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Hershey hits snag while cutting costs

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Posted 8:57AM on Tuesday 30th April 2002 ( 23 years ago )
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. <br> <br> 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. <br> <br> 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&#39;s Kisses, and Reese&#39;s Peanut Butter Cups.<br> <br> They credit frugality push to new president and CEO, Richard H. Lenny, who was hired from Nabisco in March 2001. <br> <br> 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. <br> <br> A second savings effort resulted in bitter labor negotiations with the union that represents 2,800 workers at two Hershey production facilities. <br> <br> 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. <br> <br> 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. <br> <br> In recent years, confection growth has slowed to 3 to 4 percent a year, Pinheiro said. <br> <br> 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.&#39;&#39; <br> <br> 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&#39;s strength in the confection market. <br> <br> Wrigley, for example, Leach said, has a net margin of 15 percent after tax. Hershey Foods is much lower at 8 percent, he said. <br> <br> But trying to save money on worker contracts already may have hurt Hershey Foods. <br> <br> George Askew, an analyst with Legg Mason in Virginia, downgraded the company&#39;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. <br> <br> Askew, however, said the company&#39;s strategy is solid and noted that the company&#39;s stock price is strong: Hershey Foods&#39; 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. <br> <br> Pouring savings into marketing the company&#39;s top brands - which account for a little more than one-third of the company&#39;s sales - is a strategy that would provide a high return on the investment, Askew said. <br> <br> It&#39;s not a strategy, however, that has pleased the workers represented by the Chocolate Workers Local 464 union. <br> <br> 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. <br> <br> 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. <br> <br> 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. <br> <br> ``It&#39;s time to share the wealth,&#39;&#39; Hummel said, ``and stop the corporate greed.&#39;&#39;

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