Hershey's chocolate bars (Photo : Getty Images News)
The shares of Hershey Co. took a dive after it posted revenues for the quarter that were below estimates by analyst due to a decrease of 16.6 percent sales in China, one of its biggest markets.
The poor sales were mainly due to adverse macroeconomic conditions in the Chinese market.
Enticed by projections of a 10 percent annual compounded growth rate in Chinese chocolate sales, Hershey Co. expanded in China by acquiring local chocolate maker Shanghai Golden Monkey in 2014.
However, Hershey Co. has been striving to succeed in China since the acquisition of Shanghai Golden Monkey resulted in a 60 percent write-off of the purchase price. The write-off was equal to 45 percent of the deal's total value, which is $557 million including debt. Distribution and payment collection problems have also hampered the business.
Hershey Co. will have to cut 15 percent of its workforce as among its cost-savings measures to overcome adversities in the Chinese market.
To make matters worse for the American chocolate manufacturer, Lotte Shanghai Foods, its joint venture with the Lotte Group in China, has been ordered to stop production by China as a retaliation for the deployment of a U.S. missile-defense system in South Korea.
Hershey Co. owns a 50 percent controlling stake in the joint venture it established with Lotte in 2007.
In previous decades, Hershey's stayed in the U.S. market as other chocolate companies went global. It generates almost all of its revenue in the U.S.
It is the first time that a U.S. company has been dragged in the middle of a political dispute between China and South Korea.
The monthlong production stoppage, which was ordered due to alleged safety violations, could cost the joint venture about $3.5 million in lost sales.
According to Hershey Co., it suspended production to "perform maintenance activities," which it described as being in connection with a routine inspection. The company added that it is working closely with the Chinese government on the matters.
Hershey's international unit posted a loss in the past two years.