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Hershey Price Hike Tests Theory That Americans Love Chocolate At Any Price

Hershey Co., maker of the eponymous Kisses and Milk Chocolate bars, as well as other favorites like Kit Kat and Reese’s, announced an average wholesale price increase of 8% across the majority of its products this week, thanks to rising costs that include higher cocoa prices.

But chocolate consumption has historically been very inelastic, which means consumers tend to indulge in the treats even after price hikes. On Thursday, the National Confectioners Association reported that the amount of cocoa processed in North America—viewed as a proxy for chocolate demand—hit a near-record during the second quarter.

The 4.5% increase from a year earlier beat market expectations and points to robust demand for chocolate, even as cocoa prices were trading near three-year highs during the quarter. Cocoa grindings in Asia also rose 5.2% during the second quarter, the Cocoa Association of Asia said early Friday. Consumption growth in developing markets has been particularly strong.

Hershey has historically had success with price increases, says Barclays Capital analyst Andrew Lazar, giving investors’ confidence in the move.

Hershey has long called chocolate an affordable indulgence that consumers will splurge for even when money is tight. That’s partly why the company, and its stock, did relatively well throughout the latest recession. Hershey shares have more than doubled over the last five years.

Still, Hershey had set a target of increasing revenue by 5% to 7% this year, but said but said some people may curb their purchases because of the price increase. It now expects revenue growth to come in at the low end of that range.

A representative for Hershey told The Wall Street Journal that a standard Hershey’s Milk Chocolate bar typically costs just under $1 at retail, and will still be around $1 after the price increase.

Hershey’s, which has a 34.4% market share in the U.S., according to market research firm Euromonitor International, cited higher commodity, utility and transportation costs for the price increase, specifically calling out ingredients such as cocoa, dairy and nuts, the prices for which “have increased meaningfully since the beginning of the year.”

Cocoa futures have soared 34% over the last year and are up 13% year-to-date, recently trading up 0.4% at $3,076 a ton.Milk and peanut prices are up about 10% this year.

Rob Dickerson, an analyst with Consumer Edge Research, said Hershey is losing market share this year, as higher-end chocolate makers put pressure on its legendary brands.

But Hershey isn’t the only one raising prices. Soaring cocoa costs are prompting candy makers around the world to increase their prices. A kilogram (2.2 pounds) of chocolate is forecast to cost an average of $12.62 in the U.S. this year, up 2% from last year, according to Euromonitor.

Hershey has more to fear from non-chocolate competition, particularly snacks like pretzels and cookies that benefit from lower grain prices. Those sorts of snacks have been growing in popularity as Americans increasingly grab snack foods to eat on the go instead of sitting down for meals at home.