Hershey's Profit Margins Under Siege: Can Strategic Pricing and Portfolio Diversification Offset Tariff and Commodity Headwinds?

The confectionery industry has long been a sweet spot for consumer staples, but for The Hershey Company, 2025 has brought a bitter pill to swallow. Despite a 26% year-over-year revenue surge to $2.61 billion in Q2 2025, driven by aggressive pricing and volume growth, the company's adjusted gross margin contracted by 50-100 basis points to 38.1%. Cocoa prices, tariffs, and inflation have combined to erode profitability, testing the resilience of Hershey's cost structure and its ability to innovate. Yet, beneath the surface of these challenges lies a strategic playbook that could redefine its long-term value proposition.

The Margin Squeeze: Cocoa, Tariffs, and Inflation

Hershey's Q2 results highlight a classic conundrum for commodity-dependent businesses: top-line growth does not always translate to bottom-line gains. Cocoa prices have surged due to supply constraints in West Africa, where political instability and climate-related crop failures have disrupted production. The company now spends $20 million annually on tariffs, a direct hit from trade tensions. Meanwhile, a higher tax rate (33.5% in Q2 2025 vs. 24.5% in Q2 2024) further compressed net income.

The margin pressure is not transient. Hershey anticipates continued cocoa volatility and tariff impacts into 2026, with commodity hedging covering just 40% of its annual needs. This leaves the company exposed to further cost shocks unless pricing and productivity gains accelerate.

Strategic Pricing: A Double-Edged Sword

Hershey's 5% net price realization in Q2 2025 was a calculated move to offset input costs. The company has rolled out a 3-4% price increase across its U.S. confection portfolio, which accounts for 80% of total sales. While such actions risk consumer backlash, the market has so far responded favorably. The key question is whether these price hikes can be sustained without triggering demand erosion.

Hershey's confidence stems from its “Smart Complexity” initiative, which simplifies packaging and product assortments to reduce manufacturing costs. This effort, combined with its $400 million Advancing Automation and Agility program, has boosted operational efficiency. For instance, automation in its North American supply chain has cut labor costs by 12%, a critical buffer against inflation.

Portfolio Diversification: The Salty Snacks Gamble

Hershey's pivot into salty snacks—via brands like SkinnyPop and Pirate's Booty—has proven a masterstroke. The segment's 36% revenue growth in 2024, including a 424% leap in segment income, underscores its potential to insulate the company from cocoa price swings. This diversification aligns with broader consumer trends toward protein-rich, low-sugar snacks, reducing reliance on a single volatile commodity.

The strategy is not without risks. Salty snacks face competition from established players like Frito-Lay and Mondelez. However, Hershey's ability to leverage its distribution network and brand equity gives it a unique edge. The company's $300 million productivity savings target by 2026, driven by automation and supply chain optimization, further strengthens its competitive position.

Hedging, Sourcing, and Policy Advocacy

Hershey's hedging strategy for cocoa—covering 40% of annual needs—is a hedge (pun intended) against price spikes. But the company recognizes that hedging alone is insufficient. Its $500 million Cocoa For Good initiative aims to stabilize supply chains by improving farmer livelihoods and diversifying sourcing regions. This long-term bet on sustainability could mitigate future volatility.

Equally critical is Hershey's lobbying for tariff relief. CEO Michele Buck has publicly urged the U.S. government to address the “non-substitutable” nature of cocoa in trade negotiations. While political outcomes are uncertain, the company's proactive stance signals a recognition that external factors will shape its margins for years.

Investment Implications: Resilience or Reckoning?

Hershey's 2025 results present a mixed bag. The company's capital expenditures have fallen to $231 million in Q2, down from $344 million in Q2 2024, reflecting the maturation of recent projects. However, its decision to forgo share buybacks in favor of strategic acquisitions (Fulfill North America and Lesser Evil) suggests a focus on growth over short-term returns.

For investors, the key question is whether Hershey's margin compression is temporary or structural. The company's guidance for a 500-basis-point gross margin recovery by 2026 hinges on successful pricing, cost savings, and cocoa hedging. If these initiatives deliver, Hershey could outperform peers in the consumer staples sector.

Conclusion: A Sweet Spot in a Bitter Environment

Hershey's challenges are emblematic of a broader struggle for consumer goods companies in a high-inflation, trade-turbulent world. Yet, its strategic pricing, portfolio diversification, and operational rigor position it to navigate these headwinds. While 2025 has been a test of resilience, 2026 could mark a turning point. Investors with a medium-term horizon may find value in Hershey's stock, provided the company executes its cost-saving and diversification strategies effectively. In the end, the question is not whether Hershey can survive the siege—but whether it can emerge stronger.