Hot off the presses.
Ocean Spray Cranberries Inc. and The Hershey Company (HSY) announced on May 9 that they would collaborate on chocolate-dipped fruit products.
Initially, there will be two flavors: Milk Chocolate Dipped Cranberry Bites and Dark Chocolate Dipped Cherry Infused Cranberry Bites. Starting in May, the products will be available at Walmart (WMT), Publix, and other select grocery stores.
For Hershey, this is an opportunity to extend its brand into the fruit business. At the same time, Ocean Spray gains the brand power of one of the world’s largest confectionery and snacks businesses.
It's a Win/Win
This isn’t the first licensing deal for Hershey, and it won’t be the last. The company has worked hard to get its name out there in other grocery store aisles beyond candy.
“We are excited by this partnership and extension of our iconic Hershey's brand into new snacking occasions,” said Ernie Savo, President, Hershey Licensing Company. “Ocean Spray is synonymous with cranberry, and we can't think of better way to enjoy this wonderful superfruit than with an indulgent touch of delicious Hershey's milk chocolate.”
Ocean Spray isn’t afraid to partner with other companies. The co-operative’s cranberries can be found in more than 1,000 products worldwide. The Hershey collaboration adds to the lengthy list.
“‘When brand alignment and collaboration makes sense, we jump at the chance to partner,’ Kelvin Vuong, senior director of brand marketing for foods and snacking at Ocean Spray, said in an email,” FoodDive reported.
According to Hershey's website, it is the number one food licensor in the U.S. While the revenue generated by licensing isn’t significant relative to Hershey’s $10.4 billion in 2022 revenue, the margins are virtually 100%.
The company states in its 2022 annual report that it has four major licensing agreements in place at the moment: Kraft Foods Ireland, Cadbury UK, Nestlé, and Iconic IP Interests LLC. The brands involved in these licensing agreements include Peter Paul Almond Joy, Cadbury Caramello, Kit Kat, Rolo, Good & Plenty, and Jolly Rancher. In addition, the company allows its partners to manufacture and sell the products mentioned in these agreements.
It licenses out the Hershey’s and Reese’s brand names to companies like Ocean Spray for them to use these names for some of their products.
The company’s Licensing business is contained within its North America Confectionery segment, which generated 82% of Hershey’s 2022 revenue and 91% of its net income. While it doesn’t reveal how much revenue it generates from licensing, it does say in its annual report that it’s less than 1% of its consolidated net sales.
Suppose its 2022 licensing revenues were 0.75% of its $10.4 billion. That’s nearly $80 million, almost 100% pure profit. Interestingly, the McLane Company accounts for 28% of Hershey’s annual sales, yet Berkshire Hathaway (BTK.B), which owns the McLane Company, doesn’t own Hershey's stock.
Maybe it should?
Sweet and Salty Category Looks Ripe for the Taking
Around the same time, Hershey and Ocean Spray announced their collaboration, the company’s vice president of salty snacks, Vero Villasenor, provided some insight into its push to be the number-one branded manufacturer in the $1.7 billion sweet and salty category.
“‘We are seeing an opportunity to win,’ Villasenor said in an interview. ‘The more and more we have been going deeper into this space, we are prioritizing it even more within the salty business unit,’” FoodDive reported.
Currently, the company is the second-largest company in the U.S. snacking segment, behind only Frito-Lay, a division of PepsiCo (PEP). It now generates 10% of its annual revenue from salty snacks. It wants to double the amount to $3 billion by 2033.
It first got into the sweet and salty category in 2016 through Hershey’s and Reese’s chocolate-dipped pretzels. I like the Rold Gold chocolate-covered pretzels (Frit0-Lay) more, but the Hershey’s variety has a 40% repeat purchase rate, which is relatively high.
As mentioned previously, the sweet and salty category is $1.7 billion in the U.S. Of that, approximately 59% of it is from private label, which leads the company to believe it can take some of this market in the future.
Acquisitions have been a big part of Hershey’s expansion into salty snacks. In 2018, Hershey’s acquired Amplify Snack Brands, the parent company of SkinnyPop popcorn. In April, the company acquired two popcorn manufacturing facilities in Indiana and Pennsylvania to expand SkinnyPop’s capacity as it grows.
“‘We weren’t able to be a bigger player before because we weren’t positioned to win,’ Villasenor said. ‘Now, we are uniquely positioned to play here,” the Hershey executive told FoodDive.
While collaborating with Ocean Spray is a tiny part of its business, it's part of Hershey's drive to innovate and create new products. Don't
If you don’t try, you’ll never succeed.
Hershey's stock isn't cheap, trading at nearly 30x free cash flow. However, despite the elevated valuation, it’s delivered a five-year annualized total return of 25.9%, 2.5x the overall U.S. market.
It will likely continue to deliver value for its shareholders over the next five years whether or not the Ocean Spray collaboration amounts to more than a one-off licensing deal.
HSY is a must-own consumer staples stock.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
