In Chinese, its name means good times, or hao shi. But times aren’t much fun for Hershey’s in China right now. In fact, the biggest confectionery company in the US has been having it tough since it purchased local player Shanghai Golden Monkey (SGM) in 2014.
In 2015 Hershey’s wrote down $281 million of the Rmb3.17 billion ($460 million) acquisition (including debt) after sales failed to live up to expectations. During last month’s first quarter earnings announcement, it took a further $208.7 million provision covering property and employee severance charges relating to an ongoing restructuring plan.
The problems persist for Hershey’s at SGM and, as Jiemian reports, it is now in the process of suing 130 of the Henan-based company’s managers and a thousand of its distributors for unpaid loans. In turn, they have petitioned the local government with claims that Hershey’s hasn’t paid them Rmb270 million in commissions and bonuses following their dismissals after the takeover.
Were they to read the company’s history books, the former employees might argue that Hershey’s has forgotten the ethos of its founder, Milton S Hershey, who once said that, “one is only happy in proportion to how much he makes others feel happy”. The legendary philanthropist, who produced his first chocolate bar in 1900, believed “business is a matter of human service”. Less than two decades after he established his firm, he transferred its ownership to a trust that would endow a school for underprivileged children. The trust still controls the New York Stock Exchange-listed company today.
Hershey’s acquisition of SGM from the Zhao family signalled a major push to expand its global footprint. The two companies seemed like a good fit as SGM was strong in third and fourth-tier cities, while Hershey’s had built its market share in tier-one and tier-two locations. However, as food industry researcher Zhu Danpeng tells Jiemian, SGM had already passed its peak, with sales declining from Rmb1.5 billion in 2007 to Rmb1 billion in 2012. Zhu also says that Hershey’s failed to understand how family-owned businesses operate in China. In particular, SGM had been granting loans to its distribution managers so they could purchase stock, which they would then offload to confectionery traders around the country. As one former distribution manager Chen Zhen complained to Jiemian, “regional managers kept pressurising us with sales targets”. To meet them, Chen and his colleagues purchased inventory that the dealers subsequently refused to take because they had unsold stock of their own at a time of declining chocolate sales.
Chen says he wasn’t worried because “Boss Zhao and regional managers promised the company would take unsold stock back as they had done in the past”. But in May 2015 Hershey’s served him notice and asked him to fill in a form detailing his outstanding loans. A year later he was summoned to court to pay the money back. The company didn’t want the unsold stock, which had sat in a warehouse until it passed its sell-by date. In the meantime, Hershey’s had managed to drop the price it paid for SGM after refusing to pay the final 20% tranche at the originally agreed level. As a result, it was able to reduce the cost of the acquisition from Rmb3.5 billion to Rmb3.17 billion before the deal finally closed in February last year.
Analysts say that Hershey’s has compounded its troubles by failing to understand the way that e-commerce is transforming the retail landscape in China – much faster than in other countries. Whereas online chocolate sales account for about 5% of purchases in developed markets, the ratio is about 23% in China, up from 1% in 2011. Hershey’s is also coming under new pressure from Mondelez, which owns Cadbury’s and Milka. Mondelez has a tie-up with Alibaba’s Tmall and currently commands 3% of Chinese market share versus Hershey’s 6%. However, both have some way to go before they threaten Mars’ 40% market share (see WiC55 for an earlier article on why Mars “won the chocolate wars in China”) .
Hershey’s has also been unlucky enough to fall foul of geopolitical trends in China. In March, its joint venture with Lotte Confectionery was shut down by the Chinese authorities because of “safety violations” after the South Korean group agreed to provide land to deploy THAAD, an anti-missile shield that has upset Beijing (see WiC357).
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