Hershey's large-scale layoffs and streamlining of its distributor network in China have caused a stir in the industry. Recently, Hershey China revealed in a phone response that it will undergo major adjustments in the China region, including handing over sales channels and services to local distributors, with management and executive staff facing large-scale layoffs. On December 1, Hu Tingzhou, General Manager of Hershey Greater China, announced his resignation, with the president's duties temporarily assumed by a director. The full handover of sales channels and large-scale layoffs indicate Hershey's comprehensive contraction in China. Compared to other brands, Hershey's acquisition and subsequent bargain sale of Golden Monkey left it severely weakened, with consecutive losses in the China region until 2018 when it began to recover. "The reason Hershey made this decision is still concern about its own financial situation. Although the Chinese market has begun to recover from the impact of the epidemic, with the Spring Festival approaching, the market still requires substantial investment. Given the uncertain epidemic situation in North America, Hershey needs to ensure funds to maintain its home market," said Lu Shengzhen, a FMCG expert, to a reporter from China Business Journal. He also suggested that the failure of Golden Monkey may have caused Hershey's top management to lose confidence in China. Hershey responded that this optimization had been under evaluation before the epidemic, so it is unrelated to the current pandemic. In the future, it will retain an operations team, operational institutions, and office space in China. -01- Hershey China's "Earthquake" On November 27, 2020, Hu Tingzhou announced important news to all employees via a conference call. "We will adjust and optimize the way sales channels and services are provided in China. We will cooperate with a large local distributor to continue providing high-quality Hershey products to Chinese consumers. The change in business model will have corresponding impacts on Hershey employees' development within the company." According to information released by Hershey, the reporter learned that Hershey China will dissolve its market operations department, handing over all market operations to distributors, and will also implement a certain degree of layoffs. Hershey did not disclose which distributor will take over the distribution rights, but it is certain that Hershey China's channel policy will shift from regional offices plus regional distributors to a general agent system with major distributors, and the role of Hershey China Investment Company in the Chinese market will be greatly weakened. According to internal employees, layoffs at Hershey China began immediately after the meeting. On November 30, Hershey China issued the "Notice on Adjustment of Employee Labor Relations," stating that the shareholders of Hershey (China) Investment Management Co., Ltd. and Hershey Group headquarters decided to comprehensively adjust the current operating entities, business methods, organizational structures, and business departments of Hershey Group in China. The content includes specific measures for economic compensation to laid-off employees. According to the notice, Hershey China's layoffs will be completed before December 11. For Hershey employees, although they face layoffs, based on available materials, Hershey will still compensate laid-off employees in accordance with the Labor Law. The day after the layoff notice was published, on December 1, Hu Tingzhou announced his resignation, with the president's duties temporarily assumed by a director. However, it is worth noting that Tianyancha shows that as early as September, Hu Tingzhou had already stepped down from his positions as General Manager, Director, and Legal Representative of Hershey (China) Investment Management Co., Ltd. Regarding Hu Tingzhou's departure, Hershey stated that he resigned for personal reasons. Senior executives leaving, large-scale layoffs, and handing over the market to local distributors directly reflect Hershey's comprehensive contraction in the Chinese market, and it may even exit China again. "Dissolving its own operations team means Hershey will no longer directly contact the market, so it is not impossible for Hershey to exit China again," said Zhu Danpeng, a Chinese food industry analyst, noting that Hershey does not have significant heavy assets in China. The reporter reviewed Hershey's current products, and the vast majority are produced by other domestic companies under OEM agreements. Hershey also has no heavy upstream production assets in China, which would allow it to exit China quickly. In 2004, due to internal corruption causing turmoil among senior management, Hershey, which had been in China for nearly 10 years, announced its withdrawal from the Chinese market. In 2006, Hershey made a comeback, focusing on the chocolate market after returning to China. Regarding this major change, Hershey's official explanation is "due to objective factors such as the epidemic." However, Zhu Danpeng believes that the epidemic has had the same impact on global markets. Hershey's decision should be part of a global strategic contraction. "Because of the failure of the Golden Monkey investment, Hershey headquarters has already been cautious about the Chinese market. It is reasonable for them to target China this time." "From Hershey's global perspective, recovering the market after the epidemic requires substantial funds, whether in China or other regions. But if Hershey has limited funds and can only focus on one regional market, ensuring the US home market is inevitable, and abandoning the Chinese market is understandable," said Lu Shengzhen. -02- Hershey's Market Squeezed According to Euromonitor market data, in the 2020 Chinese chocolate market, Hershey's market share was only 3.2%, far lower than Mars' 32.8%, Ferrero's 22.3%, Nestlé's 8.3%, and Pladis' 3.5%, ranking fifth. After 2014, China became Hershey's largest consumer market outside the US. However, from fiscal 2015 to fiscal 2017, Hershey's China region was in a loss-making state, especially in fiscal 2017, when the China region became Hershey's most loss-making market globally. It was not until 2018 that Hershey China's net sales grew by 14% and operating profit grew by 18%, marking the first time in four years that Hershey China achieved net sales growth. As of the end of March 2019, compared to the original plan, Hershey China's net sales exceeded the target by 2% and operating profit exceeded the target by 34%. Although Hershey's own data shows an upward trend in the Chinese market, Mintel data shows that from 2015 to 2018, Hershey's share of the Chinese chocolate retail market fell from 8.5% to 5.1%, with market share further squeezed by Mars. In recent years, Hershey has attempted to expand into China's vast third- and fourth-tier markets through acquisitions. After re-entering the Chinese market, Hershey's biggest setback was the acquisition and sale of Golden Monkey. In 2014, Hershey China took over Golden Monkey from Zhao Qisan and planned to complete full control of Golden Monkey with 3 billion yuan. However, after completing the acquisition of 80% of Golden Monkey, Hershey soon discovered that Golden Monkey was completely "a hot potato." Hershey carried out drastic reforms on Golden Monkey, including cutting original employees. For the original Golden Monkey distributors, Hershey did not help alleviate inventory problems but instead filed lawsuits demanding repayment. "Hershey acquired Golden Monkey without being fully prepared. Instead of achieving a situation where the two brands shared channels, it almost disbanded and overturned Golden Monkey's original distribution team and channel structure. The result was that the brand acquired with huge investment became a burden for Hershey, and Golden Monkey was on its last legs under Hershey," Zhu Danpeng said. Hershey did not use Golden Monkey to achieve channel penetration into lower-tier markets; instead, the acquisition became the most expensive lesson Hershey paid in China. Hershey found that the effect of acquiring Golden Monkey was lower than expected, which led to delays in the delivery of the remaining 20% equity, and it was not until February 2016 that the acquisition was completed for about 200 million yuan. The deal, originally planned at 3 billion yuan, was actually completed at about 2.6 billion yuan. Even so, it remains Hershey's largest overseas acquisition to date. Regarding the evaluation of Golden Monkey, Hershey once stated that Golden Monkey's net sales and profitability were significantly lower than initially expected, and it recorded a goodwill impairment of up to $280.8 million for Golden Monkey. Hershey once said, "We would rather sell Golden Monkey to anyone than to Zhao Qisan." But ultimately, in July 2018, Hershey sold Golden Monkey at a bargain price of 200 million yuan. Tianyancha's equity penetration shows that one of the transaction's shareholders was a former subordinate of Zhao Qisan, who had sold Golden Monkey years earlier. Whether Zhao Qisan became the winner is unknown, but Hershey's largest overseas acquisition can be said to have ended in failure. "In fact, since the acquisition of Golden Monkey, Hershey's plans in the Chinese market have been disrupted. The mid-to-low-end market was not opened up through Golden Monkey, and the gap with Mars and Ferrero in the high-end market has become increasingly obvious," Lu Shengzhen said. After resolutely selling Golden Monkey at a loss, Hershey became light again, and just as the market began to turn around in 2019, it encountered the epidemic in 2020. "For Hershey, although the Chinese market is large, making a profit from it requires greater investment. Hershey's withdrawal from China is actually to ensure the stability of its own funds, so that it can survive under the complex situation of the overseas epidemic." Source: China Business Journal, Author: Sun Jizheng