Hershey's Cocoa Cost Relief Can't Mask Core Business Headwinds

The Hershey Company (HSY) has seen its stock price rise in recent weeks on optimism that falling cocoa prices will ease margin pressures. But beneath the surface, the iconic confectioner faces mounting challenges in its core chocolate business that could limit its ability to rebound. While cocoa costs are moderating—thanks to a projected global surplus—structural issues in consumer behavior, channel alignment, and competition are creating persistent headwinds. For investors, the question is whether the near-term relief from lower cocoa prices can outweigh the long-term risks of a business struggling to adapt to a shifting marketplace.

Cocoa Costs: A Mixed Blessing

Hershey’s struggles began in 2024, when cocoa prices nearly tripled due to supply disruptions in West Africa. The company responded by raising product prices and reformulating recipes to reduce cocoa content. Yet even as cocoa prices eased in late 2024 and early 2025—driven by a projected 142,000-metric-ton surplus—the damage was done. Input costs had already eroded margins so severely that Q1 2025 gross margins are expected to shrink by 410 basis points compared to the prior year.

The International Cocoa Organization (ICCO) notes that the global surplus has brought some relief, but volatility persists. A smaller-than-expected mid-crop harvest in Ivory Coast and Ghana, coupled with ongoing geopolitical tensions, keeps prices from collapsing further. For Hershey, this means cocoa remains an unpredictable cost driver.

Consumer Shifts: The Real Elephant in the Candy Store

The bigger problem lies in consumer behavior. Economic uncertainty has pushed shoppers toward essentials, shrinking demand for impulse buys like chocolate. Foot traffic at convenience and drug stores—traditional pillars of Hershey’s everyday chocolate sales—has plummeted, costing the company market share. Even as take-home chocolate sales show modest recovery, the damage in impulse channels is deep.

Worse, consumers are migrating to channels where Hershey is underpenetrated. Club stores, dollar retailers, and e-commerce platforms now account for growing shares of snack purchases, but Hershey’s product lineup and distribution deals lag behind competitors. Smaller, agile brands like Kind Snacks and Enjoy Life Foods are capitalizing on this gap, eroding Hershey’s dominance in key segments.

Channel Weaknesses and Competitive Pressures

These shifts are translating directly into lost sales. The North America Confectionery segment is projected to decline 12.1% in Q1 2025, while salty snacks—a brighter spot—saw only a 1.1% dip. But salty snacks represent only a fraction of Hershey’s business; its core chocolate division remains the engine, and it’s sputtering.

Retailers aren’t helping. North American stores have tightened inventory management, reducing orders for brands perceived as discretionary. Meanwhile, global demand for chocolate is weakening. Cocoa grindings—the metric that tracks chocolate production—fell in Europe, Asia, and North America in late 2024, signaling softer consumption.

The Bottom Line: Can Hershey Turn the Tide?

Hershey’s Q1 2025 results underscore the scale of the challenge. Revenue is expected to drop 13.3% to $2.82 billion, with EPS plunging 36.8% to $1.94. The full-year adjusted EPS guidance of $6–$6.18 is a stark contrast to analyst estimates of $7.34, a gap CEO Michele Buck attributes to lingering cocoa cost pressures and “broader macroeconomic headwinds.”

While the company’s Zacks Rank #3 (Hold) and trailing four-quarter earnings surprise of 1.7% suggest some operational resilience, structural issues remain unresolved. The Earnings ESP of +2.20% hints at a slight Q1 beat potential, but it’s a minor bright spot in an otherwise dim landscape.

Conclusion: A Bittersweet Outlook

Hershey’s stock may have rallied on cocoa price relief, but its core business is still under siege. The company’s struggles—weakness in key channels, competition from nimbler rivals, and margin-sapping input costs—outweigh the benefits of lower cocoa prices. Investors should approach with caution.

The data paints a clear picture: without a strategic pivot to emerging sales channels, meaningful cost discipline beyond cocoa, or a renaissance in its chocolate innovation pipeline, Hershey risks becoming a relic in a fast-evolving snack market. At current valuations, the risks of underperformance outweigh the rewards of short-term cocoa-driven optimism.

For now, the chocolate king’s path to recovery remains bittersweet.