Out of race to buy British chocolatier, Hershey faces new challenges

Out of race for Cadbury, Hershey on slower path

HARRISBURG, Pa. — The Hershey Co. on Friday conceded the race to acquire British candy maker Cadbury, opting for a slower road to international expansion but also possibly a tougher battle for shelf space in grocery stores at home.

The all-but-certain acquisition of Cadbury PLC by American food giant Kraft Foods Inc. marks the second time in two years that the most recognizable name in American chocolate must stand by while its competitors make plays for much faster growth.

The Kraft-Cadbury combination coming on the heels of the 2008 acquisition of Wm. Wrigley Jr. Co. by privately held Mars Inc. also could erode Hershey’s strength in domestic distribution channels in coming years.

“Both point in the same direction: They’re going to be, relatively speaking, a weaker player,” said Jet Hollander, a former candy industry executive who now runs a North Carolina-based packaged-food consulting firm.

By veering away from the most direct path to international expansion, Hershey effectively chooses a more circuitous and costly course, some analysts said.

For now, analysts say Hershey remains in a strong position in North America, where it is No. 1 in chocolate and No. 2 in the wider candy category that includes mints and gum.

It has seen six straight strong quarters, partly because of heavier spending on marketing but also because the recession prompted many chocolate lovers to give up pricier specialty brands for Hershey’s mainstream products, such as Hershey’s Kisses and Reese’s Peanut Butter Cups.

Hershey may be better off without borrowing to buy Cadbury, some analysts say, because that could have overstretched the company begun more than a century ago in the town named for founder Milton S. Hershey.

A key allure of Cadbury was its large footprint in India — where it pulls in more than 30 percent of retail candy sales, according to data from market research firm Euromonitor International.

Acquiring a company with solid market share in India or another developing nation is attractive because candy sales are growing much faster there than in the United States and Europe.

Hershey has joint ventures in China, India, Brazil and elsewhere, but those sales are small and growing slowly and may never catch up to a commanding market share like Cadbury’s.

“In terms of time and investment … it’s more efficient to expand through acquisition,” said Ildiko Szalai, a packaged-foods analyst for Euromonitor.

Now, if Hershey is to acquire market share in developing nations, it is more likely to happen through smaller, piecemeal acquisitions.

The combination of Cadbury and Kraft — maker of Toblerone chocolate, Velveeta processed cheese and Oreo cookies — would create the world’s biggest confectionary company, edging out Mars from the top spot.

Behind them, in order, are Switzerland’s Nestle SA, Hershey and Italian candy maker Ferrero International SA, according to Euromonitor.

Still, a combination with Nestle or Ferrero is not out of the question for Hershey and would place it within striking distance of Mars and Kraft, based in Northfield, Ill., some analysts say.

“I don’t think it’s all doom and gloom,” said Edward Jones analyst Jack Russo. “It does put them in a little bit of a spot, but I think there’s solutions to that and ways out of it.”

In the United States, Hershey has the license to make and distribute several Cadbury candies, and it has an iconic name in chocolate, elements that should protect its space on shelves in the next few years.

Eventually, though, the heft of Mars and a Kraft-Cadbury juggernaut could squeeze Hershey in negotiations with retailers.

“In their existing markets, I think there’s going to be a lot of inertia,” Hollander said. “I don’t think that’s an imminent risk, but, over time, say five 5 to 10 years, they could see erosion.”