Lotte to make Hershey candy in China: source

SEOUL Fri Jan 26, 2007 7:40am GMT

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SEOUL (Reuters) - South Korea's Lotte Confectionery Co. (004990.KS) has reached a deal with Hershey Co. (HSY.N) to make candy for the U.S. group in China, a person familiar with the deal said on Friday.

The agreement would mark a move into a potentially huge market for the maker of Hershey's Kisses, Reese's peanut butter cups and other products, as it faces higher costs and fierce competition in the United States.

Hershey said earlier this week it would announce a project to make candy in China, and on Friday, a Lotte official confirmed that the vice chairman of the Lotte Group and the CEO of Hershey would hold a news conference on Monday in Seoul.

The official declined comment on any deal though, and officials at Hershey Korea could not be reached for comment.

In quarterly results this week that missed its own lowered forecast, Hershey said it was looking to expand in China, India, Mexico and parts of South America.

It said its planned Chinese project would manufacture candy that will be sold there and in other parts of Asia.

Lotte bought a chocolate factory in Shanghai in 2006.

"From Hershey's point of view, choosing Lotte means lower costs, since they won't have to secure their own production facility," said Lee Kyoung-ju, an analyst at Korea Investment and Securities.

"For Lotte, an alliance with the world's biggest chocolate maker may translate into a boost for other Lotte products."

Hershey lowered its 2006 earnings outlook in December, but results were still worse than expected, creating skepticism over its 2007 earnings forecast. The company is trying to increase sales of its core products while developing new lines like premium dark chocolate.

Hershey shares closed down 60 cents at $50.18 on Thursday on the New York Stock Exchange. Lotte Confectionery shares ended down 2.24 percent at 1.135 million won, a bigger drop than the wider market's .KS11 0.8 percent fall.

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