Global Chocolate Industry

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Table of Contents

1. Introduction        1

1.1 Current Market Situation        1

1.2 Motivation        1

1.3 Porter’s 5 Forces        1

1.4 History of Chosen Companies        2

1.4.1 Hershey History        2

1.4.2 Lindt and Sprungli History        2

1.4.3 Tootsie Roll Industries History        2

1.5 Strengths and Weaknesses        2

1.6 Revenue and Market Capitalisation        2

2. Historical price analysis (Cumulative Change in Stock Prices)        3

2.1 Industry-Wide Price Analysis        3

2.2 Company Specific Analysis        4

2.2.1 Hershey        4

2.2.2 Lindt        4

2.3.2 Tootsie Roll        4

3. Ratio Analysis        5

3.1 Gross Margin        5

3.2 Operating Margin        5

3.3 Net Margin        5

3.5 Interest Coverage Ratio        6

3.6 Debt Ratio        6

3.7 Asset Turnover Ratio        7

3.8 Return on Asset (ROA)        7

3.9 Return on Equity (ROE)        7

3.10 Equity Multiplier        7

4. Price Ratios        8

4.1 Price to Earnings Ratio        8

4.2 Price to Sales Ratio        8

4.3 Price to Book Ratio        8

4.4 Determining which price ratio to use        8

5. Evaluating Market Valuations        8

5.1 Hershey        8

5.2 Lindt        9

5.3 Tootsie Roll        9

6. References        10

7. Appendices        13

1. Introduction

1.1 Current Market Situation

All around the world, it is no secret that chocolate is irresistible. What once seemed to be only popular among Westerners is now being enjoyed as a sweet snack by many. According to Euromonitor, sales in the chocolate market rose 13% between 2010 and 2015 to hit $101 billion (Graham, 2016). The chocolate market is segmented based on the different confectioneries – dark, milk and white chocolate. As ongoing research continues to roll out new health benefits of chocolate, Singapore chocolate lovers too have spared no effort to hunt down these flavourful confectioneries.

The global chocolate market involves the cocoa market and the chocolate confectionaries market. Countries with the highest consumption of chocolate include the United States, United Kingdom, China and Switzerland (McCarthy, 2015). The major players in the chocolate market are Nestle, Ferraro group, Lindt & Sprungli, Mars Inc and Hershey (Businesswire, 2017). The 3 companies we have picked for comparison in this report are Hershey, Lindt & Sprungli and Tootsie Roll Industries.

1.2 Motivation

Chocolates used to be a luxurious delicacy only enjoyed by the rich and Westerners. Interestingly, while demand for chocolate is decreasing in the European and North American markets, the chocolate market in the Asia-Pacific region will increase by around 23% to some USD$16.3B by 2018, as shown from market research by Euromonitor (Nierhoff, 2014). This trend can be attributed to the growing affluence among the middle class in Asia and the increased publicity of health benefits for certain chocolates.

Therefore, there is definitely a need to increase production of these sweet delicacies to cater to the rising number of ‘chocaholics’. In fact, chocolate manufacturers are tailoring their manufacturing and storage methods to suit the needs of Asian chocolate lovers. Nestle claims that one of its challenges faced is producing chocolate that can be consumed in the tropical climate and be kept out of the refrigerator for a longer period of time. On this note, they are developing ideas to produce chocolate that is able to retain its shape above the usual melting temperature of chocolate, while not compromising on the taste and consistency of the chocolate.

Being chocolate lovers ourselves, chocolate production and services are of a concern to us. Hence, we wish to use the market indicators learned in class to assess how well major players in the chocolate industry are doing currently in terms of chocolate production. We chose 3 companies that would be representative of the different market players in the chocolate industry in order to provide an objective analysis based on different chocolate purchasers. These chocolate companies include those producing more ordinary and affordable home brands to cater to the middle class, as well as those that produce more expensive and luxurious chocolates for the rich. As such, we chose 2 well-established, popular chocolate manufacturing giants – Hershey and Lindt & Sprungli, and a smaller company – Tootsie Roll Industries. Based on the current company analysis, we will then proceed to provide recommendations for them to improve their businesses in both the manufacturing and service sectors to reach out to the Asian market.

1.3 Porter’s 5 Forces

We will use Porter’s 5 forces to analyse the attractiveness and the potential profitability of the Chocolate industry.

High threat of new entry: Cost of capital for new entrants is relatively low and companies that produce innovative types of chocolate can easily compete with these major players.

Low buyer power: Buyers do not have much control over the market given the variety of chocolate companies available.

Low threat of good substitution: Chocolate has a unique taste and cannot be easily replaced by other confectionaries.