Confectionery

# Executive Summary * The confectionery industry faces an unprecedented crisis from soaring cocoa prices, causing severe gross margin compression and pressuring profitability across the board. * In response, leading firms are aggressively investing in technology, automation, and ERP systems to drive operational efficiencies and offset historic input cost inflation. * A long-term strategic pivot is underway, with major players diversifying portfolios via M&A into "better-for-you" and adjacent snacking categories to mitigate risk and capture health-conscious consumers. * Despite cost pressures, revenue growth remains resilient, supported by the industry's pricing power and the enduring consumer demand for indulgent treats. * Upcoming EU regulations on deforestation-free sourcing (EUDR) will add another layer of cost and complexity, favoring companies with advanced, traceable supply chains. * The competitive landscape is diverging between global-scale players leveraging technology and diversification, and niche operators focused on hyper-efficiency. ## Key Trends & Outlook The single most critical factor defining the confectionery industry in 2025 is the unprecedented surge in cocoa prices, which have climbed approximately 172% over the past year. This surge, driven by poor harvests in West Africa, has created a severe supply deficit and is directly eroding profitability. The mechanism is direct margin compression, forcing companies to choose between aggressive price hikes, which risk volume declines, or absorbing costs. The impact is stark: The Hershey Company saw its gross margin fall by 870 basis points to 32.6% in the third quarter of 2025. Mondelez International, despite its scale, forecasts an approximate 15% decline in adjusted EPS for 2025 on a constant currency basis due to cocoa costs, highlighting the crisis's severity, which is expected to continue into 2026. To counteract margin erosion, firms are accelerating investments in technology and automation to enhance efficiency. Hershey's "Advancing Agility Automation Initiative" is a prime example, targeting $400 million in annual savings by its conclusion in 2026. Similarly, Mondelez is undertaking a multi-year, $1.2 billion ERP system overhaul, approved in July 2024 and expected to conclude by year-end 2028. Even smaller players like Tootsie Roll Industries are leveraging AI, having implemented an AI layer in manufacturing operations that led to a reported 28% improvement in Overall Equipment Effectiveness (OEE). The primary long-term opportunity lies in strategic diversification into adjacent "better-for-you" and salty snacking categories, as demonstrated by Hershey's recent acquisitions, to capture new growth and reduce reliance on volatile cocoa. The key risk is the inability to balance price increases with consumer affordability, potentially leading to volume losses and market share erosion for brands that cannot justify premium pricing. ## Competitive Landscape The global confectionery market is a highly concentrated industry valued at nearly $620 billion, with the chocolate segment alone accounting for over 40% of the market share. Within this landscape, large players compete alongside niche specialists, each employing distinct strategies to navigate market dynamics. Some global players, such as Mondelez International, leverage a massive portfolio of iconic brands across both confectionery and adjacent categories like biscuits to command pricing power and shelf space globally. Their core strategy involves using scale to invest heavily in technology, marketing, and sustainable supply chains. This approach provides diversified revenue streams, economies of scale, and the ability to fund large-scale technology and supply chain initiatives, as evidenced by Mondelez's $1.2 billion ERP system investment and its extensive "Cocoa Life" sustainability program, which sourced 91% of its cocoa volume by Q1 2025. However, this model is vulnerable to complex global supply chain disruptions and currency fluctuations. Other leaders, such as The Hershey Company, are evolving from a confectionery focus to a broader snacking powerhouse through acquisition. Their core strategy is to dominate the domestic market with iconic, heritage confectionery brands while using strategic M&A to aggressively expand into faster-growing "better-for-you" and salty snack segments. This provides deep brand loyalty and pricing power in the core market, with M&A offering new avenues for growth and reducing commodity risk. Hershey, for instance, leverages heritage brands like Hershey's and Reese's while actively acquiring companies like LesserEvil, LLC to build a "better-for-you platform". A key vulnerability for this model is the high dependence on the successful integration of new acquisitions. A third approach, seen with companies like Tootsie Roll Industries, involves focusing on a niche portfolio of classic brands while competing intensely on manufacturing efficiency. This strategy centers on operational excellence and cost control. Tootsie Roll, which focuses on classic brands like Tootsie Rolls, funds a $95 million to $100 million plant expansion internally and implemented an AI layer that improved Overall Equipment Effectiveness (OEE) by 28%. While offering a strong balance sheet and operational focus, this model faces limited growth avenues and potential vulnerability to shifts in consumer taste away from traditional candy. The key competitive battleground is currently managing input cost inflation, with technology investment and pricing power being the primary differentiators. ## Financial Performance Revenue growth across the confectionery industry is a story of pricing power in an inflationary environment, demonstrating surprising resilience but also divergence. Mondelez International exemplifies successful price realization, reporting a +5.90% year-over-year net revenue growth in Q3 2025, with organic net revenue growth at +3.40%. This consistent mid-single-digit growth is largely driven by the company's ability to leverage the pricing power of its iconic brands to pass on higher costs. In contrast, Tootsie Roll Industries experienced more volatile performance, with a -3.3% year-over-year decline in net product sales in Q1 2025, though it rebounded to +3.0% year-over-year GAAP revenue growth in Q2 2025. {{chart_0}} Despite positive top-line performance, profitability is under severe attack from input costs, particularly the historic surge in cocoa prices. The Hershey Company provides the clearest evidence of this damage, with its gross margin decreasing by 870 basis points to 32.6% in Q3 2025, primarily due to "unfavorable commodity and tariff costs". This dramatic margin compression highlights how raw material expenses are overwhelming the benefits of price increases. In this challenging environment, the divergence in profitability now depends entirely on a company's ability to mitigate these costs through operational efficiency. Tootsie Roll Industries, for example, reported an adjusted gross margin of 34.7% in Q1 2025, benefiting from operational efficiency gains to partially offset "significant input cost inflation". {{chart_1}} Capital allocation has become highly defensive and strategic, prioritizing investments in efficiency to build long-term cost advantages. The Hershey Company's "Advancing Agility Automation Initiative" (AAA Initiative), projected to incur $200 million to $250 million through 2026, is a prime example of strategic investment in technology to secure future profitability. Similarly, Mondelez International is undertaking a multi-year, $1.2 billion ERP system implementation to enhance operational capabilities. These large-scale technology projects underscore the industry's focus on offsetting cost pressures through internal improvements. The industry's balance sheets generally remain strong and stable, providing the necessary liquidity to navigate the current crisis and fund strategic investments. Tootsie Roll Industries, for instance, reported aggregate cash, cash equivalents, and short and long-term investments totaling $507.6 million as of March 31, 2025, alongside a robust current ratio of 4.20 to 1.00. This financial strength allows companies to absorb some margin pressure while investing for the long term. {{chart_2}}