Chocolate sales in China more a trick than a treat for Hershey

It looks like the Chinese don't have as big a sweet tooth as the Hershey Co believed.

On Friday, the Pennsylvania-based maker of Hershey's Kisses, Reese's Peanut Butter Cups, Kit Kat and Mr. Goodbar, among other rich confectionaries, cut its profit outlook and announced that it will trim 300 jobs. The reason given: slowing sales growth in China.

"Hershey chocolate growth was below expectations in April and May (in China)," the company said in a release on Friday. "As a result, the company has tempered its expectations for organic net sales and operating income growth.

"Macroeconomic challenges and trends are affecting consumer shopping behavior, resulting in continued softness within the China modern trade, particularly the tier one hypermarkets where the company generates the majority of its chocolate sales.

"Additionally, increased chocolate category competitive activity and the accelerated momentum of e-commerce and online purchases are impacting results and prolonging trade inventory destocking."

The company also said it was moderating its 2015 net sales expectation for the Shanghai Golden Monkey Food Joint Stock Co Ltd (SGM) acquisition. Hershey said that recent market visits with sales and distribution networks "have indicated that the slowdown in the economy is affecting many consumers, resulting in lower than expected retail velocities".

Inventory is at greater than optimal levels, the company said. Hershey also is working with SGM representatives to reassess the value of the business, including the 20 percent of outstanding shares that Hershey is scheduled to acquire on the one-year anniversary of the initial close.

In an interview with China Daily last November, CEO J.P. Bilbrey said the acquisition of SGM, a privately held confectionary company, "gives us access now to over 1,000 distributors all across China and into small cities - including tier two and three cities".

"So when you think about the size of China, people's changing eating habits, imagine that there is an opportunity [that] the market will grow," Bilbrey said enthusiastically in November. "We see China as probably the most dynamic market anywhere in the world. We believe our business (by 2020) in China will be over $1 billion."

"They haven't been overly successful in terms of getting a handle on local tastes," Erin Lash, an analyst at Morningstar Inc who estimates that China accounts for about 5 percent of Hershey's sales, told Bloomberg.com. "It's a very difficult undertaking."

Hershey shares dropped 3.5 percent on June 19, closing at $89.04 on the New York Stock Exchange, just $1.16 from their 52-week low.

The job cuts Hershey announced will result in pretax charges of as much as $120 million, or 35 cents a share, mostly in cash.

Hershey's Kisses are more popular as gifts than for chomping on in China, but a deceleration in the economy made Chinese consumers cut spending even during the Lunar New Year holidays in February, Reuters reported. Hershey was banking that China would become its No 2 market behind the United States by 2017, and forecast sales of $450 million in the country this year.

Hershey's "disappointing performance" in China has left it ripe for potential shareholder activism, Philip Van Deusen, director of research at Tigress Financial Partners, told Reuters. But other analysts noted that 80 percent of the company's voting rights are held by the Hershey Trust, Reuters reported.

Financial pundit Jim Cramer posited on cnbc.com that the slowing chocolate sales, along with lower liquor sales and a drop in business at casinos in Macau, are connected to the Chinese government's efforts to curtail luxury spending.

"This all seems government led to me, not consumer led," Cramer said.

Contact the writer at williamhennelly@chinadailyusa.com