Hershey and Mondelez International investors will be eager to see how the chocolate makers plan to tackle the recent surge in cocoa and sugar prices when they report first quarter results this week.
These companies have already been grappling with heightened costs in the past few quarters, which they have in part passed on to consumers by raising prices.
A recent surge in cocoa prices amid a shrinkage in supplies due to droughts and inconsistent rainfalls as well as crop disease in the world’s top cocoa producing regions could spell more trouble for them.
In addition, sugar prices have also spiked in recent months.
“A lot of investors are waiting to learn about how the consumer is reacting to the current price of chocolate in the market and how that influences the companies’ decisions to take more pricing in the future,” said Sean King, an analyst at Columbia Threadneedle
Investments, which holds shares of both Hershey and Mondelez.
THE CONTEXT
Cocoa prices – which have nearly tripled in value this year – currently form about 20% and 10% of Hershey and Mondelez’s cost-of-goods-sold (COGS), respectively, according to Jefferies.
“Typically, these companies incur higher cocoa costs first and then they go to their retail customers and try to increase prices,” said CFRA Research’s Arun Sundaram, adding there could potentially be stronger pricing in the second half.
The possibility of more price hikes comes when demand has already started to falter and companies try to make up for the fall by raising prices.
Data from market research firm Circana showed unit sales for chocolate in the U.S. dropped 1.8% in 13 weeks ending March 24, while prices climbed 6.3%.
“The big question would be whether price-related growth is enough to offset volume declines that we’re likely going to see this year,” Sundaram noted.
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