Rory Bukofzer

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Nikki Chorba
Rory Bukofzer
Danielle Senge
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Table of Contents

• Danielle Senge
• History of Hershey
• Corporation Overview
• Supply Demand
• Income Effect
• Nikki Chorba
• What is Economics?
• Hersheys Factors of Production
• Substitutes
• Advertising

• Rory Bukofzer
• Costs opportunity, short-run, long-run
• Competition
• Profit Maximization
• Government Intervention

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History of Hershey

• Milton Hershey was born on September 12, 1857 in
• Central Pennsylvania.
• After being a candy-makers apprentice in
  Lancaster, he opened his own candy shop in
  Philadelphia in the year 1846, at age 18.
• When the business failed after 6 years, he
  attempted to open shops in Chicago, New Orleans,
  and New York City.
• He returned to Lancaster in 1886 where he
  established his Lancaster Caramel Company, and
  his new reputation as a candy-maker.
• In 1894, the Hershey Chocolate Company was
  created in addition to the Lancaster Caramel
  Company.
• In 1900, Mr. Hershey sold the Lancaster Caramel
  Company for 1 million yet retained the chocolate
  manufacturing equipment and the right to
  manufacture chocolate.

Milton S. Hershey founded Hershey Foods
Corporation in the early 1900s.
http//www.hersheys.com/about/milton.shtml
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History of Hershey

• In 1903, he built what is now the worlds largest
  chocolate manufacturing plant.
• It opened in 1905, and it began Hershey
  Corporations mass production of milk chocolate.
• By its 10th anniversary, the community around it
  had flourished. Under Milton Hersheys guidance,
  a bank, department store, school, park, churches,
  golf courses, zoo, and a trolley system had been
  established.
• Mr. Hershey started a second building boom in the
  1930s, with the construction of a grand hotel,
  community building, sports arena, and a new
  office building for the chocolate factory.
• Milton Hershey believed that an individual is
  morally obligated to share the fruits of success
  with others. One example of his charitable
  endeavors is the establishment of the Hershey
  Industrial School which houses and provides
  education for 1,100 homeless children.

The food products that bear Milton S. Hersheys
name represent an ongoing dedication to quality
and value a commitment established by Hershey
Foods unique founder.
http//www.hersheys.com/about/milton.shtml
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Corporation Overview

• Hershey Foods Corporation is the leading North
  American manufacturer of quality chocolate, and
  non-chocolate confectionery and chocolate-related
  grocery products
• Hershey International oversees the corporations
  international interests and exports to over 90
  countries worldwide

http//www.hersheys.com/about/profile.shtml
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Demand
Law of Demand As the price of a good increases,
the quantity demanded decreases (on the demand
curve)
Other Factors Shift the Entire Demand Curve

• Causes of a Rightward Shift
• Income Increases
• Wealth Increases
• Price of Substitute Increases
• Population Increases
• Expected Price Increases
• Decrease in the price of complements
• Shift of tastes toward the good

• Causes of a Leftward Shift
• Income Decreases
• Wealth Decreases
• Price of Substitute Decreases
• Population Decreases
• Expected Price Decreases
• Increase in the price of complements
• Shift of tastes away from the good

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Demand
A Shift on the Demand Curve

• In a survey of 10 Washington and Jefferson
  College students, all 10 said that if the cost of
  a bag of Hershey Kisses were to increase from
  0.55 to 0.70, they would buy less. Due to an
  increase in price, the quantity they would
  purchase decreased.

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Demand
A Shift of the Entire Demand Curve

• If KDKA broadcasted to its listeners that the
  price of all Hersheys candy bars would increase
  5 at the start of next year, consumers would
  purchase as many candy bars as possible before
  prices increase.

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Supply
Law of Supply As the price of a good increases,
the quantity supplied increases (on the supply
curve)
Other Factors Shift the Entire Supply Curve

• Causes of a Rightward Shift
• Price of Input Decreases
• Profitability of Alternate Good Decreases
• Expected Price Decreases
• Increase in Productive Capacity
• Improvement in Technology

• Causes of a Leftward Shift
• Price of Input Increases
• Profitability of Alternate Goods Increase
• Expected Price Increases
• Decrease in Productive Capacity

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Supply
A Shift on the Supply Curve

• If Hershey raised the price of Breathsavers by
  0.20, they would make a greater profit. With the
  larger profit, Hershey would be able to produce
  more output.

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Supply
A Shift of the entire Supply Curve

• Example Hersheys Kisses were individually
  hand-wrapped until automated wrapping machines
  were invented in August of 1921. This increase
  in technology caused an increase in the quantity
  of output.

http//www.hersheys.com/products/kisses.shtml
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Income Effect

• As the price of a good decreases, the consumers
  purchasing power increases, causing a change in
  quantity demanded for the good.

• If the price of Hersheys Cocoa decreased, the
  ability (purchasing power) of the consumer
  increases. This causes a change in quantity
  demanded for the good.

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What isEconomics?
The Science of Choice
The way in which society chooses to allocate
its scarce resources in order to satisfy
unlimited wants and needs.
Scarcity A situation in which the
amount of something available
is not sufficient to satisfy the
desire for it.
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How does economics affect Hershey?

• Hershey must decide how to use the
• resources it has in such a way to
• produce the most quality output possible.

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Hersheys Factors of Production
Land The main Hershey plant in Hershey, PA
covers more than 2 million square feet
with manufacturing space.
Hershey is the largest chocolate plant in the
world its big enough to cover the floor of the
Houston Astrodome 5 times!
Labor Hershey is an active company in
approximately 50 countries and they
globally employ over 15,000 people.
From the Bean to the Bar
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Capital -Hershey has many plants in the US as
well as a few international
plants. Some Hershey plants are
located in

• Pennsylvania
• California
• Virginia
• Illinois

• Canada
• Brazil
• Japan
• Philippines

-The most significant raw material used in the
production of Hersheys chocolate is cocoa. The
main Hershey plant includes 24 cocoa bean silos
that can hold up to 90 million pounds of cocoa
beans.
Thats enough cocoa beans to make 5 and a half
billion chocolate bars!
www.hersheys.com 11/3/02
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Capital, cont.
-Some of the machinery used in Hersheys
production lines was introduced in 1921. With
these machines, Hershey can
Wrap 1,300 Hershey Kisses per minute.
Magically fit the almond into Hersheys
Kisses with almonds.
Produce 4,000 Reeses peanut butter cups per
minute.
From the Bean to the Bar
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Entrepreneurial Initiative
It all started with Milton Hersheys
life-long dream to be a candy man.

• Did You Know?
• Hershey is one of the largest users of sugar in
  the United States.
• The main Hershey plant uses about
  700,000 quarts of
  milk every day.

Thats enough milk to supply all the people in
a city the size of Philadelphia!
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Substitutes
Substitute A good that can be used in place of
another good and fulfills
more or less the same
purpose.

• Hershey produces a wide variety of products, so
  there are
• substitutes within the corporation. These
  substitutes are
• considered alternate goods, or other goods the
  firm can
• produce using the same types of inputs used
  for other goods.

Some examples of Hersheys alternate brands
include

• Hersheys Milk or
• Dark Chocolate
• (with or without
• almonds)
• Reeses
• Twizzlers Licorice

• Jolly Rancher Candies
• Ice Breakers
• Carefree
• Breathsavers
• Kit Kat

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Hershey also produces a line of grocery
products such as

• Hersheys Chocolate Milk
• Hersheys Cocoa
• Hersheys Syrup

• Hersheys Chocolate Chips
• Hersheys Ice Cream toppings
• Reeses Peanut Butter

Substitutes for Hersheys chocolate within the
chocolate industry include

• Nestles
• Mars

• Russell Stover
• Palmer

• Nabisco

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Alternate Goods and Substitutes
If the cost of producing an alternate good
decreases, the supply of the current good
will decrease. For example, if the cost of
producing Hershey kisses decreases, the supply
of Hershey chocolate bars will decrease (as
supply of kisses increases).
If the price of a substitute increases, then the
demand for the current good will increase and
vice versa. For example, if the price of
Nestles chocolate crunch bars increased, the
demand for Hershey Krackle bars would increase
also.
S2
Price
Price
S1
D2
D1
Quantity Hershey chocolate bars
Quantity Hershey Krackle bars
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Advertising
Advertising One way to differentiate your
product from other similar
products.

• Originally, Hershey was against any kind of
  large-scale
• advertising, and they didnt really need any
  because they
• were one of Americas original confectioners.
• However, in the late 1960s, Mars/MM launched a
  massive
• advertising campaign and forced Hershey to
  hit the national
• airways.
• Hershey began marketing its products nationally
  in 1969.

www.bu.edu 11/01/02
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Advertising

• Hersheys overall marketing strategy hasnt
  changed much
• since they began advertising in 1969.
• The aim of the commercials is to express a
  relationship that
• people already have with the chocolate.
• Hersheys newest campaign centers around
  consumers
• expressing their feelings about Hershey
  chocolate. Some of
• their comments include
• I think everybody needs a little
  chocolate in their life.
• This is the original. Small squares
  of finite joy.

• The spots close with a Hersheys chocolate bar
  rising out of a
• pool of liquid chocolate with a close-up on
  one square of
• chocolate where Happiness is imprinted in
  the place where
• Hershey is usually written.

www.hersheys.com 11/03/02
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Advertising
Hershey takes great care to insure that the media
environment where its products are advertised are
appropriate.
They want their advertising to reflect favorably
on their image as a manufacturer of wholesome,
quality products.
Hershey avoids programs and publications that
contain

• Graphic or unnecessary violence
• Excessive use of vulgarity or profanity.
• Glamorization of drug use.
• Sensationalism involving controversial social
  subjects.

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Advertising Hersheys Cocoa Mulch
Hersheys mulch is made from the waste shells
from the extraction of chocolate from cocoa beans.

• Smells like real chocolate.
• Acts as a deterrent to slugs, snails and other
• garden pests.
• Used in the Rose Gardens at Hershey Park.
• 100 natural organic fertilizer.
• Its weed-free and decomposes to combine with
• the ground when it rains.

www.hersheys.com 11/14/02
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• Competition Revenue

• Annual Revenue is the amount of money taken in
  by a firm in any single year
• When comparing absolute monetary values of
  revenue over time, one has to compensate for
  inflation.
• When comparing percentage values of revenue
  over time, figures found will already be adjusted
  for inflationary factors.
• It is important to note that as a firm grows in
  size, it becomes much harder to retain the same
  percentages of revenue growth as in previous
  years. The firm only begins to decrease in
  revenue levels when revenue growth is negative,
  not when figures decrease numerically.

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10 9 8 7 6 5
4 3 2 1
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10 9 8 7 6 5
4 3 2 1
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• Hersheys Vs. Competitors

• When Plotting the lines of best fit for the
  percentage Revenue Growth
• Industry
  Competitors -0.183x 2.90
• Hershey
  -0.970x 4.76
• The steeper slope downwards of the Hersheys
  line, indicates that Hersheys Revenue growth is
  decreasing at a much greater rate than its
  competitors.
• Hence, although the entire industry indicates
  downward trends in revenue growth, other factors
  must influence Hershey to create such a
  difference in slope between the lines of best
  fit.
• The primary goal of any firm is to maximize
  profit. This is done by maximizing revenue and
  minimizing costs of production. Revenue is
  usually dependant on consumer demand, hence,
  firms are often separated only by the degree to
  which they are able to minimize costs.

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• Accounting Cost Opportunity Cost

• Opportunity cost is what a firm or consumer
  forgoes, when they use their limited resources to
  obtain a good or service.
• If a consumer were to buy a Hershey Chocolate
  Bar, their opportunity cost, would be not buying
  a different kind of candy.
• Accounting cost, is the financial cost of using
  ones limted resources to purchase a good or
  service.
• If a firm were to purchase new machinery, their
  accounting cost would be the price of the new
  machinery. Their opportunity cost would be the
  interest lost if one had invested that capital
  instead of spending it.
• One can get an approximation for accounting
  cost, by the Formula
• Annual Revenue Annual Income Annual
  Accounting Cost
• (total money taken in) (profit)
  (annual production cost)

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• Hershey's Cost Analysis

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• Government Intervention

• Over the last decade Hersheys profit levels
  have been dropping fairly steeply.
• Recently the board of directors decided to
  accept an offer from British confectionary firm
  Cadburys, to buy Hershey.
• The State government decided to block the sale
  by rushing a bill through the state legislature,
  which would place strict regulations on both
  firms as pertaining to the sale.
• The resulting legislation made the takeover
  unprofitable for Cadburys, and thus the sale fell
  through.
• The rational behind the legislation was to
  protect the Pennsylvania employees of Hershey
  from losing their jobs when a foreign firm took
  control.
• Effectively, the government stopped an entirely
  legal transaction in a capitalist market from
  occurring.

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Any Questions?