The other day I was scanning headlines and came across an interesting item: earnings are suffering at Hershey’s chocolate due to a disappointing China performance. That’s not how it was supposed to work out: back in 2013 Hershey, in an expansionist mood, acquired candy maker Shanghai Golden Money for $584 million, in hopes that it could become China’s biggest chocolate player.
What went wrong? Was this just another case of China’s souring economy dragging down another venerable American company? Or was there something else at play here – something more subtle. In search of an answer, I emailed a gentlemen whose judgment on foreign investments in China I trust, and who asked that – for the purposes of this blog – he be referred to as “Cocoa.” He took a look at Hershey’s attempt at an explanation, and used it to form his own. So, with Cocoa’s permission, I reprint Cocoa’s sound explanation for why Hershey’s is tanking in China.
“I think Hershey’s problems in China – and as judged by China – have nothing to do with Hershey’s chocolates taste which is acceptable, design and packaging which is okay, price which is reasonable and all in all an acceptable value (I pointedly dismiss all other products but the chocolates no matter in what form; peanut butter cups probably make the average Chinese gag). Rather, the company bought a pig in a poke, to wit Shanghai Golden Monkey which Hershey now understands has an “unstable distributor network” (call that distributors disloyal to the brand who can’t be won over to push sales without hefty rebates coming into their pockets) and so the “retail customer reach is not as broad as we (Hershey) believed it to be” (meaning the customer base is much, much smaller than was presented to Hershey) and so the consequence that sales in 2015 are US$90 million less than the US$200 million they expected – well, that’s 45% below projections which to anyone in industry is a sure-fire pink slip to all involved. In short, Hershey’s problems in China have nothing to do with chocolates but everything to do with newbies coming to China and being sold a bill of goods. Yep, it’s that simple.”
I have nothing to add to this except to say that, a) I agree, and b) it’s remarkable that after three decades, well-heeled, established companies continue to allow their enthusiasm to run past their common sense when seeking growth in China.