HERSHEY CASE IN TURKEY
1. Evaluate the economic conditions of the country for the past 10 years; pay particular attention to the most
recent data. Indicators to be discussed:
a. GDP growth rate
b. GDP per capita
c. Unemployment rate
How would you characterize the economic performance of the country in recent times? Is it conducive to Hersey
entering the market or expanding its presence?
2. Recognize the state of the foreign sector:
a. Identify the exchange rate regime in the country and evaluate its performance since 2006. Collect
information on recent sociopolitical or economic events that may affect the exchange rate and discuss
b. Evaluate the performance of the balance of payments since 2006. Is the state of the balance of
How would you characterize the overall condition of the foreign sector?
Sources: IMF: http://www.imf.org/external/index.htm
World Bank: http://www.worldbank.org/
Federal Reserve Economic Data (FRED): https://fred.stlouisfed.org/
and various websites including www.tradingeconomics.com
3. Trade agreements and disputes
a. Identify trade agreements that may be relevant for Hershey.
b. Identify ongoing or past trade disputes that may be relevant for Hershey.
Sources: WTO: https://www.wto.org/
1. Return on Equity
2. Price to Earnings ratio
Team 5: South Africa
Megan Lee, Guannan Wang, Marinda Delgado, Talib Habib, Jonathan Vazquez
Table of Contents
• Founded by Milton Hershey in 1894
• Based in Hershey, Pennsylvania
• 6th biggest confectionary in the world
• Largest confectionary in the US
• Net Income 2016: $720,044,000
Return on Equity
Return on Assets
Net Profit Margin
Economics: GDP Annual Growth Rate
Economics: GDP Growth Rate Comparison
US Inflation Rate
South Africa Inflation Rate
Population: 54.3 Million
1.02 males per 1 female
46.41% under age 25
41.44% between 25 & 54
12.15% age 55 or older
70% < 6000 Rand ($456)
Middle Class: ≈ 18%
$426.29 to $3044.96
1 Rand = 0.08 USD
1 USD = 13.14 Rand
Literacy Rate = 94.6%
Gross Enrollment = 19%
8 other languages 38.2%
Political & Legal
ANC - 1994
Social Reform & Corrupt
April 7 protests
Management: Global Confectionery Industry
Global confectionery companies,
based on annual revenue
#1 Mars Inc.
#2 Mondelez Int.
#3 Ferrero Group
#4 Nestle SA
#5 Meiji Holdings
Hershey’s Global Presence
80% of Hershey’s Sales
are in North America
Confectionery in South Africa
Mondelez - 36%
Nestle - 23%
Tiger Consumer Brands - 8%
Lindt & Sprungli - 6%
4 companies hold 73% of
confectionery value share
Global Strategy to Enter South Africa
with a local confectioner
● Smaller investment and less risk
● Less resistance from local competition
● Opportunity to introduce Hershey’s brand to S.A.
● Measure consumer reaction to brand and products
● Share resources such as R&D, MKT & Distribution
● Easier to implement Localization Strategy
Hershey’s Mission Statement
“To continue Milton Hershey’s legacy of commitment to
consumers, community and children, providing high quality
products while conducting business in a socially responsible
and environmentally sustainable manner”.
How do you maintain
integrity in foreign markets?
Conducting due diligence when creating
contracts with suppliers, manufacturers and
any type of business outsourcing and
Monitoring internal and external activities
AND intervening in a timely manner when
quality or performance affects the values or
mission of the company.
Hershey’s in South Africa?
Table of Contents
South Africa is often considered the land of hope. Marred by its history of brutal
racial divisions of Apartheid that ended in 1991, the struggles between the socioeconomic
classes still exist. Although on the surface South Africa has transformed itself to be
“rainbow nation” where citizens are equal and coexist regardless of color, the recent
economic turmoil and political instability is causing the citizens of South Africa to create
divisions based on color and economic status. Even with all this mess, the future of South
Africa can still be salvaged to sustain its one-of-a kind vibrant culture, natural resources,
beautiful landscapes and the success of its citizens.
This report will provide an analysis of whether if The Hershey Company should
expand its product to be sold in South Africa. Our decision has been concluded by
analyzing a plethora of data, ratios, and concepts ranging from subjects as Hershey’s
10K, South Africa’s GDP analysis, demographics, current political landscape, and the
confectionary industry already established in South Africa among other sources of data.
All the data and info will not only be included in the body of this paper, but also in the
appendix at the end. In its entirety, all the information was necessary to weigh the pros
and cons to make our decision.
Hershey is the 6th largest confectionary company in the world and the largest
confectionary company in the United States. By no mistake, Hershey enjoys the ability to
lead industry averages in aspects like Return on Equity (76.8% vs 60%), Return on
Assets (13.24% vs 5.49%), Assets turnover (1.41 vs 0.64) among others. It is a small
enough company where it can focus its attention to being the best but a large enough
company to compete with the like of Cadbury and Ferrero. As one of the most socially
responsible corporations, any country that Hershey does business with will be given a
boost in their society. From using certified and sustainable cocoa, Hershey averts any risk
of underpaying their suppliers for its raw materials. Because the confectionary industry is
very competitive and the health of The Hershey Company is strong, it is imperative that
Hershey needs to expand to attain market share from a country that is outside of the US.
Even though Hershey is looking to expand, the question remains whether if South
Africa is an ideal country to do business with. Looking at from an economics viewpoint,
South Africa has a declining GDP and GDP per capita, high unemployment rate (26%)
and an average inflation rate. However, the foreign direct investments (FDI) are
increasing and the exchange rate of USD to RAND is high (1USD=13RAND); the dollar
goes further. If there is to be any investment, it would be relatively cheap to establish a
physical presence. However, factors like a declining GDP and a high unemployment rate
suggest the economy of South Africa to be in a condition that will not support a product
that needs discretionary income. But with many FDI and its decreasing balance of
payments, South Africa might have the capability to reinvent itself in the future.
The present-day South Africa’s economy might not be strong but it has very
interesting aspects about who Hershey’s can market towards. South Africa has a booming
population of around 54 million people but when Hershey is to segment the population it
wants to target, it will have a very difficult time. There are 12 official languages spoken
in South Africa; English is the 4th most spoken (9.6%). The top 3 languages are spoken
by primarily low-income people. The education system is terrible with only 19% of the
population who can go to college, attend. Around 70% of the population is considered
low-income and live on the equivalent of $456/month. On April 7, nationwide protests
broke out to oust President Jacob Zuma because of his firing of the finance minister that
ultimately led to South Africa’s credit rating to be considered junk. With so much
political upheaval, it is a clear sign to stay away from the country.
We have established that present-day, it is not a wise decision to go into South
Africa based on their declining economy and political unrest. But all hope is not lost;
South Africa has a bright future. Our recommendation is to wait 10-years to see if the
investments in South Africa yield good results. If they happen to do so, a strategic
alliance with Mondelēz International’s Cadbury would be a wise choice. Cadbury owns
36% of market share in an industry where 4 companies (Cadbury, Nestle, Tiger, Lindt &
Sprungli) own 73% of market share. By creating a strategic alliance that closely
resembles how Hershey manufactures and sells Cadbury products in the US, Cadbury
would own the rights to manufacture and sell Hershey products in South Africa. This is
only if the health of South Africa improves and becomes a viable option for Hershey to
The required financial ratios (Figure 1) and the explanations of each ratio (Figure 2) are
outlined in the appendix near the end of the paper. Please refer to those as it will heavily
complement the ideas presented here, and provide an overall financial view of The
Hershey Company. The data of our findings were significantly sourced from Hershey’s
most recent 10K.
The value of Hershey’s inventory is based on either the lowest cost or the market
value. Hershey has separate methods to estimate the value of their US and international
inventories. For the year ending on Dec 31, 2016, most of the value of the US inventory,
which is about 54% of their inventory, uses the method of last-in, first out (LIFO). The
remaining amount of US and international inventory uses the method of first-in, first out
(FIFO). As of Dec 31, 2016, the value of their inventory using the method of LIFO is
$402,919. On Note 16, it stated that an adjustment was made to show the excess of
inventory value using LIFO.
Hershey uses straight-line depreciation regarding the cost of their property, plant,
and equipment. Straight-line depreciation is calculated by the cost over their estimated
useful life. For instance, Hershey’s machinery and equipment has an estimated useful life
of 3 to 15 years, whereas a building which has an estimated useful life of 25 to 40 years.
For the year ending on Dec 31, 2016, Hershey’s total depreciation expense was $231,735;
in that year, maintenance and repairs also occurred. Interest was also accumulated for the
construction of new facilities and production lines. Impairment assets (items less than
book value) may not be recoverable. Assets held for sale or disposals are reported at the
lower amount of fair value minus the cost to sale.
In 2016, Hershey continued their investment with corporations for developments
that qualified for them to receive federal historical and energy tax credits. All their
investments are reported under the Consolidated Balance Sheet using the equity method.
Tax credits are also recognized as a tax expenses once it is documented, and it is recorded
to show the remaining value of the future tax benefit. For the year ending in Dec 31,
2016, the investment tax benefit Hershey recognized was $52,342, when the equity
investment was written-down as $43,482. To show the recognition of the tax benefit, it
can be found under other (income) on the Consolidated Statement of Income.
Effective Tax Rate
When comparing Hershey’s income tax rate for the year 2015 and 2016, we can
see that there is a big difference in taxes. For 2016, we can see that the income tax rate
was 34.5%, whereas in 2015 the rate was 43.1%. The tax rate was higher in 2015,
because there were “non-deductive goodwill impairment charges”. According to
Hershey’s 10K report, for the year 2016, Hershey had more tax benefits from
“manufacturing deductions, research and development and investment tax credits, and a
favorable foreign rate differential relating to cocoa procurement operations.”
Transfer Pricing in South Africa
According to the Government Gazette, effective as of October 28, 2016, South Africa
Revenue Service (SARS) made changes to the policy regarding transfer pricing
documentation requirements. The new policy Notice No. 1334, under Section 29 of the
Tax Administration Act, requires South African companies with “cross-border relatedparty transaction” to provide additional documentation if they have a combined amount
of more than 100 million Rand per year. If they have reached the limit, additional
documentation requirements will cover all individual cross-border transaction that
exceeds 5 million Rand starting on or after October 1, 2016. Some requirements include,
“the description of ownership structure”, “business operation summary”, “copies of any
contracts or agreements”, and “cash flow statements”. All South African companies must
maintain and records these documents.
South Africa, just like many countries that are trying to be more developed, is
growing; the population rate in millions has grown at an average of 1% per year for the
last ten years, but other aspects of the country have not been growing as much. Recently,
their gross domestic product growth rate and gross domestic product per capita have
declined. The consumption and investments of South Africa have decreased, the
unemployment rate, policy interest rate, and exchange rate have all increased, and the
inflation rate has stayed relatively the same, bringing more hardship to this third world
country in the recent years.
The gross domestic product is a primary indicator to see how an economy is doing
by representing all the goods and services, and affixing a dollar amount to it. The gross
domestic product (GDP) has been decreasing in South Africa; the economy is not
growing by any means. last ten years there is data showing of (in $Billion) 299.42 for
2007, 286.77 for 2008, 295.94 for 2009, a drastic increase of 375.35 in 2010, 416.42 for
2011, and began to steadily decline again in 2012 with a GDP of 396.34, 367.59 in 2013,
351.31 in 2014, and 314.57 in 2015. Information for the GDP for 2016 nor 2017 is
available. Figure 3 shows the date in a graph that explains numbers of the decreasing
The GDP growth rate measures how fast the South African economy is growing;
in this case, declining. Comparing a quarter of the country’s economic output, Figure 4
shows a representation of the annual growth rate for South Africa; most years resembles
the United States. However, since 2014, South Africa has seen a dismal growth rate.
Many sectors like mining and manufacturing are posting low numbers leading to a
decrease in the overall GDP growth rate. South Africa needs to depend on its established
industries to do well so it may develop others.
GDP per capita is calculated by dividing South Africa’s GDP, adjusting to
inflation, and dividing by the population. Figure 5 shows an ultimate low in 2009 of (in
USD) 7248.4 followed by a steady increase for the next 6 years. The increase coming in
2010 with 7362.8, to 7494.3, 7546.8, 7606, 7610.7, and ending with 7585.8 in 2015. Data
from 2016 is not available. Although we don’t have data for 2016, we can assume that it
has decreased due trends that we have seen in other parts of the data. Still high yet
signaling of a decrease is alarming because standard of living and the
productivity/efficiency is going down.
The unemployment rate in South Africa has been drastically different every year
and exceptionally high for the last 10 years. Figure 6 shows the different unemployment
rates. Employment grew in few sectors including, the community and social services,
transportation, manufacturing, agriculture, trade and private households but decreased
drastically in mining and construction. This is one of the most important indicators
showcasing if people can hold down a job. The chart shows over 26% of the population
do not have a job in 2016. This explains less contribution in the GDP per capita and
hence the loss of purchasing power in the overall decline of the GDP.
Inflation rate in South Africa in the past 10 years has declined almost half of what
it was. In the last few years, the rate has stayed between 4% and 6%; except for in 2009 it
had dropped to 3%. Figure 7 the average and the drastic lows. The inflation rate is
healthy where the prices of products aren’t being effected so much. Inflation and
deflation can both hurt the economy. The rate over the years has achieved to be very
beneficial for the citizens of Africa as it has almost decreased by half within 5 years.
The exchange rate in South Africa has increased steadily for the last 10 years.
Figure 9 shows how Africa has increased its exchange rate and Figure 10 compares it to
the United State exchange rate. Just recently, the exchange rate in South Africa has
decreased because of the political dilemma that had started in 2016. Pravin Gordhan, the
finance minister, had unveiled government spending cuts, a civil service job freeze, and
some moderate tax rises. Gordhan’s actions were because he wanted to stop the country
spending money/resources that it couldn’t afford, and did not want to borrow money that
South Africa could not pay back in the future. His goal was to increase the credit rating
for South Africa so that interest rate would not increase. An article by Newsweek written
on October 17, 2016 states that there was also a power struggle between Jacob Zuma, the
president of South Africa, and Pravin Gordhan because he is being investigated for fraud.
Recently, Zuma fired Gordhan and led to nationwide protest for the firing of the
The balance of payment for South Africa since 2006 has been sustainable. The
value in 2006 was 30.238 million and has dropped down to 19.136 million in the last ten
years. But there was a 19% increase in the 2010 compared to 2009 which is the largest
increase South Africa has had. Figure 11 and 12 shows the data and the value of South
Africa’s balance of payments and includes the change percentage per year. These
numbers prove that South Africa balance of payments as slightly declining every year as
a good sign that the economy in this part is doing okay.
The overall condition of South Africa’s foreign sector is as steadily increasing
both foreign direct investments (FDI) have been stable for the last three years as shown in
chart Figure 13; and South Africa’s foreign exchange reserve has also increased in the
last ten years but just recently has kept a steady pace with not much increase since 2014
also shown in chart Figure 14. The more FDI that South Africa is being involved in, the
better outlook for the country of its investment in the future.
Three important trade agreements that may be relevant to the expansion of
Hershey’s moving into South Africa: Southern Africa Development Community (SADC)
Free Trade Agree ...
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