All kinds of economic wisdom have been tested within the last year, including old ideas that certain industries like food, medicine and mundane consumer products like toothpaste and candy are recession-proof. Chocolate was included in this axiom of old because it was thought that consumers whose budgets did not support the purchase of big ticket items like houses and cars, still afforded the occasional chocolate pleasure. For Hershey (NYSE:HSY) and other chocolate-makers, however, the current economic environment has been more sour than sweet. (To learn more about where to turn in a tumultuous market, be sure to read Industries That Thrive On Recession.)

IN PICTURES: Eight Ways To Survive A Market Downturn

Earnings Unsweet
Hershey was expected to finish out the year with earnings of $1.84, with projected earnings for 2009 pegged at $1.90. The actual number turned out to be $1.89 EPS on operating income, excluding restructuring charges. The fourth quarter hit 59 cents, which beat the estimate of 54 cents, and these results are up slightly from the same quarter in 2007.

Although these are not bad numbers, they are not wildly exciting. However, especially taking into account the conservative guidance for next year, Hershey should rebound or at least hold the line. Like most of the chocolate-makers, Hershey has been hit by rising commodity costs of essential raw ingredients like cocoa, sugar and dairy products. Therefore, despite the mild upturn in Hershey's business, a number of challenging forces remain in the chocolate industry.

Sugar Giants: Cadbury and Nestle
While Hershey endures as the number one U.S. chocolate-maker and the second overall candy-maker (since Mars's purchase of Wrigley), Hershey's nearly $8 billion market cap makes it only slightly smaller than English confectioner Cadbury (NYSE:CBY), which has a market cap of $11 billion. Yet, Hershey is dwarfed by Swiss chocolate and food company Nestle (OTC:NSRGY), which has a $132 billion market girth. To better compete with the candy-makers, Cadbury has been in
the process of either divesting itself of, or spinning off, its beverage units, particularly in the U.S., with its Dr. Pepper-Snapple (NYSE:DPS) deal.

Playing In Candy Land
The candy industry is made up of strong, diverse players such as large, mega-food companies like Nestle, which views itself as a food company with candy and chocolate products, Cadbury, which now strives to be a candy-only company in the U.S. and private titan Mars,which has added the Wrigley line to its legendary Snickers arsenal of sweets. Smaller players, both public and private, international and national, regional or even local, also vie for space in the candy and chocolate industries.

Take longtime candy-maker Tootsie Roll (NYSE:TR), for example. With a $1.3 billion market cap and only one signature chocolate candy that forms the core of its product line, Tootsie Roll has stretched its niche into annual revenue of $500 million. (Hershey, by contrast, generates roughly $5 billion in annual revenue.) Smaller still, Rocky Mountain Chocolate Factory (Nasdaq:RMCF) has a market cap of about $40 million and generates between $20 million and $30 million in revenue annually. Yet, these smaller chocolate players are profitable, perhaps because they are small enough to carve out comfortable niches in the market and, therefore, to stay out of the way of the big players.

A Taste Of Hershey's Future
So what does the future hold for Hershey? Despite the challenges of the current economy, its earnings are bouncing back, which is a favorable sign. More pressing, though, is the possibility of a consolidation in the chocolate world. Cadbury and Hershey have at times been rumored as takeover candidates, although recent speculation puts Hershey as the possible buyer, not the target.

Hershey's primarily chocolate product line, unlike that of the significantly more diversified food conglomerate Nestle, can work as a strength and a weakness. Hershey has to show stronger management of its valuable, though concentrated, chocolate asset in order to stay competitive during the changing commodities landscape and shifting consumer market. The next few years will determine whether Hershey kisses investors with sweet gains or goes sour.

(Find out what to do when the sun sets on a burgeoning market in Recession-Proof Your Portfolio.)