Are higher commodity prices affecting your industry and can you pass them on? On Jan 28, 2008, Hershey’s announced a 13% increase in the prices of about 1/3 of its chocolate products because of higher costs for milk supplies and energy related costs. How will this price increase affect demand from consumers and its positioning vs. competitors?
Hershey is putting a positive spin on the increase by claiming it has more quality ingredients that competitors, "While we have no way of knowing what others are thinking, or what their cost situation is, we do know that within the category our products include far more pure milk chocolate and solid chocolate than our competitors," Hershey spokesman Kirk Saville told Associated Press in an article published on msn.com’s food section on Jan 28, 2008.
Will competitors Mars and Nestles respond and if they will, how? Confectionary vendors can effectively raise prices with other tactics besides the obvious. They can:
• Change cost structure for distributors; lower rebates, co-marketing funds, etc.
• Reduce the size of the product while maintaining the product price
• Increase the size of the product, but increase the price proportionately more
• Add value to the product; “new improved!”
• Introducing new products at higher price points
They can also maintain prices while seeking to lower costs to maintain margins:
• Switching to lower cost ingredients
• Changing sourcing or distribution practices
• Upgrade manufacturing technology
They can do one to all, of the above, but not all quickly and not all simultaneously since some would take years to implement.
What do you think Mars and Nestle will do, if anything, to respond to Hershey’s price increase, and the underlying cost pressures that must affect them also although not to the same level?