Hershey Keen for Piece of China

May 20, 2013, 2:56 p.m. ET

Hershey Keen for Piece of China

By COLUM MURPHY in Shanghai and LAURIE BURKITT in Beijing

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Aware that it needs China’s sweet tooth, Hershey Co. HSY -1.44% is rolling out a Chinese brand designed for the world’s fastest-growing candy market.

In a first launch beyond the U.S. market, Hershey is unveiling on Tuesday a candy known in English as the Lancaster and in Chinese as Yo-man. The Pennsylvania company plans to spend “several million dollars” marketing three kinds of the condensed-milk candy to gain a share of China’s market for milk candy, which Hershey estimated to be worth 7.5 billion yuan ($1.2 billion).

Premium milk candy is the fastest-growing segment in China’s candy market, Hershey said.To better concoct recipes that cater to Chinese tastes, Hershey on Wednesday will officially open its Shanghai-based Asia Innovation Center. It will be company’s second-largest research and development center world-wide. One of Hershey’s main rivals, Kraft Foods Group Inc., KRFT +0.23% has captured a growing segment of China’s snack foods business by selling Oreos with special flavors like Green Tea and Birthday Cake.

“From a company standpoint we’re very excited about the size of the category and the opportunity it presents,” said Steven Schiller, senior vice president of the global sweets and refreshment business unit for Hershey.

Hershey aims to expand international sales to 25% of global sales by 2017, up from its current 10%. The company had net sales last year of $6.6 billion and has a goal of reaching $10 billion in annual sales by 2017.

China is key to hitting that mark. Sales of chocolate, candies and gum in China climbed 46% from 2007 to 2012, reaching more than 79.6 billion yuan, or about $13 billion, according to market research firm Euromonitor International.

 

Hershey, maker of chocolate Kisses and its classic Hershey bar, is playing catch-up in this critical growth market. Until now, Hershey’s sales in China have been mainly limited to the country’s chocolate market, a segment in which Hershey held a 2.2% market share last year, while rivals like Mars Inc., maker of M&M’s and Dove, held 43%, according to Euromonitor.

Sales of chocolate in China totaled 12 billion yuan, or $1.95 billion, in 2012, Euromonitor said.

Lancaster will be produced in Hunan province by a local confectionery maker using imported milk.

Other competitors have already expanded beyond chocolate in China. Swiss food maker Nestlé SA NESN.VX +0.37% acquired a 60% stake in Chinese candy maker Hsu Fu Chi International Ltd. in 2011, expanding beyond its Kit Kats and Crispy Shark chocolate wafer bars to lychee-flavored gelatin custard cups and cucumber cookies.

Hershey says it wants to increase sales by a factor of seven in China over the next five years, which would transform the country into Hershey’s second-largest market after the U.S.

The candy maker plans to increase the number of stores in China by 32% and its sales force by 60% in 2013 from a year earlier. It declined to disclose data behind such projections. Hershey also plans to launch its Kisses Deluxe and will unveil other brands like its peanut butter and chocolate candy Reese’s and its hard fruit candy Jolly Rancher brand in China, according to a company spokesman.

Hershey introduced in China last year mint and gum brand Ice Breakers and is now launching Lancaster, which is expected to hit store shelves in June. The candy will debut in three cities: the central city of Wuhan, southwestern Chengdu and coastal Hangzhou.

Lancaster was inspired by similar candies that founder Milton Hershey made more than 120 years ago at his original candy company located in Lancaster, Pa., Hershey said.

But the product also resembles that of state-owned Bright Food Group, which sells White Rabbit, a popular milk candy.

Hershey executives say White Rabbit is targeting the mass market while its more-expensive Lancaster candy hits premium, with a higher-quality texture and taste. A 108-gram bag of Lancaster will cost 12.9 yuan. A 114 gram bag of White Rabbit was selling in Shanghai Monday for 8.6 yuan.

Industry watchers say Hershey’s bid for a Chinese brand is a good one. “Creating a new brand can be helpful, especially if consumers have ingrained perceptions of what other brands in a company’s product portfolio stand for,” said Ben Cavender, a senior analyst at Shanghai-based consultancy China Market Research Group.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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