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Episode: Mars Inc. (the chocolate story)

Author: Ben Gilbert and David Rosenthal
Duration: 03:53:12

Episode Shownotes

M&M’s, Snickers, Milky Way, Double Mint, Ben’s Rice, Pedigree, Whiskas, VCA, Banfield… all the brands you know, owned by the company you know nothing about: Mars, Incorporated. And Mars itself is 100% owned and deeply intertwined with the Mars family, who are currently the second wealthiest (and perhaps first most

secretive!) family in the United States. Tune in for one of the 20th century’s most incredible entrepreneurial stories across candy and pet care, and one that’s all the more incredible because it’s so little-known!Sponsors:Many thanks to our fantastic Fall ‘24 Season partners:J.P. Morgan PaymentsCrusoeStatsigLinks:Hershey’s M&M response: Hershey-etsOur past episodes on Berkshire Hathaway, LVMH, and Novo NordiskWorldly Partners Multi-Decade Mars StudyEpisode sourcesCarve Outs:Dandelion Chocolate and the Dandelion Advent CalendarTesla Model Y + repair serviceSiloHome AloneMore Acquired:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Check out the latest swag in the ACQ Merch Store!‍Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

Full Transcript

00:00:00 Speaker_02
Okay, David, how many current varieties of M&Ms can you name?

00:00:04 Speaker_03
Oh, wow. Okay. Well, plain, peanut, peanut butter.

00:00:08 Speaker_02
Uh-huh. Actually, plain is technically now called milk chocolate.

00:00:11 Speaker_03
Oh, interesting. There's dark, right?

00:00:14 Speaker_02
Yep, which I've got right here.

00:00:16 Speaker_03
They had mint for a while. Did they discontinue mint?

00:00:19 Speaker_02
Mint is a holiday-only theme. So that's a seasonal one.

00:00:25 Speaker_03
Oh, what else? I mean, at the end of the day, it's kind of only plain and peanut that matter, right?

00:00:31 Speaker_02
I think in sales numbers. Are there pretzel ones? There are pretzel ones. There are also almond.

00:00:40 Speaker_03
Oh, almond. See, I, yeah, I'm allergic to almonds, so I never think about almonds.

00:00:43 Speaker_02
There's also some weird ones. Caramel.

00:00:46 Speaker_03
Yeah.

00:00:47 Speaker_02
I don't want that at all, but they make it. Crunchy Cookie, which replaced Crispy of our youth. Do you remember the blue packaging, Crispy M&M's?

00:00:56 Speaker_03
Oh yeah, I remember the Crispy's, yeah.

00:00:59 Speaker_02
And then there's some specialty ones, Dark Chocolate Peanut, which I really want, Fudge Brownie, Campfire S'mores, and Caramel Cold Brew. Ooh, I don't know about any of these.

00:01:09 Speaker_02
And then there's these really wild limited edition ones, in addition to Holiday Mint, Birthday Cake, Chili Nut, and Pumpkin Spice Latte. That sounds disgusting. I know. But yes, I think you are right.

00:01:22 Speaker_02
The milk chocolate and the peanut are the sales drivers. Yep. All right, should we do it? Let's do it. Welcome to the fall 2024 season finale of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

00:01:53 Speaker_02
I'm David Rosenthal. And we are your hosts. Listeners, we were thinking, what episode would be fun to do before the holidays?

00:02:01 Speaker_02
We picked M&M's, thinking this'll be just some nice lighthearted fare about the candies and the characters on commercials that remind us all of our childhood.

00:02:10 Speaker_02
But as we dug into Mars Incorporated, the parent company, we realized that the story is totally thrilling. It's got World War I, World War II, new technologies and inventions, and serious, serious family drama.

00:02:24 Speaker_02
And their corporate strategy over the years is just as clever as companies like LVMH, Walmart, and Costco. I mean, you don't get to be the second wealthiest family in America without it.

00:02:34 Speaker_03
Yeah, seriously. Maybe it's because we just did it, but I feel like there are a lot of echoes of Ikea in this one too.

00:02:41 Speaker_02
Absolutely. And the Mars family is way more quiet and reclusive than the Comprod family too.

00:02:48 Speaker_03
They're way more quiet and reclusive than anybody.

00:02:51 Speaker_02
Yeah. Mars also owns way more than you think. You may know that they own the world's most popular candy, Snickers, in addition to M&M's. Or perhaps you know they're in the pet food business.

00:03:03 Speaker_02
But they also own everything from Ben's Original Rice to now Kind Bars, and they have one massive deal in the works that we will talk about later on this episode. David, here's one crazy stat to illustrate their sheer size.

00:03:15 Speaker_02
Do you know Mars now does more revenue than the Coca-Cola company?

00:03:20 Speaker_03
know.

00:03:21 Speaker_02
Wild. Mars crossed $50 billion in sales last year, and they're still completely privately owned by the Mars family, making it one of the top five largest private companies in America. This really is an incredible American and global story.

00:03:37 Speaker_02
Well, listeners, after this episode, come listen to ACQ2.

00:03:40 Speaker_02
We just had one of my favorite conversations ever on the show, in part because I just love talking computer architecture, with Rene Haas, who is the CEO of Arm Holdings, the chip design company that makes the designs and the instruction set architecture of everything inside your smartphone, your car, your laptop, and now even massively in the data centers.

00:04:02 Speaker_03
Gosh, between Synopsys and now ARM, we're going to have to rename ACQ2 into like acquired semiconductors.

00:04:08 Speaker_02
Totally. It was a great computer science lesson and history lesson sort of all rolled into one. So go subscribe to the ACQ2 feed in the podcast player of your choice to check it out. We've got a survey winner. Thank you to everyone who took our survey.

00:04:20 Speaker_02
It is Kurti from Boston. We will email you with details on how to claim your free Ray-Ban metas, and 10 other folks in addition to Kurti will also receive free ACQ dad hats, so keep an eye out in your email if that is you.

00:04:35 Speaker_02
Now before we dive in, we want to briefly thank our presenting sponsor, JPMorgan Payments, for an incredible year.

00:04:40 Speaker_03
Yes, just like how we say every company has a story, every company's story is powered by payments and JPMorgan Payments is a part of so many of their journeys from seed to IPO and beyond.

00:04:51 Speaker_02
Yep. So with that, this show is not investment advice. David and I may have investments in the companies we discuss, although not Mars, obviously. And this show is for informational and entertainment purposes only. David, where do we start our story?

00:05:06 Speaker_03
Well, we start in September 1883. There's some debate about whether it's in Pennsylvania or Minnesota, but you know, there's a lot of, um,

00:05:17 Speaker_03
legend shall we say about the mars family which we will get into as we go here but before really we start i have to say a thank you to joelle glenn brenner who wrote the amazing book emperors of chocolate mars as we'll talk about is an incredibly private company and private family she's the only journalist that ever got real access to the company like

00:05:40 Speaker_03
ever.

00:05:41 Speaker_02
And it was in 1991, almost a century after founding, that she actually got access for a Washington Post article and then that turned into the book. Is that right?

00:05:50 Speaker_03
Yep. She was a young reporter at the Post and called the company like every day for a year and finally got access and that became a piece in the Washington Post magazine and then she turned it into the book Emperors of Chocolate. Yep.

00:06:05 Speaker_03
Okay, so back to 1883, and let's just call it Minnesota, when Frank Clarence Mars is born. Now, Frank's father is a flour gristmill operator, and his mother, Elva, is a housewife. Both of those trades are going to become very important here.

00:06:26 Speaker_03
So Frank, sadly, when he's very young and in what I think was also very sadly commonplace at the time, he contracts polio and he has a mild case. Luckily, he survives, but it does affect his legs and he has to wear orthopedic braces all growing up.

00:06:43 Speaker_03
Which means that Frank can't play outside, he can't play sports, he has to stay home after school with his mother in the home. And so what does he do after school with his mother?

00:06:54 Speaker_03
Well, his dad would bring home extra bags of flour and somebody had to put that to use. So Elva and Frank do lots and lots of baking. They're baking bread, they're baking pies, they're baking cakes. And most enjoyably, for Frank, they are baking candy.

00:07:11 Speaker_03
And what was candy at this point in time? Well, I'm glad you asked. It's not chocolate. Chocolate is basically not a thing in America yet. Candy, though, was big. And specifically, we're talking about penny candy.

00:07:27 Speaker_03
gumdrops, licorice, all sorts of sugar based sweets. And they were typically unbranded. Like there were no big national or really even like local brands of candy at this point in time.

00:07:40 Speaker_03
And they're sold wholesale by small regional bakers to local retailers and drugstores who stock them for kids. Like the main market here is selling sweets to kids. And that's what Frank is doing.

00:07:54 Speaker_02
You can think about the candy industry at this point in time sort of like the baked goods industry today.

00:07:59 Speaker_02
You've got some local baker that's making them, distributing to a bunch of coffee shops, and you don't really know, except in really bougie ones, who the baker of that particular scone is.

00:08:10 Speaker_02
It's just, oh, I go to that coffee shop and they have scones there.

00:08:13 Speaker_03
Exactly. So this is what Frank and his mom are making in their kitchen. Now, fast forward to high school and Frank has kind of become the local candy chef extraordinaire. He's mastered all of his mom's recipes. He's experimented with some of his own.

00:08:27 Speaker_03
People are liking them. And so after high school, he does the natural thing. He becomes one of these candy entrepreneurs. When he's 19 years old in 1902, he establishes his own candy company there in Minneapolis and

00:08:41 Speaker_03
goes into business, selling his creations and other people's creations wholesale to these local retailers, merchants, drugstores, et cetera, for kids to buy. In that same year, in 1902, he would also briefly marry a woman named Ethel Kissack.

00:08:56 Speaker_03
Now, remember this Ethel. She will come up much, much, much later at the end of the story. But for the moment, the two of them have a son named Forrest. Forrest Mars.

00:09:08 Speaker_02
Our real protagonist, this story.

00:09:10 Speaker_03
Yes. But put a pin in Forrest, we will come back to him in a few minutes. So his dad, Frank, starts this candy business. You'd think, you're like, yep, this is it. This is the company. You know, Mars, Snickers, M&M's, Milky Way, it's all to come here.

00:09:26 Speaker_02
Out of this one company named Mars. Yes. Not true.

00:09:30 Speaker_03
Well... Not yet. So, we mentioned a minute ago that chocolate was not a thing yet in America. Now, at this point in time in 1902, that is not technically true.

00:09:43 Speaker_03
Milton Hershey has started selling his Hershey's chocolate bars in Pennsylvania, which he started in 1900.

00:09:49 Speaker_02
The notorious five-cent just chocolate. I don't even think they had made Hershey's with almonds yet. It was just the, like, single five-cent slab of chocolate bar called the Hershey bar.

00:10:01 Speaker_03
Yup. There weren't even any kisses yet. Nothing. It was just the very beginnings. Hershey had not yet figured out how to scale production. So it was regional and it wasn't popular around the country and certainly not in Minneapolis.

00:10:14 Speaker_02
Hershey had just figured out by the skin of his pants production and the recipe at all. He almost built an entire factory to produce milk chocolate without knowing how to produce milk chocolate.

00:10:24 Speaker_02
That was like a lucky diving save at the last minute right before they needed to turn everything on.

00:10:28 Speaker_03
Totally. So what Frank's selling, this penny candy stuff, it's fine. And like I said, the target market is kids, which is a good market, but you know, kids turn into adults and then they stop eating penny candy. And so the market is not that big.

00:10:43 Speaker_03
There's also another problem with the penny candy business, a bigger one, which is in those days, it was all pretty highly perishable.

00:10:53 Speaker_02
And there's not air conditioning yet.

00:10:55 Speaker_03
Exactly. Exactly. And so most candy producers end up having really, really horrible inventory problems. And a lot of them end up going out of business, which after a couple of years is exactly what happens to Frank.

00:11:09 Speaker_03
So in 1910, Frank's now bankrupt, his wife Ethel divorces him and takes their six-year-old son Forrest and sends Forrest off to live with her parents in a remote mining town in Saskatchewan, Canada.

00:11:24 Speaker_03
And Ethel stays in Minneapolis and takes a job as a department store clerk and just hits reset on her life. It's wild. Do you know why? I think because nobody had any money to support him, right?

00:11:36 Speaker_02
And in particular, Frank actually owed her $20 a month for child support for Forrest when he was six years old, but was failing to make payments. And so she just couldn't support him and needed to send him to the grandparents.

00:11:48 Speaker_03
I mean, you gotta remember, like, we're in the early 1900s here. This kind of stuff happened all the time. Yep. So Frank, undeterred by bankruptcy, divorce, being a deadbeat parent, not paying child support, he marries another woman, also named Ethel.

00:12:06 Speaker_03
Unbelievable. Specifically, they move to Seattle.

00:12:09 Speaker_02
Ayo.

00:12:10 Speaker_03
Where Frank does what else? He sets up another candy business and starts hawking his candy again. This Seattle candy venture goes about as well as the Minneapolis one. Within one year, Frank is bankrupt again. The creditors are coming after him.

00:12:24 Speaker_03
So he skips town again, this time just down the road to Tacoma. So this is two failed candy companies under his belt. Yep. We're now on number three. He sets up another candy business in Tacoma in 1914. Out of his house. Yes.

00:12:39 Speaker_03
He's running the business out of his kitchen. That's right. And that business also fails after a couple years. So three down, three strikes.

00:12:48 Speaker_03
We're now in 1920 and Frank and Ethel number two return once again to Minneapolis, figuring that 10 years have gone by. They can now show their face around town again. So Frank sets up yet again, another candy company.

00:13:05 Speaker_03
Candy company number four now in total, if you're keeping track at home. And against all odds, this candy company, would go on to become the globally famous $50 billion annual revenue private family business, Mars Incorporated.

00:13:22 Speaker_02
Sort of. It's not totally Frank. That is the reason for its success. Yes.

00:13:29 Speaker_03
Okay. So what's different now about this fourth candy company that Frank starts? It's chocolate.

00:13:36 Speaker_02
And chocolate is a completely different universe than these penny candies, than caramels. The first thing you have to know is it uses cocoa. I mean, this is a very, at this point in history, scarce and not very common in America.

00:13:52 Speaker_02
Like very few people are importing it from South America where it originated. It's a totally different and difficult thing to try and process. And at this point in history, only Europeans really are doing it, except

00:14:05 Speaker_02
for one American entrepreneur, Milton Hershey.

00:14:08 Speaker_03
Yep. So we got to rewind a little bit and tell the Hershey story because A, it's also crazy and B, it is deeply, deeply intertwined with the Mars story. So Milton Hershey had been also a actually successful candy entrepreneur.

00:14:26 Speaker_03
He had his own shares of failures, but he started eventually a caramel company that became quite big regionally in the Philadelphia area.

00:14:34 Speaker_02
Yep. He sold it for a million dollars in 1900. which is 36, 37 million today with inflation.

00:14:40 Speaker_03
Yup. He is among the most successful of this kind of generation of pre-chocolate candy entrepreneurs.

00:14:48 Speaker_03
Before he sold the business though, in 1893, Hershey traveled to Chicago where at the Columbian Exposition, which I didn't know this was the precursor to the World's Fair, he tries chocolate for the first time and he's smitten.

00:15:05 Speaker_03
in the German pavilion there there's a German company that is displaying chocolate and chocolate making equipment and Hershey is so taken by the rich complexity deliciousness of chocolate that he buys from this German company all of the equipment on display there just like on the spot and says I want this shipped back to my production facility in Lancaster Pennsylvania out in the Philadelphia countryside and I am going to set up

00:15:34 Speaker_03
a chocolate making operation. Now, this is not milk chocolate. This is just plain chocolate.

00:15:40 Speaker_02
And it's worth noting, too, this concept of solid chocolate is a pretty new thing, like a chocolate bar. Up until, I don't know, 15, 20 years before this, basically all chocolate was drinking chocolate.

00:15:55 Speaker_02
And so this notion of a machine that makes chocolate as bars at the Columbia Exposition is quite novel.

00:16:03 Speaker_03
Yeah, I mean, chocolate is a very rich, very complex food, very difficult to make, and the history goes all the way back to Montezuma and the Aztecs.

00:16:14 Speaker_02
And even before the Aztecs, about 5,300 years ago, around Ecuador.

00:16:20 Speaker_03
Wow. I didn't even know that. So we're talking about a 5,000 year old tradition here.

00:16:25 Speaker_02
Yes.

00:16:25 Speaker_03
But like you said, until call it the late 1800s, this is a drinking activity.

00:16:31 Speaker_02
Yes. And it's so different than the chocolate we think of today. There's no milk chocolate. It's not sort of that nice breakable chocolate with a shine. It's a very different and only barely enjoyable flavor.

00:16:45 Speaker_02
It's better than everything else, but it's not a bar of chocolate like you know today.

00:16:49 Speaker_03
Yep. So you said milk chocolate. And I said, Hershey at this point is not making milk chocolate when he first introduces it to his caramel company.

00:16:58 Speaker_03
As he gets deeper and deeper into the chocolate world, he travels to Europe and learns about milk chocolate, which had just been invented not too long before in Switzerland by the Swiss company, Nestle.

00:17:14 Speaker_02
Sort of, Nestle. We're going to talk about how to make chocolate. And then we're going to use that as a basis of understanding for how to make milk chocolate and how the discovery of milk chocolate came about.

00:17:26 Speaker_02
So first of all, how do you make chocolate?

00:17:29 Speaker_02
And we have a huge thank you to Todd Masonis at Dandelion Chocolate, which is an excellent, excellent bean-to-bar chocolate company in San Francisco, for walking us through this entire thing, not only giving us all the notes of how to describe it on air, but also taking us through their factory in San Francisco, which is unbelievably cool if anyone has a chance to do it.

00:17:47 Speaker_02
So, where does chocolate come from? There's a cocoa fruit that grows on a tree originally in South America, now very commonly in Africa where they've been transplanted. It's kind of a football-looking thing.

00:17:59 Speaker_02
You pick it, you cut open the pod, and inside there are the seeds of the fruit. David, you and I sort of ate some of it or sucked on some of it. It's sweet, but it's not chocolate. It has no reflection of a chocolate flavor.

00:18:10 Speaker_02
That all comes from the seeds or the beans.

00:18:13 Speaker_03
Yeah. Yeah. The fruit itself is actually quite delicious, but it's like a pulpy sort of milky type thing.

00:18:18 Speaker_02
Yes. So that fruit is actually the thing that people ate for thousands of years, but the seed ends up being the thing that becomes chocolate. You first ferment those beans in wooden boxes. The yeast eats the sugar that creates alcohol.

00:18:33 Speaker_02
Then the acid eats the alcohol. There's fermentation that kills the beans. So after this fermentation, you then dry it. All this kind of happens at the site of production or of growth, typically in South America or in Africa.

00:18:46 Speaker_02
So then after the fermentation, you dry it out. So this could happen sort of in drying beds or in mechanical smoke dryers or on banana leaves.

00:18:56 Speaker_02
All the different ways that you dry it can affect the flavor, how aggressively you dry it contributes to how much acid is in the beans. So there's a lot of fluctuation here in the flavor just based on the way that you are harvesting the bean itself.

00:19:11 Speaker_02
The beans then go into sacks, they go on boats, they go at this point in history basically to Europe because that was the only place that was making chocolate. They then get sorted, sterilized, de-bacterialized.

00:19:24 Speaker_02
I suspect not a lot of this was happening in the old days, but it is what happens now. They get roasted, you remove the shell, which is a process called winnowing. So now you have nibs.

00:19:34 Speaker_03
So just like the core like meat of the bean after it's been roasted.

00:19:38 Speaker_02
Yes, you can press those nibs in to create two separate things, cocoa powder and cocoa butter.

00:19:44 Speaker_02
Both of those come from the nib, but there are many reasons why different chocolatiers will first separate them out and recombine them at different ratios later. You grind the nibs down to the right particle size.

00:19:55 Speaker_02
It then goes through something called conching.

00:19:57 Speaker_03
Conching is awesome. It's basically like these big cylinders, right, that like spin around and around and smooth out all these particles.

00:20:05 Speaker_02
Yeah, and there's a great story back in 1879 that Rudolf Lindt, which is another name you may recognize, the Swiss chocolatier, discovered it by accidentally leaving his cocoa in a roller grinder over the weekend instead of shutting the machine off.

00:20:20 Speaker_02
So it accidentally pressed the beans for three full days, which created this silky, smooth, flowing texture. And then you could do cool stuff like add more cocoa butter in to get that Swiss chocolate texture that we all know of today.

00:20:34 Speaker_02
If you've had it and you're like, how is this so unbelievably creamy? You know, you separate the nibs into cocoa powder, cocoa butter, and then you add a bunch more cocoa butter back in, and it's that delicious Swiss chocolate.

00:20:45 Speaker_02
So 1879 is when conching sort of first discovered. Now there's, David, to your point, specific conching machines that will do this as a part of the chocolate production process. Still not done yet.

00:20:57 Speaker_02
You now have this great, conched, liquidious, wonderful chocolate sitting there. If you just let it dry, it's actually not shelf-stable. it will bloom.

00:21:09 Speaker_02
For any of you who ever left a chocolate bar in a hot car and it sort of melted and then re-solidified, it gets that sort of white gross stuff on top and it doesn't have that shine to it, it doesn't snap nicely the way that you're used to a chocolate bar snapping.

00:21:22 Speaker_02
There's actually some pretty complicated chemistry that happens where you are taking this conched chocolate and you are tempering it. And what tempering it does is you are aligning the crystals in the cocoa butter

00:21:36 Speaker_02
to make it so that it forms into that shiny, breakable chocolate that you know of today.

00:21:40 Speaker_03
And this is an incredible process, right?

00:21:43 Speaker_03
You take this liquid chocolate after conching, you heat it up to like kind of super liquefy it, and then you cool it down to like just the right amount of temperature where the right sort of seed crystals form.

00:21:56 Speaker_02
That's exactly right.

00:21:57 Speaker_03
And then you heat it back up again, and then you let it cool. And if you don't do that second step, all the bloom will happen, but you want to get just the right seed crystals to set the right crystal and structure for how it'll come together.

00:22:09 Speaker_02
That's exactly right.

00:22:09 Speaker_02
When you're superheating it, you're eliminating all crystals, so then you can kind of start from scratch with this seed crystal, and then you're trying to let the rest of the chocolate form around that seed crystal so they're all aligned in that nice, shiny break.

00:22:23 Speaker_03
Believe me, I appreciated chocolate before doing this episode, but now knowing how it's made, and we haven't even gotten to milk chocolate yet, which is even more complex. This is more complex than wine. This is more complex than coffee.

00:22:36 Speaker_02
who shots fired on wine and coffee, you're gonna hear something.

00:22:38 Speaker_03
Well, at least in terms of like stages of production, right? Like let's take coffee. Coffee looks pretty similar until, you know, you get the beans there roasted, but then you grind the beans and you just put the beans in liquid.

00:22:48 Speaker_03
You're not getting any of these steps here.

00:22:50 Speaker_02
Chocolate is remarkably hard to make. I think that is a huge takeaway. The fact that I'm looking down here at all these bags of M&M's and the Snickers bar, we sort of just assume, oh, this is a industrial thing that just sort of comes off the line.

00:23:03 Speaker_02
It's an agricultural product that then has to go through a variety of different processes developed on different continents many decades apart in order to create something very uniform and predictable and desirable out of that pure agricultural product.

00:23:21 Speaker_02
Okay, so that's all the way from the fruit, through the fermentation, through the processing of the beans, through the conching, through the tempering.

00:23:30 Speaker_03
And in those last steps of the process, in the conching and the tempering, you're also adding sugar in, right? So, like, unless you want to make 100% dark chocolate, which is, like, very complex but very bitter.

00:23:42 Speaker_02
No one's going to eat that. Most people max out at 85% chocolate and the rest, the 15% is sugar. Or you're getting a 70% bar and the 30% is sugar.

00:23:52 Speaker_02
Or if you're getting a milk chocolate bar, it's more in that 30% to 50% cocoa and the rest is sugar and milk.

00:23:58 Speaker_02
But in reality, most of the time you're eating chocolate these days, unless it's a bean-to-bar producer like a Dandelion or something, you're ending up with all sorts of stuff added in that process. You know, more cocoa butter, sugar, soy lecithin.

00:24:12 Speaker_02
Oftentimes you'll get vanilla that's added in part of this process to kind of create a chocolate taste you know of.

00:24:18 Speaker_03
Yep. Okay, so we're still in the dark chocolate world here. Let's talk about Nestle and milk chocolate.

00:24:23 Speaker_02
Which is sort of a funny misnomer, right? Dark chocolate. It's just chocolate. It's chocolate that doesn't have milk, so we needed to retro-nim it something. Like, we needed to come up with a name and we're like, oh, it's dark chocolate.

00:24:33 Speaker_02
Okay, it's chocolate that's chocolate and sugar, but doesn't have milk. Okay, anyway, dark chocolate. So what is milk chocolate then? Well now we need to flash back 35 years before Milton Hershey sells his first caramel company.

00:24:47 Speaker_02
This is before he started the Hershey Chocolate Company, 1866. Henri Nestle David, to give some credence to your comment, is researching infant feeding as a means to solve infant mortality.

00:25:00 Speaker_02
He invents a new type of food for babies who are unable to breastfeed there in Switzerland. And remember, at this point in time, something like one in five babies died before their first birthday.

00:25:10 Speaker_02
So infant mortality is a massive, massive global problem. Now he's researching this alternative infant feeding methods. Milk would quickly turn rancid, so there was this question of how do you keep milk fresh. He eventually solved it.

00:25:24 Speaker_02
It is hard to condense milk without burning it, but he figured out this method of using an air pump at low temperatures to concentrate sort of a milk powder, and then he added a bunch of cereal, a proprietary cereal mix he created, and this is effectively the first baby formula.

00:25:39 Speaker_02
So, in 1867, he demonstrated that a baby could drink this formula that he made, rehydrated, and it was effectively a miracle to keep babies alive.

00:25:48 Speaker_03
Totally. This is like one of many mind-blowing things in the research that I learned. Nestle was a baby formula company. That's how it started.

00:25:56 Speaker_02
Totally. It's great. It's in the same way that Hermes, the Birkin bag, was a bag for baby bottles.

00:26:03 Speaker_03
Yeah, right. Who knew that baby formula literally leads to the modern chocolate industry?

00:26:09 Speaker_02
Yep. So, incredibly, one of his neighbors who desperately needed this formula because his baby was rejecting breast milk happened to be a chocolatier, a guy by the name of Daniel Peter.

00:26:20 Speaker_02
So he had this idea for milk chocolate in 1867 by combining the dehydrated baby formula with cocoa and sugar to create a creamy drink. We're still in the drink era. And people at that time were already pouring milk in with their drinking chocolate.

00:26:38 Speaker_02
But he sort of said, well, can I create this as a premade product?

00:26:41 Speaker_03
Yeah. And again, to the issues with creating baby formula and then now here the issues with creating milk chocolate. Milk is not a stable product. Milk goes bad fast. So how are you going to put this in a product?

00:26:55 Speaker_02
Milk chocolate is something that sits on a shelf for six months and you can eat it and it's not spoiled. It's kind of unique in that way.

00:27:01 Speaker_03
Totally.

00:27:02 Speaker_02
So the issue that he kept running into, this is Daniel Peter, was that the mixture was grainy, the water in the milk didn't blend well with the cocoa's bean oils, it was a mess.

00:27:12 Speaker_02
And when he tried to dry the milk on his own, it was really easy, David, to your point, that it was spoiling and the chocolate would sort of be rancid by the end when he finished it.

00:27:20 Speaker_02
Eventually, Daniel Peter walked away from Henri Nestle's powdered milk entirely, and instead he tried condensed milk, which is more like a concentrated syrup, not actually dried powder.

00:27:31 Speaker_02
And when he tried this, plus then a final step of spreading the milk chocolate mixture on these big trays to slowly dry them and slowly add a little bit more heat to turn it into these milk chocolate flakes, that is the thing that worked.

00:27:45 Speaker_02
that he finally was able to create this marketable milk chocolate flaky stuff that would turn into a drink, and then later, especially over at Cadbury and other European chocolate companies, would turn into milk chocolate bars that Milton Hershey would try to emulate.

00:28:02 Speaker_03
Ah, interesting. I didn't actually know that it was condensed milk, not the formula milk that ended up working for Nestle.

00:28:09 Speaker_02
That's my understanding. I got this from – there's a descendant of the Cadbury family, Deborah Cadbury, who wrote this book called Chocolate Wars.

00:28:16 Speaker_02
And two chapters out of 20 or something are about Mars, but it was this great primer on the history of the chocolate industry to learn all this.

00:28:23 Speaker_03
Hmm. Interesting. Yeah. So you're deeper on this part than me. So you might be asking yourself, why was everybody going through all this trouble to combine milk and chocolate? It's the perfect combination.

00:28:34 Speaker_03
Chocolate is so wonderful and complex and delicious on its own, but it's heavily bitter. And when you temper it, not tempering in the chocolate process, but sort of temper that flavor with the smoothness and the creaminess of milk.

00:28:48 Speaker_03
Anybody who likes chocolate knows it's just absolutely delicious.

00:28:52 Speaker_02
Yeah, so by 1879, once you have milk chocolate in solid form and then you have conching, you now go from bars that are sort of really gritty and hard to bite to this kind of amazing mouthfeel that just massively increased the market.

00:29:07 Speaker_02
10x, it's hard to get a number on it, but the market for what chocolate would be from 1879 onward is way bigger than before.

00:29:15 Speaker_03
Yep, totally. So back to Hershey. He, of course, learns about all of this as he's building his new chocolate company there in Pennsylvania. And he decides that he's going to make milk chocolate too. Except he's not a chemist.

00:29:30 Speaker_03
He doesn't employ any chemists. He basically has no idea what he's doing. And for years, he just experiments via trial and error to try and find a way to produce milk chocolate.

00:29:45 Speaker_03
He builds a huge new factory in what would become Hershey, Pennsylvania, like the town of Hershey, Pennsylvania. He's basically betting it all of, I am going to figure this out and I am going to bring chocolate and milk chocolate to America at scale.

00:29:59 Speaker_03
Finally, after a couple of years, He does hit on a method that works for producing milk chocolate. However, you know, it's not quite as scientific as what you were just describing, Ben. And in the process, effectively, the milk does spoil a little bit.

00:30:22 Speaker_03
Which is why I'm sure all of our, you know, European and other international non-American friends who are listening to us here and are saying like, Hershey's, that is so disgusting.

00:30:34 Speaker_03
I have no idea how all you Americans eat Hershey's chocolate and why it tastes sour if you're not used to it. This is why. It is sour.

00:30:45 Speaker_02
Yeah, so there are two versions of the story, and we don't know which one is true.

00:30:50 Speaker_02
But either way, David, it leads to this thing that you're talking about, which is there's kind of a little bit of a funk or a little bit of a sourness in Hershey's chocolate. And that is just what Americans are used to.

00:31:01 Speaker_02
So to Americans, that's chocolate. Okay, account number one, and this is all in the Cadbury book that I just mentioned.

00:31:08 Speaker_02
After a series of laborious failures, Schmalebach, who was a scientist working with Hershey, seized on the initiative and tried a slow evaporation of nonfat milk over low heat.

00:31:19 Speaker_02
He succeeded in reducing the water content of the milk and added the sugar to create a sweet, creamy concoction with no hint of a burned flavor.

00:31:26 Speaker_02
Better yet, they found that the mixture could be blended with the ingredients of the cocoa bean without spoiling to produce a smooth milk chocolate. Hershey was thrilled. Slightly sour, but distinctly original. The perfect American chocolate bar.

00:31:40 Speaker_02
Now, there's a second view, which is that Hershey happened to acquire a large batch of milk powder from Europe, which has slightly soured by the time it crossed the Atlantic.

00:31:50 Speaker_02
Reluctant to waste such a large amount, he used it to make chocolate and found that it sold well. Company officials have always denied that soured milk powder played any part in the company's formula.

00:32:01 Speaker_03
Amazing, amazing.

00:32:02 Speaker_02
Thank you, Deborah Cadbury, for all that.

00:32:04 Speaker_03
If written by a member of the Cadbury family, you can imagine why that story is preferred. Regardless, here's the amazing thing, though, that this illustrates. When it comes to candy, and specifically when it comes to chocolate,

00:32:20 Speaker_03
The most important thing in the business is being first to market and setting the taste of a specific regional area. Because, again, Europeans think that Hersey's chocolate is disgusting, and Americans are like, this is chocolate.

00:32:35 Speaker_03
When you're a kid and you eat this stuff for the first time, your taste gets associated with, oh, this is what this is. There's also a nostalgia element to this too.

00:32:46 Speaker_03
Because the tastes are so strong, so powerful, so complex, you bite into a Hershey's bar and like, subconsciously or not, your brain is going right back to childhood when you first ate that.

00:32:56 Speaker_02
Yep. And actually today, 75% of candy is eaten by adults. And in fact, it accounts for 90% of total purchases, a complete departure from the pre-chocolate world you were talking about with the penny candies at the checkout counter.

00:33:10 Speaker_03
Yep, totally. So Hershey, he was crazy in believing in the potential for all this, but because he invested so much money, he set up the only scale chocolate production facility period in America.

00:33:26 Speaker_03
He was able to set this taste for the country, which basically locked him in as what chocolate was in America. Fascinating. And he's smart about this too, from a business perspective. Like Ben, you mentioned the nickel Hershey bar.

00:33:42 Speaker_03
He intentionally sets the price at a nickel. He totally could have charged a lot more. This is like this great, delicious, luxurious item. He wants it to be ubiquitous. So he prices the bars at a nickel and he pushes distribution everywhere.

00:33:59 Speaker_03
Five and dime stores, grocery stores, gas stations, newsstands, standard oil stations. He's pushing everywhere. I mean, he basically invents the modern candy industry by doing this.

00:34:10 Speaker_02
Yes. And Hershey's kind of uniquely positioned to do it. Imagine you're walking around today with 40 million bucks from the sale of your previous company, You realize there's something going on in Europe. You know it's going to work in America.

00:34:24 Speaker_02
You can't get your hands on the formula, but you're going to try and reverse engineer it. Your competitors can't self-fund to the degree that you can. And so he decides, I'm rich. I'm going to go big immediately.

00:34:36 Speaker_02
And so he builds out this huge factory to start production before he's even finalized the formula. So it's really like a go big or go home strategy, where if it works, boom, mass production, mass distribution.

00:34:49 Speaker_02
I set the flavor profile in America and I set the brand in America for chocolate. And if it fails, it fails pretty catastrophically.

00:34:57 Speaker_03
Yep. So putting the final pieces on this initial Hershey success story. right after Milton Hershey figures out milk chocolate and starts this production and is expanding distribution nationwide, World War I happens.

00:35:14 Speaker_03
And the American military, as they have seen European armies do, they source chocolate as ration bars for the troops. And Hershey's is the big supplier.

00:35:29 Speaker_03
So millions and millions of American GIs now get introduced and hooked on the slightly sour Hershey's chocolate.

00:35:36 Speaker_02
And it's great. It's a super dense store of energy. It triggers an emotional response in the brain.

00:35:41 Speaker_02
I mean, everybody who eats sugar today knows that if you're eating sugar, it is triggering, I don't know if it's dopamine or serotonin, but there's definitely a stimulus of a happiness release, which if you're a soldier in World War I, you could use a little of that.

00:35:56 Speaker_03
Yeah, it's got caffeine. Totally. So these soldiers then come home and right after the war is prohibition in America. So you can no longer buy alcohol, at least legally buy alcohol.

00:36:09 Speaker_03
And all these adults are now like, you need some sort of social lubricant here. Well, what's the natural alternative? It's chocolate. Which brings us to the candy bar.

00:36:22 Speaker_03
So all of these former penny candy entrepreneurs all around the country, they're like, wow, you know, chocolate is amazing. You know, we can market to adults, et cetera. It's expensive. Hershey's selling their own bars.

00:36:36 Speaker_03
What if I take just some chocolate and some other stuff and also make a bar?

00:36:41 Speaker_03
Well, that I could make a lot cheaper because the other ingredients, whether it's nuts or nougat or sugar or whatever, are cheaper and I can develop my own unique taste that people in my region might find appealing. So by the end of the 1920s,

00:36:57 Speaker_03
There are more than 40,000 different candy bars being made in America.

00:37:05 Speaker_01
Oh my God.

00:37:06 Speaker_03
Almost all of which are these regional entrepreneurial operations. The most infamous of these is, Ben, do you know the story of the Baby Ruth candy bar?

00:37:14 Speaker_01
No.

00:37:15 Speaker_03
So still available today. Baby Ruth Candy Bar named, I think, for President Grover Cleveland, I think's daughter, Ruth, baby daughter, Ruth.

00:37:23 Speaker_03
To introduce the bar, the Curtis Candy Company, which made it, chartered an airplane to fly over the city of Pittsburgh and drop bars down with little paper parachutes over the city. It is like a literal drop. It puts the visa drop to shame.

00:37:41 Speaker_02
Wow.

00:37:42 Speaker_03
Amazing.

00:37:42 Speaker_02
We're going to have to do that for an acquired marketing stunt at some point.

00:37:45 Speaker_03
I know, I know. Charter an airplane. I think we would get in a lot of trouble if we did that these days.

00:37:51 Speaker_01
I think so, too.

00:37:53 Speaker_03
Oh, man. So, OK, you might be scratching your head a little bit and being like, wait a minute, you just told me about how, like, Hershey controls the means of production for chocolate and nobody in America can make chocolate except Hershey.

00:38:02 Speaker_03
Well, that's right. And Hershey is freaking loving all of this because they are supplying the chocolate to all of these entrepreneurs. They're like the AWS of the chocolate business.

00:38:13 Speaker_02
They've become the blue jeans and pickaxes company in this gold rush.

00:38:17 Speaker_03
Yes. So, like, if you've ever wondered how the heck did Milton Hershey build a town and how to become like Rockefellers or Carnegie's or Vanderbilt's like this is how.

00:38:27 Speaker_02
this is when you start to see this separation of the different players in the value chain of chocolate. It used to just be, well, I buy beans and then I make consumer branded chocolate bars.

00:38:39 Speaker_02
And this is the first time there's a sort of intermediation step where you say, well, Hershey makes the chocolate and then other people buy the chocolate from Hershey for their consumer products.

00:38:48 Speaker_02
And yeah, Hershey also makes a chocolate bar, but in America, this is really the creation of the wholesale business of chocolate.

00:38:55 Speaker_03
Yep. And there's one game in town, at least when it comes to milk chocolate, which is most of the market, and that's Hershey.

00:39:00 Speaker_02
And the US military loves it too, because you can put all these high energy density ingredients inside of the candy bar and then use the chocolate effectively to seal it in and keep it fresh.

00:39:12 Speaker_02
And so you put a wrapper around it, you send it off with the troops, and you know, you've got eggs in the nougat, which has protein. You've got nuts, which is protein and fat.

00:39:20 Speaker_02
I mean, all of this, you're delivering these kind of complete meals, complete in quotes, but it's carbohydrates with sugar and other carbohydrates. It's fat, it's protein. It's not a ton of protein, but they're energy bars.

00:39:33 Speaker_02
And it's all because the chocolate seals up the ingredients inside.

00:39:37 Speaker_03
Totally. So this now brings us back to Frank Mars and Minneapolis and the fourth candy company and what is different this time, which is chocolates. So when Frank first gets back to Minneapolis and starts up the fourth company,

00:39:54 Speaker_03
He had seen out in Seattle and Tacoma that buttercream truffles were like really, really popular. So he brings the buttercream truffles, he steals from the companies out there, brings the concept back to Minneapolis. That's quite successful.

00:40:07 Speaker_03
He calls them Victorian buttercreams, and I believe started coating them in chocolate using Hershey's chocolate, which makes sense given everything that's going on. That becomes pretty successful.

00:40:19 Speaker_03
He adds another line called Patricia's Chocolates, named after his new daughter, Patricia, that he has had with wife Ethel, number two. And after a couple of years, the business is doing like, call it $100,000-ish in revenue.

00:40:33 Speaker_03
So like, really, really well. We're not talking Hershey levels of entrepreneurial ambition here, but that's not the ambition that Frank has.

00:40:41 Speaker_03
And then, in 1922, he decides that he's gonna get in on this candy bar craze that is sweeping the nation, and he introduces his first combination bar, or candy bar, called the Maro Bar.

00:40:56 Speaker_02
Yes. And do you know the other name for these types of candy bars that are sort of chocolate wrapped something else? Combination bars, right? The term I read was count lines. Oh, no. I didn't come across that. So this is from the Cadbury book.

00:41:12 Speaker_02
Interestingly, all chocolate before was measured by weight. And once somebody kind of rolls their first candy bar off the line, you know, what we now know today, the Snickers bar, the Milky Way, all these things.

00:41:24 Speaker_02
you couldn't really just measure it by weight because it's got a bunch of much cheaper ingredients inside. Treating chocolate as one substance that has weight no longer maps to the consumer product.

00:41:36 Speaker_02
And so these lines where you'd manufacture these candy bars were measured by count of bars, so they're called count lines. So these manufacturers are spinning up count lines instead of, I don't know, weight lines or whatever they were before.

00:41:48 Speaker_03
Amazing. It's like the KD furniture from the Ikea episode. So, here we are. The first candy bar, Count Line Bar, from the Mars Company, 1922. Comes out, and I don't want to say it's a flop, but it's not a success.

00:42:05 Speaker_02
No one's eaten Maro bars today.

00:42:07 Speaker_03
Correct. Correct indeed. But then, the next year, in the summer of 1923, a fateful reunion occurs in Frank's life, which is that his estranged son, Forrest Mars,

00:42:26 Speaker_03
reappears in highly dramatic fashion, and the two of them team up, father and son, to introduce a new candy bar, one that will take the nation by storm, that would end up being called the Milky Way.

00:42:44 Speaker_03
Or at least that's the legend, and we will tell that in just a second.

00:42:49 Speaker_02
Yes. But first, this is a great time to tell you about our presenting partner, JPMorgan Payments. So everyone listening knows that we started working with JPMorgan earlier this year, and you can probably tell it's going very well.

00:43:02 Speaker_02
David and I on this final episode of the year wanted to pause and tell you why.

00:43:06 Speaker_03
Well, first is the team, the folks that we work with there. They are absolutely world class. And also they really get acquired. They're huge acquired listeners, just like you. I mean, just look at the Chase Center show.

00:43:18 Speaker_03
They took our vision and said, what if we did all of this times 10?

00:43:22 Speaker_02
Yeah. And deeper than that, our two products and brands just fit together like a glove. J.P. Morgan Payments is the world's largest payments franchise. They power 18 of the top 20 corporations in the world and most companies we've covered on the show.

00:43:36 Speaker_02
In fact, 90% of Fortune 500 companies do business with them. They're extremely trusted.

00:43:41 Speaker_03
And at first, when we started working with J.P. Morgan, we were a little worried of like, oh, this might only be for big companies, but it's not. We've seen startups that heard about J.P.

00:43:50 Speaker_03
Morgan payments on Acquired earlier this year for the first time become customers.

00:43:55 Speaker_03
Our goal in picking partners is to find the very best companies that A, create value for our audience right now, and B, will scale with your success and be around forever. That is J.P. Morgan payments.

00:44:07 Speaker_03
They do literally $10 trillion in payment volume a day.

00:44:12 Speaker_02
Yeah, listeners, think about how insane that is. With J.P. Morgan processing over 50% of all e-commerce transactions in the U.S., their software and payment rails basically underpin our entire global financial system.

00:44:24 Speaker_03
Yep. And lastly, payments is a process that every single one of your companies needs. If you make revenue, you need payments. And JP Morgan thinks about payments as a lever for growth, not just vanilla operational stuff.

00:44:36 Speaker_03
They've been investing heavily with products now for fraud prevention, foreign exchange, working capital, and more. All, of course, built enterprise-grade and with developer tools and APIs.

00:44:48 Speaker_02
So thank you listeners for tuning in all year. You can learn more at jpmorgan.com slash acquired, which itself is a very cool custom site they built just for this partnership.

00:44:57 Speaker_02
And when you get in touch, just tell them that Ben and David sent you or shoot David or I a message in Slack and we'll get you connected with their team. Our thanks to JP Morgan payments.

00:45:05 Speaker_02
Alright David, so Forrest emerges into his father's life and somehow we end up with the Milky Way. How does that happen?

00:45:12 Speaker_03
Well, let's tell the legend. So, summer 1923. Young Forrest Mars is 19 years old and on summer break from college. More on college in a minute. He's got a summer job as a traveling salesman selling camel cigarettes. Times sure were different.

00:45:31 Speaker_03
Times sure were different. I mean, it's debatable how true any of this is, so we'll roll with it. One night, he's in Chicago in late summer. And he gets instructions from his boss that they really got to blow it out.

00:45:45 Speaker_03
They need to hit big time sales numbers here in Chicago. Forrest, you got to go blitz the whole city with posters marketing camel cigarettes. So Forrest goes around and he puts billboards up all over downtown Chicago.

00:46:00 Speaker_03
Supposedly like every storefront window on State Street, he's plastering with camel cigarette posters. Which certainly gets attention. It actually makes the Chicago Tribune the next morning that this happened.

00:46:13 Speaker_03
But also, much like if we were to do an acquired marketing stunt like Baby Ruth and drop stuff from an airplane these days... We might go to jail. It's also illegal, yes. And it lands Young Forest in jail.

00:46:26 Speaker_03
So, from his Chicago prison cell, Forrest makes his one phone call to the only soul that he knows in the area who could possibly bail him out, his estranged father, Frank Mars.

00:46:41 Speaker_02
Which, this whole thing, I mean, this is the legend, and this is the Mars Company's version of the story, this is the journalist's version of the story, this has been in other books, but like, the guy hasn't seen his father since he was six years old, and he somehow knows his phone number to call him from jail.

00:46:56 Speaker_02
By the way, his dad lives in Minnesota.

00:46:59 Speaker_03
There's the whole state of Wisconsin between Minneapolis and Chicago. But we're giving you a flavor of who Forrest is here.

00:47:08 Speaker_02
If Forrest was in charge of coming up with the story of how this all went, this is the story he would have come up with, so. Yes, exactly.

00:47:17 Speaker_03
And as we'll see, Forrest is in charge of everything. Frank shows up at the jail. Father and son are reunited after 13 years, during which, yeah, Ben, like you said, they've had no contact with each other, but Forrest has his phone number to call him.

00:47:32 Speaker_03
Frank bails out Forrest. By now, it's early afternoon the next day, and he says, all right, son, let's go out for a lunch."

00:47:40 Speaker_03
And they go to a luncheonette to share a meal, at which young Forrest, who is selling cigarettes, orders a wholesome malted milkshake over this lunch reunion with his father.

00:47:53 Speaker_03
They get to talking, they're getting reacquainted, and Forrest learns that his dad is now this middlingly successful candy entrepreneur. And His dad's telling him about this Maro bar that he's introduced. Forrest says, well, hey, I got an idea for you.

00:48:11 Speaker_03
What if you take this malted milkshake here? Everybody loves a malted milkshake. What if you take that and put that into a candy bar? And, you know, like I'm obviously pretty good at, you know, street marketing here.

00:48:23 Speaker_03
I bet I can go sell that all around the country. So they get to talking, jamming, father and son, and, uh, With that, the Milky Way bar was born with the marketing of a malted milkshake in a candy bar.

00:48:39 Speaker_02
And this is the story, there's so much in between, I have an idea that you should put a malted milkshake in a bar, and actually what a Milky Way is, it's nougat and caramel inside of chocolate.

00:48:52 Speaker_02
It's a pretty different ingredient set than a malted milkshake. There had to be quite a bit of R&D, experimentation, flavor development, to figure out how to make the inside of your candy bar taste like said malted milkshake.

00:49:05 Speaker_03
But here is the exact quote from Forrest as recorded in the family archives that Joelle got access to as part of her access to the company.

00:49:13 Speaker_03
He says, quote, I'll be damned if a short time after our lunch, the old man has a candy bar and it's a chocolate malted drink. He puts some caramel on top of it and some chocolate around it. Not very good chocolate.

00:49:26 Speaker_03
He was buying cheap chocolate back then, but that damn thing sold. No advertising. Oh, Forrest. Regardless of how all this happens, Frank Mars does release, in 1924, the Milky Way bar, and it does become a big hit.

00:49:42 Speaker_03
That year alone, the first year that it comes out, it does $800,000 in sales.

00:49:49 Speaker_02
Yes. The Morrow Bar Company went from $73,000 to $793,000 in one year.

00:49:55 Speaker_03
And that is all the Milky Way. Like, undeniably, huge success.

00:49:59 Speaker_02
And, effectively, what they were doing was they were the first ones who said, wait a minute, if we're gonna make a count line, we should do it in a mechanical way.

00:50:08 Speaker_02
And so, even though all these other people are selling these one-offs locally to different stores and hand-making them, they were doing it in factory quantities all under the same production process and brand.

00:50:18 Speaker_03
Yep.

00:50:18 Speaker_02
Now, it was early industrialization, but it was still much more industrial than the rest of the manufacturers at this point.

00:50:24 Speaker_03
Totally. Now, first question you should be asking here is, wait, Forrest is in college now and ends up in jail in Chicago? Like, what the hell happened here?

00:50:35 Speaker_03
Okay, so when Forrest is six years old, as we said, he gets sent off to live in Saskatchewan in Canada in like a hardscrabble rural mining community with his grandparents. Unlike, I imagine, most of the folks around him,

00:50:52 Speaker_03
Forrest is a total outlier there. He's super smart, super entrepreneurial, super ambitious, and he's a super arrogant show-off. Probably because he's so insecure from his deeply traumatic childhood.

00:51:06 Speaker_02
Deborah Cadbury has a good line in her book, Noah's flood wouldn't have deterred Forrest Mars.

00:51:11 Speaker_03
Yes. So when Forrest graduates, unlike everybody else there who goes off to work in the mines, he supposedly wins a scholarship to the University of California in Berkeley.

00:51:25 Speaker_03
Now, how he wins a scholarship to UC Berkeley, which is, you know, the public University of California, when he's living in Canada and he's from Minneapolis is suspect, but we'll go with it.

00:51:38 Speaker_03
He does show up at Berkeley, though, we know that, and he enrolls in the School of Mining there with the idea that he is going to study to become a mining engineer and go back and run a mine instead of just being a laborer in a mine.

00:51:51 Speaker_02
And this all makes sense. He had an engineer's mind. I mean, he also had a marketing mind, but he ended up building a company that ran at incredible efficiency and thought through it as sort of a systems thinker.

00:52:02 Speaker_03
Yes, 100%. So while he's at Berkeley in his first year there, to make money and support himself, he takes a job in the cafeteria.

00:52:13 Speaker_03
And supposedly he finagles a deal with the head cook that if Forrest can go source meat and other ingredients for the meals cheaper than budget from local wholesalers, that he and the chef would split the savings and just pocket the difference.

00:52:32 Speaker_03
And of course, you might get a sense that Forrest is a good negotiator here. This works like a charm.

00:52:37 Speaker_03
And supposedly, he's soon taking home like $100 a week, which if you annualize that to, you know, $5,200 a year, that's about double what the average American was earning at that point in time. So he's making bank.

00:52:52 Speaker_02
Which, by the way, is a trend among all these entrepreneurs that we study. You look at Ingvar, you look at Sam Walton, you look at Buffett.

00:53:00 Speaker_02
I mean, all these guys, it feels like it's a part of their childhood story that as a teenager or a college student or something, they were out earning the average head of household.

00:53:10 Speaker_03
Totally. And you know what? It is still true these days. Remember the Zuckerberg story of he and Adam D'Angelo are coding upset apps and people want to buy it for a million dollars. Yep. Just turns to software instead of candy bars.

00:53:22 Speaker_00
Yeah.

00:53:23 Speaker_03
Anyway. This is all during Forrest's freshman year at Berkeley, and then the summer comes, and of course the cafeteria closes down, so he needs to get a job for the summer. That's when he joins the traveling camel cigarette sales team.

00:53:35 Speaker_03
And that probably is when, somewhere or another, maybe it was in Chicago, maybe it was in Minneapolis, he reconnects with his dad, Frank, and discovers that Frank had become a wealthy man. And I think

00:53:47 Speaker_03
regardless of whether Forrest had anything to do with the Milky Way idea or launch or anything like that, meeting his dad, seeing that there is a business in the family, starts recalibrating Forrest's ambitions even higher than just being an engineer who can now go run a mine.

00:54:03 Speaker_03
He's like, oh, I should run a business. I should run my family's business. I should run my dad's business.

00:54:10 Speaker_02
And I imagine seeing one of his dad's businesses be successful is sort of a different type of data point for him. He always knew my dad starts a company and it fails.

00:54:21 Speaker_02
And just seeing an existence proof of a successful business has got to be a reorientation for him.

00:54:26 Speaker_03
Even when the candy company before Milky Way was just making $100,000 a year. I mean, $100,000 a year, I mean, I don't know who knows what the margins are on that, but even if they're 10%, he's making 4x, 5x what the average American is.

00:54:40 Speaker_03
This is eye-opening to Forrest. So his literal words about this when he gets back to Berkeley are, the hell with running some mines in the backwoods.

00:54:52 Speaker_02
I'm so glad you have these Forrest quotes.

00:54:53 Speaker_03
Oh my God, they're so good.

00:54:55 Speaker_03
Supposedly, in the Mars family archives, there's a video of Forrest, of Forrest chatting with one of his longtime lieutenants from the company after he retired, but before he died, and it's in the family archives, and Joel got access to go watch the video, which is where all these quotes are from.

00:55:12 Speaker_03
It's amazing. He does his sophomore year at Berkeley. But he's got his sights set higher now. He, with his father's help and presumably money, for Forrest's junior year, he transfers to Yale.

00:55:27 Speaker_03
And he's going to Yale with the goal of, I want to learn about business. He's like focused. You know, it's like the Zuckerberg story of going to Harvard.

00:55:36 Speaker_03
Yeah, Forrest wanted to go to Yale because it was Yale, but really he wanted to go to Yale to meet all the other people. Yeah. So, it just so happens that his roommate, his first year when he shows up at Yale, is the nephew of Pierre S. DuPont.

00:55:51 Speaker_01
Wait, really?

00:55:52 Speaker_03
Yes, really.

00:55:53 Speaker_01
No way.

00:55:54 Speaker_03
That's Pierre S. DuPont. His nephew is Forrest's roommate at Yale.

00:55:59 Speaker_04
Whoa.

00:56:00 Speaker_03
And Pierre S. DuPont, at this point in time, is not only running DuPont, which is in and of itself one of the most important and biggest companies in America, Pierre is also running General Motors at this point in time because DuPont is the largest shareholder in GM.

00:56:18 Speaker_02
And that is a crazy story that we will save for a future episode of Acquired on how that came to be.

00:56:22 Speaker_03
Oh, we gotta do DuPont. It's an incredible, incredible story. But, back to Mars, Forrest worms his way through his roommate into getting to know Pierre, and starts just pumping Pierre for lessons on how he runs his businesses.

00:56:39 Speaker_03
Like, how does he run DuPont? What is this DuPont planning system that you have?

00:56:44 Speaker_02
How do you run a chemical industrial manufacturing process?

00:56:48 Speaker_03
Exactly. How do you do accounting? How do you do planning? Like I want to know everything about this business.

00:56:53 Speaker_03
It's freaking unbelievable that here's this kid from the mines in Canada who in a few short years in the 1920s has worked his way up through hook and crook that he's rubbing shoulders with.

00:57:07 Speaker_03
one of the greatest businessmen of that era, right up there with Rockefeller and Carnegie. Yep. Amazing. So after a couple of years, when Forrest graduates from Yale, he's ready to go put all this knowledge to work in his dad's candy business.

00:57:23 Speaker_03
So the first thing he suggests to his dad, Frank, is that, hey, We got to get out of Minneapolis. We got to move to Chicago.

00:57:30 Speaker_03
Chicago is the center of the candy industry at this point, but also it's just a way bigger city and it has way better freight distribution to the rest of the country. Yep.

00:57:42 Speaker_02
If you want to go national, Chicago is a great place to do it.

00:57:45 Speaker_03
Yep.

00:57:46 Speaker_02
And why else, David, you said it's the center of the candy industry. Why else is that true?

00:57:50 Speaker_03
Well, I think, yeah, definitely at this point already, the Wrigley Company is there. Yep, you bet. Yeah, if you want to know how good a business gum is, you should just ask yourself, why do the Cubs play in a building called Wrigley Field?

00:58:08 Speaker_02
And why is there an entire neighborhood called Wrigleyville?

00:58:12 Speaker_03
Yes, yes, exactly. It's kind of like Hershey and the chocolate business. Anyway, we will get to that much later in the episode. Spoiler alert, Mars now owns Wrigley.

00:58:22 Speaker_03
Okay, so Frank goes along with this idea that they're going to move to Chicago, but in his heart of hearts, he's not the same man that Forrest is. Like, he doesn't have anywhere near the same level of ambition. He likes being wealthy now.

00:58:36 Speaker_03
He likes being comfortable. He's like, I'll go along with you to Chicago, but Really, I want to focus on enjoying the fruits of our labor here. So the factory that he builds in Chicago on the inside is really state-of-the-art per Forrest's designs.

00:58:55 Speaker_03
On the outside, he spends $500,000 in, you know, whatever this is, 1928, 29, buying a tract of land next to a golf course to put a factory in.

00:59:08 Speaker_03
The outside of the factory is like this beautiful Spanish style building with stucco and cupolas and like wrought iron ornamentation. It looks like a Hollywood studio building. Dude, you're building a factory.

00:59:20 Speaker_02
Yeah. Must've been great margins on those Milky Ways.

00:59:23 Speaker_03
Yeah, exactly. Shows you the difference of where Frank's head is out and where Forrest's head is at. And probably it's differences over this factory, I would assume.

00:59:32 Speaker_02
Start to chafe the relationship here a little bit.

00:59:34 Speaker_03
Chafe the relationship, yeah. He contracts the Austin company, which had built and designed all the Ford automobile plants and assembly lines to build the lines in the Mars factory. So Forrest is pushing the workforce super hard.

00:59:51 Speaker_03
He's like, we have this factory. We have these state of the art lines. We need to run these lines 24 seven with multiple shifts. Like everybody else is just, you know, Oh, we run our lines during the day. Like hell no.

01:00:01 Speaker_03
We spend all this money investing in this factory. We need to crank out as many Milky Ways as possible.

01:00:06 Speaker_02
Scale economies, baby.

01:00:08 Speaker_03
Totally. So by 1929, which I think is the first year that the factory is up and running, they're producing 20 million Milky Way bars annually. And the forest is just like, go, go, go, go, go.

01:00:21 Speaker_02
20 million of anything at this point in history is massive.

01:00:24 Speaker_03
Yes. Now, one thing that they are not making in the factory, of course, is chocolate.

01:00:31 Speaker_03
They're buying all the chocolate wholesale from Hershey, which probably is another reason for the move to Chicago of like, Hey, we need to be on a main train line, not only to get the product out.

01:00:40 Speaker_03
We need to be there to get the ingredients, including chocolate in. Yep. So very quickly, Mars becomes Hershey's biggest customer. They are buying millions of dollars of chocolate every year from Hershey.

01:00:56 Speaker_02
Which my understanding at this point in history is still that Hershey's like, great. We love being a industrial wholesaler supplier to other candy companies. This is only good for us.

01:01:06 Speaker_03
Yes. I mean, I think the right way to think about Hershey at this point in time is like Amazon. They are both amazon.com and they are AWS.

01:01:14 Speaker_00
Hmm. Yeah.

01:01:16 Speaker_03
They're very happy either way. As long as chocolate is being sold in America, they're taking their tax.

01:01:22 Speaker_00
Yep.

01:01:23 Speaker_03
So once this gets going and money really starts flowing into the company, Frank wants to spend it. So he builds a 20,000 square foot vacation home on a lake in Wisconsin. He buys a $2 million horse ranch in Tennessee that he names the Milky Way Ranch.

01:01:39 Speaker_03
He buys his own airplane so that he can be flown around to all of these places. Forrest hates all of this.

01:01:46 Speaker_02
He's trying to reinvest as much into the business as possible.

01:01:49 Speaker_03
Exactly. He wants to be DuPont. He doesn't care about a horse ranch or airplanes.

01:01:53 Speaker_03
But even he, I think, probably would have to admit that he's thankful that Frank does these things because in 1930, the next year, Frank creates a new chocolate bar that he wants to introduce to the market and he decides that he wants to name it

01:02:09 Speaker_03
after his favorite, beloved horse at his Tennessee ranch. Ben, you are opening it right now. It's the most popular chocolate bar in America, and I think in the world? Yep. Yes. The Snickers bar, named after the horse in Tennessee.

01:02:26 Speaker_02
Thank God they bought the horse ranch. I've been waiting for you to get to this part because I'm just trying to be satisfied, you know? I just needed to grab a Snickers.

01:02:37 Speaker_03
Amazing.

01:02:38 Speaker_02
It really is so good.

01:02:39 Speaker_03
It's so good.

01:02:41 Speaker_02
I massively prefer the bean to bar style chocolate, the dandelion. You know, I like dark chocolate more than milk chocolate. I might not even be able to finish a whole Snickers bar just because it's so sugary, but oh my God, is that first bite good.

01:02:55 Speaker_03
I mean, we're talking about two totally different products here of like high-end chocolate versus mass-market chocolate, but no, Snickers are so good.

01:03:01 Speaker_02
I feel like I'd go play in the NFL after a bite of this.

01:03:05 Speaker_03
Totally. Well, so there's another potential story of the origins of Snickers that we heard some wind of rumors in the sort of forest legend canon here.

01:03:16 Speaker_03
Supposedly, Forrest was thinking about what would be like, you know, an incredible product to build on the Milky Way's success and market to all of America and the world.

01:03:29 Speaker_02
Because by the way, a Snickers is a Milky Way with peanuts.

01:03:33 Speaker_03
Exactly. And so, supposedly, he went to the library. He wanted to know what did the Roman army feed their legionnaires when they were, you know, out marching. And apparently, he learned that it was peanuts and eggs and sugar. It's a lot of energy.

01:03:52 Speaker_03
Super dense. So, the other story is that that was the inspiration for Snickers was putting what the Roman army fed their legionnaires into a candy bar.

01:04:03 Speaker_02
In practice, it's actually a great energy bar.

01:04:05 Speaker_02
I was being tongue-in-cheek about the NFL because they're a partner of the NFL today, but there's a whole industry around Clif bars and things like that being marketed as energy bars and Snickers being marketed as candy.

01:04:16 Speaker_02
But really, what's the difference?

01:04:18 Speaker_03
Snickers launches in 1930. In 1932, they add Three Musketeers to the lineup. Now, Three Musketeers originally was something very different.

01:04:27 Speaker_02
Yes. So listeners, you are probably thinking to yourself, a Three Musketeers bar is just that nougat and chocolate. It doesn't have peanuts. It doesn't have caramel. Why would this come after a Snickers? Well, Three Musketeers is actually a misnomer.

01:04:41 Speaker_02
I see you're eating a Three Musketeers. Way to be in theme. It was actually sold as a package containing three separate bars, each with a different flavor, chocolate, vanilla, and strawberry.

01:04:51 Speaker_02
And due to restrictions during World War II, they had to cut production to just the chocolate version.

01:04:57 Speaker_02
I think part of it was also a spike in strawberry prices, and so they just did away with the vanilla, and so now it's just called Three Musketeers, even though it's only the chocolate variant. One Musketeer doesn't have the same ring to it.

01:05:09 Speaker_03
No. No, it doesn't. So, if you're paying attention here and thinking, you're like, wait a minute. They built this factory in 1928, 1929. Sales are skyrocketing. Frank is living large. 1930, they introduced Snickers. 1932, they introduced Three Musketeers.

01:05:26 Speaker_03
What else is going on in America and in the world in the early 1930s? The Great Depression. Yeah. This tells you everything you need to know about the resiliency of the candy business. Mara's revenue goes up to $25 million in 1932.

01:05:39 Speaker_03
They're just growing hugely. I mean, what did we say? Milky Way did $800,000 in its first year in 1924. Yep. So they go from $800,000 of revenue in 1924 to $25 million in 1932, all amidst the throes of like the worst years of the Great Depression.

01:06:00 Speaker_02
Yeah. Candy may not be good for you, but when you really need a dopamine hit, it is there for you. And boy, does it condition an addictive or addictive-like activity where you sort of incorporate it into your habitual everyday life.

01:06:14 Speaker_02
It's a reoccurring purchase. And at this point in time, between Mars and Hershey, both were laser focused on keeping the price low to get as wide a distribution as possible.

01:06:25 Speaker_03
That's exactly what I was going to say. You know, Forrest, and I think it probably really was Forrest here, was closely studying Hershey and what they did and realized, oh yeah, this is a scale business.

01:06:35 Speaker_03
If we get to scale, we can make profits while pricing our bars such that they are still accessible, even for Americans that have lost their jobs and are in the middle of the Great Depression.

01:06:46 Speaker_03
And by the way, they want a sweet treat more than ever because their lives are depressing. Brilliant.

01:06:51 Speaker_02
Yep, absolutely. The other interesting thing is, nowadays you've got all these variations of candy. I mean, M&M's peanut, M&M's almond, dark M&M's.

01:07:02 Speaker_02
The Milky Way, the Three Musketeers, and the Snickers are all just adding one ingredient to the same thing. Yes. But they're not labeling them that way. They're building entirely different brands and franchises around each of these three products.

01:07:16 Speaker_02
I think that's fascinating. They really didn't get into this whole variation thing until way later in their life. That was not the standard practice then. This is a different product. It needs a different name and a whole different personality.

01:07:26 Speaker_03
Yep. And actually, you know, I think to be fair to Frank, I think that is really like Frank's influence on the business and company there. Forrest, as great as he was at so many things, he was never a product innovator in the way that Frank was. Hmm.

01:07:47 Speaker_03
Makes sense. as evidenced by the fact that, you know, here we are today eating the most popular candies in the world that Mars makes, and it's still Snickers, Milky Way, Three Musketeers, M&M's, which we will get into.

01:07:59 Speaker_03
That was Farrah's big contribution.

01:08:01 Speaker_02
Yep. So, depression. Sales are going great.

01:08:05 Speaker_03
Here we are, 1932, the worst years of the depression, and Forrest totally recognizes all this, like, we need to invest, invest, invest, pedal to the metal. We are going to use everything happening here to blow away our competition.

01:08:20 Speaker_03
We're going to go compete with Hershey. We're going to become huge. Frank, though, has no interest. According to Forrest, quote, my father says we're making enough money. We have an airplane. We've got the fishing place. We've got horses.

01:08:33 Speaker_03
Why do we need any more? And Forrest's reply to that is, quote, I want to conquer the whole goddamn world. So he issues his dad an ultimatum. Look, obviously you want to just go enjoy life. Let me run things.

01:08:50 Speaker_03
Give me one third of the stock of the business. You keep two thirds and you relax and I will make you even richer. Frank turns him down.

01:09:00 Speaker_02
And I think he turns him down and kind of insulted. Like, I built this business and you came in recently and you're just randomly asking me to give you a third of it. Go to hell.

01:09:11 Speaker_03
Yeah. And, you know, of course, there's more behind this. Forrest was not liked within the company. He's driving everybody hard.

01:09:20 Speaker_02
Frank is this kind of a distracted leader.

01:09:23 Speaker_03
You can imagine, you know, if you're a line worker or even if you're a manager within the company,

01:09:27 Speaker_02
That's great.

01:09:27 Speaker_03
Which boss do you prefer? Yeah. So the company certainly sided with Frank here. There's also the family element too. Frank's got a new family now, so he's got his wife, the other Ethel, he's got his daughter, Patricia.

01:09:43 Speaker_03
Frank's like, yeah, Hey, I mean, you're my son too. You've helped me build this business, but I'm not just going to give you a third of the business. Either way, there's quite a bit of animosity around this and Forrest walks out.

01:09:57 Speaker_03
and in the process tells his dad to, quote, stick his business up his ass.

01:10:01 Speaker_01
There's no missing words in any of these direct quotes. It's crazy.

01:10:05 Speaker_03
Yeah, literally. I mean, this is what he said he said. So Forrest leaves town, not just Chicago, but leaves America entirely.

01:10:13 Speaker_03
goes off to a new continent to build his own business, his own way, leave Mars Incorporated totally behind him, leave him in the dust.

01:10:22 Speaker_02
Almost. He takes with him a right. Yes. He has the right to what, David?

01:10:27 Speaker_03
He takes actually two things with him that his dad sort of gives him as he's heading out the door. One, $50,000. And two, the foreign rights to the Milky Way recipe.

01:10:40 Speaker_02
Yes, but I don't think the Milky Way name.

01:10:45 Speaker_03
No, not the Milky Way name, just the recipe.

01:10:47 Speaker_02
You can't market this as Milky Way, but you can sell this recipe internationally.

01:10:52 Speaker_03
Yep. So Forrest takes these two sort of parting gifts, tells his dad that he'll never hear from him again. leaves America entirely, and super sadly, Frank doesn't ever hear from him again.

01:11:05 Speaker_02
Yeah, this is the last time that Frank and Forrest would ever speak.

01:11:09 Speaker_03
Yeah. The next year, when Frank is just 50 years old, he collapses in the Chicago factory and dies of kidney failure, and Forrest doesn't come back for the funeral. Yeah. Yep. That was it.

01:11:22 Speaker_02
Now granted, in the 30s, much harder to come back from Europe on short notice, but still.

01:11:29 Speaker_02
So Forrest is over in Europe, and the set of events of what he does in Europe to build this ridiculous, almost Trojan horse, like the set of skills he acquires, the assets he builds up, is crazy before he comes back to the US.

01:11:48 Speaker_02
And before we talk about his European adventure, now is a great time to talk about one of our favorite companies, the climate-aligned AI infrastructure company, Crusoe.

01:11:58 Speaker_03
Yes, they build and operate GPU data centers for AI workloads and each one is powered by low-cost stranded energy that otherwise would go to waste or worse get emitted as greenhouse gases.

01:12:10 Speaker_03
For this episode though, we thought it'd be fun to talk about what actually goes into building and running a GPU cloud and how it's different from traditional clouds run by the hyperscalers.

01:12:21 Speaker_02
Right. You might have been thinking, have Ben and David lost their minds talking about a new cloud provider in 2024? Isn't it impossible to compete with the incumbent hyperscalers at this point?

01:12:31 Speaker_02
And yeah, if you're trying to start a traditional cloud, but GPU clouds are different.

01:12:37 Speaker_03
Yes. Counter positioning.

01:12:39 Speaker_02
Yeah. I mean, all the infrastructure that the hyperscalers have built up over the past two decades actually is not optimal for GPU clusters.

01:12:47 Speaker_03
Yep. Which brings us to crucial difference number one, location. Hyperscaler data centers need to be physically located where the internet happens. Like latency is really, really important when say you're powering an e-commerce website.

01:13:02 Speaker_03
But for 99% of AI training workloads, latency actually doesn't matter at all. So instead, Crusoe puts their data centers in remote locations where quote unquote energy happens.

01:13:13 Speaker_02
like where oil is being flared and you can take that energy and use it to power your data center.

01:13:19 Speaker_03
Totally. So this not only creates cost efficiencies, it also just enables way more absolute power density in a single location, which is super important when you're trying to build a huge GPU cluster.

01:13:32 Speaker_02
Yep, and that leads to big difference number two, cooling. AI training generates a tremendous amount of heat, and traditional cloud data centers usually manage that with air conditioning.

01:13:42 Speaker_02
But air cooling is not going to cut it when you're running a massive GPU cluster full out for weeks or months on end. So Crusoe builds their data halls, which is the rows of racks within data centers, with direct-to-chip liquid cooling.

01:13:56 Speaker_02
This is where the liquid coolant gets pumped through the racks to cold plate heat exchangers mounted directly on each individual chip.

01:14:04 Speaker_03
Yep, it's super cool. This is all state-of-the-art stuff and impossible for the hyperscalers to replicate in their existing data center footprints, which means that Crusoe's customers get AI infrastructure that just scales way, way better.

01:14:18 Speaker_03
Bigger GPU clusters with less failures. And when you're trying to train cutting edge, large parameter models, that doesn't just mean lower usage costs and better efficiency.

01:14:28 Speaker_03
It can mean the binary yes or no difference in being able to accomplish your workload at all.

01:14:33 Speaker_02
It's just an awesome, awesome company. David and I are super proud to work with them and also to be investors.

01:14:38 Speaker_02
So to learn more, go to crusoe.ai slash acquired, that's C-R-U-S-O-E.AI slash acquired, or click the link in the show notes and just be sure to tell them that Ben and David sent you.

01:14:49 Speaker_03
Thank you, Crusoe.

01:14:51 Speaker_02
All right, Forrest's summer in Europe. A little longer than a summer.

01:14:56 Speaker_03
Summer or, you know, close to a decade in Europe. So we're here at the end of 1932. Forrest and his young family now, by the way, with his young son Forrest Jr. Land first in Paris.

01:15:11 Speaker_03
And Forrest tries a couple little things, but eventually he decides that if he's really going to build his own big company and stick it to his dad, he needs to learn the one critical thing that his dad didn't know.

01:15:26 Speaker_03
He needs to learn how to make chocolate.

01:15:29 Speaker_02
Yes. No better place than Europe to learn.

01:15:32 Speaker_03
Here's his quote on it.

01:15:34 Speaker_03
You can hire lawyers, you can hire accountants, you can hire advertising men or financial types, but if you want to get rich, you got to know how to make a product and you aren't going to hire anybody to make a product for you to make you rich.

01:15:46 Speaker_03
They'll only make it for themselves. True that. Forrest is just like, he's such a freaking G. Like if it hasn't come across already on this episode, he is hall of fame, complete G. You got to know how to do the scarce thing. Totally. So important.

01:16:02 Speaker_03
So, in early 1933, Forrest moves his family from Paris to Switzerland to go learn from the chocolate masters, and Forrest goes to work, first at Jean Tobler, making Toblerone, and then at the original itself, Nestle.

01:16:22 Speaker_02
In the factories, without disclosing to anyone who he is,

01:16:26 Speaker_03
So yeah, when I say he goes to work there, it's not like he calls them up and is like, I'm Forrest Mars. He doesn't tell anybody who he is. His quote on this later is like, well, they never asked. And he doesn't go get management roles.

01:16:41 Speaker_03
He goes and gets jobs on the line as a factory worker, learning directly how these machines work, how these chemical processes work, how to make chocolate.

01:16:53 Speaker_00
Amazing.

01:16:54 Speaker_02
Who would do this today? It takes a very specific type of person. If you're sitting there thinking, hmm, only some European company knows how to do this well, and I'm someone who attended an Ivy League college, my family is wealthy.

01:17:07 Speaker_03
I'm friends with the DuPonts. Not only that, I basically feel like I've already built a $25 million business.

01:17:14 Speaker_02
But I'm going to upend myself, my family, and my life, and go and be a line worker in a plant. in another country. I mean, in this era, in the 30s, where it's difficult to get over there, I imagine he went by boat.

01:17:28 Speaker_02
I imagine they didn't speak English in the Swiss factory. Yeah.

01:17:33 Speaker_02
Would you ever do this, listener, if you're looking around at a pretty good life that you have and you're saying, I'm going to go to a different continent, move my family up in my whole life so I can go and learn this scarce skill that I know is the key to building a world-dominating business?

01:17:47 Speaker_02
It's a big trade-off.

01:17:49 Speaker_03
Big, big trade-off. and totally on brand for Forrest.

01:17:54 Speaker_02
Because you couldn't learn it in America. That's the other thing. Hershey is super secretive at this point in time. No one knows their formula.

01:18:00 Speaker_03
Well, I think not only is Hershey super secretive, the sense I get, at least from Emperors of Chocolate, is they knew how to productionize their recipe, but they didn't actually know the science of how it worked.

01:18:18 Speaker_03
They kind of got there through trial and error. Huh. The sense I got is that the European chocolate manufacturers, and probably Nestle in particular, they really knew what they were doing.

01:18:27 Speaker_03
And Hershey, sort of in an industrial sense, knew what they were doing, but nobody there really knew the science behind it.

01:18:34 Speaker_03
And in fact, there's a story about how the first plant that Hershey expands to, their first second plant outside of Hershey, Pennsylvania, they can't get it to work. They can't get the chocolate to taste the same.

01:18:46 Speaker_03
Cause they like don't exactly know how they get that specific sour note in the taste.

01:18:52 Speaker_00
That's so interesting.

01:18:54 Speaker_03
But anyway, back to Forrest. So for most of the year of 1933, they're just in Switzerland and he's working on the factory lines, learning how to make chocolate.

01:19:05 Speaker_03
And then toward the end of the year, when he feels like he's learned everything he needs to know.

01:19:09 Speaker_03
He moves the family to England, where he uses the $50,000 to open up a small factory in Slough, England, which is a small industrial town about 20 miles west of London. It's right near where Heathrow Airport is today.

01:19:25 Speaker_03
And he installs the family in a one-room apartment above the factory, and they start making a version of the Milky Way adapted to British tastes.

01:19:36 Speaker_02
which basically means more sugar, right?

01:19:38 Speaker_03
Yep, more sugar and less malt. Malt is not as big in British tastes. So he has the recipe to the Milky Way that he's adapted now for British tastes. but he doesn't have the naming rights, and so he names it the Mars Bar.

01:19:53 Speaker_03
And this, of course, goes on to become the most popular candy bar in the UK, I think still to this day.

01:20:00 Speaker_02
The funny thing is, the lineage of this weird family split, and this, you have the rights to the recipe, but not the marketing, is the way that the world works today, even though they are, spoiler alert, one company now.

01:20:14 Speaker_02
If you get a Milky Way in the US and you go and you get a Mars bar in the UK, they're a little different the way you just described, but those are effectively the same products. They never unified the brand.

01:20:23 Speaker_03
Yes. Now there is also an important difference besides the level of sweetness and level of malt. And that is the type of chocolate that is used in the Mars bar versus the Milky Way.

01:20:36 Speaker_02
Ooh, the Mars bar is Cadbury, right?

01:20:39 Speaker_03
Well, in these early days, yes. So Forrest has now learned how to make chocolate. But of course, with $50,000 in a new startup factory, like there's no way that he's going to make his own chocolate.

01:20:48 Speaker_02
Everything we talked about in chocolate making, it's like an insane amount of capex, really hard, easy to screw up, potentially low yield.

01:20:55 Speaker_03
Yep. Totally. And like, you know, how are you going to get the supplier relationships for the beans and like that requires a lot of capital, et cetera, et cetera.

01:21:03 Speaker_02
And this part of the value chain really wasn't well established yet where there's these companies specifically to go buy commodity beans from. It was starting, but it was early.

01:21:11 Speaker_03
Yeah. Cargill wasn't the like massive giant with global liquidity for commodities buying and selling that it is today.

01:21:20 Speaker_02
Speaking of gigantic U.S. privately held companies.

01:21:23 Speaker_03
Yes, exactly. We'll have to do that someday. Yep. So as you said, Forrest goes and does a deal with Cadbury's to supply the chocolate for the Mars bar, just like Hershey had supplied the chocolate back in the U.S.

01:21:34 Speaker_03
This is also important because remember we were saying there are local tastes in each country market for chocolate and Cadbury's chocolate is to the British taste. So it actually is a pretty different bar, even though the core concept is very similar.

01:21:48 Speaker_05
Hmm.

01:21:49 Speaker_03
But it's just a matter of time in Forrest's mind until the operation eventually grows big enough that he can and will make his own chocolate.

01:21:56 Speaker_02
David, there is a Milky Way that you can buy today in the UK. Do you know what that is?

01:22:03 Speaker_03
Oh, I do, but I'm not remembering. Three Musketeers. That's right. I knew it was one of them. I was like, it's not Snickers.

01:22:11 Speaker_02
That is the brand that they decided to use for Three Musketeers overseas.

01:22:15 Speaker_03
And, um, Snickers originally was Marathon, I believe, in the UK?

01:22:20 Speaker_02
Yes. But now, globally, Snickers is Snickers.

01:22:24 Speaker_03
So, yes, Forrest not making his own chocolate just yet. But of course, his goal is that he will. He has a great saying that he repeats often that I think this is maybe around the first time it starts coming up. I'm not a candy maker. I'm empire-minded.

01:22:36 Speaker_03
And that's like his mantra. So once they start producing the Mars bar, pretty quickly it becomes a hit and starts going really well.

01:22:46 Speaker_03
So by 1939, five years-ish after they get production up and running, Mars UK has become the third largest candy company in Britain behind Cadbury and Roundtrees. So like they go from nobody to third largest player, big industrial scale, pretty quick.

01:23:06 Speaker_02
And in part, I mean, this is American capitalist coming in to an industry. I don't know if you know this or not. Both of those families were Quakers. Oh, I didn't know that. Interesting.

01:23:18 Speaker_02
And so there was a pretty intense spirit behind the company of looking after your community.

01:23:26 Speaker_03
Yeah, this is Cadbury's in Roundtree, right?

01:23:29 Speaker_02
Yeah, in particular, Cadbury built their factory outside the city in sort of this little attempt at a utopia. Ah, very Hershey-like. In the same way that actually Milton Hershey was inspired by when he built Hershey PA. So there's this very like devout

01:23:46 Speaker_02
duty-bound religiosity to the existing UK chocolate companies.

01:23:51 Speaker_02
And in comes Brash Forrest, who's like, we're going to do things the most efficient we possibly can, we're going to make the most profit we possibly can, and we're going to distribute as broadly as we can, as fast as we can.

01:24:02 Speaker_02
In many ways, it feels Bernard Arnault-esque. Like, you guys, look what I learned in America.

01:24:07 Speaker_03
Yeah, yes, very, very much so. It's funny. I wasn't even going to tell this story because A, I don't know how true it is. It's just ridiculous, but we'll tell it because I didn't realize the religious element of the competitors.

01:24:20 Speaker_03
So Forrest, uh, oh man, eventually. Flash forward. He will come back and he will retake over Mars Inc in America. And when he does his first thing he does is he goes in the boardroom.

01:24:35 Speaker_02
It's a management meeting. It's to his executives.

01:24:38 Speaker_03
And he falls down on his knees and says, I'm a religious man. And he clasps his hands together and starts to pray.

01:24:45 Speaker_01
I pray for Milky Way.

01:24:47 Speaker_03
I pray for Snickers. I pray for M&Ms. What a freaking character. Yeah. If he was religious at all, he was religious about Milky Way and Snickers and M&Ms.

01:25:00 Speaker_03
yep and dog food so yes to this empire thing so in 1934 just one year after he started the whole thing and started making mars bars he comes across this small british company called chapel brothers which had started making quote-unquote chappies brand canned dog food and this is crazy at the time

01:25:26 Speaker_03
Nobody fed their pets pet food. Oh, really? Pets, dogs, cats, they just ate table scraps.

01:25:32 Speaker_05
Oh.

01:25:33 Speaker_03
This whole idea that you feed specific pet food to pets, this all started in the 30s. Like before that, you know, it was like, I don't know, imagine go back to medieval times, like the dogs and cats, they just eat. Right. Throw them a ham.

01:25:47 Speaker_03
That's the way you clean the table. Right.

01:25:50 Speaker_02
So I have no idea how or why I couldn't fight it either. I looked all over the place. I was like, why have all the things to buy? Did he buy a pet food company?

01:25:59 Speaker_03
Totally. And why did the chapel brothers start making pet food? I don't know. There is like as little information as there is about the company and the family. What we do have, we have about the chocolate business.

01:26:11 Speaker_03
We have almost no information about the pet business.

01:26:14 Speaker_02
And who are you going to ask? The Chappell brothers are long dead. Mars isn't going to tell you. But I'm so curious, how did Forrest get the idea, hey, I should go buy a dog food company when the market for dog food is new and unclear?

01:26:30 Speaker_03
Yeah. Well, I think, you know, look, he was visionary and he got so many things.

01:26:35 Speaker_03
And I think he probably thought, or maybe the Chappell brothers thought and convinced Forrest that, you know, in the post-depression era, you know, the coming modern world, people's relationship with their pets would change and that they would start feeding them dedicated pet food.

01:26:54 Speaker_03
I mean, and obviously that was a huge, huge trend.

01:26:58 Speaker_02
And there's kind of economies of scale to the manufacturing of this. Making canned dog food isn't that different than making snacks.

01:27:04 Speaker_03
Yeah, it's a manufacturing process.

01:27:07 Speaker_02
Yeah. Interestingly enough, I learned this, and the fact that this happened in 1935 completely blew my mind. Because I knew that Mars was in the pet food business, much like Nestle Purina is in the pet food business.

01:27:20 Speaker_02
I thought this was like a recent diversification hedge. But here it is, effectively at the founding of Mars, or at least Forrest's modern Mars. And he's, in the first second year of business, buying and diversifying to pet food.

01:27:36 Speaker_02
And it was immediately a good idea because it became profitable after just a couple of years and started generating enough cash flow to fund the expansion of Mars bars.

01:27:47 Speaker_03
Yeah. It's good margins in the pet food business.

01:27:50 Speaker_02
Apparently, even in 1935.

01:27:52 Speaker_03
Yeah, so that's a huge success. So as this company is getting set up, I mean, would you expect any less of Forrest, I guess? You know, he's hitting it out of the park with Mars Bar on the candy side.

01:28:03 Speaker_03
He's building a whole new industry on the pet food side. This here in Slough in England is really where the principles, literally the principles, Mars calls them the five principles of the company today, but just the culture of Mars gets set.

01:28:21 Speaker_03
Oh yeah, you found the original ones, right? Yes. So if you talk to anybody who works or worked at Mars, they will quote the principles at you religiously.

01:28:28 Speaker_02
It's like the Amazon leadership principles.

01:28:30 Speaker_03
Totally. It's like, oh, that's principle number five, freedom. Or, oh, that's principle number three, mutuality, et cetera, et cetera.

01:28:35 Speaker_03
I think how these started, maybe even back in England, Forrest started a document called the Mars Way, where he was like codifying all this. And I think after he retired, and the business passed to his sons and the next generation.

01:28:52 Speaker_03
I think that's when they sort of adapted that document into the Mars principles. But it's really interesting. It's worth going through them all. So, number one, the first principle is quality.

01:29:02 Speaker_03
Forrest was completely obsessed with quality on every dimension. the ingredients that are going into the candy bars, the candy bars themselves, the wrappers, the shelf placement displays. He was way ahead of the curve on all this stuff.

01:29:17 Speaker_03
He knew the candy was an impulse purchase and like the way the product actually looks, how it's displayed, what the packaging is, what the placement is in the shelf in the retailer, how consistent it is, how consistent it is.

01:29:30 Speaker_03
These were like big, big drivers of purchases.

01:29:34 Speaker_02
And there's of course the famous story about he, you know, finds a defect in a wrapper and then he calls his executives into a room and he hurls it at the glass and says, you know, yeah, it's his temper and his obsession with quality all combined into one.

01:29:48 Speaker_03
Yeah, I'm laughing. You say famous story. I'm like, which one? I think there are a million of these stories. But even here in the 30s, in the UK, he basically implements the Toyota production system in the Mars factory.

01:30:02 Speaker_03
This is long before the Toyota production system exists. Any employee in the factory could stop the line for any reason at any time.

01:30:13 Speaker_03
If there's anything that's out of place, anything that could impact quality, you know, anything is dirty, anything is not perfect, every single worker in the entire facility can stop the whole line.

01:30:25 Speaker_02
And he also, if something had a defect, he would throw out the whole batch, right?

01:30:29 Speaker_03
Yes.

01:30:29 Speaker_02
As like a, let's scorch the earth around the defect.

01:30:33 Speaker_03
Yep, I'm sure he wasn't thinking about it in these terms, but he really wants to instill this as a cultural norm in the company.

01:30:40 Speaker_03
So anytime, if there was a mistake that Forrest then found that hadn't been caught on the line, he would just berate whoever should have stopped the line and be like, you needed to have stopped and fixed this.

01:30:53 Speaker_03
You cannot let this get into the finished product. The other aspect of the quality principle though, much like Ikea, it's not just quality for quality's sake. It's quality for money. It's quality at a given price value for money.

01:31:07 Speaker_03
You know, we've already been talking about how this is like the ultimate scale business and scale economies business in candies.

01:31:14 Speaker_03
Forrest knows that if you can offer a higher quality for a given price than your competitors, you're just going to build a lead and compound forever and ever and ever in this business. Interesting. So quality principle number one, most important.

01:31:27 Speaker_03
Two, this is awesome. Responsibility is the second principle. And you might be like, oh, responsibility, like, okay, whatever. For all of his crazy intensity, Forrest was not a micromanager.

01:31:41 Speaker_03
He wanted to like know how to do everything in the business, including making chocolate. But he knew that if he was going to scale like he wants to be DuPont here, you know, he wants to be General Motors.

01:31:51 Speaker_03
He needs the best people working the hardest in charge of everything. Like he can't be around telling them how to do their jobs. So the question then is when you're starting up in a new country, tiny factory, how do you get the best people?

01:32:04 Speaker_03
How do you incentivize them? He's like, well, I'll just pay them. I'll just pay them a lot. So for years and years, the standard within Mars was that you should make three to four times the normal salary for your job.

01:32:17 Speaker_00
That's so insane.

01:32:18 Speaker_03
And I think that's come down over the years. It's now like two X, but it's still true.

01:32:23 Speaker_02
I even saw numbers that say they try to pay their employees a minimum of 10% higher than other companies in the industry.

01:32:31 Speaker_03
Interesting. But definitely in those early days, it's like, no, we're going to pay you three or four times the amount that you would make elsewhere.

01:32:37 Speaker_02
I also know they try to tie pay aggressively to the performance of the company, so high bonuses rather than high salaries, which also means in tough years they would just cut.

01:32:47 Speaker_02
It's not quite having equity in the company, but it's much more akin to being a partner in a business than it is to being an employee.

01:32:52 Speaker_03
Exactly. Okay, so, you know, I said salaries. It's not salaries, it's bonuses. This is what your take-home pay should be.

01:32:59 Speaker_03
Everyone's salary in the company, again, starting in the earliest days there in Slough, tied to overall company performance and hitting overall company metrics.

01:33:10 Speaker_03
There is no, at least in the early days, individual performance element to your bonus, except for one thing. Do you know what the one thing is? The one individual performance metric? Did you show up on time?

01:33:22 Speaker_03
You get a 10% bonus if you are never late in the entire year. And it's everybody from Forrest himself on down. Everybody has a time card. You punch the time card when you go in.

01:33:34 Speaker_02
I'm pretty sure this is still true, that the CEO of Mars today has a time card and they punch in and out every day, and a 10% bonus is contingent on not being late.

01:33:43 Speaker_03
So, even more, I don't think this terminology starts until they get back to America, but everybody in the company is an associate.

01:33:52 Speaker_03
Obviously people are in charge of different things and have different external titles, but internally, everybody is an associate. There are no perks for anyone. So there are no executive parking spaces. There's no executive offices.

01:34:05 Speaker_02
Wait, Forrest really wants to rebel against his father.

01:34:09 Speaker_03
There are no offices, period, to this day at Mars. Is this the first open office company? So we said on the meta episode that we thought Facebook was the first open office. No, Mars was the first open office starting in the 1930s.

01:34:24 Speaker_03
So every building entirely open floor plan, you get a black metal desk. Get this. This is how crazy it is. Again, even still to this day, there are just a small number of conference rooms in any given Mars office.

01:34:38 Speaker_02
Oh yeah. Cause they hate presentations, right?

01:34:40 Speaker_03
They hate presentations. They hate meetings, but like sometimes you have to have a meeting. The conference rooms do not have doors.

01:34:48 Speaker_03
There is no privacy allowed anywhere, which is the craziest thing given that the company itself externally is incredibly private. But no, internally, the culture is everything is open. Everyone is equal. There are no perks here whatsoever.

01:35:03 Speaker_02
And Forrest is doing this in the 30s. This is crazy. I was going to save this for later, but this is a fun time. I Google mapped the recent factory that they built to make M&Ms, and it's like a corporate headquarters and manufacturing facility.

01:35:18 Speaker_02
And there's a bunch of pictures on Google Maps of the exterior and interior, just like you would expect from anything that's on Google Maps. And it's pretty dated. It's just a very boring, drop ceiling, fluorescent lit, cheap office.

01:35:34 Speaker_02
And the real estate that it's on is like near an Amazon fulfillment center. I mean, it's like kind of off the highway in the middle of nowhere, inexpensive. But there are two big M&Ms waving at you out of the parking lot.

01:35:46 Speaker_03
I think that's the standard decoration. Yeah. You can tell how pissed Forrest was at his dad about the Chicago factory specifically, but also just like how deep seated this is. Yeah. Okay. So then principle number three is mutuality.

01:36:02 Speaker_03
So Forrest obviously is like hyper competitive, but he also knows that this is an ecosystem that he's in and the retailers are super important. The suppliers are super important. Distributors are critical.

01:36:15 Speaker_02
Everyone needs to make money and everyone needs to be incentivized for the long term.

01:36:19 Speaker_03
And as long as his partners are making money and making more money selling Mars products or supplying Mars than they are any of Mars's competitors, that's going to be a compounding advantage.

01:36:30 Speaker_00
Yep.

01:36:31 Speaker_03
So that's three. Four is efficiency. Okay. This is a really, really interesting one. Probably back to his whole mindset and time at Yale and studying DuPont. Forrest is crazy about studying business and management literature.

01:36:49 Speaker_03
Like I don't think anybody was reading business management literature in the 1930s and 1940s.

01:36:55 Speaker_02
It's a good point. It's true both for management and for investing. If you think about the way that people were even investing back then, it was like stocks were gambles.

01:37:04 Speaker_02
Buffett was one of the first people to believe the intelligent investor, oh, you can tell something about the quality of revenue and this intrinsic way to build to a value of a business.

01:37:14 Speaker_02
The investment mindset of quality and a discounted cash flow and the management mindset of there's a science to building an organization, these were pretty new ideas.

01:37:24 Speaker_03
Totally. I mean, Buffett had to go study with Ben Graham to learn this stuff. Yep. So while he's in England, Forrest reads a textbook called Higher Control in Management by T.G. Rose.

01:37:40 Speaker_03
And the subtitle of this book is A Method of Producing the Facts and Figures of Industrial and Commercial Undertakings so that They Can Be Used for the Purpose of Management.

01:37:51 Speaker_02
It's quite academic.

01:37:52 Speaker_03
Yeah. Business academia had not yet learned marketing about itself. So in the book though, Rose argues that the primary focus of management should not be on revenue or profit or growth, but instead on a metric called return on total assets or ROTA.

01:38:12 Speaker_03
And again, if you talk to anybody in Mars today, ROTA, ROTA, ROTA, ROTA, everything is about ROTA.

01:38:16 Speaker_02
It's funny. I came across this researching. I had to look up the term we've never studied in on an episode before.

01:38:22 Speaker_03
Alright, so what is return on total assets? It is net profit dollars divided by the total dollar value of the company's fixed assets.

01:38:32 Speaker_02
So it's effectively an efficiency metric of your profits divided by your fixed cost of your assets.

01:38:39 Speaker_03
Yep. Now the textbook way to do it is by the cost of your assets as measured on your balance sheet. The way Forrest does it though, and the way the company still does it today is no, that's insane.

01:38:50 Speaker_03
Like whatever this is valued at on our balance sheet, whatever it costs us to build this factory 10 years ago, doesn't matter. What matters is what is the value of it today? Oh, interesting.

01:39:01 Speaker_03
So they are constantly revaluing what the replacement cost is of all their fixed assets, all their factories, et cetera. Like, okay, if this factory disappeared.

01:39:12 Speaker_02
What's the market value if we were to sell this thing and get rid of it?

01:39:15 Speaker_03
Exactly. And so that way they're always making sure that they're like, Hey, we're really efficiently using our assets. We're not just artificially being efficient based on what we paid for them 10, 20 years ago.

01:39:28 Speaker_02
It's fascinating. So for you and I, it'd be like the profit dollars of the business from sponsorship divided by the cost of our microphones and you know, the very modest, tangible assets that we have in this business.

01:39:39 Speaker_03
Actually, I think if we were to use this, we would divide our profit dollars by the value of the acquired brand, and we would value the acquired brand sort of as highly as possible.

01:39:51 Speaker_02
So you're basically wanting to say, per unit of fixed investment I've made, how much yield in terms of profit am I getting out of the fixed investment I've made? Exactly.

01:40:00 Speaker_02
I'd argue, David, that for acquired, we'd actually want to use our time valued at some certain amount as the denominator. What's our profitability per unit of time, which is our fixed resource?

01:40:12 Speaker_03
Well, it depends, I think, what you think is more valuable, our time or the acquired brand. We should probably do both, actually.

01:40:20 Speaker_02
Who knew this would turn into an actual holiday special? Yeah.

01:40:23 Speaker_03
So, anyway, supposedly, Forrest had and Mars has, or at least used to have, a specific target of 18% return on total assets for every division and every factory.

01:40:40 Speaker_03
Which means essentially that every investment needs to pay for itself in less than five years.

01:40:45 Speaker_03
So if you're making 18% of your value back every year, you know, that would be like five, six years if you're using the textbook definition, but they're always increasing the value of their assets.

01:40:56 Speaker_03
So it's like, in effect, anytime Forrest is making a decision to invest in something, he's like, I want like four year payback on this four to five year payback.

01:41:05 Speaker_02
And they don't want to be higher or lower than the 18%, right? Because if you're lower than 18%, you're not using your resources enough to generate enough profit.

01:41:14 Speaker_03
If you're higher, then you're taking too much profit.

01:41:17 Speaker_02
You're taking too much profit, which is bad for your customers, or you're not reinvesting aggressively enough.

01:41:23 Speaker_03
Yeah. You should be spending more on advertising and marketing, et cetera, et cetera.

01:41:27 Speaker_02
Right. It's totally fascinating. I have a couple other things on efficiency that I was going to say for Playbook, but since we're here, we should bring them up.

01:41:35 Speaker_03
Yeah, let's do it.

01:41:36 Speaker_02
So this one comes from a friend of the show, Arvind Navaratnam at Worldly Partners, who writes this great research that we link to for every episode now.

01:41:44 Speaker_02
He pointed out that despite operating with 30% fewer employees than its closest competitor, so today this is Mars versus Hershey, Mars generated more output per worker than any other in the industry.

01:41:57 Speaker_02
So in 1990, for example, Mars's revenue averaged $429,000 for employee compared to $228,000 at Hershey. So they're just doing more with less. Yeah, miles ahead.

01:42:10 Speaker_02
And I think part of this comes from the fact that they're just amazing at the industrialization of production.

01:42:16 Speaker_02
David, you raised that point that the factories run 24 hours a day and at that Chicago plant, you know, I think today the fun size Milky Way bars are produced at over 5,500 bars per minute. It was a stat that I saw.

01:42:31 Speaker_02
They just run at incredible efficiency in production. But they also then do effectively share this increase in efficiency with employees by doing the higher pay and the bonus-based pay.

01:42:44 Speaker_02
So if the revenue per employee is way higher than their competitors, like Hershey, they should pass some of that efficiency benefit along to their employees in terms of higher compensation, which in turn retains people for longer, which keeps tribal knowledge around, which decreases recruiting costs.

01:42:58 Speaker_02
I mean, it's very Costco-like in that way.

01:43:01 Speaker_03
It is. It's totally a flywheel type reinforcing structure where it all fits together.

01:43:06 Speaker_02
The other thing that they do is they aggressively try to reinvest profit dollars back into the business, doing things like R&D on new types of manufacturing equipment that they can build for their plants. That's the primary benefit.

01:43:19 Speaker_02
The second benefit is they don't pay as many taxes since they're reinvesting before those dollars fall all the way to the bottom line as income.

01:43:26 Speaker_03
Yep, totally.

01:43:27 Speaker_02
It's very John Malone-esque. They want to keep as much capital in the business as possible and not recognize a lot of it as income.

01:43:34 Speaker_03
Yep. Malone and Buffett, too. Yep.

01:43:37 Speaker_03
So then that brings us to the last principle, which is freedom, which, you know, I think in the early days here, to the extent Forrest thought about this as a principle, like, I think it was just like, he wants to build his own business, be free from his dad, be his own person, prove himself.

01:43:53 Speaker_03
Over time, this comes to mean family ownership and not going public, being a private company, not taking on debt. And then in the next generation, after Forrest and beyond, it means being incredibly private. We've alluded to the privacy of the family.

01:44:07 Speaker_03
Like, for years, the family refused to have any photographs taken of them for fear that they might get published. They really, really mean it about being private.

01:44:16 Speaker_02
In fact, when Joelle wrote the Washington Post article, do you know the thing about the photographs?

01:44:22 Speaker_03
I think it was the first time that John and Forrest Jr. had ever been photographed in public.

01:44:28 Speaker_02
It was, but then Mars didn't like the Washington Post article. Like, didn't like the way it came out.

01:44:34 Speaker_02
So not only did they then fire their PR consultant, they went and found the newspaper's freelance photographer and paid off $20,000 for the rights to the photos to be sure they couldn't be reused.

01:44:46 Speaker_03
Yeah, wild, just wild.

01:44:48 Speaker_02
But as we've talked about from IKEA to our business here at Acquired, complete ownership, or at least board control in Meta's case, is freedom.

01:44:57 Speaker_02
You can do things like invest for 10 years from now when it's going to be a super lumpy period between now and 10 years from now. If you believe in the long term vision, you can suboptimize the short term. And for Mars, that means private ownership.

01:45:11 Speaker_03
Yep. And I think it means things like you can operate with Rota as your primary operating metric instead of profitability. Good point. So back to the Forrest Mars story in progress.

01:45:25 Speaker_03
Starting up in the thirties, amazing success story within a couple of years, by the end of the decade, they're the third biggest candy company in the country. Incredible achievement. Riding high.

01:45:38 Speaker_03
And then the end of the 30s brings something else, which of course is World War II.

01:45:43 Speaker_00
Yep.

01:45:44 Speaker_03
Now to hear Forrest tell it, the UK government decides that in order to help fund the war effort, they're going to impose a very heavy tax on all foreign residents living within the country, which of course would include Forrest and Lamar's family.

01:46:03 Speaker_02
Which is kind of an interesting philosophical tax. We need to go to war. How are we going to finance the war? Well, who's riding the coattails of us being an awesome place to live but isn't actually a citizen? Let's tax them to pay for the war.

01:46:14 Speaker_03
Right. And so he would also claim that he believed that it was Cadbury's and Roundtree's that actually lobbied Parliament to implement this tax expressly to run him and Mars out of town because they were threatening their business.

01:46:31 Speaker_02
Chocolate was a big national business. They were among the biggest companies in the country.

01:46:35 Speaker_03
Totally. It's not unreasonable to think that. On the other hand, I suspect Forrest also had his ambitions always on coming back to America anyway, and now seemed like a pretty good time to do it. In fact, it was a very, very good time to do it.

01:46:54 Speaker_03
So in 1939, he leaves all of his businesses running in the UK and he moves with his family back to the US.

01:47:05 Speaker_02
Also, that's crazy. The fact that you can trust someone in the UK as World War II is breaking out. Hey, you run these businesses that I own and I can trust that I continue to own them while I move across the ocean.

01:47:19 Speaker_02
I wouldn't be confident that when all the dust settled, I would continue to own those businesses.

01:47:23 Speaker_03
Totally right, which if Cadbury's and Roundtree's was actually behind trying to run Forrest out of town, clearly they didn't know the loyalty of his employee base well enough.

01:47:34 Speaker_01
Yeah.

01:47:35 Speaker_03
Yeah, totally wild in 1939 that Forrest could do that. So he moves back to America, and of course he has his sights set back on Chicago and Chicago Mars.

01:47:45 Speaker_02
Honey, I'm home.

01:47:47 Speaker_03
Yeah. Remember, Frank had died a few years before, and at this point, Chicago Mars is being run by Forrest's widowed stepmother, the other Ethel, and her half-brother. who is the president and CEO of the business.

01:48:05 Speaker_03
And they, of course, detest Forrest, and they won't let him anywhere near the company.

01:48:11 Speaker_00
And who owns the company at this point?

01:48:13 Speaker_03
So Forrest has some shares after his dad has died, but he's by far a minority shareholder. The biggest shareholder, I believe, is the other Ethel, the second wife. And then Forrest's half-sister Patricia, her daughter, also holds a large stake.

01:48:30 Speaker_03
And then I think the employees of the business owned equity at this point. So Forrest I don't know. I'm guessing he probably owns maybe 10, maybe 20% of the business. Not enough to be a controlling shareholder.

01:48:41 Speaker_00
Okay.

01:48:43 Speaker_03
So Forrest does what Forrest does. He says, the hell with you. I started from scratch once to prove you all wrong. I can start from scratch and do it again back here in America.

01:48:53 Speaker_02
which is the final gauntlet, right? It's one thing to go across the ocean and start from scratch in a smaller market where no one knows your name. You can kind of sneak around and do these deals. Now he's here in America.

01:49:03 Speaker_02
Can he start a from scratch candy company on the world's greatest stage?

01:49:08 Speaker_03
Which on the one hand, he has more connection here and more resources. On the other hand, he's battling the old Mars at every step of the way.

01:49:17 Speaker_02
Right. And he hasn't lived here in close to a decade.

01:49:20 Speaker_03
Right. But... He's confident in his chances because he has brought back a secret weapon. Before Forrest leaves Europe.

01:49:32 Speaker_03
He had spied a new, to him at least, type of chocolate candy that had become popular with soldiers in the Spanish Civil War called drague.

01:49:43 Speaker_03
And I think it's called drague because I believe it was originally a French style of candy intended for French noble ladies who wanted to eat chocolate but not have the chocolate melt on their white gloved.

01:49:59 Speaker_01
Oh, interesting.

01:50:01 Speaker_03
And so what is drague? Well, drague is small round pieces of chocolate coated with a candy shell to prevent them from melting in your hand or in hot weather.

01:50:15 Speaker_02
And confectioners call this hard panning, the colored candy shell, which is effectively hardened sugar syrup.

01:50:21 Speaker_03
Yes. And so Forrest, as he's heading back to the U.S., thinks, you know, I think there might be some global appeal here in this Drage product.

01:50:30 Speaker_03
But before we tell the M&M's story, now is a great time to tell you about one of our favorite companies, Stats Egg.

01:50:39 Speaker_02
Yes, we are going to do something a little bit different today, listeners, by sharing a story from one of their customers, BlueSky.

01:50:47 Speaker_03
I was somehow not at all surprised when Statsig told us BlueSky was a customer. It really does seem like every up and coming tech company these days is using Statsig. OpenAI, Figma, Vercel, Notion, BlueSky, etc.

01:51:00 Speaker_02
Yep. So listeners, by this point, you've probably heard of Blue Sky. They're a new open social network that has a serious emphasis on user choice. For example, users can build their own home feed and move between apps in the open ecosystem.

01:51:13 Speaker_02
And if you ever decide to leave Blue Sky or switch providers, you can just take all of your followers with you. They've got a ton of momentum. And David, I didn't even tell you this yet. I actually just set up the at acquired FM account there yesterday.

01:51:25 Speaker_03
Ah, I saw the email come into the acquired FM email address. That must be what that was.

01:51:30 Speaker_02
Yep.

01:51:30 Speaker_03
The influx of new users that they have gotten over the last few weeks is massive. They have added 10 million new users just in the last couple of weeks. Pretty crazy for a relatively new social media app.

01:51:41 Speaker_02
Yep. And the BlueSky team has been using StatSig for pretty much everything from running experiments to collecting user analytics and releasing new features.

01:51:50 Speaker_03
We asked BlueSky to share a couple specific use cases with us to illustrate. One, when the Brazilian Supreme Court banned X in Brazil, BlueSky obviously saw an influx of Brazilian users. The way they realized this was StatsIG.

01:52:04 Speaker_03
They had a dashboard that tracked posts by language, and all of a sudden, they saw a Portuguese post spike, which tipped them off.

01:52:12 Speaker_03
Two, you may also be one of the many people crying out that you just wish you had a feed of people you follow in chronological order like the old days of social media.

01:52:22 Speaker_03
Blue Sky has been using StatsIG to run an experiment to mathematically prove that users want and enjoy this style of browsing a feed. It's kind of an inversion of the rest of algorithmic social media these days.

01:52:35 Speaker_02
Totally. So listeners, we are a grown-up podcast now, and we do things like get real quotes from customers as a part of segments like this. So here's what BlueSky's CTO had to say.

01:52:47 Speaker_02
BlueSky collects a lot of feedback from users, but StatSig gave us concrete answers about what was working and what wasn't. We thought that we didn't have the resources for an A-B testing framework, but StatSig made it achievable for a small team.

01:52:59 Speaker_02
It remains our best tool for evaluating product decisions.

01:53:02 Speaker_03
So good. If you want to leverage Statsig to grow your business, there's a bunch of ways to get started.

01:53:07 Speaker_03
Statsig has an insanely generous free tier for small companies, a startup program with 1 billion free events, which is $50,000 in value, and significant discounts for enterprise customers. To get started, just go to Statsig.com.

01:53:21 Speaker_03
That's S-T-A-T-S-I-G.com slash acquired. And remember to tell them that Ben and David sent you.

01:53:28 Speaker_02
All right, David, M&Ms, let's do it.

01:53:31 Speaker_03
Hell yeah, let's do it.

01:53:32 Speaker_02
I'm going to eat some dark chocolate and some almond M&Ms to celebrate.

01:53:36 Speaker_03
Ooh, nice. I think I'm going to pop a peanut butter. OK, so the legend is that the reason peanut butter M&Ms are not as big as what you would think their market potential is in the US is because Forrest Jr.

01:53:50 Speaker_03
and John Mars, the sons of Forrest Sr., who would take over and then launch peanut butter M&Ms, they grew up in England, so they didn't get the peanut butter and chocolate thing.

01:54:00 Speaker_02
Hmm. Is that like a uniquely American?

01:54:03 Speaker_03
Yeah. It's an American thing.

01:54:05 Speaker_02
Fascinating.

01:54:06 Speaker_03
Reese's kind of invented it. There's a whole great Reese's story. Reese's was a separate company from Hershey that was built down the road.

01:54:13 Speaker_02
And I think it was a former Hershey employee.

01:54:15 Speaker_03
Former Hershey employee started it, and then Hershey's later acquired the company. Great story.

01:54:20 Speaker_01
Yeah.

01:54:21 Speaker_03
Anyway, here we are in August of 1939. Forrest and the family have moved back to America. He's ready to hatch his plan, his revenge campaign, and he goes and pays a visit to Hershey, Pennsylvania.

01:54:38 Speaker_03
And by pays a visit, in typical Forrest fashion, I mean that he shows up there anonymously and unannounced, and he signs up and does the public factory tour. So awesome. So Forrest. So freaking awesome.

01:54:55 Speaker_03
After the tour is over, however, he asks the tour guide if he could please go see Mr. William Murray.

01:55:04 Speaker_03
William Murray, of course, being the president of Hershey and Milton Hershey's longtime number two president and COO type, but the guy who actually ran the company.

01:55:14 Speaker_03
Milton by this point is like very much focused on the town and the orphanage and the Hershey Trust and all that.

01:55:20 Speaker_02
And the gist here is I need to buy some chocolate. Well,

01:55:24 Speaker_03
Let's keep telling the story." So the guide's like, uh, excuse me, who are you? And, uh, why do you want to see Mr. Murray? To which Forrest replies, just tell him Mars is here. That's all he needs to know.

01:55:36 Speaker_02
Because at this point, while Hershey was still a supplier to Chicago Mars, they were really starting to be a competitor.

01:55:43 Speaker_02
They're starting to wake up to this idea that, yeah, we're selling these other people chocolate, but they could just go eat all of our market share.

01:55:50 Speaker_03
Yes, they're starting to wake up to that, but if this story is true, Forrest is saying, tell Murray that Mars is here. Obviously, the implication being Chicago Mars is here, which is totally not true.

01:56:02 Speaker_02
Right, because his father's passed at this point, so the Mars that it probably is is whoever is running the Mars company.

01:56:07 Speaker_03
Right, it's Ethel number two's half-brother who is installed running the company.

01:56:13 Speaker_03
Either way, Forrest does get in to see William Murray, and Murray has never met Forrest before, but of course knows who he is once Forrest introduces himself and Murray's like, um, great. Okay. You're back in the U.S. What can I do for you?

01:56:29 Speaker_03
Forrest then proceeds to theatrically remove a handkerchief from his pocket and place it down on Murray's desk. And he opens up the handkerchief, and there inside are drage candy-coated chocolates.

01:56:45 Speaker_02
This is so Steve Jobs.

01:56:47 Speaker_03
So Steve Jobs. The showmanship. It's amazing. Drama. It's amazing. Uh, Forrest is like, try one. So Murray does, and he's like, yeah, it's pretty good.

01:56:57 Speaker_03
Forrest says, what if I told you that I have had these candies in my pocket all the way on the trip here from New York?

01:57:06 Speaker_03
The whole train ride, all the time outside in this hot, muggy August weather, all through the factory tour, and not once did they ever melt. In fact, how do they taste? Do they taste melted? They don't taste melted, do they?

01:57:20 Speaker_03
And Murray's like, oh, all right, you've got my attention. So Forrest and William Murray work out a deal to start a new joint venture candy company that will be 80% owned by Forrest and 20% owned by Murray's son, Bruce.

01:57:40 Speaker_03
And Forrest says, I've even got the name for it. We're going to call it Mars and Murray, M&M's. And it's a new company.

01:57:47 Speaker_02
That's what's worth noting here.

01:57:49 Speaker_03
Well, several things are worth noting. Obviously, Forrest is totally brilliant. This is probably his most brilliant scheme on so many levels.

01:58:00 Speaker_03
He knows that if he's going to build a new candy company, come back to the US, take on and defeat his father's old company in Mars, he's going to need resources. He's going to need chocolate, which means he's going to need Hershey's chocolate.

01:58:16 Speaker_00
Yep.

01:58:17 Speaker_03
And he's also going to need capital and money. He just can't get that much capital out of his UK businesses, remember the tax. So there's a reason, though, that he specifically goes to Murray to make this proposal, not to Milton Hershey.

01:58:31 Speaker_03
A, Murray is kind of the COO type. He's actually running the place and can marshal resources. But even more important, Murray doesn't own Hershey. He's just an employee. The Hershey Trust owns Hershey. Murray has no inheritance to give his family.

01:58:48 Speaker_03
He's now, at this point, I think Murray is 66 years old. So Mars is dangling something he wants. Forrest is offering Murray the chance to have wealth and a legacy and a business to pass on to his son.

01:59:03 Speaker_02
Do you know what else Bruce Murray had access to?

01:59:06 Speaker_03
The military? Yep. Purchasing division? Yes. Okay, we will get into that. It's so brilliant.

01:59:12 Speaker_02
So this deal is nuts because Hershey has an exclusive arrangement to supply chocolate to the U.S. military. The exclusive agreement.

01:59:24 Speaker_02
And Forrest Mars has this thing that, God, if you think the military liked Count Lines, they're gonna love these non-melt candy-coated chocolates. And so

01:59:34 Speaker_02
He is going to the person who has the sole ability to provide the military with chocolate and saying, let's start a new company together with your chocolate that is rationed for the war in World War II for the military.

01:59:47 Speaker_02
We're only going to sell this to the government. I'm going to own 80% of it. Your son's going to own only 20% of it.

01:59:54 Speaker_03
I'm showing up with just the idea.

01:59:56 Speaker_02
And Hershey's going to provide the chocolate, the sugar, and the technical expertise and capital.

02:00:01 Speaker_03
Yep.

02:00:02 Speaker_02
And it's going to be an 80-20 deal? I don't understand how this deal got done.

02:00:06 Speaker_03
Well, what else is Murray gonna do? If he wants a legacy to pass on to his son, Murray's not gonna go off and do this himself. That would be disloyalty to Hersey.

02:00:17 Speaker_02
And in fact, I would guess it's to avoid a conflict of interest for Murray himself to say, my partner is actually your son, not you.

02:00:25 Speaker_03
Yeah.

02:00:26 Speaker_02
So his employment contract isn't in violation.

02:00:28 Speaker_03
And he's only a 20% owner, blah, blah, blah. Yeah, when you think about it, if Forrest were to go to William Murray and say, hey, you and me enter into a partnership, that's at least going to be 50-50, if not 80-20, Murray to Mars.

02:00:41 Speaker_03
But by saying, no, your son, he's just so freaking brilliant. What a G. Yeah. Murray agrees to this, and in the spring of 1940, Forrest and Bruce Murray, the son, set up M&M Limited as a partnership.

02:00:59 Speaker_03
They build a factory in Newark, New Jersey, and they start production in 1941. Ben, as you say, build a factory with Hershey capital and resources and chocolate and sugar and everything else.

02:01:11 Speaker_02
Yeah. And there's a great quote in the Cadbury book about how amazing it is that this is how Forrest makes his return to the US. The line is, without the support of his own family, but with the support of his leading rival, Hershey.

02:01:24 Speaker_03
Yep. It is spooky. It's like, you want to say diabolical, but like, I don't think Forrest is diabolical per se. It's just truly genius. It's just strategic.

02:01:34 Speaker_03
Yeah, so of course now what else happens in 1941 right as they set up the factory and start production the U.S.

02:01:42 Speaker_03
enters World War II which means significant chocolate rationing for all the consumers in America and significant chocolate consumption by the military. So all of a sudden The U.S.

02:01:55 Speaker_03
military becomes Hershey's biggest customer, just like during World War I, which means... And Hershey's is the only one with a chocolate contract.

02:02:05 Speaker_03
And the only one producing milk chocolate at significant scale in America, which means that they start severely limiting their wholesale chocolate supply to all of their enterprise customers, like Chicago Mars.

02:02:20 Speaker_03
Or actually, they limit their chocolate supply to all of their wholesale enterprise customers except for one. M&M Limited Partnership. Because of course, it's Bruce Murray's company.

02:02:33 Speaker_02
Yep. Sort of. In minority.

02:02:36 Speaker_03
Yes. 20% of it is Bruce Murray's company. Now, of course, just like Hershey, the vast majority of young M&M limited partnerships production is also going to the military. So the Air Force was the biggest customer of M&Ms during World War II.

02:02:53 Speaker_03
The Army was number two. I presume the Navy was probably also a large customer. And like we've been talking about, who has the chocolate sales relationship with the purchasing officers in the Pentagon? It's William Murray at Hershey's and

02:03:09 Speaker_03
Bruce gets to tag right along, and as head of sales in the new M&M Limited partnership, he is perfectly positioned to do that.

02:03:18 Speaker_02
It's so funny, head of sales. There's one customer. Yes. They're not selling it to the public yet. No, there's three customers.

02:03:23 Speaker_03
There's the Army and the Air Force and the Navy.

02:03:25 Speaker_02
Okay.

02:03:26 Speaker_03
Yeah, they're not selling it to the public yet or at any sort of real volume. Now, there's an interesting little sidebar to the M&M's story here.

02:03:36 Speaker_03
And I suspect many of our British friends are listening to all this and saying like, hey, guys, what about Smarties?

02:03:43 Speaker_03
Forrest, of course, was not the only one to spot the potential of dragée chocolates for military use and then eventually for public consumption. Well, like all things with Forrest's history, it's a little bit hard to untangle truth from fiction.

02:03:59 Speaker_03
But one thing that is undeniably true is that Roundtrees introduced Smarties to the British market in 1937. So three to four years before M&M's start up in the US and two years before Forrest even leaves the UK.

02:04:15 Speaker_02
Right. So he's saying it's this Spanish-American war thing, but very plausibly, he just saw Smarties in the UK and was like, I gotta go back to America and launch this quick.

02:04:24 Speaker_03
There is no way that Forrest did not see Smarties in the UK before he left. And the early M&Ms came in tube packaging just like Smarties. Suspicious.

02:04:38 Speaker_02
Also for the American listeners, you're probably like Smarties, those are a non-chocolate candy. What are you talking about? Those are different Smarties that are in the U.S. market.

02:04:45 Speaker_03
Yes, British Smarties are delicious. I loved eating them growing up with my British family when I would go visit them in the summers. Well, as best as I think anyone can tell, apparently there is some documentation about this in the Nestle archives.

02:05:05 Speaker_03
Apparently, Forrest and George Harris of Roundtree

02:05:11 Speaker_03
had both learned about dragés around the same time, so during the Spanish Civil War, and supposedly they negotiated a gentleman's agreement that Roundtree could have the British market for dragés candies.

02:05:27 Speaker_03
And Forrest, who was at this point in time starting to plan to go back to the U.S. anyway, he could have the American market.

02:05:35 Speaker_03
And in return, Forrest supposedly gave Roundtree the rights to manufacture and market Mars bars in other British Commonwealth countries like Canada and South Africa.

02:05:49 Speaker_03
So supposedly there's evidence to this effect in the Nestle archives, but we can't know for sure.

02:05:56 Speaker_03
Regardless, none of this really matters, at least for a few years, because basically all of the world's chocolate production is going to sovereign militaries around the world that are all fighting in World War II.

02:06:07 Speaker_03
Okay, meanwhile, during the war, as M&M's is starting up, and the US military is a big customer, and Forrest is sort of rebuilding his empire in America, he's on the lookout for his Chappie's equivalent to bring into the US. You talk about rice.

02:06:26 Speaker_03
Time to talk about rice. Another business that can provide diversification and cash and resources to build up the candy business.

02:06:34 Speaker_02
This is so crazy. He owns a British company that makes Mars bars. He bought the Chapel Brothers. He started a new partnership in the US, a third business called M&M Limited. And now he's looking to start a fourth company that makes rice.

02:06:48 Speaker_03
Yes. In Houston, Texas.

02:06:50 Speaker_03
So there are also, as always, a couple versions of this story, but I think the one that is closest to the truth is that back when Forrest was in England, he had gotten to know a chemist who had invented a new method for milling rice that was called parboiling.

02:07:08 Speaker_03
And when you parboil rice through this new method, it results in more nutritious and, importantly, faster cooking rice for when you ultimately prepare it for eating.

02:07:18 Speaker_03
And in 1942, this chemist and Forrest form another joint venture company in Houston, Texas, and they patent the method in America and start producing rice to sell, just like M&M's, to the military. Because what's the military need a lot of?

02:07:37 Speaker_03
Cheap calories. Rice. And hey, this is more nutritious. It cooks faster. Like, great. Great customer. And this becomes Uncle Ben's rice. Today, Ben's original. The idea of launching a branded rice product in America was crazy.

02:07:54 Speaker_03
I mean, it's not as crazy as like the pet food business, but there were no brands in the rice category before Uncle Ben's. You just bought rice. It's a commodity. So this is the first brand, at least in rice, ever launched in America. Fast forward.

02:08:10 Speaker_03
Today, Ben's Original does over a billion dollars in revenue annually. Crazy.

02:08:17 Speaker_02
Listeners, you can tell all these did become one company at some point, but at first they weren't.

02:08:22 Speaker_03
Right. It was all these puzzle pieces that Forrest was assembling. So back to M&Ms. After the war, Forrest and Bruce Murray, of course, now need to find new customers for M&Ms. They're going to relaunch it as a consumer candy.

02:08:37 Speaker_03
Like, obviously, that was the plan. Use the military, bootstrap up the production, Hershey's resources. But like, obviously, this is going to be a consumer candy.

02:08:46 Speaker_02
So yeah, it's crazy. Basically, five years elapsed between when they founded the company and when they are able to actually do the consumer launch because of World War II.

02:08:54 Speaker_03
Yeah. And you would think, great, what potential for the consumer market? All the soldiers and pilots have been eating these all war. It's going to be the same story as Hershey's bars all over again.

02:09:04 Speaker_03
It's going to make M&M's be Forrest's big success coming back to America. Nope. Consumer launch, pretty tepid. doesn't get a lot of pickup back with consumers in America. For years. For years.

02:09:23 Speaker_03
This, of course, as you would imagine, creates quite a lot of tension between Forrest and Bruce, especially because Bruce was in charge of sales. And Bruce had been great at sales when he's selling to the military, selling to consumers not so much.

02:09:38 Speaker_03
So did you hear about what supposedly Forrest did to Bruce here?

02:09:42 Speaker_01
No.

02:09:43 Speaker_03
Oh my gosh. so the story is as sales are not going well forest orders bruce to produce a daily report of the past day's sales of m&ms in a written form to him every morning in the office and every morning

02:10:02 Speaker_03
where the previous day's sales did not hit Forrest's target. He would write in big letters in red ink, failed on the paper, and then he would go tape it up in the men's bathroom in the company.

02:10:17 Speaker_03
We've obviously been very laudatory of Forrest, and he was an incredible, incredible genius. The dude also had a temper to match his genius.

02:10:25 Speaker_02
Is he trying to get Bruce to leave the company at this point, or is he just trying to motivate him?

02:10:31 Speaker_03
Well, yes. So here's the thing, you know, you read about lots of people who worked for Forrest and lots of accounts in Emperors of Chocolate and elsewhere about his temper and how awful he was, and he clearly was awful.

02:10:43 Speaker_03
He's also at doing things for a reason. He's trying to get Bruce to leave the company. He's trying to push him out because he wants to own M&M's 100%.

02:10:52 Speaker_03
So in 1949, four years after the end of the war and middling sales at best of Ebenem's, Forrest finally succeeds in pushing Bruce out.

02:11:03 Speaker_03
And supposedly it comes down to a confrontation one day where Bruce is like, I can't take it anymore with Forrest, how you're treating me, you know, posting these reports in the men's bathroom.

02:11:13 Speaker_03
Supposedly, they get into a literal fistfight in the office in New Jersey. Forrest kicks Bruce out of the plant as security or whatever, come and take him out.

02:11:24 Speaker_02
And Forrest is his boss. I mean, this guy owns 20%, but Forrest is the CEO. It's not like he can take his shares, but he can fire him.

02:11:30 Speaker_03
Exactly. So Bruce resigns. And then once Bruce resigns, after this, this starts the negotiations of Forrest buying out his 20% stake. They settle on $1,000,000 for the 20% stake.

02:11:42 Speaker_03
So they're valuing the M&M's business at $5,000,000, which, you know, this is 1949. So if you adjust for inflation in 2024 dollars, that would be like valuing the business at $65,000,000 and buying Bruce out for $13,000,000.

02:12:01 Speaker_03
So, meh, you know, $13 million payout, you know, in today's dollars for Bruce to walk away.

02:12:07 Speaker_02
For a company that, like, it's not clear it's going to catch with consumers?

02:12:11 Speaker_03
Right. Exactly.

02:12:12 Speaker_02
Okay. You worked on it for, well, it's nine years of work.

02:12:16 Speaker_03
Yeah. It's nine years of work. So, like, you know, I think you could really debate the valuation there in both sides. Certainly M&Ms were not yet M&Ms.

02:12:30 Speaker_02
In fact, they hadn't even started having the M's printed on them yet.

02:12:33 Speaker_03
No, they hadn't. As soon as Forrest completes the purchase and kicks Bruce out of the company, takes 100% ownership, he goes in 1950 and hires the ad agency Ted Bates & Company to perform a comprehensive market study for the product.

02:12:50 Speaker_03
This is also another genius innovation on Forrest's part.

02:12:55 Speaker_03
So other big diversified CPG companies like Procter & Gamble, they were starting to do the sophisticated kind of market research here, like we're talking about, you know, the legendary Procter & Gamble product management function.

02:13:09 Speaker_03
This was starting to happen. But nobody in the candy industry did this, like the candy industry still operated seat of the pants, Frank Mars type entrepreneurial stuff. This is emblematic of the industry. Hershey had a strict policy.

02:13:28 Speaker_03
of not advertising at all. No advertising whatsoever. They did not do any advertising until 1970. That's so insane. Which is absolutely freaking insane.

02:13:39 Speaker_02
They didn't have sales targets either, right?

02:13:42 Speaker_03
The story about sales targets and revenue growth targets in Hershey was that in some file card in some system, Milton Hershey had written grow sales 4% every year and that was the plan. That was Hershey's annual plan was grow sales 4%.

02:13:58 Speaker_02
Yeah, I will say it is pretty incredible how much from here on out the story is a story of ad campaigns. We are getting from a place where before this it was all product innovation and from here on out it's marketing innovation.

02:14:15 Speaker_02
Like who won chocolate between 1950 and 2024 is a story of marketing and distribution.

02:14:23 Speaker_03
Yes. A hundred percent marketing and distribution. And you say ad agencies, I don't want listeners to get the sense that, oh, it's just ad agencies that are doing this and it's advertising.

02:14:32 Speaker_03
It really is the discipline of marketing of which ad agencies, I think we're a lot more consultative in this function back in the day than today. They're much more execution oriented.

02:14:43 Speaker_03
Really, this is like the creation of the modern marketing discipline.

02:14:49 Speaker_00
Yeah.

02:14:50 Speaker_03
So the Ted Bates agency goes off, they do this product study, market study of who do M&Ms appeal to, and they find that actually M&Ms are super appealing to kids. Now, this is interesting.

02:15:08 Speaker_03
The candy industry had obviously started as a kid's market, but by this point in time, it's an adult's market. Everybody's marketing to adults. That's where everybody thinks the market is.

02:15:18 Speaker_03
And M&Ms and Smarties, et cetera, this had started as food for soldiers. So they were focusing on the adult market. Turns out kids love the little pieces and the bright colors, et cetera, et cetera. Here's the problem though. Kids don't buy the candy.

02:15:33 Speaker_03
The parents buy the candy.

02:15:34 Speaker_02
So you've got a market to the parents to buy them for the kids.

02:15:39 Speaker_03
Exactly. So they need to come up with some way to get that message across to the parents. And this is where, frankly, I'm going to think just like one of the most brilliant slogans and ad campaigns of all time is born.

02:15:57 Speaker_02
The milk chocolate that melts in your mouth, not in your hand.

02:16:01 Speaker_03
And it's become like water these days. Everybody knows that slogan. What makes it so effective, I think, is it just so gets at the very, very, very core of the psychology of being a parent of candy age-eating children.

02:16:22 Speaker_03
And the core truth that it gets at is, yeah, you want your kids to be happy, but really what you want is for your kids not to cause chaos in your home.

02:16:38 Speaker_01
David, how do you know all this information?

02:16:40 Speaker_03
I'm just reading about this and thinking of like, oh my God, imagining myself as a parent in, you know, 1950, 1951, when this comes out.

02:16:49 Speaker_03
The last thing in the world I want is my snotty nose kids running around the house, smearing chocolate all over the furniture, all over the walls, all over everything, which also is the last thing that I want as a parent in 2024. Yep.

02:17:04 Speaker_03
And now here is this message being delivered to me of, Make your kids happy, get them to stop whining, give them the chocolate that they so desire, and it will not ruin your furniture and your house. It's perfect. Yep.

02:17:20 Speaker_03
They, of course, back up the parent marketing with also sponsoring the most popular kids television shows of the day, the Mickey Mouse Club and the Howdy Doody television shows. And boy, does it work by 1956.

02:17:37 Speaker_03
So they start this campaign and call it 50 51.

02:17:41 Speaker_03
So five years later, M&Ms have become the biggest selling candy in all of America doing over $40 million in annual sales and growing super fast, bigger than Snickers, bigger than Milky way, bigger than the Hershey's bar. Incredible.

02:18:02 Speaker_03
five years from basically zero to $40 million in sales. They're just crushing it.

02:18:07 Speaker_02
And they're starting to get worried about copycats. So they start adding the little Ms. Actually, they were black at first. And then in 1954, they transitioned it to white.

02:18:16 Speaker_02
And they ran a second ad campaign telling consumers, look for the M on every piece to verify the authenticity. So they're saying that we're building IP here. We're not just making candy. We are building

02:18:28 Speaker_02
a frame of mind and a nostalgia point and a trust with consumers.

02:18:34 Speaker_03
Yep. And of course today, I say as I pop some M&Ms into my mouth, M&Ms are not just a kid's candy. Kids still love them, but adults love them too. But it's back to this nostalgia thing.

02:18:44 Speaker_03
Like everybody today who is an adult eating M&Ms grew up eating them as kids.

02:18:50 Speaker_02
Yep. 1954, there's the first TV commercial featuring the animated M&Ms characters. Obviously different than the ones you know today, which are computer animated, but very cute, hand-drawn.

02:19:03 Speaker_02
Actually, a few different versions of them, but pretty consistent concept all the way from then till now. The personalities changed a little bit, but these personified M&Ms that have witty stuff to say, they're pretty early.

02:19:14 Speaker_03
Yep, totally.

02:19:16 Speaker_02
Speaking of copycats, M&M's were so successful that Hershey's really was getting worried. David, as you said, it became the better-selling candy than Hershey's bars.

02:19:26 Speaker_02
So Hershey's launched something called Hersheyettes, and we'll link to it in the show notes. It's fun looking at the old marketing for this failed product. The biggest issue with marketing Hersheyettes is people would say, what is it?

02:19:40 Speaker_02
And in order to say what it is, you had to say they're like M&Ms, which that's a tough marketing position to be in. I mean, you nailed it earlier when you said being first to market is really important.

02:19:50 Speaker_02
And in markets where it is important to be first to market, getting scale quickly, so you become the product of record or of reference when people are trying to describe the category, M&Ms was that to a T. Totally, totally was.

02:20:04 Speaker_02
Hersey's would then later, as a part of the Reese's franchise, try to do Reese's Pieces. Actually, there's a fun story around that that we will talk about a little bit later.

02:20:12 Speaker_02
But here in 1954 land, there's just a lot of fun dialing in happening of all the marketing. The peanut M&Ms launched, but first only in tan. They then realized, what are we doing? We need to change this. So in 1960, they added yellow, red, and green.

02:20:29 Speaker_02
Right around the same time in 1955, TV started becoming a real factor in Americans' homes, and it was just perfect timing. I mean, it was a match made in heaven for these candy companies to utilize and create demand for their products after the war.

02:20:45 Speaker_02
If you wanted a brief moment of emotion for your brand with a quick tagline, a TV commercial is just custom made for that. And Deborah Cadbury puts it really well.

02:20:53 Speaker_02
She says, one great TV campaign could shift decades of customer loyalty in a matter of weeks.

02:20:59 Speaker_03
especially in a new category like candy-coated chocolates.

02:21:04 Speaker_02
Yep. 1955, Mars also gets into the vending machine business. Interestingly, over in England, they start this business called Vendpak, which created the earliest vending machines.

02:21:13 Speaker_02
They eventually sold this off in 2006, but they had built coin mechanisms and bill validators. I think they were like the market share leader in how to read bills in vending machines all across the world.

02:21:26 Speaker_03
Yeah, they also got into change makers. Like, you know, you put bills in and you get coins out. Oh, interesting. Yeah. So speaking of empire minded. At this point, Forrest's empire is pretty much complete.

02:21:39 Speaker_03
He's got the most popular candy bar in the UK with the Mars bar. Mars's European operations have become very, very large in and of themselves.

02:21:49 Speaker_02
I think they had started making their own chocolate instead of buying from Cadbury by this point.

02:21:53 Speaker_03
I think that's right. I think they had transitioned or were transitioning to making their own chocolate. In the US, obviously, he's got M&M's, which are now the number one candy in the US. He's crushing it there.

02:22:06 Speaker_03
He's got the biggest and pretty much the only pet food business in the entire world. He's also got the biggest and only branded rice business. All told,

02:22:16 Speaker_03
All of his sets of companies, I believe here now in the, call it mid to late 1950s, are doing like 200 million-ish in revenue. So a big empire. However, there are two things that he still doesn't have.

02:22:33 Speaker_03
One, of course, is his father's company, Mars Inc., Chicago Mars.

02:22:38 Speaker_02
And he owns, what, 10-ish percent around this point?

02:22:41 Speaker_03
But he doesn't control the company. And then two, of course, is fully separating himself from Hershey's and controlling all the means of production for all of his American businesses and making his own chocolate in America.

02:22:55 Speaker_02
Right. Because if Hershey's cut him off, M&M's would be screwed. He has a big liability there. Now, of course, Hershey's doesn't want to do that because then they'd lose a whole lot of business.

02:23:04 Speaker_03
They'd lose their biggest customer. Yeah, exactly. And probably also knowing Forrest was strategic when he chose to push Bruce out of the business, because I believe William Murray had already retired from Hershey's at that point.

02:23:20 Speaker_03
It would be like Forrest to plan all that out to a T. Yeah. Anyway. Like I said, at this point, Forrest's empire is doing, call it $200 million-ish of revenue annually around the world. And Chicago Mars had about $50 million of revenue.

02:23:37 Speaker_03
So Forrest is, call it, four times the size of Chicago Mars. Now, when Frank Mars, his dad, had died, the majority of the company went to his second wife, Ethel.

02:23:48 Speaker_02
It's about two-thirds, I think, that she gets, and then there was one-third that had gone to random other shareholders over time, many of which were employees, I think.

02:23:56 Speaker_03
Yep, I think that's right. And I think maybe Forrest and Patricia got, like, some small stakes at that point in time.

02:24:02 Speaker_01
Okay.

02:24:03 Speaker_03
And Ethel, like we said, installed her half-brother, William, running the company. Ethel dies in 1945, and when that happens, her stock gets split 50-50 between Patricia and Forrest, per Frank's original will.

02:24:20 Speaker_03
Ethel had two-thirds, one-third goes to Patricia, one-third goes to Forrest. As we get on into the 1950s, and Forrest has now turned M&M's into a big success, He starts turning his attention to Chicago Mars.

02:24:35 Speaker_03
So he goes to the board and he says, Hey, I own a third of this business. I think I should have an office at the company and the right to come in and inspect the operations whenever I want.

02:24:48 Speaker_03
I think they were like, sure, this seems like an easy demand to give this guy, like, whatever, we'll make an office for him.

02:24:55 Speaker_02
There's a fox that wants to hang out in our hen house. Is there anything anybody sees that's an issue here? Nah, just build him an office.

02:25:02 Speaker_03
Clearly they did not know Forrest very well because he shows up. I think he basically like relocates to Chicago and is like coming in every day. He's spending a ton of time. He's criticizing everywhere.

02:25:14 Speaker_03
He starts writing memos to the board about everything that is wrong at the company. All the big mistakes that William is making as CEO and why William should be fired and Forrest should take over.

02:25:26 Speaker_02
This is not so different than how Elon ended up owning Twitter.

02:25:30 Speaker_03
Yeah. It actually is very similar.

02:25:34 Speaker_02
Oh, I'm just a 5% position. Oh, I should be on the board. Oh, I have recommendations.

02:25:39 Speaker_03
Yeah. Before you know it. This is exactly the same way. Oh boy. Still though, William and Patricia and the rest of the management isn't going to get on board with selling to Forrest or letting him take over. And in fact, in 1959, William retires as CEO.

02:26:00 Speaker_03
Forrest figures like, okay, great, this is my chance. He starts lobbying Patricia. He's lobbying everyone else who owns the company, all the management, saying like, great, sell to me. Let me take over. Let me run this business.

02:26:12 Speaker_03
Instead, Patricia decides to install her husband, James, who had been working in the business as CEO. Whether he was a good employee or not, he is a totally, totally terrible CEO of Mars Chicago.

02:26:30 Speaker_03
So once he takes over in 1959, revenue drops from about 50 million, like we said, to by 1963, it's down to about 40 million. So on the one hand, okay, a 20% decline. On the other hand, this is a very, very high fixed cost business.

02:26:47 Speaker_01
Yeah.

02:26:48 Speaker_03
So a 20% decline in revenue on a significant fixed cost base is catastrophic.

02:26:54 Speaker_02
That would be a huge, huge change in the negative direction on your return on total assets.

02:27:00 Speaker_03
Yeah, it is a disaster for the company. Now, it's also a very convenient disaster for Forrest, who wants to pressure everybody else into selling and being able to take things over.

02:27:13 Speaker_03
So finally, as this is happening in 1963, Forrest flies to San Diego, where Patricia lives. Again, to give you a sense of James, the husband here, he's commuting from San Diego to run this business.

02:27:28 Speaker_01
And they didn't have Zoom then.

02:27:30 Speaker_03
No, they didn't. And it's a manufacturing business. So yeah. Anyway, Forrest finally convinces Patricia to sell. He says like, look, if we don't do something here, this company is going to go bankrupt. I can save it. I will take it over. I will run it.

02:27:43 Speaker_03
She says, okay. I will finally agree on two conditions. One, you have to promise me that you will not fire James, my husband. He can remain as CEO. Forrest is like, okay. Are we putting that in writing or for how long?

02:27:59 Speaker_03
And condition number two, you need to promise me that you will make this company, our father's company, Mars Incorporated, the new parent company of all of your businesses and preserve our father's legacy?"

02:28:13 Speaker_03
And he says, sure, done, which is probably what he wanted anyway.

02:28:18 Speaker_02
Totally. It's also his name. And so is it that different if left absorbs right or right absorbs left? And if you're the controlling shareholder of both? No, it doesn't matter. Yes. Not yet, CEO.

02:28:30 Speaker_03
So Patty sells out in 1963. Forrest now owns two thirds of the business. He spends the next few months going around to all the other shareholders of the business, again, mostly current and former management and buying out their shares.

02:28:46 Speaker_03
And by mid 1964, he has full control of Mars Incorporated.

02:28:51 Speaker_02
Which, by the way, is 20 years after Ethel dies. That's how long he has been on this quest to get full control of the business.

02:28:58 Speaker_03
Right. Well, and really, I mean, going back to him leaving for Europe, like, you have to imagine that this was on his mind the whole time.

02:29:06 Speaker_02
And just as a, like, a side note here, It's pretty insane that Forrest is able to, out of his pocket, without external financing, go and buy up two-thirds of a business that is doing $40 million a year in revenue.

02:29:21 Speaker_02
I mean, it's just because he owns M&M's and Uncle Ben's Rice and the UK businesses. This is not a strategy that most people could run if they're like, oh, I wish I was a larger shareholder of this business that is large and dominant.

02:29:36 Speaker_03
Right, you need some other way to get the money. Yes. Now, it was a distressed business at this point, but like, yeah, still.

02:29:43 Speaker_02
I'm gonna guess it's still valued north of $40 million. Seems reasonable. He needs to come up with $25 plus million in cash to pull this all off.

02:29:52 Speaker_03
Yeah. Amazing. So once he takes control, he comes to Chicago, he immediately rips out all the office walls in the building, open floor plan for everybody. He demolishes the executive dining room.

02:30:06 Speaker_03
He sells the company art collection and the company helicopter, and he hands everybody, including James, a time card.

02:30:17 Speaker_02
He may as well have walked in with a sink.

02:30:19 Speaker_03
He may as well have walked in with a sink. Seriously. Oh my God. Tragically, later that year, Patty dies of cancer, super young. I don't think she was even 50 years old yet.

02:30:31 Speaker_03
And once that happens, Forrest fires James and makes himself CEO of the entire empire, all united, finally, under Mars Incorporated.

02:30:42 Speaker_02
You know, I read this story, and I thought of the Darth Vader quote, I am altering the deal. Pray I don't alter it any further. Yes.

02:30:50 Speaker_01
Yes.

02:30:55 Speaker_03
Now, I'm not 100% sure. He may have kept James still employed in the business or something, but yeah, he was out as CEO.

02:31:05 Speaker_02
Forrest is the captain now.

02:31:06 Speaker_03
Yeah. I am altering the deal. Pray I don't alter it. So, so, so great. Okay, this now brings us to Forrest's final conquest, which is making his own chocolate in America and fully ditching Hershey's.

02:31:26 Speaker_02
And we should say, too, at this point, he has completely overhauled the Chicago factory. They're all in on mass productions. These count lines are moving at, they used to make a Snickers bar in a day, and now they can do it in under an hour.

02:31:39 Speaker_02
I mean, he's just going.

02:31:41 Speaker_03
He's going. So, his first act of business, once he becomes CEO of Mars America. As he calls Hershey up and he's like, hello, remember me? I'm the new CEO of Mars.

02:31:54 Speaker_03
I just want to let you know that we are going to start phasing out our chocolate purchases from you all.

02:31:59 Speaker_02
And the way Hershey reacts to this is, what? You would be stupid to do that. Imagine how long it would take you to pay back the investment necessary to spin up your own chocolate factory. You would have to be nuts to take on all that fixed cost.

02:32:15 Speaker_03
We have literally an entire town here that is dedicated to making chocolate, and we are supplying it to you at a competitive price. Yep.

02:32:23 Speaker_03
So the Hershey's team estimates that it'll be at least 10 years before Mars turns profitable on this decision to make their own chocolate.

02:32:33 Speaker_02
And OK, so let's say he just did it for control and he didn't think the math would pencil, which I don't think is right, but let's assume that.

02:32:40 Speaker_02
It's been 60 years since they made that decision, so I am sure they have reaped plenty of benefits in operating leverage on having their own plant versus needing to pay all those extra little margin dollars here and there to Hershey's.

02:32:53 Speaker_03
Totally. So Forrest gives his Chicago plant managers a deadline of six months to start making their own chocolate in the factory. And I suspect they turn profitable on this decision a lot faster than 10 years out.

02:33:08 Speaker_03
But there are obviously other reasons that Forrest is doing this too. One is the quality principle, which, you know, I really do think the quality principle is number one in Mars for a reason.

02:33:19 Speaker_03
If you really are serious about wanting to produce the highest quality products at a given price, you kind of need to control all the means of production yourself.

02:33:29 Speaker_02
Anyone who's serious about software should make their own hardware.

02:33:32 Speaker_03
Yes. Yes. Alan Kay for the win. The other reason that I think Forrest always had the dream of making his own chocolate is to be able to scale as large as possible.

02:33:47 Speaker_03
Like we've been saying all episodes, this man so deeply knew in his bones how to operate in a scale economies market. And by controlling all the production himself, that was just another step that enabled him to scale as big as possible.

02:34:04 Speaker_03
I think in any CPG business, it's a scale economies business, but here we haven't talked directly yet about how important shelf space is for candy.

02:34:18 Speaker_02
Yes, I was about to bring up supermarkets.

02:34:20 Speaker_03
Yes. So for candy especially, it really is a zero-sum game. 90%, nine-zero, of all candy purchases are impulse purchases. Only 10% of candy purchases are planned purchases.

02:34:38 Speaker_02
So I found that it was 70% and the place that I found it was from, this is flashing forward a little bit, some 1979 consumer market research that Mars commissioned.

02:34:48 Speaker_02
And what they did with that information was they launched an all-out initiative to lobby merchants to put candy displays near the cash registers, which didn't happen until that point in history and is now ubiquitous.

02:35:01 Speaker_03
Ah, interesting. So it may indeed be 90% now, in part because of those efforts by Mars.

02:35:07 Speaker_02
Yes. They were like, how do we lean into the idea that 70% in 1979 of our candy is purchased on an impulse basis?

02:35:15 Speaker_03
Wow. I didn't realize that. I thought that candy had always been by the cash registers. It wasn't until this Mars initiative in 1979?

02:35:23 Speaker_02
Maybe in smaller shops, but that's, I think, especially with supermarkets when that changed.

02:35:29 Speaker_03
Interesting, interesting. Well, so given the impulse nature of purchases here, I mean, it really is whatever candy is right in front of your face, tempting you to buy is what you're going to buy.

02:35:44 Speaker_03
And so being the scale player, being able to have the muscle with retailers to push Hershey's and other candy to the back of the aisle or bottom of the shelf makes all the difference in the world here.

02:35:59 Speaker_02
There's another interaction with supermarkets where the power actually flows the opposite direction. It's sort of an aggregation theory thing. If you think about the way that merchants used to work, no one owned a lot of stores.

02:36:16 Speaker_02
the power was sort of diffuse among retailers. And so if you were a candy maker and you went to the local store in your town and you said, you want to buy my bar? And they'd say, sure. And they didn't really have an ability to push back or bargain.

02:36:31 Speaker_02
They didn't have a lot of leverage. Supermarkets, and especially chain supermarkets, made it so there was a power concentration where the supermarkets could go to the candy manufacturers and say, here's what we want.

02:36:42 Speaker_02
We wanna market a uniform set of candy and a small number of SKUs that don't overwhelm us with inventory, and we want you to put a lot of marketing behind those things that we're selling, and we're only gonna stock them in the store if you're really doing marketing campaigns, because television's blowing up, and we know that that moves product in our stores, so tell us whatever you're gonna do big campaigns on, and that's the shelf space that's gonna get allotted.

02:37:11 Speaker_03
Yeah, you're totally right.

02:37:13 Speaker_02
It's a shift in technology with TV. It's a shift in consumer behavior with the supermarkets. And what it results in is massive returns to the scale player.

02:37:22 Speaker_03
And what's so frankly just kind of sad is with the exception of advertising, Hershey had been benefiting from this for its entire life as a company. I mean, this really was Milton Hershey's strategy from the get-go.

02:37:37 Speaker_03
Lower prices, get distribution, go nationwide, get shelf space, get placement, build a big company.

02:37:44 Speaker_02
He just didn't put his foot on the gas.

02:37:46 Speaker_03
Exactly. Well, and then after his tenure and after Murray's tenure, The company basically became brain dead for like three decades. They don't do advertising. They don't have a marketing department at all.

02:38:01 Speaker_03
And it's not like, you know, I mean, Hermes doesn't have a marketing department. Like Hershey really didn't have a marketing department.

02:38:07 Speaker_02
I think it was one of these things where a company internalizes a behavior because it's always been that way, and they say, well, there's a rule, and the rule is we don't do advertising.

02:38:18 Speaker_02
But that rule was developed in a different time, in a different environment where the rule made sense, and now you're sort of senselessly following a religion that is no longer relevant in the new world.

02:38:31 Speaker_03
You know, we haven't talked yet about Hershey's ownership structure. So it was and is a public company, but the controlling interest is owned by the trust.

02:38:40 Speaker_03
the management of the trust became super, super removed from the realities of the business and the market. And I think that's how this happened. Makes sense.

02:38:52 Speaker_02
Reflecting back on this period of time, thinking about Forrest Mars, this sort of was the moment in world history for the global scale economies founder to rise. If you think about the early 1910s, you couldn't take advantage of economies of scale

02:39:10 Speaker_02
in the way that you sort of can now with the rise of globalization.

02:39:15 Speaker_02
There are things that would have been non-economic before in addressing these small regional markets, but now that you're distributing everywhere – and America is a huge market on its own, finally, and beyond that international – you sort of have the potential for this personality type that Forrest Mars was to really succeed.

02:39:36 Speaker_03
And you can advertise and market and brand nationally for the first time via television. And then in the coming decades, internationally.

02:39:45 Speaker_02
Yeah. It's the rise of the scale economies entrepreneur, I think is sort of a way to summarize it.

02:39:49 Speaker_03
Yep, totally. So now that Forrest finally has his own chocolate-making means of production, how do they finally knock off Hershey's?

02:40:01 Speaker_03
Well, when Milton introduced the Hershey chocolate bar in 1900, as we've talked about all episode, he priced it at a nickel so that everybody, even in 1900, could afford it.

02:40:12 Speaker_03
The problem, as we've been talking about Hershey's decades long brain deadness here, they kept the price at a nickel from 1900 until November, 1969.

02:40:25 Speaker_02
What?

02:40:26 Speaker_03
They never changed the price.

02:40:29 Speaker_02
I didn't realize it was that long.

02:40:31 Speaker_03
Almost 70 years, a hair's width from 70 years, they not once changed the price of the chocolate bar. And which, you know, it was sacrosanct. It was like, it's the nickel chocolate bar. It's Milton Hershey's legacy. We can't change the price.

02:40:47 Speaker_03
So what did they do? How did they manage inflation? They just kept shrinking the bar size.

02:40:53 Speaker_02
I gotta say, by the way, that five cents in 1900, just so people get a sense, is 23 cents in 1970. So it's a four and a half X that they sort of have to figure out how to handle.

02:41:03 Speaker_03
Yep. So what did they do? Rather than changing the price, they changed the quantity. They just keep shrinking and shrinking and shrinking the size of the bar.

02:41:16 Speaker_00
Consumers are going to love that.

02:41:17 Speaker_03
Oh, yeah, they're going to love that. So the original Hershey's bar was 1.25 ounces, one and a quarter ounces in 1900. By the time 1969 rolls around, it is half of the original weight. Then I see you're looking at a Snickers there.

02:41:34 Speaker_03
How much is a Snickers today? 1.86. Now, that's not all chocolate. A lot of the mass of that is cheaper stuff like peanuts.

02:41:43 Speaker_03
But you can see in the consumer's mind, you're like, wait, I've got this paper-thin Hershey's bar that like, yeah, it's a nickel, but compare that to the big, meaty, satisfying, Snickers, this looks ridiculous.

02:41:57 Speaker_02
Consumers don't care that the new gets cheaper. Consumers care about, I mean, truly that is why Snickers is the satisfied slogan. Consumers care about how much value does it seem like when I bite into this thing and eat it.

02:42:10 Speaker_03
Yep. So finally in 1969, Hershey can hold out no longer. Commodity prices spike and they make the historic decision to raise the price of the bar to 10 cents.

02:42:24 Speaker_03
And they think that the way they can make this palatable to consumers is they will also boost the size of the bar back up to the original one and a quarter ounces. So actually economically, they're still at a loss here. Both were about double.

02:42:39 Speaker_02
OK, so it doesn't solve their problem.

02:42:41 Speaker_03
It's just totally brain dead. The problem is inflation. And I think the thought process probably was, OK, consumers are going to be outraged when we double the price of the bar after 70 years.

02:42:53 Speaker_02
Oh, the first time we raised the price of the bar, we should give them some value. So in the second time.

02:42:58 Speaker_03
Well, this is where not having a marketing department or doing consumer surveys or anything.

02:43:04 Speaker_02
A way to communicate with customers at all.

02:43:06 Speaker_03
Yeah. Turns out to be a really big problem. Consumers are just like, what the hell? A, you just raised the price. You doubled the price. But B, you have just totally exposed that you have been gaming us for 70 years.

02:43:20 Speaker_02
I mean, this is literally still a big deal today. So much so that do you remember the commercial that aired? I think it was during the Super Bowl from Joe Biden talking about shrinkflation. Oh, no.

02:43:33 Speaker_02
This is like a presidential thing in our country today where the president is railing against shrinkflation by keeping prices the same and making CPG food smaller.

02:43:45 Speaker_03
Amazing. Amazing.

02:43:46 Speaker_02
So, yeah, I believe that people were outraged by it.

02:43:49 Speaker_03
People were pissed. So Forrest is like, oh man, boy, am I ever glad that I started my own chocolate baking process here.

02:44:00 Speaker_03
Because he now decides that in response, he is not only going to increase his advertising and blitz the nation with M&M's and Mars products, he's also gonna increase the size of his bars while keeping price the same.

02:44:16 Speaker_03
And he starts a price and size war with Hershey. Now, interestingly, in response to this, Hershey counters by actually finally starting to advertise for the first time here in 1970.

02:44:31 Speaker_03
It's the first time in the company's history that they advertise, and surprise, it works great.

02:44:37 Speaker_03
But because commodity prices are staying high and it's putting pressure on profits, the board pulls the plug on their advertising because they say like, oh, profits are down. We can't be spending. So we need to stop advertising.

02:44:55 Speaker_03
So they do two years of advertising. It works great, but profits are down. So they say, nope, we got to stop that.

02:45:02 Speaker_01
Unbelievable.

02:45:04 Speaker_03
And as a result, in 1973, the combined Mars, which is all of the legacy Mars Inc products, Snickers, Milky Way, Three Musketeers, et cetera, plus M&M's, passes all of Hershey to become the number one candy company in America.

02:45:22 Speaker_02
There it is. I don't think they ever looked back.

02:45:25 Speaker_03
Well, Hershey did eventually retake the lead in America from Mars much later, but Mars is by far the largest candy company globally. Like, Hershey is basically just in America.

02:45:38 Speaker_02
And I think Mars' American candy business is about the size of Hershey's American candy business today. I think they're kind of neck and neck, but Mars has everything else too. Yep.

02:45:49 Speaker_02
This game that you're talking about, David, of the cat and mouse price war game would continue, and Mars would basically have the advantage every time, because Hershey's primary thing they're marketing is the chocolate bar, which is made of the densest, most expensive thing in the whole process.

02:46:08 Speaker_02
And Mars just has a durable, competitive advantage in that they're selling something to consumers that they value at the same price, but the cost of goods sold is way lower. I mean, it has nougat and peanuts.

02:46:19 Speaker_02
And so what they basically do, there's another time, I think this happens in the early 80s, where Mars knows that the commodity prices are on the uptick for cocoa.

02:46:30 Speaker_02
And so it's going to squeeze everyone's margins, but it's going to hurt Hershey the most. So what does Mars do? They announce bigger bars at cheaper prices. what can Hershey do? They're just getting boxed in from all angles.

02:46:42 Speaker_02
And so this is a sustainable competitive advantage that Mars has selling something that has just lower cost of goods for a equal perception of value to customers.

02:46:54 Speaker_03
Yep. The other thing that Mars builds up through this, maybe even starting in the 60s, but definitely in the 70s and 80s, is a very, very sophisticated commodities trading department that Hershey doesn't have

02:47:08 Speaker_02
Oh, really? Of course they do. Hedging and... Of course.

02:47:11 Speaker_03
It's very Mars style to do this. Now, obviously, it's a private company. They never report any of this, but rumors are... These are rumors, but I've heard it from multiple places. Mars has actually made

02:47:26 Speaker_03
many billions of dollars of profit from commodity trading over the years. So whereas for competitors like Hershey's, commodity spikes and prices are like a big risk and impact to the business. I'm sure Hershey's hedging also.

02:47:41 Speaker_03
These days they are, but like back in the 70s, 80s, no, no, they weren't. Mars is actually profiting hugely from market swings in commodity prices. Wow. Total G, total G. So speaking of, this is incredible.

02:47:55 Speaker_03
Here we are, 1973, Mars passes Hershey to become the number one candy company in America. And a pretty surprising twist happens here in Forrest's story, which is the end. He retires.

02:48:11 Speaker_02
He hangs it up. He walks away. And concurrently with him deciding that's it, this is basically when the company stops communicating with the outside world.

02:48:20 Speaker_02
So everything we're about to share from here on out is short, is basically just headlines that happen from news articles. And the company gets way, way, way more private after this.

02:48:32 Speaker_03
Yeah. End of 1973, he's built up this whole empire, gone to Europe, built the Europe business, built the pet business, come back to America, built M&Ms, retaken over Mars Inc., battled Hershey, beat them at their own game.

02:48:49 Speaker_03
He gives the company to his three children, a third each to Forrest Jr., John Mars, and Jackie Mars. and totally walks away and retires. At this point, the empire is doing about 800 million in annual revenue and he's just done.

02:49:09 Speaker_03
He no longer owns any part of it for the moment. So Forrest spends the rest of the decade of the 70s in retirement. His mother, the original Ethel, is actually still alive, and I think he spends a lot of it with her and taking care of her.

02:49:29 Speaker_03
And then after, you know, call it six, seven years, he's starting to get a little feisty. You know, he can't keep an old horse out to pasture here. So in 1980, when Forrest is 76 years old, He decides he's getting back in the game.

02:49:47 Speaker_02
He is his father's son. What's he going to do? He's going to start a candy company.

02:49:51 Speaker_03
He's going to start another candy company, which he names Ethel M. Chocolates after his dear mother, Ethel, who of course he considers the real Ethel Mars and matriarch of the family.

02:50:08 Speaker_02
By the way, I ate some ETHELM chocolates last night. I ordered some to prep for this episode. They're great. Delicious.

02:50:13 Speaker_03
Oh, I have never tried any. I need to get my hands on some.

02:50:17 Speaker_02
It's extremely different than the rest of Mars products. It's like a specialty chocolate.

02:50:21 Speaker_03
Yes. Well, so Forrest's business plan in starting ETHELM is basically to build a competitor to SEAS. Oh, that makes sense. He SEAS, just like Warren and Charlie did back in the day, that

02:50:34 Speaker_03
C's and high-end chocolate is actually a really, really good business. And the plan is, the way they're going to compete with C's is they are going to specialize in liquor-filled chocolates.

02:50:49 Speaker_03
So they'll make regular non-alcoholic chocolates, you know, high-end chocolates just like C's, truffles and the like, but they also will specialize in alcohol-filled chocolates, which were Going through a moment of popularity here in the go-go 1980s.

02:51:05 Speaker_03
So, Forrest, as always, decides he's all in on this. Liquor-filled chocolates are not legal in every state, and Nevada is the epicenter of them. So, he moves to Nevada.

02:51:20 Speaker_02
I did not realize that's why ETHELM is in Nevada. That's so funny.

02:51:24 Speaker_03
That is why ETHELM is located in Henderson, Nevada, which is a suburb just outside of Las Vegas. And Forrest?

02:51:32 Speaker_03
by God, builds a factory there outside of Las Vegas, builds an apartment directly above the factory, and lives in the apartment above the factory from which he runs the business. Guy has one speed and one playbook.

02:51:48 Speaker_03
And this dude is like in his late 70s. It's a success. Within a couple of years, FLM is doing $150 million in revenue. Unbelievable. Get out of here. Unbelievable. Now, as you said, Ben, it's not competing with Mars in any way. It's competing with seas.

02:52:08 Speaker_03
But the business gets so big and Mars and Forrest's children decide that they want to own this business. So in 1988, after Forrest has been running it for seven, eight years, Mars acquires FLM for an undisclosed amount.

02:52:26 Speaker_03
I would love to have been a fly on the wall for those negotiations between Forrest and his children.

02:52:32 Speaker_02
I mean, what's the point of even negotiating? He's already given all of Mars to the kids. So what's he going to do after the sale completes? Give the new stake to the kids too?

02:52:42 Speaker_03
Unbelievable. It is like the best coda ever to the story. So shortly after the FLM acquisition is when Forrest Jr.

02:52:54 Speaker_03
and John Mars, the brothers who are running Mars now as co-CEOs, this is when they give Joel Brenner access and the Washington Post access to write the piece about the company.

02:53:06 Speaker_03
But yeah, Ben, as you say, they weren't happy with it and they never gave anyone access again.

02:53:10 Speaker_02
And today, their CEO does speak publicly, does give quotes and statements, they do release press releases, they have a website.

02:53:20 Speaker_02
They, as a company, have recognized that times have changed, that consumers are not willing to go buy a product off the shelf when they know nothing about the company. in this era of people wondering about what is Mars doing with sustainability.

02:53:33 Speaker_02
And we live in an America and a world right now where diabetes is a massive epidemic and obviously they make a lot of products that contribute to that. They want to have a voice in that conversation too.

02:53:43 Speaker_02
And so they do say more now than they used to because they've kind of realized we can't be a $50 billion company that doesn't ever say anything ever.

02:53:54 Speaker_03
True. But what they don't do is allow books to be written about them or any sort of in-depth piece.

02:54:01 Speaker_02
No one knows what their balance sheet looks like, including their bankers. They don't produce financial statements for their bankers.

02:54:08 Speaker_03
Yep.

02:54:08 Speaker_02
And some product stuff that happens in this time. In 1974, they start producing Skittles in the United States after it becomes a success in the UK.

02:54:16 Speaker_03
They bring Twix over from the UK. They bring Starburst over, which was Opal Fruits in the UK.

02:54:22 Speaker_02
Yep. 1986, Mars acquires Cal Can Foods in Los Angeles and begins its association in America with dogs, cats, and their owners. They've had the British business for a long time. Cal Can Dog becomes Pedigree. Cal Can Cat becomes Whiskas or Whiskas.

02:54:40 Speaker_03
Also in 1986, they acquire Dove, Dove Bars, Dove Chocolate.

02:54:44 Speaker_02
Yes. They enter the frozen snack business.

02:54:48 Speaker_03
And then later launched Dove Promises and Dove Chocolate Bars on the brand. So Dove was an ice cream bar company when they bought it, and then they launched the chocolate bars and chocolate pieces after having acquired the company.

02:55:03 Speaker_02
Which I think works reasonably well.

02:55:04 Speaker_03
Yeah, I think so. It's not a huge business for them, but... It's their direct Hershey bar competitor now, of like a direct competitor to Kisses and to the chocolate bar. Yep.

02:55:14 Speaker_03
The really big story, though, I think of the brothers' tenure, and Jackie, too, as a third owner of the business, and eventually later she does also work in the business herself, is globalization.

02:55:24 Speaker_03
So during their tenure, by the time they hand the business over to professional management in 2001, they've grown it from, you know, that $800 million when Forrest left to $20 billion in revenue.

02:55:37 Speaker_03
And yes, there are all those acquisitions and product launches we just talked about, but the big, big thing is going global. The brothers take them to Japan, China, Russia, the Middle East, South America. This is really fun.

02:55:48 Speaker_03
In 1984, they start sponsoring the Olympics and they totally run the Visa playbook. This is when they start unifying all the product brands globally. Snickers is Snickers everywhere and we can market globally. They really do an amazing job.

02:56:03 Speaker_02
Yeah. And so the brothers took it from 800 million to 20 billion.

02:56:07 Speaker_03
Yes, over 28 years, I believe, was their tenure.

02:56:12 Speaker_02
A 25x in 28 years. It's almost like the Tim Cook story, too, where it's the out-years of compounding and the globalization end up making the more recent story numerically far more interesting than the early story.

02:56:25 Speaker_02
But the early story is where the maverick is. I mean, we told this whole story about Forrest Sr. We're gonna spend 10 minutes here on The Next Generation, and The Next Generation took it from hundreds of millions to $20 billion a year.

02:56:39 Speaker_03
Yes, incredible.

02:56:40 Speaker_03
Now, that said, while globalization was, I'm sure, a Herculean task and required a lot of vision and commitment to it from the brothers, it really was, outside of the M&A, was about globalizing all the successful brands that Forrest had built.

02:56:57 Speaker_01
Yeah.

02:56:58 Speaker_03
So speaking of M&A, and we were also talking about C's and Warren and Charlie a minute ago, in 2008, Mars buys Wrigley with the help of Uncle Warren and Uncle Charlie.

02:57:11 Speaker_02
I love that they come into this story. It's the best.

02:57:14 Speaker_03
I know. There's some amazing quotes from Warren at the time of the deal. One of them's like, I've been conducting a 70-year taste test on both Mars and Wrigley, and they both passed the test.

02:57:27 Speaker_02
Oh, it's so good. Because you know the analysis is actually far deeper than that, but that also totally sells. It's Warren's personality.

02:57:35 Speaker_03
He actually has a really insightful quote in the 2011 Berkshire shareholder letter while they were still a shareholder in Wrigley as a Mars subsidiary. He says, quote, buy commodities, sell brands has long been a formula for business success.

02:57:50 Speaker_03
It has produced enormous and sustained profits for Coca-Cola since 1886 and Wrigley since 1891. I mean, it doesn't say this, but like, obviously this is the Mars formula too.

02:58:02 Speaker_02
Sell commodities, buy brands.

02:58:05 Speaker_03
Buy commodities, sell brands.

02:58:06 Speaker_02
Oh, not as an investor.

02:58:08 Speaker_03
Yeah, not as an investor. Companies that buy raw products and then sell them as a branded product.

02:58:14 Speaker_02
Basically, you're allowed to create margin.

02:58:17 Speaker_03
Yes.

02:58:17 Speaker_02
The market is giving you the right, consumers are giving you the right to do that. Yes. It's funny, if you flip it and you say sell commodities, buy brands, that's a good mentality for an investment portfolio.

02:58:28 Speaker_03
Yes, definitely.

02:58:29 Speaker_02
In fact, I thought that's what he meant, I want to buy this because it's a durable brand or house of brands. Interesting.

02:58:35 Speaker_03
Yeah, no, no. It's the operating paradigm for a company of purchasing raw commodities and selling them as branded products.

02:58:42 Speaker_02
Right. If you have cocoa beans backed up to one side of your factory and then Snickers bars coming out the other, it's a good business.

02:58:48 Speaker_03
Yeah. You're going to do good.

02:58:49 Speaker_02
Interesting.

02:58:51 Speaker_03
So it goes down in the middle of the financial crisis. They announce the deal in April, 2008, but it closes in October, 2008, like right after Lehman collapses, Mars buys the Wrigley company for $23 billion.

02:59:07 Speaker_03
Which is a 28% premium to where it was trading that day. Yep. And even Mars at this point in time doesn't have $23 billion of cash on hand.

02:59:18 Speaker_02
Well, they may have, but they didn't want to use it. I'm always trying to guess how much, through all these points in history, I think Mars piles up a lot of cash, but I think they're really conservative in how they decide to deploy it.

02:59:28 Speaker_03
I mean, this is the trade-off with efficiency, freedom, return on total assets as the way that you're going to manage, is you're just going to be very conservative in how you run the company. Yeah. But yeah, so Mars pays $11 billion itself.

02:59:43 Speaker_03
They get $5.7 billion in bank debt from Goldman Sachs. And then Berkshire comes in with the rest of the financing, about $6.5 billion total.

02:59:55 Speaker_02
And $4.4 billion of that was a loan, and then $2.1 billion is an investment into the newly created Wrigley subsidiary. Over time, Wrigley will use the profits from all their businesses to buy out Berkshire.

03:00:11 Speaker_02
And so it must have been negotiated in that Mars had the right over some period of time to buy out that $2.1 billion equity investment.

03:00:18 Speaker_03
Indeed, that is correct. So what happens five years later in 2013, Mars repurchases the debt portion of Berkshire's financing. And man, this debt got the financial crisis.

03:00:33 Speaker_03
Like Warren was so good to be investing in such high quality companies at the interest rates that he got. So the 4.4 billion in debt that Berkshire invested had an 11.45% interest rate. Oh my god.

03:00:49 Speaker_03
So during the five years that it was outstanding, Berkshire earned $2.5 billion just in interest. Now, when Mars bought it back in 2013, that was before the debt matured. So they had to pay Warren a premium to buy it back early.

03:01:07 Speaker_03
They paid a $680 million premium. So all told, for the $4.5 billion debt investment, Berkshire gets its money back, plus another, call it $3.1, $3.2 billion just on the debt. Over five years. Over five years.

03:01:27 Speaker_03
The equity portion, the $2.1 billion, in 2016, Mars buys out Berkshire. So Buffett sells Mars his entire stake back for $4.6 billion versus the $2.1 that he originally invested.

03:01:45 Speaker_02
He more than doubled the money in five years on that, in addition to almost doubling the money on the debt.

03:01:50 Speaker_03
Even better for Warren. Because that equity that he held was preferred equity, it also had a dividend associated with it, of which they likely made another billion dollars in dividends on the preferred equity.

03:02:07 Speaker_02
It's interesting that they did the bank debt from Goldman Sachs and this dual instrument from Berkshire.

03:02:13 Speaker_03
Yeah.

03:02:14 Speaker_02
Why not go all one or all the other? Because you would think they would have the option to.

03:02:18 Speaker_03
Well, I think this gets back to the value that Warren and Berkshire always provide, but were especially providing during the financial crisis, which is just the reputational guarantee and solidity.

03:02:34 Speaker_02
Oh, you think getting Berkshire was what they used to be able to pull in the bank debt?

03:02:41 Speaker_03
I bet it helped pull in the bank debt, because I doubt Mars had significant banking relationships going into this, because they didn't have any debt.

03:02:49 Speaker_02
No, in fact, they classically never do acquisitions with outside banks. They're obsessed with using only their own cash.

03:02:56 Speaker_03
Yep. And Goldman was Berkshire's preferred bank, so it probably pulled Goldman in. The other aspect to this is the Wrigley shareholders, You had to give confidence to the Wrigley shareholders to vote for the deal, to get it done.

03:03:14 Speaker_03
And so having Buffett come in, you know, put his stamp of approval, calm everybody down, even in the midst of all the craziness with Lehman, I suspect there's no way the deal gets done if Berkshire doesn't get involved.

03:03:28 Speaker_02
That's really interesting.

03:03:29 Speaker_03
Given what was happening in October 2008. Wow. All told, Berkshire puts in $6.5 billion and about doubles its money in the whole eight years. So five years on the debt and then another few years on the equity. How much did Goldman make on the deal?

03:03:47 Speaker_03
I doubt that much.

03:03:49 Speaker_02
Right. Definitely Berkshire got some sort of premium for using their reputation in this deal.

03:03:56 Speaker_03
Yep. Now, interestingly, we didn't dive super deep on Wrigley as a company, but it's a very good business. Probably I'm guessing even better than the candy business because gum, I believe, is mostly a petroleum byproduct.

03:04:14 Speaker_02
Is it really?

03:04:14 Speaker_03
Yeah. So for a long time, I don't know if this is still true, Goodyear, the tire company, was one of Wrigley's major suppliers. And it was like unused byproducts from

03:04:25 Speaker_03
Petroleum that if you can brand that and sell it to consumers, you're going to have pretty good margins. So Wrigley, I went back and looked at their old 10 Ks before Mars acquired them.

03:04:36 Speaker_03
They had about 50% gross margins and 20% net income margins in the last, you know, sort of decade of the company. Pretty good for a business like that. Not bad. Not bad at all. They also owned a mints like Altoids and Lifesavers.

03:04:53 Speaker_03
And that was the other big part of the business. Right. If chocolate is a expensive product to make, gum is a not expensive product to make. Yep.

03:05:04 Speaker_02
Okay, other things that happened in the 2000s. They bought a significant stake in the Banfield Pet Hospital chain, which is the largest chain of pet hospitals in America. And was started in partnership with PetSmart.

03:05:18 Speaker_02
That's right, because most of them are actually in PetSmart's.

03:05:21 Speaker_03
Yes, that partnership is now ended and Mars now owns Banfield outright, a hundred percent. And I believe in 2007, they took a large stake and then in 2015, they fully bought out PetSmart for a hundred percent ownership.

03:05:37 Speaker_02
That's interesting. It is worth noting, we did some sleight of hand there, that's a completely different business, pet hospitals, than dog food.

03:05:46 Speaker_02
Related, in pet care, you can use the pet hospitals as channel for your dog food, but very different type of operation that needs to be performed.

03:05:57 Speaker_03
Yeah. This really is the big story about Mars of the last 10 years. So after they fully acquired Banfield in 2017, they acquired VCA.

03:06:08 Speaker_02
Which is even bigger, right?

03:06:10 Speaker_03
Yes. They were the largest independent vet hospital operator in America for $9 billion. So like a large acquisition. And Ben, like you say, you know, there's two interesting things about getting into this business. One, it's a super different business.

03:06:28 Speaker_03
We're talking about a services business. Like this is not manufacturing. Yep. So very, very, very different DNA.

03:06:35 Speaker_03
I think a big part of the strategy though, like you said about distribution of pet food in 2002, Mars had bought a French pet food company called Royal Canin or I've also heard it pronounced Royal Canin.

03:06:51 Speaker_05
Hmm.

03:06:53 Speaker_03
and royal canin makes prescription pet food like especially for like an aging dog or a mobility challenge dog and as dogs became more and more family members and people started caring for them more and more like humans.

03:07:10 Speaker_03
Prescription pet food became a really, really big business. So I think Royal Canin was like a Grand Slam acquisition for the company.

03:07:19 Speaker_03
And I think that's partially what led them to then get involved with Banfield and BCA of like, oh, well, let's consolidate a lot of the distribution and value chain here in this prescription pet food business?

03:07:32 Speaker_02
Pretty interesting. I mean, it's a very different business, but they run so decentralized that it's probably okay that it's a services business. You're not having people who are making candy trying to run a veterinary clinic.

03:07:46 Speaker_02
It's a pretty small head office, and it's a very decentralized operation. I think the decision-making authority really rests with the board still, but these independent operating groups are independent operating groups.

03:08:00 Speaker_02
I'll pull a playbook theme forward, which is that this company, obviously, grows through inorganic acquisitions. So in buying Wrigley, Royal Canin, VCA, all these… Mars itself. Mars itself. They've kind of overpaid on a price-to-earnings basis.

03:08:17 Speaker_02
I mean, Wrigley was a 35x and a 27% premium over the public valuation. Royal Canin was a 39x. But if you kind of think about, especially with Banfield Pets Hospitals, they really understood what they were buying.

03:08:32 Speaker_02
So they were able to underwrite better than anyone else.

03:08:35 Speaker_02
And I think this is very similar to the idea that Ho-Nam shared with us way back in our 2021 episode, which is multiples are kind of a blunt instrument used for valuation when you don't actually deeply know and understand the business.

03:08:49 Speaker_02
And when you do, you can just underwrite better than everyone else, and you have more margin of safety in the price that you are willing to pay than the rest of the market does.

03:08:57 Speaker_02
So when they want to come in over the top at a 35x for Wrigley, maybe they know more about Wrigley than other bidders do.

03:09:05 Speaker_03
Interesting.

03:09:06 Speaker_02
Yeah. Or at least the case on Banfield was we've owned pieces of this business over and over. And so now that we've amassed a minority share, we feel good about buying a majority share.

03:09:15 Speaker_03
Yep. I totally buy it.

03:09:17 Speaker_02
Arvin from worldly partners had a good comment to me about this, that they shoot bullets, not cannonballs.

03:09:22 Speaker_02
And when you sort of see that in an acquisition strategy, you should be careful not to judge too harshly when people overpay for things because they're taking these little baby steps to try and understand first.

03:09:32 Speaker_02
And maybe they know something you don't.

03:09:34 Speaker_03
Yup. Speaking of they ran this playbook again with their most recently completed big acquisition of kind bar.

03:09:46 Speaker_02
Yes. $5 billion in 2020 after buying a small piece of it a few years earlier and then buying the rest of it in 2020.

03:09:54 Speaker_03
I didn't realize how big kind was. Kind was doing one and a half billion in revenue. I believe almost completely domestically in America.

03:10:03 Speaker_02
Yeah, and Mars took it global.

03:10:05 Speaker_03
And Mars took it global, yeah. So I think that has been a big success for the company as well.

03:10:08 Speaker_02
Do you know how they grew so big domestically? Ooh, I don't. Starbucks. Ah, makes sense. Checkout counters at Starbucks. Impulse purchase. There you go. There you go. And it fits with Starbucks brand ethos. It's like healthy.

03:10:21 Speaker_02
Honestly, I eat them all the time. It's a five gram of sugar bar. That's super satisfying. That doesn't leave my teeth feeling gross or make me feel like I ate something with a bunch of unnatural ingredients.

03:10:31 Speaker_02
I know it's still a candy bar, but it's a five gram of sugar candy bar. So I think as far as Mars thinking about, geez, we want some sort of diversification hedge. If people stop eating candy bars, they're on a good trend there.

03:10:44 Speaker_03
Which leads us to the final piece of the story, maybe, which is the biggest deal that the company has ever done, or is attempting to do.

03:10:56 Speaker_02
So in August, Mars announced that they have entered a definitive agreement with Kelinova to purchase the company for $35.9 billion. So what is Kelinova?

03:11:09 Speaker_03
Right. Yeah, as we were researching this and getting into this, I was like, Mars is paying $36 billion. What is Kelanova?

03:11:15 Speaker_02
It's like Mondelez. You're like, ooh, what's Mondelez? That sounds interesting and foreign. And you're like, oh, it's craft. It's like a weird corner of craft.

03:11:22 Speaker_03
Yeah. So Kelanova, do I have this right, is Kellogg's minus the American cereal business.

03:11:29 Speaker_02
That is correct. So it's all the snack businesses and international cereal. So the snacks are like Rice Krispie Treats, Pringles, eggs, Pop-Tarts. RxBar, which is gonna be interesting if they'll own RxBar and KindBar.

03:11:42 Speaker_02
It is the largest CPG transaction since the merger between Kraft and Heinz in 2015.

03:11:49 Speaker_03
And so... Another Berkshire Hathaway special.

03:11:52 Speaker_02
I mean, if you think about it, the family is worth $117 billion today, which essentially means the company's worth $117 billion, which is kind of interesting.

03:12:02 Speaker_02
It's a $50 billion company that at least Forbes, I think it's Forbes, pegs it at $117 billion of enterprise value. Of course, there's no market to buy these shares, so who knows how to value it really.

03:12:14 Speaker_03
And when you say $50 billion company, that's their annual revenue?

03:12:17 Speaker_02
Annual revenue, yep.

03:12:19 Speaker_03
So they have started reporting in recent years, or at least alluding to what the top line revenue number is.

03:12:24 Speaker_02
Yes, that's correct. They're going to get a lot bigger, I guess, is the takeaway from this.

03:12:29 Speaker_02
If they're worth $117 billion now, and they're using a bunch of their cash and presumably some outside leverage, we'll have to see, for a $35.9 billion acquisition, that's a big size up.

03:12:42 Speaker_03
That is transformative, yes. It also basically makes them look like Nestle.

03:12:49 Speaker_01
Yeah.

03:12:50 Speaker_03
Which Nestle has been the real competition for years now.

03:12:54 Speaker_02
And Nestle's huge. They're over $100 billion in revenue and they're extremely diversified.

03:13:00 Speaker_03
Extremely diversified, yes. Which, obviously, again, Mars has always been diversified, but nowhere near the extent that Nestle is. And now with the Kelinova acquisition, they're going to look a lot more like Nestle.

03:13:12 Speaker_02
And Mars is going to be selling, I just looked it up, investment-grade bonds to help with its planned sale of Kelinova. So they are raising some outside capital for that, not just using their cash.

03:13:23 Speaker_03
Interesting. Interesting.

03:13:25 Speaker_02
So that brings us to today. David, we were just talking about it in 2021. They did $45 billion in revenue. 2022 was $47 billion. 2023 was $50 billion. And to your point, they're now saying over $50 billion.

03:13:36 Speaker_02
Here's the interesting thing that we have been hiding from listeners the whole episode, and I know you've been dying to say. Mars Snacking did $18 billion in revenue. That is a segment of their business that includes all the candy.

03:13:51 Speaker_02
So we've told this whole story, all about the smaller piece of the business. You'll notice 18 is not only a smaller number than 50, it's less than half of 50. Yeah. Pet care is actually the bigger business.

03:14:07 Speaker_02
59% of revenue comes from the pet care segment, and of their 140,000 employees, almost 100,000 work in pet care. Yep.

03:14:16 Speaker_03
Of course. Service is business. They own thousands of hospitals.

03:14:19 Speaker_02
Yep. So we don't know the margin of the pet hospitals versus the dog food versus the candy. Specifically about Mars, we can probably look at industry comparables to try to understand that.

03:14:31 Speaker_02
But at least on a top line basis and an employee basis, pet care is the dominant component of this business. If you want a little bit of a hint, the new CEO in 2022 came from their pet care division.

03:14:44 Speaker_02
In many ways, they are a pet food company that also makes candy and always has been.

03:14:51 Speaker_02
I mean, if you look back, it was the year after Forest Mars founded the UK division is when they bought the first dog food, which was almost immediately cash generative. Totally.

03:15:02 Speaker_02
That's like the biggest aha moment to me is they've been doing this the whole time. Other than the veterinary services, that is again new. So you might be wondering, well, how significant of the market of VETS do they own?

03:15:15 Speaker_02
Mars owns 3,000 locations out of 35 to 40,000 VETS in the US. So that's like 8% of VETS. They're not just exploring VETS. They're, I don't know, the largest or one of the few largest player in VETS in the entire country.

03:15:31 Speaker_03
I think they are the largest. There are other vet roll-up plays. It's been a darling of search funds and private equity in the last decade is veterinary roll-ups, dental roll-ups, you know, stuff like that.

03:15:43 Speaker_02
Yeah. Looking at the market, at least in the U.S., Mars and Hershey each have about 24% market share of candy and confections, and no one else even comes close. It's the Hershey and Mars show here domestically.

03:15:57 Speaker_02
Internationally, it's kind of a different story. It is a very fragmented industry.

03:16:03 Speaker_02
Mars is the whale with 11%, but the next highest are 7% and 5%, and only a third of the market is made up by the top five companies, Mars, Mondelez, Ferrero, Hershey, and Nestle.

03:16:15 Speaker_02
So two thirds of international candy and confections is made up by smaller companies. And that is even after all these mergers from the last few decades. So there's still this huge international long tail of candy companies. Wow.

03:16:29 Speaker_03
Because there's already been huge consolidation.

03:16:32 Speaker_02
Yeah. So that is the shape of the business today. You've got a pet business masquerading as a candy business. And we continue to perpetrate that narrative.

03:16:46 Speaker_03
Now, obviously the pet business, huge, bigger in revenue, and I'm sure very, very large in profits as well. I don't know. I'm just purely speculating, but I suspect profit contribution wise, they're at least equal, if not bigger on the candy side.

03:17:01 Speaker_03
I could be totally wrong. I don't know. I don't know the economics of pet hospitals.

03:17:07 Speaker_02
Yeah. I would love to know that. If your last name is Mars, please reach out or join us in the Slack, acquire.fm slash Slack. We'd love to hear from you.

03:17:15 Speaker_03
Yeah. Power? Power. So this is a segment we do in analysis in every episode based on Hamilton Helmer's excellent Seven Powers book and framework.

03:17:26 Speaker_03
And the idea is that there are seven ways that a business can sustainably generate significantly more profit than its closest competitors.

03:17:36 Speaker_03
And those seven ways are through counter positioning, scale economies, network economies, switching costs, process power, branding, and cornered resources.

03:17:47 Speaker_03
We have spent a lot of this episode talking about the biggest and most obvious one here in scale economies.

03:17:54 Speaker_02
Actually, like a lot of the businesses we study on this show, scale economies is the biggest deal.

03:17:59 Speaker_03
It is actually kind of crazy. It's almost always scale economies is a big part of it.

03:18:02 Speaker_02
I think for the biggest businesses in the world, it's these businesses that operate at high gross margin in very large markets. where you basically can build out a massive, massive fixed cost base and then have great operating leverage?

03:18:18 Speaker_02
Can you amortize your high margin sales in huge volume across a comparatively small fixed cost base? Manufacturing businesses are like that. Software businesses are like that.

03:18:31 Speaker_03
Cloud competing is like that.

03:18:33 Speaker_02
Exactly. And the businesses that get the biggest tend to benefit from this principle.

03:18:38 Speaker_03
Totally.

03:18:39 Speaker_02
Okay, scale economies, check. Done. So there's a thing I want to bring up with you, and this has been a debate in the acquired slack, I don't know if you've seen it at all, around branding.

03:18:49 Speaker_02
So the classic definition of branding, and I need to reread Seven Powers to refresh myself on this, but the idea is if I show you two products side by side that are identical but one is branded, will you pay me more money?

03:19:03 Speaker_02
for the one with the better brand, the Tiffany ring versus the unbranded ring. I think there's another way that branding shows up. We said that IKEA doesn't have brand power last episode. That's obviously not true.

03:19:21 Speaker_02
It might be technically true in that they don't take margin because of their, but they have to deploy their brand power in another way, in the same way that Mars, I don't think, charges more for a Snickers than a different candy bar.

03:19:36 Speaker_02
Mars doesn't take price in the form of brand. But they do something else. There's brand power here for sure. Consumers pick Snickers over unbranded, random, unsafe, untrusted candy bar.

03:19:47 Speaker_03
Definitely. I think it's got to be a version of our Costco episode, scale economy shared, brand power shared.

03:19:54 Speaker_02
There was someone in the Slack that pointed out that this brand power could translate to volume. Essentially, if you trust the brand more and the prices are the same, you just buy more of it over time.

03:20:06 Speaker_02
So you give more absolute margin dollars to that company over time, especially in a reoccurring purchase business like this. That's the way that brand power accrues. It's not in margin percentage, it's in total lifetime margin dollars.

03:20:21 Speaker_02
I totally buy that. So by that definition, they absolutely have branding.

03:20:25 Speaker_03
Yep. I've got one I want to talk about. I'm curious if any of the other set jump off the page to you.

03:20:32 Speaker_02
Hmm. I think the candy industry used to have cornered resources. I don't really think it does anymore. Same with process power.

03:20:39 Speaker_02
I'm not convinced that anyone's actually developed a superior way to make something that is not known by others in the industry.

03:20:48 Speaker_03
I think Mars has always had the best technology and the best equipment and the best resources. There's actually great stories about Forrest, perhaps both himself but also through

03:20:58 Speaker_03
employees and outside firms he'd hire would come up with all these technical improvements to the manufacturing equipment, but they would never patent it because he didn't want to tip off any competitors.

03:21:07 Speaker_02
Makes total sense. Keep it trade secret.

03:21:09 Speaker_03
Yeah, totally.

03:21:10 Speaker_02
Uh, no, none of the others jump off the page to me.

03:21:13 Speaker_03
So obviously we did not do a deep dive on the pet business despite it being the larger business. I think though the main power in the pet business is switching costs.

03:21:25 Speaker_02
Oh, if your dog doesn't have problems with its current food, you're never changing to another food.

03:21:31 Speaker_03
Yes. Well, there's a couple of dimensions. One, you're never going to change to another food because it's going to cause digestive issues for a while.

03:21:37 Speaker_03
Like, imagine if you only ate one food for years and years of your life, and then all of a sudden you started eating.

03:21:44 Speaker_02
What are we doing? We should be feeding him table scraps so they get a well-rounded diet. Just like the 30s. Exactly.

03:21:49 Speaker_03
Exactly. I mean, it happens. Dogs switch food all the time, but it's not like humans choosing to eat something else. It's a process. Right. But then pet hospitals, like vets, like huge, huge switching costs.

03:22:04 Speaker_03
So I actually think this is like the primary power in the business on the pet side. Yeah, I think that's right. Okay. That's power. Should we do playbook?

03:22:12 Speaker_02
Yes. The first one that I have is that you actually can build a durable, sustainable business through great marketing, not just great product.

03:22:24 Speaker_02
And this makes me uncomfortable as someone who kind of doesn't want to believe that, who always believes the best product wins. I mean, on the meta episode, the takeaway was their growth came from product and not from marketing.

03:22:36 Speaker_02
On this episode, I kind of feel like it's the opposite. The whole thing is the story of marketing campaigns and how whoever had the better message for America at that moment, I mean at least post-1960, was able to lean on that.

03:22:53 Speaker_03
After the advent of television.

03:22:54 Speaker_02
Yeah. And of course paired with distribution, paired with grocery stores, paired with... Actually, let's talk about the ET thing.

03:23:03 Speaker_03
Yes, let's talk about the E.T. thing. This is really fun. So in the late 1970s, early 1980s, when Spielberg is making E.T., the movie E.T., he's written into the script that E.T. is going to be lured into the house by a trail of M&Ms.

03:23:24 Speaker_03
And anybody who remembers the details of the movie remembers that it is not M&M's.

03:23:29 Speaker_02
And M&M's passed on the opportunity because it had to come with a guaranteed million dollars of co-marketing, consumer promotion, trade promotions, displays, featuring E.T.

03:23:42 Speaker_02
Mars was not down to do that with the M&M's characters and passed on the opportunity. If you saw the movie, there's a pretty memorable moment where it's Reese's Pieces.

03:23:53 Speaker_03
Yep.

03:23:54 Speaker_03
This was relatively early in the brothers' tenure, so I wonder, A, if Forrest would have made a different decision, and also, B, if the brothers would have made a different decision had they had a little more confidence in their own security and their own place as CEOs.

03:24:12 Speaker_03
So I think there was a timing element to this.

03:24:14 Speaker_02
But Hershey almost passed too. Someone had to basically go bang down the door and say, I'll actually pledge a million dollars from my budget that I was going to use for other stuff to use for this instead.

03:24:24 Speaker_02
So the Hershey leadership was also going to pass on it.

03:24:26 Speaker_03
Yeah, I mean this was one of, if not the biggest deal up until this point for product placement. Yeah. It was a paradigm setting deal.

03:24:35 Speaker_02
And it worked in a huge way. Multiple sources cite that it 3x'd the sales of Reese's Pieces when this came out.

03:24:43 Speaker_02
And Reese's Pieces, they launched it a year before, it had done well initially, it kind of fell off, and then they were trying to use this to, hey, maybe we can galvanize sales.

03:24:51 Speaker_02
And I think it tripled Reese's Pieces sales for a while, and then it ultimately Everyone knows Reese's Pieces are not M&Ms. They're good, but they're never going to be competitive with M&Ms.

03:25:01 Speaker_03
But at least in my experience, I haven't been to a movie theater much lately, but I believe there is a lasting legacy of this, which is Reese's Pieces are a mainstay at movie theater concession stands. And it's all because of this.

03:25:15 Speaker_02
Totally. So maybe the takeaway is actually M&M's are a better product and Reese's Pieces are sort of this specialty niche product and that's why they don't have the market share.

03:25:25 Speaker_02
And maybe that this whole postulate is wrong that marketing can create durable brands. And the reason why all these Snickers and Milky Way and M&M's are victorious is because they're just better products.

03:25:38 Speaker_02
Well, I think they're good products, but I think it's like the nostalgia element is just so huge. Right. They're somewhat commodity products or could have been either product.

03:25:46 Speaker_02
And then it was about who could create a better lifetime story over the story of your life about the associations you have with that product.

03:25:53 Speaker_03
I think the candy industry is much like the luxury industry in that once you have an established product and product brand, it is impossible to kill it. You just can't.

03:26:05 Speaker_03
I mean, all the fumbles that Hershey had for decades and decades still today, what is a chocolate bar in America? It's a Hershey bar. You just can't kill it.

03:26:15 Speaker_02
That's so true. And let's flip back to the Mars side of the world. the associations that they have leaned into with the brands that people love. It's a very Disney-like playbook that M&M's has run.

03:26:29 Speaker_02
In fact, they operate a M&M's store in Disney World or in Disneyland. I can't remember which one. But they associate with the holidays.

03:26:37 Speaker_02
They've got that commercial where the two M&Ms characters come in the house, Santa's just come down the chimney, they run into him at the Christmas tree. They do exist. So great. I mean, it's a classic.

03:26:47 Speaker_02
They've run it every year for 20 years or something. I think it started in the 90s. Yeah. the rolling stones they've associated with for Snickers. They had the, I can't get no satisfaction ad, obviously the Olympics.

03:27:01 Speaker_02
I mean, I'm looking at my Snickers bar right now. The only other logo on it that is not Snickers is the NFL. I mean, they find ways to associate with national or global premier brands that everyone loves, that you have nostalgia for.

03:27:15 Speaker_02
In fact, NASA, they went up on I think it was the Space Shuttle.

03:27:21 Speaker_02
NASA can't obviously endorse because it's a government agency, but it's on the menu and it's a part of all the astronaut videos you watch where they're popping M&Ms up and having fun trying to chase them around the cabin in zero gravity.

03:27:33 Speaker_02
It's been a strategy for Mars to chase known, loved, universal brands.

03:27:41 Speaker_03
Well, sounds like we've learned a lot here at Acquired from the Mars playbook.

03:27:47 Speaker_02
Another one, just like the innovation on commercials, think about how long they've had those computer-generated M&Ms characters. I looked it up. The first one I could find was in 1994.

03:27:58 Speaker_02
Jurassic Park was in 93, and that was effectively the first use of computer-generated 3D modeling in cinema. That's right. Within one year, they were running commercials with those characters. Yeah. Wow.

03:28:12 Speaker_02
They know how to create these durable marketing franchises and moments. In some ways it's actually shocking that they missed ET given how good they've been in all these other facets.

03:28:25 Speaker_02
And ultimately the ET thing's a fun story, but did missing it really hurt them? Not really. Not in the long run. No. My last one around this is in this sort of marketing world.

03:28:37 Speaker_02
Do you remember in 1995 when they said they were going to do away with the tan M&Ms? Yes. Do you remember anything about that?

03:28:44 Speaker_03
Is that when they were replacing it when there was a vote, right, of which color to replace it with and blue won?

03:28:51 Speaker_02
Absolutely. Genius.

03:28:53 Speaker_03
Total genius.

03:28:54 Speaker_02
They needed to spice it up because basically it was boring. And does it cost them anything? Or does it have any impact on their business if they change the color of one to something else? No. Do they actually care what it is? No.

03:29:05 Speaker_02
But they got millions and millions of Americans to call 1-800-FUNCOLOR, which, by the way, I called yesterday. Oh, amazing. It is no longer in service. You call 1-800-FUNCOLOR to vote.

03:29:19 Speaker_02
So they're giving everyone this like vested interest in what the new color is. Blue wins. Blue replaces tan. They lit up the Empire State Building after announcing it was blue with blue. Genius.

03:29:33 Speaker_03
So great. This is like the Facebook internationalization where they have local people in each market translate and then they feel ownership over the product. Yeah.

03:29:42 Speaker_02
Yes.

03:29:43 Speaker_03
Totally.

03:29:44 Speaker_02
All right, that's all I got on their consumer marketing.

03:29:46 Speaker_03
I'm sure you read too, Mars is constantly rebalancing the ratios of colors in M&M bags to suit current tastes.

03:29:55 Speaker_02
Yes, it's amazing. Yeah, it's not even. I was shocked. I was like looking at the bag trying to, I'm not going to go count, but apparently it's a secret what the ratios are.

03:30:05 Speaker_03
But I think they're adjusting it constantly.

03:30:07 Speaker_02
Interesting. I believe that. Okay, next one I've got is be a recession-proof business. I thought candy was the one I was talking about, and the deeper I got into the research, I realized, nope, pet food is one too.

03:30:21 Speaker_02
People don't stop buying candy when times are bad, and they certainly don't stop feeding their pets, especially now in this era where we consider pets part of our families. And I think the data shows it.

03:30:30 Speaker_02
If you look back at 2008, neither of their businesses took a hit from being in that recession, and that's an awesome business to be in if you can get it. A corollary to being recession-proof is being universal.

03:30:42 Speaker_02
A survey done by the Food Institute says that 98% of households buy candy every year, and of those, 97% are reoccurring purchases at an average of 35 times a year. Again, good, good business if you can get it. It's just like our Starbucks episode two.

03:31:01 Speaker_02
Sugar is an addictive habit, so all the research, I don't know, it seems like sugar is way worse for our bodies than coffee. I'm not at all worried that I'm addicted to coffee. I'm pretty worried that I am addicted to sugar.

03:31:13 Speaker_02
In fact, I feel pretty crappy after eating all these M&Ms and Snickers. I probably ate more than a recommended amount because we've been sitting here for five and a half hours doing this.

03:31:21 Speaker_02
But that's probably the most concerning thing about the whole business is they're extremely participatory in the increase of sugar consumption among Americans and around the world, and that it's very good for their business, at least their original core business, if we eat more sugar.

03:31:36 Speaker_02
So I can see why they're diversifying away from those core franchises.

03:31:40 Speaker_03
into Kind and Kelanova, et cetera, et cetera. Yep.

03:31:44 Speaker_02
More Kind bars are in my future. Maybe some detox tomorrow.

03:31:48 Speaker_03
All that said, no matter what happens, I don't think M&Ms and Snickers, they're not going anywhere.

03:31:55 Speaker_02
Even if everyone starts taking Ozempic, I don't actually think chocolate sales are gonna fall.

03:32:00 Speaker_02
In fact, all the numbers show to this point, everybody who's been saying, oh, people are trying to eat healthier, and they're doing their very best, and they're changing their habits, chocolate revenues are still at an all-time high.

03:32:11 Speaker_03
Yeah, I think this is a good place here in playbook. There are a couple things about chocolate that I want to talk about that are more general than specific to Mars. One is just that chocolate. I'm sort of biased here because I love chocolate. Me too.

03:32:24 Speaker_03
Same. I loved doing this episode because I love learning about chocolate. It really is a food. Part of that is marketing and part of that is a hundred years of Mars marketing and Hershey's marketing and all that.

03:32:34 Speaker_03
Really, really, when you were describing the production process of chocolate earlier in the episode, like it is one of the most complex, rich foods on the planet.

03:32:45 Speaker_02
When Milton Hershey shut down and got out of the caramels business, he thought caramels is a fad, but chocolate is a complete food.

03:32:52 Speaker_03
Chocolate is a food, exactly. And like, he was totally right. I don't think chocolate is going anywhere and the ozempic risk for chocolate is way lower.

03:33:02 Speaker_02
Far lower than like gummy candies.

03:33:04 Speaker_03
The other aspect about chocolate though, and I think here is the right place to talk about it, is The industry and what chocolate is, is changing hugely.

03:33:14 Speaker_03
I think most people have no idea about this, but both the first and second order effects of climate change are like massively, massively changing the chocolate industry. The cacao tree is a very, very sensitive tree. It's this bizarre plant.

03:33:32 Speaker_03
I don't think we talked about this earlier, but the pods, the fruit that have the seeds and beans in them, it grows directly on the trunk of the tree. There's no like branches. It's the weirdest thing to look at.

03:33:44 Speaker_03
It's like these football sized pods that just go right off the trunk of the tree.

03:33:48 Speaker_02
Yeah, and it's something like only 25 years of their full hundred and something year life, they actually can produce the fruit in a way where you can use it to make chocolate.

03:33:58 Speaker_03
Yeah, so it's this super, super long lead time to get a tree to the point where it's productive. And it's a really narrow temperature and climate band that they can be grown in.

03:34:10 Speaker_03
So as both world consumption and thus production of chocolate has increased hugely over the past decades and climate change is happening, these trees are so sensitive to it like it's really impacted production.

03:34:26 Speaker_03
That's the first order effect on the industry. The arguably as big or bigger is the second order effect of how the industry has responded.

03:34:34 Speaker_03
So there's been huge efforts over the last couple decades in genetic engineering and hybridization and breeding of cacao trees to optimize for resiliency and output and production.

03:34:50 Speaker_03
All of which is good, you know, ensuring continued production of chocolate. As long as it doesn't come at the expense of taste. Right. So that's the downside.

03:34:58 Speaker_03
It has not been optimizing for taste, either preservation of the current taste or just good taste in general. So like actually...

03:35:07 Speaker_03
The taste of chocolate has changed a lot in the last few years as the plants themselves have been engineered and changed a lot.

03:35:15 Speaker_02
To be more resilient and productive.

03:35:17 Speaker_03
Yep, exactly. So a lot of the real, real richness and complexity that has for thousands of years made chocolate like a super attractive food for humans. is sort of in danger of being lost or being watered down.

03:35:33 Speaker_03
I will say the industry is very focused on this. This is like a existential, super, super important focus of Mars and the entire chocolate industry.

03:35:45 Speaker_02
Yeah, that is the correct takeaway. Whenever you talk to people in the industry, this is what they're talking about. Alright, I've got a couple more. The first one is conglomeration and doing it well.

03:35:57 Speaker_02
They very early on learned how to acquire and conglomerate, how to do acquisitions, which parts to centralize. Spoiler alert, very few. Which parts to decentralize, actually most of them.

03:36:09 Speaker_02
When you are running two completely different businesses and running two completely different geographies from the first five years of your company's existence, you end up actually developing the muscle to do this well.

03:36:21 Speaker_02
I think it's very different than these companies that later in life are like, we're going to get into X, Y, Z. Mars always has been a diversified conglomerate. They actually look a lot like LVMH in that

03:36:33 Speaker_02
They aren't a private equity firm, they're a buy and hold. I think they've made 30 acquisitions since the 90s, and they've only sold two things since 2015. It's very Bernard Arnault style.

03:36:46 Speaker_03
They also don't rebrand things. They keep the original brands, even in the pet hospital business.

03:36:53 Speaker_02
Yeah, that's super interesting.

03:36:54 Speaker_03
You think of anywhere where you would want to centralize the brand, it's like, no, VCA, Banfield, they're separate.

03:37:00 Speaker_02
Yeah, that's super true. And then my last one is duration. If you look at them over the last hundred years, they have grown revenue at a compound annual growth rate of 14% for a century. Pretty good.

03:37:13 Speaker_02
The question sort of comes back to what conditions enable a business to grow like that for that long? It's global applicability. It's the margin structure you're talking about where you can take in commodities and spit out brands.

03:37:29 Speaker_02
It's the operational efficiency of doing it. It's the reoccurring purchase that has a habitual, if not addictive, component to it.

03:37:39 Speaker_03
It's the scale economies of being able to achieve and maintain number one dominant market share over many decade long periods.

03:37:48 Speaker_02
Yep. It's pretty amazing that those things come together in a way that make it possible to grow at 14% for a century, if executed well. Wild. All right, David, we are into the quintessence.

03:37:59 Speaker_03
Quintessence.

03:38:01 Speaker_02
Listeners, this is a new thing that we added as we tried to figure out how do we land the plane? What is the big takeaway that we can't stop thinking about after talking through the whole story of the episode?

03:38:12 Speaker_03
Great. I'll go first. A couple of things about this company. One, Man, Forrest Sr.

03:38:19 Speaker_03
was such a freaking G. And because the company is so private, like nobody knows about him, you know, like, but he should be right up there with Sam Walton, Henry Ford, with the very, very greatest American entrepreneurs of all time.

03:38:35 Speaker_03
He was truly a genius. I think probably had a lot of complications and faults in his personal life.

03:38:40 Speaker_02
Which is the same thing as basically everyone we cover on this show.

03:38:44 Speaker_03
Rockefeller all of them. Yes, but when it comes to business and entrepreneurial leaders He's one of the greatest. Yep, for sure.

03:38:54 Speaker_03
Okay, so that's one that's not necessarily the quintessence of the company but I feel like we need to say that just because it's not like a widely accepted fact. Totally. Two, though, you know, we have not yet studied Coca-Cola.

03:39:05 Speaker_03
We haven't studied Procter & Gamble. So with the caveat that those companies and ones like them probably also fit this bill, I think Mars is one of the first modern companies. Hmm. That's interesting. You know, everything that Forrest was doing

03:39:23 Speaker_03
back in the 30s when he was starting, were like radical and now are just completely widely accepted.

03:39:31 Speaker_03
Everything from open office structures to diversification, to getting into pet food, to seeing that dogs and cats were going to become part of families.

03:39:40 Speaker_02
Maximizing yield on equipment for efficiency.

03:39:43 Speaker_03
Maximizing yield, operating, managing companies in a scientific way, getting into television advertising. You know, all of it, he was like really, really visionary on this stuff in an era where none of his competitors were doing this.

03:39:59 Speaker_03
I mean, God, the market research and the positioning that they did with M and M's taking what essentially was a failed product and then doing the research to understand who the target consumers were and who the target buyers were and how that was different.

03:40:13 Speaker_03
And then tailoring marketing messages. Appropriately for that way, way, way ahead of its time.

03:40:19 Speaker_02
Yep, you're so right. It's funny, that leads me all to my quintessence of this episode is how path dependent the outcome was. And what I mean by that is, could you do all of the things that Forrest Mars did to create a company like this today?

03:40:41 Speaker_02
No, you could not. It required being in that place in that time with that technology and that competitive set.

03:40:49 Speaker_02
And this is probably true across all episodes, but it just strikes me in the face right now that he needed to have the chip on his shoulder from the relationship with his dad. He needed the assets that he got from his dad when he went to Europe.

03:41:03 Speaker_03
Yeah. Oh, even before that, I mean, he wouldn't have gone to Yale if it weren't for his dad finally becoming somewhat wealthy. And if he hadn't gone to Yale, he wouldn't have gotten exposed to the DuPonts. Yeah, so many path dependencies here.

03:41:16 Speaker_02
Right. He happened to be an American capitalist competing against British Quaker and British Quaker-inspired competitors.

03:41:28 Speaker_02
Industrialization and mechanization, the timing of television and commercials and grocery stores when it did, all of these were brilliant decisions executed within the context of his time.

03:41:38 Speaker_02
But you needed to be in that time, in that place, in that specific situation in order to pull any of this off. So the question is, how do you do this today with a completely different playbook?

03:41:47 Speaker_03
Yep. You don't. You build your own company. Because all of the great companies that we study are their own companies.

03:41:53 Speaker_02
Yep. That's exactly right.

03:41:55 Speaker_03
Love it.

03:41:56 Speaker_02
All right. Before we get to carve outs, I have one piece of trivia for you. Ooh, I love trivia. So you mentioned that the Hershey Trust

03:42:05 Speaker_02
is responsible for maintaining the Milton Hershey School, which started as a school for orphans and now is a school for students that come from low-income families or sort of need a home or, you know, just need a benefit from what the school provides.

03:42:19 Speaker_02
David, how big is the endowment of the Milton Hershey School?

03:42:23 Speaker_03
I think it is by far the largest endowment of a secondary school in America and assuredly the world. Yes. I want to say it's like 10 or 15 billion.

03:42:35 Speaker_02
Yep. $17.4 billion. Yeah. For a high school? Well, it's some younger than that, but the enrollment of the school is 2,200 students. And so the endowment dollars per student, I assume, are the absolute highest anywhere in the world.

03:42:52 Speaker_03
It is totally incredible. I mean, we debated when we first set out to do this episode whether it should be about Mars or Hershey. We ultimately decided Mars because these days it's the bigger and more important company.

03:43:04 Speaker_03
But the Hershey story is freaking wild.

03:43:06 Speaker_02
Milton Hershey gave the whole company to the Hershey Trust.

03:43:09 Speaker_03
Yeah, which operated a school for orphans, like a high school for orphans that owns the company.

03:43:15 Speaker_02
The primary shareholder has a primary purpose that is maintain the school.

03:43:19 Speaker_03
Right. It is a very specific mission to support this school.

03:43:24 Speaker_02
They have a hard time spending all the money. I mean, they're never going to get close to actually spending the endowment dollars or have any risk of spending the endowment dollars.

03:43:31 Speaker_02
Just think about what 4% of $17 billion is a year and think about what the required budget is to run a 2200 person school.

03:43:37 Speaker_03
Yeah, totally wild. Love it.

03:43:40 Speaker_02
Okay, carve-outs. I got three. One we've already talked about. Dandelion chocolate. These people are the best. The factory is so freaking cool and the chocolate is absolutely amazing.

03:43:52 Speaker_02
They are a part of the bean-to-bar movement, so they source beans that are not commodity beans. They specifically source single-origin beans They go the extra mile to, you know, remove any imperfections.

03:44:06 Speaker_02
And then in a very craft way, they make some of the best chocolate you've ever tasted.

03:44:10 Speaker_03
It really is like the wine industry.

03:44:12 Speaker_02
Yeah, I think I speak for you, too. We're both very grateful to Todd, Elaine and the team there for just kind of taking us through it all and explaining how chocolate is made. It was very cool.

03:44:23 Speaker_02
So if you're looking for any late holiday gifts or just any good chocolate, I can't recommend Dandelion enough.

03:44:29 Speaker_03
Ah, well, you stole one of my carve-outs. Dandelion was one of my carve-outs. But specifically, the Dandelion Advent Calendar. Didn't you buy that for Jenny? Which, thanks to our relationship with the company, yes, I got the opportunity to buy.

03:44:42 Speaker_03
I bought the double so that Jenny and I can both enjoy every night. Oh, my God. This is the single greatest advent calendar that has ever been created in the history of mankind. The artwork, the design, the presentation.

03:44:55 Speaker_03
It's like, this is if Hermes made an advent calendar with all of the presentation and the objectness. Like every day is an ornament that can go on the tree. It's so great. And then the chocolate inside.

03:45:08 Speaker_03
They partnered with chocolatiers all over the country. I think maybe even internationally, all over the world. to just highlight some of the very best talent in the chocolate making industry globally. Anyway, amazing. Dandelion, they're so great.

03:45:23 Speaker_02
All right. My second one, I think a while ago I mentioned I got a Tesla model Y, which is just an awesome car. It's just great.

03:45:31 Speaker_02
Went out the other day, noticed that there was a bolt sticking through the tire that we had driven over and the tire was flat.

03:45:38 Speaker_02
I opened up the app and within 90 minutes, there was somebody at my house that was taking off the wheel, throwing it in a truck, putting on a temporary wheel. So I was good to go immediately, you know, within 90 minutes.

03:45:53 Speaker_02
And then two days later, it showed back up at my house. They had repaired the issue with the tire, pumped it back up, gave me my wheel back, took the other wheel. I didn't have to do anything. I'm just standing there.

03:46:05 Speaker_02
And the whole thing cost me like 120 bucks.

03:46:07 Speaker_03
Wow.

03:46:08 Speaker_02
It was like the best car service experience I've ever had in my life.

03:46:12 Speaker_03
That's pretty awesome. It is wild how different Tesla is from other car companies. The Model Y is the best family vehicle ever created by mankind. It's like the Model T of our generation.

03:46:26 Speaker_02
Yeah, it totally is.

03:46:28 Speaker_03
So great. Okay, that's number two. You got one more?

03:46:30 Speaker_02
Last one, I think last year I carved out Silo. Silo season two is here on Apple TV and it is excellent.

03:46:38 Speaker_03
Yeah. per usual part for the course for me. I have not watched any of it, but I did read the book, and the book is excellent.

03:46:45 Speaker_02
You read Wool?

03:46:46 Speaker_03
I read Wool, yep.

03:46:47 Speaker_02
It's great, though. I mean, a lot of times shows, I think, have a hard time maintaining their season one into momentum into two and two into three, and there's no problem with that here.

03:46:55 Speaker_03
Didn't you get to meet the author a while back?

03:46:58 Speaker_02
Hugh, yeah. He's great. He's really great.

03:47:01 Speaker_03
All right, I had one other besides the dandelion advent calendar, which is the movie Home Alone.

03:47:06 Speaker_03
This is sort of a humorous one, but since this is a nostalgic episode about our childhood and the holidays, Home Alone was my very, very, very favorite movie growing up as a kid. I saw it in theaters when it came out. I was the perfect age.

03:47:22 Speaker_03
I think Macaulay Culkin and I are roughly the same age, give or take a year. Loved it so much. After Thanksgiving holiday travel this year, I have a whole new appreciation for that movie, which is the perspective of the parents.

03:47:38 Speaker_03
Did you leave one at home? No, but I almost. Did you come close? I now understand exactly how it could happen. And I am excited to watch it again at the holidays this year through the lens of mom and dad.

03:47:56 Speaker_00
Nice.

03:47:57 Speaker_03
Yeah, Thanksgiving travel was pretty wild this year. We went back to Pennsylvania to visit my parents and it was exciting on the plane ride there. I'll put it that way. And, uh, the most awesome moment though.

03:48:11 Speaker_03
I mean, it was, this was one of those plane trips as a parent where, oh man, like the lowest of the lows, shall we say.

03:48:18 Speaker_02
You're sorry for everyone around you.

03:48:20 Speaker_03
Sorry for everyone around you, but the most amazing thing happened. We landed after the five and a half hour flight and a very kind gentleman sitting in the seat directly ahead of my three-year-old daughter who was

03:48:34 Speaker_03
causing ruckus the whole time and kicking his seat, et cetera. He turned around, he said, are you David from Acquired? I was like, yes, I'm sorry. You're like, oh no, I've been identified. Oh no, oh no.

03:48:44 Speaker_03
And he's like, I've been listening to you the whole flight. And then some other people in the row started popping up and being like, oh, I've been listening.

03:48:51 Speaker_02
It was, uh... Wait, multiple people were popping up and saying...

03:48:54 Speaker_03
Yeah, that they listened to a choir that either had been listening on the flight or these are their favorite episodes. It turned what was like truly one of the lowest lows of my parenting journey into a wonderful memory.

03:49:06 Speaker_03
So thank you to you all on that flight from SFO to Philadelphia the day before Thanksgiving.

03:49:12 Speaker_02
After watching your daughter kick someone's seat for five hours, you have to be like, I really hope that guy doesn't ever know who I am.

03:49:17 Speaker_03
Yeah, yeah, yeah. Yeah, that was my first reaction to have like, oh, no. But but no, I turned into the most wonderful turnaround of the day. Wow.

03:49:29 Speaker_02
Wow. Wow. Alright listeners, well with that, a huge thank you to JPMorgan Payments, to Crusoe, and to Statsig. You can click the links in the show notes to learn more about some of our favorite companies.

03:49:41 Speaker_02
Special shout-outs also to Arvind Navaratnam at Worldly Partners for his awesome, awesome write-up on Mars. There's way more data in that than we were able to describe on air, so if you want to see some great charts

03:49:53 Speaker_02
industry stats on chocolate over the years, on sugar consumption, on Hershey, on Mars, on the whole competitive set. It's linked in the show notes. I can't recommend reading through his whole PDF enough.

03:50:05 Speaker_03
Oh, Arvid is so great.

03:50:06 Speaker_02
So great. To Todd at Dandelion Chocolate, as we mentioned.

03:50:10 Speaker_03
Yes, and also Clara Shen, who works at Dandelion as well and chatted with me and had a lot of great insights also on the industry and on Mars.

03:50:18 Speaker_02
Yeah. To Gary Guitard, who I'm sure many of you have eaten Guitard chocolate, either directly by knowing it or indirectly by not knowing it, as they are the chocolate supplier to many excellent chocolate companies around the world.

03:50:30 Speaker_03
Including the world-famous See's Candies.

03:50:34 Speaker_02
Yes. Which I didn't know how much I enjoyed Guitard chocolate until, well, I realized how much of it I'd eaten through seas.

03:50:43 Speaker_03
Yes. Speaking of trivia, I've got one for you related to Guitard. Before Milton Hershey started making chocolate in 1900, there were three chocolate producers in America

03:50:57 Speaker_03
who predated him, and I believe all of which are still operating, making dark chocolate, not milk chocolate, obviously, at the time. One of which was guitared here in San Francisco. Do you know who the two others were?

03:51:10 Speaker_03
I don't think you will get the one on the East Coast, but the third was also located here in San Francisco.

03:51:17 Speaker_02
Ghirardelli.

03:51:18 Speaker_03
Ghirardelli, yep. Yes.

03:51:19 Speaker_02
And then the East Coast, I don't know.

03:51:21 Speaker_03
The one on the East Coast was Walter Baker's in Massachusetts, I think.

03:51:25 Speaker_02
Oh, shoot. I did know that. Yeah. Yeah. Baker's sort of like the godfather of chocolate in the U.S., right? I think that's right.

03:51:32 Speaker_03
I think that's right. But it's super interesting how two manufacturers popped up here in San Francisco in the 1800s.

03:51:37 Speaker_02
Nice climate for it before air conditioning, at least.

03:51:41 Speaker_03
And then one more big thank you to say on multiple fronts to Joelle Glenn Brenner, the author of Emperors of Chocolate and the only journalist ever to get access to Mars. One, for just reading the book.

03:51:54 Speaker_03
We read a lot of business books, business histories here on Acquired and Emperors of Chocolate is one of the greats. It's a total page turner. And then also thank you to her for chatting with me as we were preparing.

03:52:06 Speaker_03
She was very, very helpful in clarifying a few points and getting the story behind the stories. Can't recommend the book enough. Go check it out.

03:52:15 Speaker_02
Great. Well, if you liked this episode, go check out our other episodes on LVMH, Sony, or Berkshire Hathaway if conglomerates are your thing, or for more complex manufacturing, Novo Nordisk, the makers of Ozempic.

03:52:28 Speaker_02
Or, if you want something more recent, check out ACQ2. We just had that awesome conversation with the CEO of Arm Holdings, Rene Haas, if you're looking for more semiconductors in your life.

03:52:38 Speaker_02
And if you want to discuss it, please come join us at acquired.fm slash slack with the other smart, respectful, kind folks there. With that, listeners, happy holidays, and we will see you next time.

03:52:51 Speaker_03
We'll see you next time.

03:52:55 Speaker_04
Is it you, is it you, is it you who got the truth now?