Hershey hits snag while cutting costs

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Posted 8:57AM on Tuesday, April 30, 2002

HARRISBURG, PENNSYLVANIA - During the Great Depression, chocolate maker Milton S. Hershey ordered up a number of facilities, like the Milton S. Hershey School, The Hotel Hershey, and Hershey Stadium, that were built for public benefit not profit. Despite the goodwill, the company has always been a profit machine, and now with a new chief executive, an aggressive frugality campaign has resulted in closed plants and tough negotiations for nearly 3,000 unionized workers, who went on strike Friday. Tightening spending, said analysts, is a company strategy to save money on expenses and route the savings into marketing its best-known brands, like Hershey's Kisses, and Reese's Peanut Butter Cups. They credit frugality push to new president and CEO, Richard H. Lenny, who was hired from Nabisco in March 2001. Cuts took place last fall when the company said it would streamline operations, like closing three plants and a distribution facility, eliminating more than 1,100 jobs, and farming out production of cocoa powder to outside contractors. A second savings effort resulted in bitter labor negotiations with the union that represents 2,800 workers at two Hershey production facilities. The strategy comes at a time when competitors like Mars and Nestle are stepping up promotions and cutting prices in a $16 billion confection market that is shrinking, said Mitchell Pinheiro, an analyst with Janney Montgomery Scott Inc. in Philadelphia. Historically, the confection sector has grown at 4 to 6 percent a year, much higher than the 1 percent growth per year of the food industry, analysts say. In recent years, confection growth has slowed to 3 to 4 percent a year, Pinheiro said. Hershey Foods, said Pinheiro, is ``going to have to work a little harder. The challenges are a slowing category and lately more aggressive promotions from competitors like Nestle and Mars.'' William Leach, an analyst with Banc of America Securities in New York, said Hershey Foods needs to raise its margins, which are lower than they should be, given the company's strength in the confection market. Wrigley, for example, Leach said, has a net margin of 15 percent after tax. Hershey Foods is much lower at 8 percent, he said. But trying to save money on worker contracts already may have hurt Hershey Foods. George Askew, an analyst with Legg Mason in Virginia, downgraded the company's rating on Hershey Foods stock earlier this month, citing, in part, possible production troubles stemming from a strike, which last happened at this central Pennsylvania company since 1980. Askew, however, said the company's strategy is solid and noted that the company's stock price is strong: Hershey Foods' stock has bounded up nearly $30 since early 2000, when the value of the New York Stock Exchange began its descent. Disaffected traders have dumped risky tech stocks for more traditional, brand-name stocks like Hershey Foods, analysts said. Pouring savings into marketing the company's top brands - which account for a little more than one-third of the company's sales - is a strategy that would provide a high return on the investment, Askew said. It's not a strategy, however, that has pleased the workers represented by the Chocolate Workers Local 464 union. Bruce Hummel, a business agent for the local, noted that the company is a healthy one, and that it has dished out healthy bonuses to executives. Hummel pointed out that Lenny, the president and CEO, in nine months on the job last year, made $1.5 million in salary and bonuses and stock options worth $3.1 million. In addition, Kenneth L. Wolfe, who retired as chairman in January 2001 and president and CEO two months later, made $1.7 million in salary and bonuses in addition to $1.4 million from exercised stock options. ``It's time to share the wealth,'' Hummel said, ``and stop the corporate greed.''