Global chocolate maker The Hershey Company (HSY - Analyst Report) is geared to bolster its presence in the growing market of China. As part of this strategy, Hershey’s wholly owned subsidiary Hershey Netherlands B.V. has inked an agreement to take over 80% interest in Shanghai-based chocolate maker, Shanghai Golden Monkey Food Joint Stock Co., Ltd. (“SGM”).
Although the company has not made any comments on the purchase consideration for the deal, as media reports Hershey is taking over the Chinese company for a cash consideration of $584 - $600 million. The deal will add popular Chinese brand Golden Monkey honey-peach hard candies, strawberry-flavored cheese chews, and seaweed-flavored wafer sticks into Hershey’s already rich portfolio. Moreover, this is a strategic fit for Hershey’s as the former has similar strategies related to brand building and selling capabilities with Hershey. The takeover is expected to add to Hershey’s earnings on an adjusted basis in 2014.
Among the emerging countries where Hershey is boosting its presence, the company’s special focus is on China. China is emerging as an economic powerhouse with its large population, largest consumer bases given its growing number of middle-class and affluent households. According to market research firm Euromonitor, the chocolate confectionary industry in China is expected to grow by a 6% compound annual growth rate (CAGR) for the coming five years.
Hershey plans to add manufacturing capacity and resources to drive growth in China. The company expects China to become the fifth largest global confectionary market by 2016. However, Hershey will have to compete with Brussels, Belgium, based Mars Foods Mars Foods which is the leading player in chocolate confectionery with a 43% share of retail value sales in 2012.
Though Hershey’s is accelerating investments in overseas markets, particularly in Mexico, Brazil, India and China, competitors like Mondelez International, Inc (MDLZ - Analyst Report) have a stronger presence outside North America. Mondelez’s purchase of Cadbury in Jan 2010 has opened new sales channels for the company through the latter’s vast distribution networks in developing markets such as India, Brazil and Mexico. In contrast, markets outside the U.S. have accounted for only 14%–16% of the company’s net sales between 2010 and 2012.
Other Stocks to Consider
Hershey carries a Zacks Rank #3 (Hold). However, better-ranked food companies are Green Mountain Coffee Roasters Inc. and The Hain Celestial Group Inc.(HAIN - Analyst Report). Both the companies carry a Zacks Rank #2 (Buy).