Hershey warns capacity constraints will prevent it from meeting Halloween demand

Dive Brief:

• Hershey is struggling to ramp up production for popular candy and mint brands as it awaits relief from its capacity investment plan. During a Q&A with analysts after the company’s second-quarter 2022 earnings call this week, CEO Michele Buck described the continuing issues around Reese’s — which is Hershey’s largest brand and has enjoyed double-digit growth — as “a pressure point.”
• The company’s share of candy, gum and mints fell 54 basis points due to production issues around products like Ice Breakers Mints. Hershey said it also would not be able to fully meet demand for Halloween due to capacity constraints.
• Despite these issues, Hershey said its confectionery share was 83 basis points higher than before the pandemic. But maintaining or growing this share over the coming year will require balancing pricing, inflation and commodity costs, while pushing through its capacity improvements.

Dive Insight:

Hershey first announced its capacity investment plan in May, which includes adding 10 production lines and three distribution and fulfillment centers in 2022. In comments to analysts this week, Buck said Hershey expects some “short-term pain” before it sees greater relief from the investments.  

“Generally, we continue to see struggles across the supply chain,” said Buck. While early logistics issues were driven by labor shortages, “we’re now starting to see bigger concerns relative to scarcity of ingredients, needing to leverage different suppliers at higher costs and price points in order to secure production and then also the geopolitical environment has put certain strains on the business.” 

She cited the Ukraine-Russia conflict for creating challenges around ingredients, and even impacting equipment purchasing. Buck said Russia’s restrictions on shipping natural gas to the European Union is one factor. “Germany will be impacted. That’s an area where we source a lot of equipment, supplies, as do many of our suppliers,” she said.

The capacity investment plan was targeted to help Hershey meet demand around the Halloween season, after falling short during the Easter holiday. Although the company said it expects “high single digit” sales growth from the upcoming holidays, at least one analyst during its earning call considered the projection surprising because of the prep work Hershey had been doing and the importance of the Halloween holiday for confections. In 2021, dollar sales of Halloween-themed chocolates rose nearly 50% in 2021, with non-chocolate candies up 25.8%, according to the National Confectioners Association.  

Buck noted Hershey began planning and producing Halloween candy in the spring, but has prioritized everyday on-shelf availability at retail. “It was a tough decision to balance that with the seasons, but we thought that was really important,” she said. “We feel really good about having high single-digit growth, but we also feel good about as we get into the future being able to have more capacity to really fulfill more of the demand that we see during the season.” 

The company’s salty snacks business had a solid second quarter, with net sales rising nearly 100% vs. the same period a year ago. Strong sales for Dot’s Homestyle Pretzels — a 2021 acquisition — were driven by expanded distribution. SkinnyPop popcorn grew retail sales by 16.9% and gained share. 

Consumers have largely accepted Hershey’s North American price increases in salty snacks, although this has not been enough to offset the growth in raw material and logistics costs over the past two quarters, according to CFO Steve Voskuil. However, he expects a new round of price increases slated for the next two quarters to provide “some stability and relief.” 

“But right now, it’s kind of fighting the balance between pricing and inflation and commodities costs,” Voskuil said.