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Mixed News From Hershey: Recession is Good - Closing Plants

Today, the Hershey company announced in an article in the Wall Street Journal (subscription required) that their "Profits Jumped 51% Amid Signs Consumers Are Trading Down but Not Giving Up Chocolate."

However, yesterday in an announcement reported in the San Francisco Gate that shocked many who live in the San Francisco Bay Area it was revealed that Hershey is planning to shutter BOTH the Scharffen Berger plant in Berkeley and the Joseph Schmidt plant in San Francisco.

From the article:

Hershey already makes the majority of its Scharffen Berger products in its newly upgraded plant in Robinson, Ill., said spokesman Kirk Saville from the chocolate giant's headquarters in Hershey, Pa. He said the plant closures will affect a total of about 150 employees from both facilities. Saville said Hershey intends to maintain the quality of the brands, which make up the company's wholly owned subsidiary, Artisan Confections Co. "We will continue to source the world's best cacao to create our rich and distinct chocolate," he said. "We will maintain the highest quality standard for all our artisan productions."

That provided little solace to Bay Area fans of the chocolate-makers. Both brands have created a strong legacy and helped increased the popularity of high-end, gourmet chocolates around the country.

What say you? Is this the beginning of the end for Artisan Confections Company brands? And what are your thoughts about how they are doing maintaining the quality of the brands?

From the Wall Street Journal article:

But, as with coffee, eating out, and apparel, the recession has consumers trading down with chocolate. Supermarket sales in the premium chocolate category in the fourth quarter were flat versus last year, Hershey Chief Executive David West told analysts Tuesday. Mr. West said he expects that to continue, adding that manufacturers have been making premium chocolates faster than consumers have been buying them and that retailers probably will devote less shelf space to them.

High-end chocolatiers have noticed. Katrina Markoff, president and founder of Chicago-based Vosges Haut-Chocolat, said sales slowed in the fourth quarter. People aren't splurging on offerings that cost $100 and up, she said, although sales of products in the $25-to-$50 range are growing.

Last Valentine's Day, she said, people spent an average of $75 to $80 on online orders; she thinks they will spend an average of just $50 this year. "People still want to have a little taste of luxury and decadence," she said.

At a Fannie May chocolate counter Tuesday in downtown Chicago, accountant Karen Martin said the recession hasn't dimmed her taste for chocolate -- but she is cutting back on price.

"I still indulge but not on huge items," she said. "When I want a really nice treat, I go out and buy it. It's like $2 -- maybe." Even thriftier, her friend Nora Wideikies snapped up four Santa Claus chocolates on sale for a dollar.

However, Jim Goldman, chief executive of Yildiz Holding's Godiva Chocolatier Inc., said he expects sales to grow. "One of our best-selling products this holiday season was the 'Ultimate Collection,' a $130 offering of the best of Godiva truffles, chocolate and biscuits," Mr. Goldman said in an interview. Lower-priced items also sold well during the winter holidays, and he said he expects strong Valentine sales.

Swiss chocolate maker Lindt & Sprüngli AG, maker of premium Lindt chocolates, reported a 5.8% sales increase in 2008, saying that was at the low end of its long-term goal of 6% to 8% annual sales growth.

"Considering the market conditions, this result is encouraging," the company said last week in a news release.

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Sigh, that's a sad development, but not unexpected. Given the way large corporates work, it is probably more of a surprise that it didn't happen earlier.

A similar scenario played out here in Australia a while ago with a small manufacturer of sweets called The Natural Confectionery Company. They were bought by Cadbury principally for their recipes. Cadbury then tried to shut down their plant and absorb the production into other plants. The staff and management got together and offered Cadbury a deal: If they could make their plant the most profitable in the company within a year, then they would not be closed.

Cadbury took them up on it expecting them to fail (but having nothing to loose by letting them try). One year later Cadbury were more than a little surprised to find that The Natural Confectionery plant was the most profitable in their operation. It really goes to show that a determined team of managers and staff in a small operation can compete with the big boys. Small doesn't have to mean inefficiently.

I think that it is a real shame that the physical operation of Scharffen Berger, including the people who worked so hard to make the product and the brand, was given so little value by Hershey.

I would expect that while the (technical) quality of the product may not suffer from the change, it is almost inevitable that the "qualities" of the product will change over time. I can't see Hershey sticking to the Scharffen Berger core values in the long term (since the core values of that business were driven by the creators of the company).

Still, Scharffen Berger have shown us the way, so hats off to them for their achievement and here's more incentive for those of us following in their footsteps.

Langdon
Gwen, what you are suggesting is a lame excuse for Hershey.

Scharffen Berger were able to ship their product to the east coast of America prior to being bought out by Herchey, after all, they opened a shop in New York in 2004 (have a look at the press release http://www.scharffenberger.com/NEart13.asp). So claiming that a giant like Herchey can't is a bit rich.

The decision to close the California factory isn't an economic imperative, it is about rationalisation and making bigger profits. Is this evil? I hadn't thought of it that way until you brought it up, but considered in the light of the sub prime mortgage crisis and the misery that is causing, perhaps it should be.

I find it sad to see a company like Scharffen Berger (or the Natural Confectionery Company) swallowed up and any values they may have had (like loyalty to the community, or staff that made their business possible) thrown out the window just because transport costs eat into profit.
There is historical precedent for this. In the first third of the 20th century hundreds of small chocolate makers, chocolatiers, and candy makers were bought out and closed down - deliberately to eliminate competition - by the Hershey, et al. I don't think that was the case with these three, however.

I am sure that all of the people who reaped the rewards of the buyout packages (like Mr Schmidt in Gwen's comment below) have mixed feelings. They are sad to see the companies they worked so hard to build falter or fold. On the other hand, they have been rewarded well and the companies' current difficulties are no fault of their own.

Personally, I would have liked to see Schmidt offer to buy back the company for 10% of what Hershey paid for it and continue it for what it is: a strong local player that was never strong enough to go national on the scale that Hershey, as a public company, needed it to be.
I think you have highlighted my point nicely Gwen. Joseph Schmidt got his golden handshake deal and walked away to do whatever he chose. But what about the staff and customers who helped to get him that deal? What do they get other than redundancy?

As a business owner I feel a sense of responsibility to the people who help to make me successful. I wouldn't sell out and walk away knowing full well that my employees will end up redundant.

We set up our business in a small town in a rural area because we want to make a difference to this community (which has an unemployment rate of around 40%). I would not take a big buy out and walk away knowing what that would do to the community. That's just my personal ethic Gwen.

Perhaps Joseph Schmid did do something for his staff to mitigate the inevitable. I certainly hope so.
Hershey had a plant in Oakdale, CA for decades. I may be wrong but I believe they may have produced more chocolate there than in PA. Why? Proximity to many of the raw materials sources: almonds, milk etc.

Now that they've moved the plant to Mexico, I wonder if they're getting all the raw materials from Mexico, except for the almonds. Hmm. At least they're closer to the cacao sources perhaps.
Tell me if it is more practical to produce and ship from a central location in the US then why has Hershey after 50 years in Canada closed every single manufacturing facility and sent this production including all the jobs to Mexico.

Even when shipping and production cost are lower in Canada than the US and sugar prices in Canada are cheaper than Mexico, not to mention Canada has some of the purest milk on this planet.

Please explain how evil and greed are not the culprit here, and I do understand Hershey`s ways as I worked for them for 20 years.
If you Google : Robinson , Ill. Hershey; you'll find that Heath Confections was established in Robinson years ago and you may suspect that it makes business sense to consolidate small divisions of a large manufacturing company.

That's what Hershey is, a large company with several smaller divisions.

We once had a Zenith T.V. plant in a nearby town, now all televisions are made overseas. Maybe we should be happy Hershey is not moving it's small divisions overseas but to the Midwest at least for now. Just a thought.
Hershey did not consolidate small divisions of their business, they closed 7 out of 23 plants many of which were making huge profits for this company, the Smiths Falls plant in Canada made a consistent profit for this company for 44 years that why Hershey sunk $50 million in this facility in the past 5 years.

The former CEO Rick Lenny ( the hackett man that he is ) made a huge mistake and moved American and Canadian jobs to Mexico, that's why Hershey`s stocks have been in the "loo" for the past 2 years and consumer are ticked off with this company.
Well, Golly! It's sure tough to put a positive spin on Hersey's buying up artisan producers and shutting them down... :-(

I'm pretty sure they knew where these plants were located when they purchased them.
Clay -

What do you know about Scharffen Berger's production lines? When I toured them in '06, not long after their takeover of Hershey's was finalized, it was quite clear that they didn't make all the chocolate in Berkeley even then. (I've never heard of anyone seeing anything but the plain dark chocolate bars coming off that one product line.) They made vague mention of some other facility in Napa County. Do you know where that was and when this Illinois plant started making SB products?

It is sad that they won't even be keeping that "factory" location open as a lab of sorts & public education facility.

(California property values are very high but the climate of the Bay Area is particularly suited to chocolate production and San Francisco/Oakland are port cities providing excellent access to the raw materials like sugar & cacao.)
Thank you for bringing that up, Gwen. I was just pointing out that there's also a reason that there are a large number of chocolate factories in the Bay Area (a lot of candy manufacture, period in California ... it's surpassed Illinois & Pennsylvania, I believe). While the shipping is a concern, so are energy costs associated with heating & cooling.

Even Hershey's had a factory out here before they moved that off to Mexico & subcontracted to Callebaut. That Oakdale facility has now been taken over by Sconza, which was also based in Oakland before that. They don't plan to make chocolate from bean to bar, but are mostly a panning company.

The Midwest as a manufacturing hub only makes sense if the customer base is actually evenly distributed across the country. California is a huge economy and we eat a lot of chocolate. (I'm going to have to see if I can find which state eats the most! Fun project.) For the early years of SB, I suppose that made sense, they were primarily a West Coast brand.

My guess, as Frank has added some important info, is that Hershey's already owned that land/factory space. (But I'll add this - Why they didn't move to Oakdale is beyond me, I think a lot of folks would have moved, it's only 90 miles away - they've really soured people on the company.)
I'll never forget when I was studying the candy industry in business school finding out that Utah is the biggest consumer of sweets. It totally made sense after I read that...a great vice! I haven't followed up recently to see if that applies to chocolate or if it's just candy in general.

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