UBS' latest report by analyst Steven Strycula says mainstream chocolate accounts for 88% of the US chocolate category, but has grown at a compound annual growth rate (CAGR) of 2% in the last three years, compared to 8% for premium chocolate.
Mainstream chocolates: prices increase; volume goes down
It says the US chocolate industry's +3.1% CAGR since 2011 has come primarily through price increases as per capita chocolate consumption has declined at a -3% CAGR since 2005. Strycula said the US chocolate industry is now driven by pricing, rather than sales volumes.
“2005 is the peak of [US chocolate consumption] on the volume basis,” he said, “and the slowing trend in chocolate market by definition means slow revenue growth [for Hershey]”.
Shoppers are also opting for fewer chocolate occasions, which are centered around seasonal purchases, according to the report.
In addition, US consumers are increasingly experimenting with alternative snack offerings and premium chocolate offerings from firms such as Lindt and Ferrero, it says.
Domestic competition caused by Mars’ growth
The UBS report says that soon after Mars hit a business bump in 2012, losing a 200 bps (basis point) market share, the Twix owner staged a comeback by investing to expand manufacturing capacity and increasing its media marketing effort.
As a result, Mars’ everyday sales increased over 5% this year according to Nielsen, and its year-on-year percentage of seasonal chocolate sales growth has shot up to 8.3% in 2015, compared to 2.9% the previous year.
However, UBS believes Mars’ dramatic growth as another major mainstream US chocolate company imposes a “headwind” for Hershey.
“Hershey is likely to respond with increased trade spend activity,” the report says. “Increased promotional activity amid a declining per capita consumption category leaves us cautious on the mainstream-priced US chocolate category near-term.”
Strycula added Hershey's Chinese Golden Monkey acquisition made matters even tougher.
Hershey posted a net loss of nearly $100m for the second quarter last year due to bleak performance in China.
However, UBS believes Hershey can return to breakeven profitability for its international business by 2018 from a $100m loss in 2015. “Our pathway back to breakeven profitability requires +MSD [mid-single digits] sales growth and a sizable restructuring in Hershey’s cost-heavy China business,” the report says.
Strycula added Hershey could still cater for US premium chocolate consumers by appealing to trendy values such as health, provided it doesn't sacrifice taste.