Strategy Management Question.

1. Complete Experiential Exercise 4C, Step 1, on textbook page 124. Once you have found Table 4-4, complete the first 18 ratios and then 2 of your choice from the remaining growth ratios (this will equal the 20 required in the Assurance of Learning Exercise). It is required that you show your work. Use the financial documents on pages 29–31.

Exercise 4A Apply Breakeven Analysis

Purpose

Breakeven analysis is one of the simplest yet underused analytical tools in management. It helps provide a dynamic view of the relationships among sales, costs, and profits. A better understanding of breakeven analysis can enable an organization to formulate and implement strategies more effectively. This exercise will show you how to calculate breakeven points mathematically.

The formula for calculating breakeven point is BE Quantity = TFC/P – VC. In other words, the quantity (Q) or units of product that need to be sold for a firm to break even is total fixed costs (TFC) divided by (Price per Unit – Variable Costs per Unit).

Instructions

1. Step 1 Let’s say an airplane company has fixed costs of $100 million and variable costs per unit of $2 million. Planes sell for $3 million each. What is the company’s breakeven point in terms of the number of planes that need to be sold just to break even?

PAGE 29-31 (Financial Documents)

Hershey’s sales and income by geographic region are given in  Exhibit 2 . North America accounted for 85.6, 86.8, and 87.5 percent of the company’s sales in 2014, 2013, and 2012, respectively. Note in  Exhibit 2  that Hershey’s income from outside North America has declined steadily. All sales and income from Hershey stores are included in the International and Other segment.

Exhibit 2 Hershey’s Net Sales and Income (in millions)

	2014	2013	2014
Sales
North America	$6,352.7	$6,200.1	$5,812.7
International and Other	1,069.1	946.0	831.6
Total	7,421.8	7,146.1	6,644.3
Income
North America	1,916.2	1,862.6	1,656.1
International and Other	40.0	44.6	51.4
Total	$1,956.2	$1,907.2	$1,707.5

Source: Based on Hershey’s 2014 Form 10K, p. 25.

Finance

Hershey reported a 3.9 percent increase in revenues in 2014 to $7.42 billion, whereas company earnings increased about 7 percent overall from the prior year. The company’s international net sales increased nearly 15 percent, including the negative impact of foreign currency exchange rates and positive contribution of about $54 million from Hershey’s acquisition of Shanghai Golden Monkey in China.

Hershey has gained market share in every measured channel three years running, even after raising prices on many items 10 percent over the same period. In fact, Hershey has produced higher earnings every year but two since 2000. With a 34 percent market share in North America, Hershey instituted an 8 percent price hike in late 2014 on most of its chocolate products, partly in response to higher cocoa prices. The company’s most recent income statements and balance sheets are provided in  Exhibits 3  and  4 , respectively. Note the steady increases in both revenues and net income.

Exhibit 3 Hershey’s Income Statements (in thousands, except per share amounts)

	2014	2013	2012
Sales	$7,421,768	$7,146,079	$6,644,252
Costs and expenses
Cost of sales	4,085,602	3,865,231	3,784,370
Selling, marketing, and administrative	1,900,970	1,922,508	1,703,796
Business realignment and impairment	45,621	18,665	44,938
Total costs and expenses	6,032,193	5,806,404	5,533,104
Income before interest and taxes	1,389,575	1,339,675	1,111,148
Interest expense	83,532	88,356	95,569
Income before taxes	1,306,043	1,251,319	1,015,579
Income taxes	459,131	430,849	354,648
Net Income	846,912	820,470	660,931
Net income per share	3.91	3.76	3.01
Dividends paid per share	2.04	1.81	1.56

Source: Based on Hershey’s 2014 Form 10K, p. 45.

Competitors

The chocolate industry is dominated by five companies: (1) Hershey, (2) Nestlé, (3) Mars, (4) Lindt & Sprungli AG, and (5) Tootsie Roll Industries. Europe, the United States, and South America account for 54, 32, and 8 percent of total chocolate and nonchocolate candy revenues, respectively, or a dominant 94 percent. Thus, there is much room for expansion by these firms into developing nations whose disposable incomes are increasing, especially nations in Asia and Africa, but also in South America. A comparison of competitors is provided in  Exhibits 5  and  6 . Note that Mars dominates in nonchocolate candy. Also note that Nestlé is about 10 times larger than Hershey.

Exhibit 4 Hershey’s Balance Sheets (in thousands)

	2014	2013
Assets
Cash and Cash Equivalents	$ 374,854	$ 1,118,508
Short-Term Investments	97,131	—
Accounts Receivable—Trade (Net)	596,940	477,912
Inventories	801,036	659,541
Deferred Income Taxes	100,515	52,511
Prepaid Expenses and Other	276,571	178,862
Total Current Assets	2,247,047	2,487,334
Net Property, Plant, and Equipment	2,151,901	1,805,345
Goodwill	792,955	576,561
Other Intangibles	294,841	195,244
Other Assets	142,772	293,004
Total Assets	$ 5,629,516	$ 5,357,488
Liabilities and Stockholders’ Equity
Short-Term Borrowings	$ 635,501	$ 166,875
Accounts Payable	482,017	461,514
Accrued Liabilities	813,513	699,722
Accrued Income Taxes	4,616	79,911
Total Current Liabilities	1,935,647	1,408,022
Long-Term Debt	1,548,963	1,795,142
Other Long-Term Liabilities	526,003	434,068
Deferred Income Taxes	99,373	104,204
Total Liabilities	$ 4,109,986	$ 3,741,436
Stockholders’ Equity
Preferred stock shares issued: none in 2014 and 2013
Common stock, shares issued: 299,281,967 in 2014 and 299,281,527 in 2013
Class B common stock, shares issued: 60,619,777 in 2014 and 60,620,527 in 2013
Additional paid-in capital	754,186	664,944
Retained earnings	5,860,784	5,454,286
Treasury stock: 138,856,786 in 2014 and 136,007,023 in 2013	(5,161,236)	(4,707,730)
Accumulated other comprehensive loss	(358,573)	(166,567)
Stockholders’ equity	1,455,062	1,604,834
Noncontrolling interests in subsidiaries	64,468	11,218
Total stockholders’ equity	1,519,530	1,616,052
Total liabilities and stockholders’ equity	$ 5,629,516	$ 5,357,488

Source: Hershey’s 2014 Form 10K, p. 47.

Nestlé S.A. (stock symbol = NSRGY)

Headquartered in Vevey, Switzerland, Nestlé is a large food-processing company with 2014 revenues of 96.2 billion U.S. dollars (USD) and a net income of $15.14 billon. According it its website, Nestlé proclaims to be the top global company with respect to nutrition, health, and wellness by providing customers with nutritious and great-tasting food and beverage choices. Nestlé’s mission statement is simply “Good Food, Good Life.” The company produces a wide array of products ranging from baby foods, chocolate, coffee, juices, dairy, ice cream, pet care, and more. Notable chocolate products include Butterfinger, Crunch, Aero, KitKat, and Toll House chocolate chips. Wonka is also owned by Nestlé and includes Nerds, Sweetarts, Spree, Laffy Taffy, Runts, Gobstopper, Fun Dip, and many other sugary candy options. In 2013, Nestlé reported chocolate sales of $8.5 billion Swiss Francs ($8.5 billion USD) and sugary confectionary sales of 1.2 billion Swiss Francs ($1.4 billion USD). Total chocolate and sugary confectionary sales were around 10 percent of total company revenues. Total sales derived from (1) the Americas, (2) Europe, and (3) Asia, Oceania, and Africa were 44, 28, and 28 percent, respectively.

Exhibit 5 Hershey versus Rival Firms, Market Share (percent)

Product Type	Hershey	Mars	Nestle	Others
USA Chocolate	37	28	5	* 30
USA Nonchocolate Candy	21	35	2	42
Global Chocolate and Nonchocolate Candy (non-USA)	5	14	9	** 72

Source: Based on information at IBIS and a Wall Street Journal article on 2-18-15, p. B6. Numbers are rounded.

* Lindt & Sprungli AG contributed about 10 percent of others market share.

** Mondelez International Inc. and Ferrero SpA contributed 11 and 8 percent market shares, respectively.

Exhibit 6 Hershey versus Rival Firms

	Hershey	Nestlé	Tootsie Roll	Industry Avg.
# Employees	20,800	333,000	2,000	1,730
$ Revenue	7.5B	105.47B	541M	3.79B
$ Revenue per Employee	360,575	316,000	270,500	219,000
$ Net Income	840M	11.15B	62.6M	3B
$ Market Capitalization	20.7B	242B	2.08B	675M
% Operating Margin	0.19	0.15	0.15	0.05
Earnings per Share	3.76	3.49	1.03	–0.11

Source: A variety of sources.

Nestlé is much more diversified than all of its chocolate competitors, except for Mars, and continues to expand its brands. Recently, Nestlé paid $12 billion to acquire Pfizer Nutrition to bolster its market share in the child nutrition market, as well as Pamlab, a U.S.-based health-care products company. In February 2014, Nestlé sold an 8 percent stake in French cosmetics firm L’Oreal and is currently planning a large share buyback of its own stock. Analysts anticipate that Nestlé will sell its remaining 23 percent stake in L’Oreal. One potential company it might try to acquire is Ferrero, an Italian firm known for producing the chocolate hazelnut spread Nutella. Analysts estimate the value of Ferrero would be around $22 billion USD.

Nestlé and Google agreed in 2014 to name Google’s new Android operating system KitKat after Nestlé’s world-renown chocolate wafer candy. No money changed hands on the agreement. Google benefits by having more than 50 million specially wrapped KitKat bars in 19 different nations, including the United States, where Nestlé licenses KitKat to Hershey. The 50 million KitKat bars are timed to be released with the launch of Google KitKat. The special wrappers lead consumers to Google-affiliated websites where they can win prizes such as the Google Nexus 7, and credits to spend at Google Play.

Mars, Inc.

Mars is the second-largest candy manufacturer in the United States and the third-largest privately held company in the United States according to Forbes. Headquartered in McLean, Virginia, and having annual sales over $30 billion, Mars, like Nestlé, is well diversified with six business units consisting of chocolate, drinks, food, symbioscience, pet care, and Wrigley chewing gum. Mars blockbuster chocolate brands include Snickers, Milky Way, M&Ms, Dove, Bounty, 3 Musketeers, Starburst, and Skittles, among others. The annual revenue of Mars in 2014 was about $35 billion—more than 50 percent higher than in 2007, largely due to the firm’s 2008 acquisition of Wrigley. Since patenting recipes is difficult and producing chocolate is secretive, Mars does not allow visitors to its kitchens in its factories and facilities. Mars’ first blockbuster product back in 1923 was the Milky Way candy bar, still a big seller today.

Market researcher Euromonitor International recently reported that Mars’ market share in the United States rose to 28 percent from 24 percent. To further battle Hershey, in 2014, Mars opened a new 500,000 square-foot chocolate factory in Topeka, Kansas, at a cost of $270 million. The factory cranks out more than 8 million miniature Snickers candy bars and 39 million peanut M&M’s every day.

Like Nestlé, Mars advocates global sustainability of the cocoa resource but has received criticism in recent years over purchasing cocoa from West African farms that use child labor. Mars is also one of the world’s biggest producers of dog food and pet-care products. Mars’ Wrigley division produces chewing gums, confectionery products, and a variety of other products ranging from Uncle Ben’s rice to Pamesello grated cheese and Flavia coffee. Mars’ pet-food brands include Pedigree, Greenies, Sheba, and Whiskas. Interestingly, chocolate is Mars’ second-largest business globally, behind pet care.

Lindt & Sprungli AG

Headquartered in Switzerland, Lindt purchased U.S.-based and privately held Russell Stover in 2014 for an unreported amount, making Lindt the third-largest chocolate company in the United States (with a 10 percent market share), behind Hershey and Mars, and ahead of Nestlé. With the Russell Stover addition, Lindt acquired over 70,000 drugstore outlets for their products in the United States and Canada. Lindt also currently owns Ghirardelli Chocolate, based in San Francisco. Interestingly, Lindt is taking a slightly different strategic path than Hershey, Mars, and Nestlé. Although many top chocolate brands are betting on emerging markets such as China and India that have growth rates over 15 percent, Lindt is betting on North America with growth rates of less than 2 percent in chocolate sales. Lindt cites the main reason for sticking with the United States and Canada are they are safer markets and still will be three times larger chocolate markets than both China and India combined, even as far out as 2018. Lindt also specializes in higher- and middle-end chocolates and these products are not cost-effective options for many of the customers in China and India.