Tuesday, April 29, 2008

Why does Hershey need to be global?

I don't envy the executives at The Hershey Company or at the Hershey Trust today. The news that Mars is acquiring Wrigley's (with Warren Buffett's help) has led to the question, "Who's next?" and caused all eyes in the business world to focus on Hershey (along with its oft-mentioned potential partner, Cadbury).

It's easy to understand why the business press focuses on acquisitions. The primary readers of the Wall Street Journal, Forbes, etc., are investors in the public stock markets. And nothing moves a stock like an acquisition (or even rumors of an acquisition). Shareholders of Hershey Foods, downcast because of the 40% slide in the share price since 2005, can't be blamed for looking for a way to claw back some of their losses.

More elusive is the strategic benefit of merging to the companies concerned. "Achieving global scale" is a mantra running through all the Mars-Wrigley coverage. And being primarily focused on the US market does mean that Hershey is more exposed to the swings in the US economy than other, more global producers--like, say, Nestle (headquarters: Vevey, Switzerland).

But the US ain't Switzerland. The US confectionary market is the largest, and arguably the most diverse, in the world. If you're going to be "stuck" in one market, this one isn't so bad. A fascinating article in the Harvard Business Review a few years ago asserted that it's easier to attain competitive advantage--and therefore sustain margins--in tightly-focused regions than globally ("All Strategy Is Local," September 2005 - $$), and points out that Wal-Mart's margins were never higher than when it was a regional player one-third the size of kmart.

And until someone articulates the clear benefits of being global versus being regional, Hershey shouldn't feel they need to rush into a deal with anyone else--no matter what the newspapers say.

Hershey: the end of an era approaches

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