Global confectionary giant Hershey (NYSE: HSY.US) rattled the market late last week after weak demand in China forced it to slash its global sales forecasts once again. North America’s largest chocolate maker cut its total net sales growth forecasts to 2.5%-3.5%, a severe climbdown from the 4.5%-5.5% projection published in April.
Hershey said that uptake in China had been “below expectations” in April and May, noting that “macroeconomic challenges and trends are affecting consumer shopping behaviour… particularly [in] the tier one hypermarkets where the company generates the majority of its chocolate sales.” A backcloth of intensifying competition and the rise of online shopping are also hampering sales and prolonging destocking, the firm said.
Don’t panic!
Hershey has invested heavily in China to cotton onto rising consumer spending power in new geographies, and last September completed the purchase of Shanghai Golden Monkey for close to $600m.
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The Pennsylvanian company had previously stated that “China is Hershey’s number one priority international market for growth,” so warnings of slowing momentum in this market — one that Hershey had hoped to generate annual sales of $500m from by the close of 2015 — has exacerbated concerns over much of the fast-moving consumer goods (FCMG) sector.
Drinks giant Diageo (LSE: DGE) has been a high-profile victim of the slowing Chinese market in recent times, worsened in large part by the government’s anti-corruption clampdown which had dented demand for its premium spirits. However, it appears that these headwinds have blown themselves out, and Diageo’s net sales in mainland China leapt 13% during July-March as baijiu demand has picked up.
Meanwhile, household goods specialists Unilever (LSE: ULVR) and Reckitt Benckiser (LSE: RB) have also seen performance improve in China more recently. Stabilising conditions in the Asian powerhouse helped Unilever’s emerging market revenues advance 5.4% in January-March, up from 4.1% during the previous quarter. And its rival noted “strong and broad-based growth” in China during the first three months of 2015.
Sweet is turning sour
Rather, it could be argued that Hershey’s poor performance is principally down to Chinese shoppers’ lack of appetite for chocolate compared with their Western counterparts — the ubiquity of the cocoa products in shops across the rest of the world is certainly not replicated across much of Asia.
So while I believe that bulging consumer wallets in emerging regions should bolster Diageo’s top line in the coming years, not to mention sales of Unilever and Reckitt Benckiser’s vast array of food and personal care products, Hershey may struggle simply due to different shopper tastes rather than broader weakness in China’s retail sector.
