BLOOMBERG NEWS Hershey Co., the biggest U.S. chocolate maker, said first-quarter profit rose 7 percent after it cut expenses, but missed estimates. Max Schnaper broke a Hershey's chocolate bar in half yesterday outside the Hershey's store in New York's Times Square.

Hershey happy with Mauna Loa but plans to trim product line

The company will reduce the number of its items by as much as a quarter to bring down costs

Hershey Co. is cutting back on products made with nuts from the Mauna Loa macadamia business it bought 16 months ago, though Hershey says it is still happy with the acquisition.

The largest U.S. chocolate maker, which missed analysts' first-quarter earnings estimates yesterday, is making the move as part of a plan to lower costs.

"We'll be reducing the absolute number of existing and new items while aggressively pursuing major growth platforms, including snack nuts, dark chocolate and cookies," Hershey Chief Executive Richard Lenny said. "We will be evaluating our total product line over the next 12 months and will work to reduce our (item) count by 20 to 25 percent."

Mauna Loa, now a wholly owned subsidiary of Hershey, has the exclusive rights to buy all of the macadamia nuts produced by ML Macadamia Orchards LP on the Big Island.

But that will change next year after ML Macadamia, unhappy with the below-market prices it was receiving for its nuts from Mauna Loa, signed contracts to sell to other local nut processors. Those contracts, which go into effect at the beginning of next year, will enable ML Macadamia to sell 15 million pounds, or three-quarters of its nut supply, to Hamakua Macadamia Nut Corp., MacFarms of Hawaii and Island Princess.

"I don't think (Hershey's announcement) will have any significant effect on us at all," said Dennis Simonis, president and chief executive of ML Macadamia. "We will be selling them quite a bit less in the future. It doesn't surprise me they're making business adjustments to improve their margins and profitability. Hopefully, they're making the right moves."

Hershey spokeswoman Stephanie Moritz called Mauna Loa "a great addition to Hershey's stable of iconic brands."

"Mauna Loa's superior brand equity, leadership in an on-trend segment and proven extendibility strengthens Hershey's presence in the broader snack market," she said.

Hershey, though, apparently had second thoughts about expanding its product line too much. First-quarter sales rose less than 1 percent from a year earlier, its smallest gain in three years. Net income increased 7 percent to $121 million, or 50 cents a share, missing analysts' estimates by a penny, according to Thomson Financial.

Analyst Eric Katzman of Deutsche Bank Securities Inc. suggested in a report last week that Hershey might be trying to do too much.

"While we applaud the company's innovation effort, we wonder if the amount of new products, especially as Hershey moves into the uncharted territory of the broader snack market, is beginning to become burdensome to retailers," Katzman said, according to a Bloomberg News story.

Moritz said she couldn't speculate on what Mauna Loa products Hershey would be dropping. Lenny said the company will reduce its underperforming items and focus on major growth ones.

"We'll be introducing several new items that deliver a superior salty-sweet taste to consumers with an attractive margin structure for the trade," Lenny said. "These include chocolate-covered and cocoa-dusted almonds and macadamia nuts."

Simonis said that even though ML Macadamia has signed agreements with other nut processors for the company's four expiring contracts, he would like to maintain a relationship with Hershey, whose lone remaining contract with ML Macadamia after this year will expire in 2019. That contract covers 6 million pounds of nuts.