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Recession-weary US consumers appear to be turning to chocolate to soothe their economic worries.
Although obesity concerns have steered consumers away from sugary soft drinks, the confectionary industry has benefited from being an “affordable luxury” for sweet-toothed consumers seeking comfort food.
Hershey, the largest US chocolate maker by revenues, announced earlier this year that it was increasing prices by 10 per cent because of higher raw material costs, and on Tuesday reported that its second quarter net income more than tripled from a year ago. The company also raised its 2011 earnings outlook.
“The confectionary category has been resilient,” said Erin Lash, analyst at Morningstar. “It’s an affordable luxury and consumers so far are willing to spend on that indulgence.”
Ms Lash said that Hershey is betting that consumers will not shy away from more expensive chocolate because traditionally they downsize from jumbo bars to smaller snacks when times are tough.
Chocolate companies also benefit from having high profit margins and from the fact that their products are “impulse purchases”, noted Vincent Andrews, analyst at Morgan Stanley, earlier this month. Meanwhile, there is little private label competition for chocolate, leaving consumers with few options for trading down.
Cheaper private label brands account for 20 per cent of the overall US consumer packaged food market, but just 5 per cent of the confectionary market, according to Morningstar.
Hershey, which makes brands such as Reese’s, Twizzlers and Kit Kat, has been focused on the US, with only 10 per cent of its revenues coming from overseas. But John Bilbrey, the company’s new chief executive, said that he wants to set up a research and development facility in Asia in an effort to come up with brands better suited for local consumers.
“We believe this is a logical next step in building out our international footprint,” Mr Bilbrey said in a call with analysts.
The company is concentrating on China, India, Mexico and Brazil and expects combined sales growth of 20-25 per cent in those regions.
Analysts are expecting an aggressive global push from Mr Bilbrey, who joined Hershey in 2003 as president of Hershey International. Mr Bilbrey became chief executive in May after David West, the previous CEO, left to take the top job at Del Monte Foods.
During the second quarter, net income at Hershey rose to $130m, or 56 cents a share, from $46.7m, or 20 cents, in the same period a year ago, thanks partly to the absence of one off charges taken last year. Net sales jumped 7.5 per cent to $1.32bn.
Hershey shares rose 0.5 per cent to $58.61 in midday trading on Tuesday.