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China chocolate slowdown sends Hershey shares lower

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US chocolate and confectionery giant Hershey trimmed its growth expectations, citing weak sales in China, raising doubts over a market some commentators have seen as a key driver for cocoa demand.

Shares in Hershey fell to a 10-month low after the group cut to $4.10-4.18 per share, from $4.17-4.28 per share, its forecast for full-year earnings, and reduced its estimate for the rate of sales growth to 4.0-5.0%, from previous guidance of 6.0-7.0% expansion.

The downgrades reflected growth in Chinese demand for its chocolate had been "below expectations" in April and May.

The comments come less than a year after Hershey purchased for $394m for an 80% stake in Shanghai Golden Monkey Food, the "iconic" Chinese confectionery group which had sales of about $205m in 2013.

Hershey said on Friday that it was "working with representatives" of Shanghai Golden Monkey to "reassess the value of the business", including the outstanding 20% stake which the US group is scheduled to acquire later this year for some 600m yuan.

Important market

China has been seen as a key growth market for chocolate, with Hershey International president Bert Alfonso in February estimating that it will expand by nearly 60% to $4.3bn by 2019.

For Hershey itself, China was expected to bring $450m in sales this year, Mr Alfonso said, adding that "consumers are embracing our brands in China as we outpace category growth.

"We are excited about the potential for Shanghai Golden Monkey."

In April, ABN Amro forecast that cocoa, and coffee, would prove more immune than other commodities to a slowdown in Chinese demand.

"We expect the import demand for soft commodities to be shaped by the ongoing rise of average wealth levels," the bank said.

"This will remain a supportive factor for the more luxurious food items, such as coffee and cocoa."

'Continued softness'

However, Hershey on Friday said that "in China, Hershey chocolate growth was below expectations in April and May", a shortfall attributed to economic deceleration.

"Macroeconomic challenges and trends are affecting consumer shopping behaviour resulting in continued softness within the China modern trade," the group said, citing in particular "the tier one hypermarkets where the company generates the majority of its chocolate sales".

Furthermore, increasing competition on online retailers was "impacting results and prolonging trade inventory destocking".

Inventories held by distributors were "at greater than optimal levels", Hershey said.

Market reaction

The profits warning was ill received by Wall Street, which had expected the group to achieve earnings of $4.28 per share, although they were already prepared for sales growth of less than 5%.

Hershey shares fell to $88.71, their lowest since August last year, before recovering some ground to stand at $89.12 in lunchtime deals, down 3.4%.

By Agrimoney.com

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