Impact of Rising Cocoa Prices on Hershey and Mondelez Earnings

Introduction: Challenges in the Confectionery Industry

As Hershey and Mondelez International prepare to release their first-quarter earnings, investors and analysts are keenly focused on the strategies these leading chocolate manufacturers will employ to address the recent sharp increases in cocoa and sugar prices. These cost hikes come at a time when both companies have already been adjusting to elevated operational costs over previous quarters.

The Rising Cost of Cocoa and Sugar

Surge in Raw Material Prices

Recent months have seen a significant surge in the prices of key commodities such as cocoa and sugar. Factors contributing to the rise in cocoa prices include droughts, inconsistent rainfall, and crop diseases in the leading cocoa-producing regions. This spike in raw material costs is poised to compound the financial pressures already faced by chocolate manufacturers like Hershey and Mondelez.

Impact on Hershey and Mondelez

Cocoa prices have nearly tripled this year, making up about 20% of Hershey’s and 10% of Mondelez’s cost of goods sold (COGS), as reported by Jefferies. This dramatic increase is particularly challenging, prompting these companies to consider further price adjustments to offset the cost pressures.

Strategies and Investor Expectations

Price Adjustments and Consumer Reaction

Both Hershey and Mondelez have previously passed on some of their increased costs to consumers through higher product prices. However, with the additional rise in cocoa and sugar prices, further price hikes could be imminent. Investors are particularly interested in how these adjustments will affect consumer purchasing behaviors, especially given the recent trends showing a decline in chocolate unit sales despite price increases.

Analyst Insights

Sean King, an analyst at Columbia Threadneedle Investments, highlights a critical concern: “A lot of investors are waiting to learn about how the consumer is reacting to the current price of chocolate in the market and how that influences the companies’ decisions to take more pricing in the future.” Moreover, CFRA Research’s Arun Sundaram added that the companies might see a need for stronger pricing strategies in the latter half of the year to manage the increased costs.

Market Performance and Sales Data

Recent Sales Trends

Data from Circana indicates a 1.8% drop in chocolate unit sales in the U.S. for the 13 weeks ending March 24, with prices having risen by 6.3%. This data suggests that while companies are managing to increase prices, they are simultaneously facing challenges with volume sales.

Upcoming Earnings Reports

Mondelez is expected to report a slight drop in profit for the first time in 14 quarters to 89 cents, with quarterly sales projected to be flat. The company experienced organic volume growth of 1.3 percentage points in 2023, while prices rose by 13.4 percentage points. On the other hand, Hershey, which reports its results on May 3, is anticipated to see a profit drop for the first time in 25 quarters to $2.76, although its quarterly revenue is expected to increase by about 4.2%.

Wall Street Sentiment

Stock Performance

Over the past year, Mondelez shares have declined by 4.3%, whereas Hershey’s shares have fallen nearly 32%. This stark contrast in performance is also reflected in analyst ratings, where Mondelez holds an average “buy” rating with a median price target of $82, compared to Hershey’s “hold” rating with a target of $208.

Conclusion: Navigating a Complex Market

As Hershey and Mondelez brace for the impact of soaring cocoa prices on their earnings, the broader implications for the confectionery industry remain significant. The ability of these companies to effectively manage and navigate through these cost pressures will be crucial for maintaining their competitive edge and market position. Investors and analysts alike will closely watch the upcoming earnings reports to gauge how these global confectionery leaders are adapting to the evolving market challenges.

Source: Reuters