Letter to Stockholders

March 15, 2002

To Our Fellow Stockholders:

When I joined Hershey Foods Corporation in March 2001, I was excited about the Company's potential. After twelve months of learning about our brands, people, and processes, my enthusiasm continues to build. I'm convinced that by unwrapping Hershey's true potential, we will build a better business. I've experienced first hand Hershey's enduring strengths: iconic brands, the leadership position within the attractive confectionery category, and a loyal, dedicated work force. These factors, built over decades, will continue to provide competitive advantage in the future.

The new management team's first order of business was to conduct a rigorous situation assessment. While this assessment reaffirmed Hershey's strengths, it also identified key improvement opportunities, particularly in the areas of margins and returns. We're now implementing a strategic agenda which builds on Hershey's strong foundation and capitalizes on significant value-enhancing opportunities. This agenda strikes the appropriate balance between solid top-line growth and improving underlying profitability. The net result will be a competitively-advantaged business which consistently delivers superior financial performance and rewards stockholders.

2001 Financial Performance

Hershey's strong performance in 2001 illustrates both our strengths, as well as the business's initial response to initiatives designed to deliver balanced sales and earnings growth. Consolidated net sales of $4.6 billion increased by 8.0 percent. This gain, primarily all volume, was driven largely by the acquired mint and gum business, with modest growth in our core brands aided by the fourth quarter introduction of Reese's Fast Break and a packaged candy price increase. This sales increase was offset somewhat by our planned product line rationalization and the divestiture of the Luden's throat drops business. Excluding one-time items, continued improvements in the supply chain contributed to a gain of 1.1 percentage points in gross margin to 42.6 percent. Particularly gratifying was the excellent progress in lowering logistics expenses and improving customer service achieved with the help of new distribution centers in Central Pennsylvania, Georgia, and Southern California. The combination of solid sales growth and margin improvement resulted in net income (excluding one-time items) increasing by 14.5 percent and earnings per share-diluted growing by 14.6 percent. Returns improved as well with economic return on invested capital increasing from 15.3 to 16.3 percent. These results describe our ongoing business and do not include the realignment charges and one-time gains discussed later.

Hershey's Strengths

Hershey has immense strengths. Hershey's iconic brands define the category. We have twelve $100 million brands, and our products are truly household names. In the United States, we're number one in total confectionery with clear leadership in both the chocolate and non-chocolate categories. Equally important, we posted solid market share gains in 2001.

Confectionery is the largest segment of the $52 billion U.S. snack market. Candy and gum represent 31 percent of this market, larger than either cookies and crackers or salty snacks. With snacking such a part of consumers' lifestyle, confectionery is on-trend, and as we like to say, enjoyable, affordable, portable and available.

Consumers seek out confectionery virtually everywhere they go, making confectionery the highest impulse snack item in the entire U.S. snack category. Given that confectionery is so attractive to consumers, it's also very important to our customers, the retailers. This encourages retailers to provide incremental merchandising displays in their stores, and these displays deliver superior sales results. The combination of these factors helps build expandable consumption; that's why the U.S. confectionery category enjoys a higher retail growth rate than most other food items.

In addition to these strengths, what's most impressive is Hershey's loyal and dedicated work force. There are countless employees with long tenure and tremendous depth of industry experience. Our people truly love the company and will do whatever it takes to see it succeed. They're embracing the changes necessary to take Hershey to the next level of performance. Hershey employees represent our most important competitive advantage.

Basis for Change

Hershey has been an organization with a strong foundation and enduring strengths. In turn, these strengths have delivered strong sales and market share results. In recent years, however, this growth in revenue and market presence has not translated into strong profit growth.

Going forward, we've set more balanced, and thus, more sustainable goals for Hershey. These goals include three to four percent organic sales growth, margin expansion, nine to eleven percent earnings per share-diluted growth, and continued market share gains. Achieving these goals will deliver superior performance and continue to reward stockholders. Clearly, Hershey must change to accomplish these goals, but importantly, we won't change who we are, but we will change what we do.

Key Opportunities

Key opportunities for change were identified in the comprehensive situation assessment mentioned earlier. Specifically, we determined that Hershey was not leveraging its scale brands, margins had not expanded, assets were not fully optimized, and the organization was not properly aligned with the market place. To capitalize on these opportunities and thus achieve our goals, we set a strategic agenda consisting of four imperatives:

• Drive profitable organic sales growth;
• Create ongoing affordability via a low-cost, value-adding supply chain;
• Develop superior asset management; and
• Build a streamlined, results-driven organization.

Superior Marketing and Selling Capabilities

Superior marketing and selling capabilities are the essence of profitable organic growth. We're building a framework of new capabilities called Integrated Business Intelligence (IBI) to enhance our brand equities. IBI is a disciplined, fact-based approach to decision making. It maximizes total brand investment which enhances brand preference and builds sales profitably.

We've already taken actions based on our preliminary IBI learnings. For example, advertising spending has been reallocated to our larger, more profitable brands, portfolio-wide consumer events have been added to better leverage our leadership position, and we'll be introducing value-added new products to deliver news and innovation. As 2002 progresses and our IBI learnings continue to build, additional brand building initiatives will be implemented.

Brand building, however, is more than just marketing. Experience has demonstrated that the selling function can play a very important role in profitably building our brands. I'm impressed with the outstanding capabilities of the Hershey sales force, and we'll do even more to leverage the strengths of our confectionery sales team.

Creating Ongoing Affordability

Enhanced marketing and selling programs will be funded by the cost savings generated through a number of initiatives:

• Continued rationalization of non-strategic items from our product line;
• Elimination of under-utilized manufacturing facilities;
• Improved working capital management; and
• Reduced administrative costs.

To jump start these efforts, on October 24, 2001, we announced charges to realign our business by eliminating non-strategic brands, closing underutilized facilities, reducing raw material inventories, and reducing administrative costs. Most of these charges were taken in the fourth quarter of 2001 and included a charge to cost of sales of $50 million resulting from a reduction in raw material inventory levels, as well as business realignment and asset impairment charges of $228 million. The total charge of $278 million was equivalent to $1.25 per share-diluted, leading to reported net income of $207.2 million, or $1.50 per share-diluted in 2001.

Specifically, we'll exit certain under-performing businesses. These businesses, along with the sale of the Luden's business, which was completed in the third quarter of 2001, include brands which are lower margin, lower volume, or non-strategic. The elimination of these items and brands, many of which were sold by brokers, enables us to consolidate our remaining confectionery brands back into the direct sales force. This move further builds our selling scale.

Supply chain overhead will be reduced with the closure of three manufacturing facilities, as well as one company-owned distribution center. These actions are the result of our ongoing capacity utilization study and improvements in our distribution center network.

Completing the outsourcing of cocoa butter/cocoa powder requirements will further streamline our asset base. In-house pressing operations have been discontinued as this activity added little value. The outsourcing of these intermediate stage ingredients saves additional operating costs while simultaneously avoiding the significant cost of replacing old equipment. In addition, exiting this non-value adding process helped enable significant reduction of raw material inventories.

A reduction in staffing levels is also taking place. Our administrative costs as a percentage of sales are higher than industry benchmarks. We'll eliminate twelve percent of our salaried work force or about 600 people. Given the demographics of Hershey's work force, this reduction is being accomplished on a voluntary retirement or mutual separation basis.

The overall realignment charge of $310 million equates to $1.39 per share-diluted, with projected annualized savings of $75-$80 million when fully implemented. Consistent with our strategic direction, on-going savings will be invested substantially in enhanced brand building and selling capabilities. This was not an earnings re-base; going forward, we expect earnings per share-diluted on a continuing operations basis to grow nine to eleven percent annually from the $2.74 base achieved in 2001.

Senior Management Changes—Retirements

On January 1, 2002, Kenneth L. Wolfe, Chairman of the Board of Directors retired, and I was elected as Chairman of the Board, President, and Chief Executive Officer. The leadership transition process had begun in March 2001 when I joined Hershey as President and Chief Executive Officer, and this step marks the completion of that process.

During Ken's tenure as Chairman and Chief Executive Officer, he put a strong emphasis on creation of economic value and enhanced cash flow, and brought a strong focus to the company's structure by shedding non-strategic businesses and making key complementary acquisitions such as Leaf North America and the intense mint and gum business. Ken spearheaded the implementation of a corporate-wide information system, successfully positioning Hershey for managing its business in an increasingly complex environment, and he initiated a management succession program to enable the company to achieve enhanced levels of performance. His eight years of leadership saw increased sales and earnings, culminating with a stock price which grew at a rate of 13.5 percent compounded. Ken was of immense assistance to me during 2001, providing sound advice and counsel during my early months at Hershey. The Board of Directors and I commend Ken for his outstanding leadership and thank him for his 34 years of service to the company.

Also retiring effective January 1, 2002, was William F. Christ, Executive Vice President and Chief Operations Officer. During his 32 years of service, Bill held a variety of financial and operational positions including Senior Vice President, Chief Financial Officer and Treasurer, and President, Hershey International.

Robert M. Reese, Senior Vice President—Public Affairs, General Counsel and Secretary, retired effective January 1, 2002. Bob joined Hershey as Counsel in 1978 and held a series of positions in the Company's Legal Department.

Senior Management Changes—New Hershey Executive Team

In June 2001 a more streamlined organizational structure was established, beginning with a new Hershey executive team. The current members of this team are listed on page B-4 in Appendix B to this report. Nine of the ten members are new to their role in the past fifteen months, and they represent a balance of internal and external managers, maintaining 175 years of Hershey experience, while simultaneously adding needed skill sets. We've established clear accountabilities with a renewed focus on brand building and supply chain capabilities. Hershey's new incentive structure is more comprehensive. In addition to key financial measures, strategic and organizational components have been added. Our compensation criteria for 2002 include sales growth, operating profit, earnings per share, economic return on invested capital and individual objectives.

Board Changes

Effective August 10, 2001, Jon A. Boscia, Chairman and Chief Executive Officer of Lincoln National Corporation, was elected to the Board of Directors; and effective October 3, 2001, Gary P. Coughlan, retired Senior Vice President, Finance, and Chief Financial Officer of Abbott Laboratories, Inc., was elected to the Board. These individuals bring to the Board a wealth of experience across multiple disciplines.

Dr. C. McCollister Evarts, who has been a director since 1996, will retire from the Board at the 2002 Annual Meeting of Stockholders in accordance with the policies of Hershey Trust Company and Milton Hershey School regarding service on the Board. The company has benefited greatly from Dr. Evarts' judgement and counsel during his time on the Board.

The Road Ahead

During the final months of 2001, we began the execution of the realignment and continued the brand building and sales force initiatives begun earlier in the year. By the end of the first half of 2002, we expect to substantially complete these initiatives. During the second half of the year, we will begin to invest the cost savings generated by the realignment and other programs in brand building activities and further enhancement to our sales force capability. This sets the stage for ongoing excellence in 2003 and beyond. Our strategy is fundamentally sound, and our effort is focused on execution. As these programs take hold and our brands begin to respond to the marketing and selling initiatives, we'll truly unwrap Hershey's potential and create a better balance between growth, profitability and return on investment.

Hershey experienced an enormous amount of change in 2001. Our employees have embraced Hershey's new strategic direction and are now working very hard to implement our plans. At the beginning of 2002, the most visible change is the impact of the Early Retirement Program. This program was designed to allow long-tenured employees to take advantage of the many years which they've devoted to Hershey and also help us bring our total costs in line.

We thank our retiring employees for their contributions to Hershey's success and wish them well as they venture into the next chapter of their lives. While a lot of great people are leaving, many great people remain with Hershey, and opportunities for personal advancement have been greatly accelerated as a result. We have much work to do, but I have enormous confidence in everyone on the Hershey team.

Thank you for investing in Hershey and our future growth prospects. We will continue to unwrap the potential of this great company delivering superior value to all of our stockholders.