Hershey’s Dumps Artisan Chocolate Factories Amidst 31% Profit Increase

The Hershey Company announced net sales of $1,377,380,000 for the fourth quarter of 2008, compared with $1,342,222,000 compared to 2007.  Net income for the quarter was $82,155,000, compared with $54,343,000 for 2007.  For the full year 2008, consolidated net sales were $5,132,768,000 compared with $4,946,716,000 in 2007, an increase of 3.8 percent.   Net income was $311,405,000, compared with $214,154,000 in 2007, a 31%.  Not shabby in this economy.  It seems financial troubles find solace in chocolate.

Profits are a nice thing for a company.  What is not nice is when they come at the expense of brand integrity.  Hershey is winding down its “Global Supply Chain Transformation program,” which aims to increase shareholder value rationalizing and restructuring various operations.  To date the company has spent over half a billion dollars on the program.  Buried in all this financial information lurks an inconvenient truth:

“During the fourth quarter of 2008, the scope of the Global Supply Chain Transformation program increased modestly to include the closure of two subscale manufacturing facilities of Artisan Confections Company, a wholly owned subsidiary, and consolidation of the associated production into existing U.S. facilities, along with rationalization of other select items.”

Hershey, the nation’s second-biggest candy maker, owns Artisan Confections Company, which in turns owns Dagoba, Joseph Schmidt, and Scharffen Berger chocolate companies.  Those two “subscale manufacturing facilities” are bay area chocolate companies Joseph Schmidt and Scharffen Berger. 150 people in the area will lose their jobs.

Hershey acquired both the Schmidt and Scharffen Berger companies in 2005, and the chocolate world was abuzz with speculation first about whether, than about how much, the Hershey acquisition would impact the quality of the chocolate.

As the chocolate slid slowly downhill (in many people’s estimations), Hershey’s continued to pursue its “Global Supply Chain Transformation program,” (despite the program sounding a lot like something that the Spice Merchants of Planet Arrakis http://dune.wikia.com/wiki/Arrakis would not have appreciated) Hersheys was also reportedly behind a plan to radically improve the profitability of all its chocolate lines.

From what I hear, it was Hershey’s that proposed and pushed a petition to the FDA to allow for the re-formulation of chocolate to allow for using any vegetable oil rather than the cocoa butter naturally found in chocolate.  “By specific language in this Petition document, it would allow for the unlimited use of vegetable fats from any source and at any level to replace the cocoa butter in chocolate and still allow the product to be called chocolate,” said Don’t Mess With Our Chocolate, an organization founded by Guittard Chocolate to combat the petition.

Don’t Mess With Our Chocolate alleged that “the petition would allow liquor to be made by combining purchased cocoa butter and cocoa powder instead of solely being ground from nibs.  In addition, the 50% minimum requirement can be voided if you want slightly reduced fat liquor—say 40%, which does “not rise to the level of a defined nutrient claim” (FDA language). In effect, we would now have a new form of ingredient that would also be called “chocolate liquor” which could then be used to make chocolate and would allow the use of even more vegetable fat in the final product that would be called chocolate.

“The key issue we would face with approval of the Petition in current form is that the marketplace will have two fundamentally different versions of products, yet both would be legally permitted to be called chocolate, resulting in great consumer confusion. While the ingredient label would identify vegetable fat as a component, the front panel would not be required to alert consumers that it is really what the Industry today calls a compound (not 100% cocoa butter) chocolate.”

But then, a miracle: “Cocoa butter is one of the key defining ingredients in chocolate, providing the signature melt-in-your-mouth creaminess and texture.”  Miraculously (or perhaps I should have more faith in industry) Mars jumped into the fray.  “In sharp contrast to recent industry efforts to change the Standards of Identity for chocolate, Mars Snackfood US today announced its support for the current definition of chocolate and pledged to continue to make pure, authentic chocolate with 100% cocoa butter for all of its U.S. chocolate products.”

Todd R. Lachman, President, of Mars Snackfoods US, said: “Even though we could save millions of dollars, we simply won’t compromise the purity and authenticity of our chocolate by diluting it with a cocoa butter substitute. This company was built on quality – it’s one of our core principles – and we will not lower the bar on chocolate quality.  At Mars, the consumer is our boss, and American consumers are passionate about chocolate.”  Word from the FDA was that challenges to such petitions were rarely met with success.

And lo! the heavens trembled and the skies opened and an Almighty Hand reached from the light above to the earth below and smote a terrible blow to the forces of vegetable oil proliferation.  Guittard leading, with Mars stepping up to the plate to defend them, plus the voices of however many squeaky voices like mine and yours, were heard.  The effort to redefine chocolate failed.

No public announcements of this coup were made, to the best of my knowledge.  I only found this out by calling Guittard myself (are they not the most humble chocolate company in the world?) to get an update.  In honor of Guittard’s agitating on behalf of humanity, I suggest you buy a Quevedo 65% Ecuador Bittersweet Chocolate bar (which I just ate for other reasons and which really is just a great chocolate bar).

Picking its hulking frame up and dusting off its hulking shoulders, Hershey’s “Global Supply Chain Transformation program” continued unabated.  The “program” will be completed in 2009, meaning Sharffen Berger and Joseph Schmidt have only a short while to live.  Hershey expects total cost of closing the plants to be about $25 million.  In return they will economize to the tune of $5 million annually.  Operations will be consolidated in a plant in Robinson, Ill.

To a normal Joe like me, it might seem crazy for a $5 billion company to trade all the risks (like further degradation of quality and negative public perception) for $5 million in savings—that’s a .1% savings.   However, the cumulative savings for the “Global Supply Chain Transformation program” are expected to be about $81 million, with total ongoing annual savings by 2010 of $175 million to $195 million.  Not small potatoes.

Hershey’s announced: “The financial market and credit crisis has not had a material effect on our business operations or liquidity, to date.  However, the increase in our cost structure and uncertainties in the financial markets and in the broader economy present challenges as we head into 2009.”  Apparently there is no room for the artisan in meeting those challenges.

2 Responses to “Hershey’s Dumps Artisan Chocolate Factories Amidst 31% Profit Increase”

  1. on 27 Feb 2009 at 12:57 pmCheryl

    Wow, incredible. You’d think with people down in the dumps they’d eat MORE and more jobs would be created :) Have you tried some of Guittard’s bars? What do you think?

    Ok, being a woman of an open mind, I just ordered some of the bacon….good lordy this is a stretch for me :) Thanks for the heads up!

  2. on 07 Feb 2011 at 10:58 amLowe

    I just found this. Thanks for letting us know

    This part struck me:
    “Hershey expects total cost of closing the plants to be about $25 million. In return they will economize to the tune of $5 million annually”

    So they spend $25M and save $5M/year. That means it will take them 5 years just to break even.

    So who now owns Scharffenberger? And how most importantly, what is the current quality of their chocolate? Except for their Ben Tre Viet Nam bar I’m not a SB fan so I haven’t reviewed any in a long while.

    Lowe
    ChocoFiles

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