The Hershey Company

The real-life Willy Wonka?

Do you still remember Willy Wonka and his Oompa-Loompas? The reclusive Willy Wonka hid 5 golden tickets in his chocolate bars, granting the lucky winners access to his fairytale chocolate factory. Without a doubt, the film adaptation "Charlie and the Chocolate Factory" is one of my favorite children's movies. While researching today's article on the Hershey Company, one of the largest chocolate makers in the world, I discovered quite a few similarities and therefore couldn't resist using the movie as an intro.

The company's founder, Milton Snavely Hershey, had a clear vision and didn't let numerous failures stop him. In the end, he built one of the largest candy companies and even founded his own town for his employees. How he managed all that, and whether the company might sweeten our portfolios too, is what this article is about.

The history and business model of the Hershey Company

It was September 13, 1857, when Milton Snavely Hershey was born on a small farm in a farming community in central Pennsylvania. In fact, he was the only child in the family who survived. When he was 10 years old, his parents separated. His father Henry was a daydreamer who was always on the lookout for the next big thing. However, he lacked the work ethic and perseverance to ever really see something through. His mother, in turn, kept drilling into him how important hard work and endurance were in business. At the age of 14, Milton dropped out of school and began an apprenticeship with a master confectioner in Lancaster. Just four years later, he seized his chance, borrowed 150 dollars from his aunt and opened his first own candy shop in the heart of Philadelphia.

For a full five years, Milton tried to get the shop going, but without success. Eventually he closed his business and moved to Denver, where he reconciled with his father. There he found a new job with a confectioner and learned how to make delicious caramel from fresh milk. However, he couldn't warm up to working for someone else, so Milton went into business for himself again. First he tried his luck in Chicago, then in New York. Although he failed again in both cases, he returned to Lancaster in 1883 and founded the Lancaster Caramel Company there. At last he was successful, and soon he was shipping his caramels all over the country. But Milton was far from resting on his laurels. He was always looking for ways to improve and was immediately fascinated when he discovered the chocolate temple of the Stollwerck brothers at the 1893 World's Fair in Chicago. The novel equipment was perfectly suited for coating his caramels with chocolate. Without further ado, he founded the Hershey Chocolate Company as a subsidiary and looked for a way to make chocolate accessible to the general public. Back then, chocolate was still very expensive and mostly reserved for the nobility as a delicacy.

So convinced of his vision was Milton that in 1900 he finally sold his Lancaster Caramel Company for a handsome 1 million dollars. He took the chocolate division with him, of course, and with the proceeds of the sale soon began building a gigantic and innovative chocolate factory near his hometown. To keep the transport routes of his milk suppliers as short as possible, he bought 1,200 hectares of surrounding pastureland and made it available to his farmers. His chocolate quickly became a bestseller and Milton was able to expand further. For his employees he built modern housing, schools and amusement parks and took care of the infrastructure. This created a sizable little town around his chocolate empire, which was soon named after him and became known throughout the country as Chocolatetown.

Wanting to expand the product line, the company launched chocolate candies called "Hershey's Kisses" in 1907. At first all the candies had to be wrapped by hand, until a machine wrapping process was introduced in 1921. The company kept evolving and was also able to make a number of acquisitions. Today the Hershey Company is the leading American chocolate maker and broadly diversified with over 80 brands.

How might the Hershey Company develop in the future?

Before we turn to the chocolate giant's future prospects, I'd like to briefly sum up the business model once more. The Hershey Company produces and sells chocolate and many other confectionery products, including chewing gum, toppings, syrups, bars, cookies, popcorn, beef jerky and even spreads. Thanks to its many acquisitions, it now manages around 80 different brands, of which Hershey's, Reese's, Kisses, Ice Breakers and Kit Kat are probably the best known and highest-selling. The latter, by the way, is sold in Europe by Nestlé. These 5 brands alone account for around 75 percent of the company's revenue.

Established food companies in particular, like Hershey, are known for their stability and are therefore popular with many long-term investors. After all, people snack on their favorite treats in good times and bad. But to stay relevant in the future as well, the company puts a lot of money into marketing and the development of new creations. Apart from that, of course, it's always on the lookout for suitable acquisitions.

Naturally, the fact that more and more people are avoiding high-calorie sweets hasn't escaped the company. For that reason, it's now increasingly focusing on marketing healthier snacks too, to match the taste of the times. Apart from that, it's constantly trying to optimize its manufacturing processes in order to operate as efficiently as possible. With its strong brand recognition, though, it's definitely well positioned for the future. One topic the company could stand to devote a bit more attention to is its international presence. At the moment, it generates the majority of its revenue (around 88 percent) in its home country, America.

And what about the dividend?

Ever since 1930, when the Great Depression in America was in full swing, the chocolate giant Hershey has been giving its investors a share of the company's profits. Since then, the company has managed to pay the dividend year after year. The last time it had to leave the dividend unchanged from the previous year was in 2009 - since then it has resumed its annual dividend growth. The average dividend growth rate over the last 10 years here is a solid 9.8 percent. The dividend yield of 2.1 percent is also respectable. The only thing I find a bit high is the payout ratio of 61.2 percent.

Conclusion:
Milton Hershey managed, even without Oompa-Loompas, to build a truly phenomenal chocolate empire. Today the company is broadly positioned and caters to quite a few tastes. It certainly suits my taste as a long-term-oriented dividend investor, too.