Hershey's 2026 Margin Recovery Potential in a Declining Cocoa and Sugar Cost Environment

The Hershey Company has faced relentless cost pressures from historically elevated cocoa and sugar prices, which have compressed its operating margins by 650–700 basis points since 2023, according to the HSY Q2 deep dive. With cocoa prices peaking at $10.75 per kilogram in early 2025-a 60-year high-Hershey's cost of goods sold (COGS) has surged, forcing the company to implement aggressive cost-savings measures and pricing actions to preserve profitability. However, recent market dynamics and strategic shifts suggest a potential inflection point for margin recovery in 2026, driven by moderating commodity costs and operational restructuring.

Cost Pressures and Mitigation Strategies

Hershey's 2025 operating margin of 7.4%-a stark decline from 13.9% in Q2 2024-reflects the acute impact of cocoa inflation, tariffs, and sugar price volatility, as detailed in the HSY Q2 deep dive. Cocoa prices alone, which rose from $2,900 per tonne in 2023 to $6,308 in 2025, are highlighted in a Monexa analysis and have forced the company to absorb significant cost headwinds. To counter this, Hershey launched its "Advancing Automation and Agility" (AAA) cost-savings program, expanding it to $400 million in pre-tax savings by 2026. This includes automation investments, supply chain optimizations, and workforce adjustments. While these measures have generated $150 million in 2025 savings, Monexa notes they cover only a fraction of the margin compression from cocoa price shocks.

Pricing Power and Market Share Gains

Goldman Sachs analysts argue that Hershey's pricing actions and market share gains could offset lingering cost pressures through 2026. The company has raised prices on key confectionery products and adopted "shrinkflation" strategies to maintain profit margins without alienating price-sensitive consumers, as reported by FoodNavigator. These tactics, combined with expanded shelf space in categories like seasonal candy and mints, have driven volume recovery and strengthened Hershey's competitive positioning. Goldman Sachs later upgraded Hershey to "Buy," citing resilience in consumer demand and the company's ability to pass on costs amid a fragmented confectionery sector.

Cocoa Price Outlook and Margin Relief

While cocoa prices stabilized at $7/kg in late 2025 after a record surge, structural challenges persist. J.P. Morgan Global Research notes that multi-season supply constraints in West Africa-driven by aging cocoa trees, disease, and climate disruptions-will keep prices elevated at roughly $6,000/tonne in the medium term. However, a 20% projected decline in 2026 cocoa costs, coupled with improved rainfall in key producing regions like Ivory Coast and Ecuador, could provide partial relief, according to a Valor report. This moderation, though not a full correction, may allow Hershey to narrow its margin gap, particularly as sugar supply surpluses (with a 17.8% stocks-to-use ratio in 2025/26) temper sugar inflation, per the USDA ERS market outlook.

Strategic Positioning in the Confectionery Sector

Hershey's long-term success hinges on its ability to balance cost management with innovation. The company's focus on premium product launches, such as high-end chocolate lines and plant-based confections, aligns with shifting consumer preferences toward indulgence and health-conscious options. Additionally, its supply chain resilience-demonstrated by securing cocoa supply amid tariffs and production shortfalls-positions it to outperform peers in a volatile sector, as noted by FoodNavigator. Moody's, however, cautions that EBITDA recovery in 2026 will remain modest, with full margin normalization contingent on sustained commodity stabilization.

Conclusion

Hershey's 2026 margin recovery potential rests on a delicate interplay of moderating cocoa costs, disciplined cost management, and pricing agility. While structural supply-side challenges in cocoa-producing regions will keep input costs elevated, the AAA program and strategic pricing actions offer a pathway to margin expansion. Investors should monitor the company's ability to execute operational efficiencies and navigate the confectionery sector's evolving demand dynamics. For now, the balance sheet remains robust, and Hershey's proactive approach to cost containment suggests a cautiously optimistic outlook for 2026.