In response to rising commodity prices for key ingredients, such as cocoa, dairy and nuts, the Hershey Company on July 15 raised its wholesale prices by approximately 8 percent across most of its instant consumable, multi-pack, packaged candy and grocery lines. The price increase was effective immediately, but direct buying customers are exempted from the increase until Aug. 12.
According to the company, price increase was necessary to offset part of the significant increases in Hershey’s input costs, including raw materials, packaging, fuel, utilities and transportation, which the company expects to incur in the future. Hershey anticipates its fiscal 2014 results to be at the lower end of its previous targets.
“Over the last year key input costs have been volatile and remain at levels that are above historical averages," said Michele G. Buck, President, North America, The Hershey Co. “Commodity spot prices for ingredients such as cocoa, dairy and nuts have increased meaningfully since the beginning of the year. Given these trends, we expect significant commodity cost increases [primarily dairy] in 2015."
This marks the first time in three years that the No. 1 candy producer in the United States has raised its chocolate prices to cover rising commodity costs. In 2011, the company raised its wholesale prices by about 9.7 percent. According to Hershey, most of the benefit from price increases will not materialize until the Halloween buying season in 2015. Halloween is the No. 1 holiday occasion for candy sales, followed by Easter and Valentine’s Day, and chocolate is the No. 1 confectionery choice for Halloween.
Rising cocoa futures over the past three years are prompting confectionery companies to increase prices globally. According to Euromonitor International, 2.2 pounds of chocolate is forecast to cost an average of $12.62 in the United States in 2014, up 2 percent over 2013 and an 18-percent jump over the last five years.
Another concern about the volatile cocoa market is the fact that industry analysts predict demand will outpace supply from the world’s top-growing region of West Africa. In 2011, the West African cocoa industry was nearly crippled during an election dispute that caused Ivory Coast presidential claimant Alassane Ouattara to cut off funding for the incumbent leader Laurent Gbagbo who refused to step down after he lost the election in November 2010. The nearly 4-month ban on exports sent cocoa prices soaring internationally, and they have yet to stabilize.
In the United States, the chocolate confectionery is dominated by two companiesThe Hershey Co. and Mars, Inc.that accounted for a combined 65% share of overall value sales. Euromonitor International predicts the U.S. chocolate confectionery market will have constant value growth of 7 percent between 2013 and 2018; however, higher prices and smaller pack sizes are expected to drive retail volume sales down by 1 percent over the forecast period.
Because of continued cocoa price volatility, many food manufacturers are coping with extraordinary uncertainty when managing price risk exposure to cocoa and chocolate ingredients. So could Hershey’s announcement prompt its competitorsMars, Kraft Foods Group and Nestlé SAto follow suit and increase prices? Will manufacturers pass those price increases on to consumers? Time will tell, but you can bet many analysts and industry insiders would like the answer.