoa products, such as cocoa butter, cocoa liquor, and cocoa powder to meet their manufacturing requirements. Cocoa beans are grown principally in Far Eastern, West African, and South American equatorial regions. Civil unrest in the world’s largest cocoa-producing country, the Ivory Coast, has resulted in volatile prices. Therefore, producing cocoa in other countries would provide the industry a great opportunity. For example, the Ministry of Agriculture in Jamaica has recently allocated millions of dollars to allow production of several Jamaican crops, including cocoa, to expand its production (www.laborrights.org). Cocoa is the most significant raw material used to produce chocolate. Further, most of the supply is currently provided by West African countries that are coping with civil unrest issues; therefore, the new development in Jamaica provides an opportunity to the industry by increasing supplier options.

Another opportunity for the industry relates to the price decline of refined sugar. In 2006, sugar crops and sugar refineries recovered from the hurricane impact of 2005. As a result, refined sugar prices declined from $0.38 to $0.31 per pound (Hershey’s 10-K, 2006). This trend is likely to continue in future years. This price decline gives the industry an opportunity to cut costs and possibly redistribute the savings into other areas such as research and development, product development, and dividends to investors.

Disposition of waste from any manufacturing process is always a significant cost to a company. This has been the case for the chocolate and cocoa industry like any other. However, recent developments in bio-fuel production have created a new opportunity for this industry. In most cases, bio-fuel uses the consumable bio-product (i.e. corn being used to create ethanol) to create fuel. Chocolate production, on the other hand, results in a by-product that, due to a new method of production, can be used to make bio-fuel (Lovell, 2007). This will reduce or eliminate disposition costs of this by-product since it now has value. Further, if the process is found to be lucrative and efficient, the chocolate and cocoa industry may see additional revenue from the future purchases of their by-product.

Threats

A recent area of debate in the U.S. has been the issue of minimum wage. In 2006, it was decided that minimum wage would increase three times in yearly increments starting in 2007. This increase will affect the chocolate and cocoa industry because a majority of employees working in chocolate manufacturing plants are at or near the minimum wage. Due to this increase, prices on chocolate goods will have to increase to sustain current profit levels, or the number of workers will have to be reduced accordingly. If prices increase, the industry stands to lose business. If manufacturing plants decide to reduce the number of workers, production will be affected and some plants may be ultimately forced to shut down.

In recent months, one of chocolate’s important ingredients, milk, has been on a steady price increase. “Milk prices hit a record [in July] in the United States, where consumers paid an average $3.80 a gallon, compared with $3.29 in January, according to the U.S. Department of Agriculture” (Vandore, 2007). This can be attributed to a steady increase in consumption by newly industrialized countries, such as China. “The Dairy Association of China estimates consumption will rise by 15 percent to 20 percent annually in the coming years” (Vandore, 2007). If the demand for milk increases worldwide and the number of cows remain constant, the price of milk will continue to increase. This will be a direct threat to the chocolate industry because manufacturers will either have to raise prices to offset the increased cost of milk, or reduce profit margin of chocolate by keeping pricing constant.

Gasoline has been increasing at an astounding rate in the past few years. This trend is more than likely going to continue in the coming years for many reasons, such as civil unrest in the Middle East, natural disasters reducing supplies, and oil becoming a scarcer natural resource worldwide. This will affect the chocolate industry in multiple ways. First, production and transportation costs will increase as gasoline prices increase. Second, as gasoline prices rise, the demand for ethanol will also increase. Sugar is one primary ingredient for creation of ethanol. Therefore, as demand for ethanol increases, sugar demand increases. The added demand for sugar for other purposes either decreases the sugar supply to the chocolate industry or increases the price of the commodity. Both these effects create additional costs for the chocolate industry and will affect sales and/or profit margins.

GLOBAL SEGMENT

Opportunities

Global trade has continued to break through a variety of barriers. Agreements such as the North American Free Trade Agreement (NAFTA) and organizations like the European Union (EU) have made trade between countries much easier. Many ingredients for chocolate are grown in very specific regions. For instance, cocoa can only be grown in locations generally no more than 10 degrees north or south of the Equator. Because of these barriers to growth, trade agreements and organizations that open the distribution channels for these ingredients are vital. The countries that have established agreements for chocolate ingredients could in turn potentially lower their transaction costs. Further, where agreements are not in place, new agreements and organizations can develop to help eliminate trade barriers. Thus, the chocolate and cocoa industry will be able to obtain their ingredients at cheaper prices and increase their overall profit margin.

Many countries around the world are steadily becoming industrialized. As this occurs, new markets are created for all industries. As infrastructure develops and distribution channels become stronger, the transport and supply of chocolate and/or its ingredients can be achieved. For instance, countries such as China and India, who have recently become industrialized, have many areas where chocolate products are not offered. The chocolate and cocoa industry can now expand their business due to the recent development of their infrastructure and distribution channels. This provides a great opportunity for the chocolate and cocoa industry to expand their business to international markets and increase overall sales.

In recent years, many industries located in industrialized countries have begun to outsource some of their basic labor operations. Countries such as China, India, and Mexico have minimum labor rates much lower than an average industrialized country with some areas paying below $1 an hour. This allows companies to get the same amount of work accomplished for a much lower labor cost. By paying some initial startup costs to build or buy a facility, a company can see a great deal of savings in a short amount of time. Further, by locating manufacturing operations in other countries, lower production costs can be attained. For instance, locating manufacturing operations closer to or within a country where the product’s ingredients are found can significantly reduce production costs. Therefore, the chocolate and cocoa manufacturing industry can attain the savings aforementioned if some of their manufacturing operations are outsourced.

Threats

Farming areas once used for many crops is continually being used to develop new residential, commercial, and industrial structures. The reduction in land in areas where chocolate ingredients are grown can potentially reduce the supply of cocoa and other chocolate ingredients and consequently cause prices for these goods to increase. As mentioned before, cocoa is grown in a very specific region, roughly 10 degrees on either side of the Equator. If urban sprawl pushes into these areas, the supply of chocolate can be greatly affected.

As previously stated, one of the key ingredients used to manufacture chocolate is cocoa. This ingredient obtained in tropical areas from a bean called the cacao bean. “Each year 20% of the cacao beans that are used to make chocolate are lost to plant diseases” (Steigman, 2006). Although this is a troubling fact in itself, there is a potential for the percentage of cacao lost to increase. This potential arises from a chance that deadly diseases will spread to West Africa and destroy a large quantity of cacao. If diseases, such as frosty pod and witches’ broom, spread to this region, these diseases “could reduce yields by an additional one million or more metric tons per year” (Steigman, 2006). If this was to occur, the chocolate and cocoa industry would be greatly impacted by shortages and increasing ingredient costs.

“West Africa accounts for approximately 70 percent of the world’s crop of cocoa beans” (Hershey’s 10-K, 2006). Recently, this region has been experiencing civil unrest. If tensions escalate beyond government control, the chocolate and cocoa industry stands to temporarily loose access to their largest supply of cocoa. Although other countries could still supply the cocoa, prices would increase if trade of cocoa ceased in West Africa. Further, even if trade continued between West Africa and other countries, civil unrest causes the price of cocoa to fluctuate. This could potentially increase production costs of chocolate and negatively affect the chocolate and cocoa industry.

Natural disasters happen each year around the world without warning. In tropical areas where a majority of cocoa is grown, hurricanes and typhoons among other natural disasters happen frequently. In the event that an area, such as West Africa, is hit by a devastating natural disaster, many cocoa farms could be destroyed and potentially disrupt the supply of cocoa for years. This would drive the supply of cocoa down and increase prices of the most valuable ingredient to chocolate.

Exchange rates are constantly changing and can at times become very unstable. The chocolate and cocoa industry relies on trade of their end product and ingredients across borders in order to offer a wide variety to customers. If exchange rates change unfavorably, the market price of goods will increase. And since chocolate is not considered a necessary food, the increase in price may drive some consumers away. This is a potential threat to the chocolate and cocoa industry because companies are left with additional inventory that is either sold for a lower profit margin or a loss.