How Hershey Is Rebuilding Margin Through the Supply Chain After the Cocoa Shock
- Hardik Shah
- 1 day ago
- 5 min read
Hershey's Margin Recovery Is Not a Commodity Story
It is tempting to frame Hershey’s margin outlook as a simple function of cocoa prices. After all, cocoa inflation was the dominant headwind in 2025, and easing input costs naturally suggest relief ahead. But that framing misses the more important point. Hershey’s margin recovery is not being driven by commodity normalization alone—it is being earned operationally through the supply chain.
Pricing stabilized the business during the shock. What determines when margins actually recover is how effectively Hershey converts improving input economics into cost of goods sold. That conversion process is governed by hedging structures, inventory flow, manufacturing productivity, and the digital maturity of the production network. In other words, this is a supply-chain normalization story, not a spot-price story.
What the Cocoa Shock Actually Did to Margins
The cocoa shock did not simply raise costs; it distorted timing. Like most large confectioners, Hershey hedges cocoa well in advance of production. When cocoa prices surged, the economic impact showed up in three different places at three different times.
First, higher hedged input costs were locked into future production runs. Second, derivative mark-to-market losses flowed through reported earnings, creating volatility that overstated near-term margin pressure relative to cash costs. Third—and most importantly—those higher costs became embedded in inventory, meaning they would continue to flow through cost of goods sold long after market prices began to stabilize.
This is why headline cocoa prices are a poor proxy for near-term margins. The supply chain operates with inertia. Costs are absorbed gradually, not instantaneously, and that lag is structural.
Why Margin Relief Lags Cost Relief
Even as forward cocoa costs improve, Hershey must work through inventory produced under higher-cost conditions. Cocoa is procured months in advance, processed into intermediate and finished goods, and then held before sale. That inventory carries its original cost basis all the way through to the income statement.
The result is a predictable but often misunderstood dynamic: margins remain under pressure even after input markets turn. This is why management has been consistent in describing margin recovery as back-half weighted. It is not hedging language—it is a description of how cost flows through a scaled manufacturing system.
Understanding this lag is critical. It explains why 2026 margin improvement is more about timing and execution than about incremental pricing or sudden demand changes.
Productivity as the Bridge Between Stabilization and Recovery
While inventory works through the system, productivity becomes the margin bridge. Hershey’s Advancing Agility & Automation initiative plays a central role here, not as a one-time cost program but as a structural offset to volatility.
Productivity matters most when volumes are pressured and absorption is at risk. Manufacturing efficiency, logistics optimization, and better planning accuracy help protect margins even when demand is uneven. Over the past two years, Hershey has generated more than $300 million in savings from these efforts, with additional gains expected as the program matures.
“We’re deploying the full suite of levers — pricing, productivity, and sourcing — to manage cocoa costs and stabilize earnings.” — Steve Voskuil, Senior Vice President and Chief Financial Officer
The key point is not the absolute dollar value of savings, but their quality. These are recurring improvements that reduce the sensitivity of margins to external shocks. They shorten recovery cycles and make the business more resilient when input costs move faster than pricing can.
Digital Lean and the Manufacturing Foundation Beneath the Numbers
One of the least discussed—but most consequential—elements of Hershey’s margin story is its manufacturing technology foundation and Digital Lean program. Long before cocoa inflation peaked, Hershey invested in standardizing lean processes across plants and then digitizing them.
This matters because digitized lean systems change how quickly problems are identified and resolved on the shop floor. Real-time equipment data, standardized digital workflows, and unified data architectures reduce downtime, improve yields, and accelerate decision-making. Just as importantly, Hershey has emphasized a people-centered approach, using technology to empower frontline teams rather than replace them.
“We’ve spent years putting the right systems in place, building robust data architecture and integrated software so that manufacturing, engineering and supply chain functions work together more effectively.” — Will Bonifant, Vice President of Manufacturing, Engineering and Supply Chain Strategy
In a volatile cost environment, this capability is decisive. It allows the organization to respond faster to disruptions, stabilize throughput, and protect margins while inventory and procurement dynamics normalize. These benefits do not show up cleanly in quarterly line items, but they compound over time.
Portfolio Mix as an Operational Hedge
Supply-chain resilience is also being shaped by portfolio mix. Hershey’s salty snacks business operates under a very different cost and throughput profile than chocolate. It has lower exposure to cocoa volatility, faster production cycles, and more responsive demand patterns.
As salty snacks scale, they provide an operational hedge. They absorb volatility when chocolate margins compress and improve overall earnings stability. This is not just a growth story—it is a risk-management story embedded in the supply chain.
“Strong innovation, strategic brand investments, and market-leading execution drove momentum across business segments, even as we navigated a challenging operating environment.” — Kirk Tanner, President and Chief Executive Officer
The implication is subtle but important: margin recovery does not depend solely on chocolate returning to historical norms. Mix is doing real work behind the scenes.
Capital Investment as Margin Insurance
Hershey’s capital expenditure plans reinforce this operational thesis. Investments in automation, manufacturing technology, and supply-chain agility are best understood as margin insurance. They are designed to shorten recovery cycles, improve cost absorption, and reduce the severity of future shocks.
Rather than pulling back to protect near-term profitability, Hershey is leaning into these investments while margins are still under pressure. That choice reflects confidence not just in demand, but in the supply chain’s ability to translate investment into durable margin improvement.
The Real Risk: Timing, Not Direction
From a supply-chain perspective, the primary risk is not whether margins recover, but when. Renewed commodity volatility, execution friction in automation rollouts, or weaker-than-expected volumes could push recovery further out. But these are timing risks, not structural ones.
The underlying mechanics—hedging normalization, inventory flow-through, productivity gains, and digital manufacturing maturity—remain intact.
Bottom Line
Hershey’s margin recovery will not arrive with a headline about cocoa prices.
It will emerge gradually, as lower-cost inputs move through inventory, productivity gains compound, and digital manufacturing capabilities convert stability into earnings. Pricing created the space to navigate the shock. The supply chain determines the slope of recovery.
For investors, the key question is not whether margins come back—but how efficiently Hershey’s operations turn normalization into results.
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