Wednesday, March 6, 2019

PERSONALITY SPECIAL .....The Delicious History of Hershey Chocolate PART II


The Delicious History of Hershey Chocolate PART II

Kenny: What's the turning point for him? He's got these two failures under his belt. He's got no money.
Koehn: No, and it's a wing and a prayer, and it's some relative’s money. But the real kick-starter is an English businessman who comes through Lancaster and tastes his caramels, and said, "You need to expand. These are so good." He gets into caramels in the mid-1880s, a little bit earlier. He's fiddling and diddling because it's all about milk—the milk not going sour, the caramel being the right texture, and being tasty. He found something called the Lancaster Caramel Factory. So these angels swoop in, basically like lots of great startup companies that become silverback gorillas in the land of business, and help him along because they like the product and they believe in his determination. This guy is so determined, he just won't take no for an answer. So, he's doing very well in the Lancaster caramel factory and then gets interested in chocolate. He gets interested in chocolate because he happens to be, in 1893, in Chicago at the Grand Columbian World Exposition, a world fair, very, very famous world fair there. He sees a chocolate manufacturing exhibit and that gets him interested. Comes back and starts playing with chocolate, but it still takes him a good seven or eight years before he really has tinkered his way into a chocolate texture, a means of manufacturing, a possible way of creating. Because what's a chocolate bar supposed to look like? You don't know that before you have mass chocolate bars, right? Mass marketed chocolate bars. He needed a way of putting it together.
So it takes him a good seven or eight years before he's ready to say "I'm done with caramels. I'm going whole hog for chocolate." That begins to happen in the very late 1890s. He sells the Lancaster Caramel Company for one million dollars, takes that money and pours it into chocolate and into milk chocolate. Another interesting historical fact: What chocolate there was around [at the time], goes all the way back to the Baker brothers. Many of your listeners who are cooks will know Baker’s Chocolate. That goes all the way back to the late 1700s. The Baker brothers were using dark chocolate.
Kenny: That's not the kind of chocolate you would snack on.
Koehn: No, and it hasn't yet become, its health benefits are not known. It's not like it is today at all, dark chocolate. It's mostly bitter. People used it with sugar to make hot chocolate for their kids. It's a very different market, but Hershey is convinced that milk chocolate—and he's piggybacking on people like Nestle, who in Switzerland at this time is beginning to produce milk chocolate that tastes delicious, and can be sold and won't go bad. He is again riding a wave that's not so obvious in Pennsylvania, but that's happening elsewhere becomes his stake in the ground is chocolate, milk chocolate, affordable milk chocolate. He makes another really important decision, which is, I'm not going to be a luxury good.
Kenny: That was different because at the time chocolate was considered a luxury good.
Koehn: Largely a luxury. Even Cadbury, which eventually becomes a really successful mass market company, started out selling primarily to wealthy Britons.
Kenny: This was the point in the case where I started to really see him as a visionary. Somebody who was innovating in really interesting ways and I thought it began in the way he set up the manufacturing plant. Can you talk about that a little bit?
Koehn: A lot of entrepreneurial success is based on placing these unusual bets with a lot of people telling you, "That's never been done before. You can't do that." And the entrepreneurs say, "I think we can." Another one of those decisions—besides going mass market, using milk, and figuring out how to make this taste really good—was I'm going to build a town. I'm going build a factory in a town and I'm going to locate it in a place where I don't really have a lot of transport. It's not like you're in New York or Philadelphia or Boston, it's not clear how we are going to easily reach lots of markets. But the draw for Pennsylvania was threefold. One, close to his family, that was important. He will quickly hire lots and lots of Hersheys. This will be very much a family company like Heinz, like Wedgewood, like Estee Lauder, like lots of companies that start off in someone's kitchen and the family becomes the first set of partners, and employees and flag bearers. Second reason is that there are really good dairy cows. I need a lot of milk. Thirdly, there's really good fresh water." You need a ton of water to make chocolate. So, he's going to set up his own, vertically integrated factory and then the surrounding town. This vision really gets built out in his head and then, in reality in material form, between about 1900 and about 1908. The factory is set up so that [product] can be mass produced. None of this has ever been done. We're going to bring the cocoa beans in here. We're going to roast them.
The stuff travels initially by cart and it's messy. But eventually it will travel by conveyor belt. The cocoa beans will travel into the pounding factory. They have to be ground to the finest powder. It's incredibly dirty, incredibly complicated, incredibly loud. Lots and lots of workers lose a lot of hearing in that room. Then that powder has to get mixed with a whole bunch of stuff very carefully and in a very, very specific order. Rivers of chocolate will travel to where they need to get to be poured into trays, all of which to say Hershey in bar form. Then they will be cooled to exactly the right temperature and flipped over initially manually, later by machines, wrapped by hand, and packed.
The whole factory is set up in a very, very innovative, very logical way as opposed to the little lemon drop company outside of Philadelphia. This is set up from the get-go, even though he doesn't yet have the market to be a factory, to produce thousands, and thousands, and thousands of bars a day, and in which he can expand and incorporate the latest technology.
So, the main factory in Hershey, Pennsylvania, and if any of your listeners have been there, they know how much the town still smells like chocolate. The main factory for Hershey Candy Company is still the factory he built. There's lots of other places they make the chocolate, but it speaks to the farsightedness of what he saw that that plant is still at the center of a lot of manufacturing operations for this gigantic candy company.
Kenny: This notion of the company town was a pretty prominent movement back in that time and it was done well in some places and done not well in others. I always think about Pottersville, the dystopian future that the character in, It's a Wonderful Life sees when he's looking at the counterfactual life. What was Hershey town like in Hershey's eyes?
Koehn: He wanted it to be a place where all of his workers could feel like they had everything they needed for work and family life. It was a town he built very purposely. He built the basic infrastructure, a bank, schools, a library, stores, and he also built housing, these individual houses. He didn't want them all to look exactly alike, like they did in George Pullman’s town, the railroad car magnet, outside of Chicago. Hershey built individual homes on streets like Cocoa Avenue. And each of the street lights had shades shaped like Hershey’s kisses; you can still see them. So it's all very much “Hersheyed,” if you will, but not only is there housing and all the services, there's a pool, there's a dance hall, there will be the beginnings of an amusement park. He wanted a town in which people could spend their whole lives and feel like they lived in a wonderful place, an egalitarian place. So, when I say Utopian vision in the title of the case, that's what I'm talking about. That was his driving train of ideas here.
Kenny: But there was some dissension along the way. He had to deal with worker issues. There was no OSHA back then, but unions were forming and there was {labor} activity he had to deal with.
Koehn: When you own the business, the working conditions never appear the same as when you work for the man or woman who owns the business. We're never going to make those exactly the same picture. I think all along, people that worked for Hershey had some qualms about it. Not that he had any shortage of people that wanted to come to Hershey, Pennsylvania. Plenty of people wanted to get there and stay there, but they worried he was kind of watching over them a lot because he was always wandering through his bank, or his library, or his theater. By 1935, unemployment is down from its high of about 26 or 27 percent in the midst of the Great Depression, but it's still plenty high, 20 percent or over. Unions [are experiencing] real, real gains in membership. Unions and union clout start to unfold and really, really multiply.
Organizers from the Congress of Industrial Organizations come to Hershey's plant just after the sit-down strike at GM and try to organize. And eventually they do, with a lot of division in the workforce. Some of the workforce wants to stay on the job just the way they are. Some of the workforce wants to unionize. This pains Milton Hershey to no end. It just tears at his heart that the people that he's, in a sense, created this town for and that he believes he's serving so well, he feels have turned on him. In the end, the CIO is recognized as the bargaining representative, or agent, or organization for workers and the story of labor strife for Hershey largely dies down. Milton Hershey will die eight years later in 1945 and he never recovered emotionally from what he felt was, betrayal may be a little strong, but a very, very surprising turnabout on the part of some of his workers toward all that he thought he had done for them.
Kenny: He was a very caring guy because the case talks about the fact that he was really concerned about people struggling during the depression and wanted to make sure that, right down to the individual, that so-and-so was okay, and so-and-so had food.
Koehn: The workers weathered the depression in Hershey, Pennsylvania, much better than most workers did. Now let's remember, going back to his childhood, this is someone who never knew the stability of a house, and a library and a pool, and eventually a railroad that would take them to and from other parts. So maybe part of what he was doing, I don't want to put him on the couch for too long, was building the infrastructure that he never knew as a child and young man. You could grow up in Hershey, Pennsylvania and never have any sense of all the turmoil that he experienced.
Kenny: Is that maybe not what drives him to establish the orphanage that he does?
Koehn: To me, that in some ways is the most interesting part of this story because of its extraordinary footprint today. He marries at the age of 41. He marries a woman about 17 years younger than he, a woman named Kitty. He meets her when he's traveling on one of his sales trips and they fall quickly in love. They try to have children and cannot. Fast forward a couple of decades, before she’s 50, she becomes very ill and dies. He is absolutely wrecked. I think a huge piece of his offering to her was to endow an orphanage. So he builds and endows the Hershey Industrial School for Boys, and plays a very active role in it, all the way up till his death. Now here's the thing that to me is just so fascinating. When he dies, he has given away [to the school] basically all his money and a huge amount of his stock in the Hershey Chocolate Company, which went public in the early 20th century. That stock became so valuable that today, in 2019 on a per student basis, it's the wealthiest school in the world.
Kenny: Wow.
Koehn: It's certainly holding its own with Harvard in terms of huge endowments because the stock appreciates so much. It's a great school and if he could see this you just know he's chortling in joy.
Kenny: It feels like so much of what he was able to do was because, I don't know, he could get his arms around the market a little bit easier and it was more manageable. Could this be replicated today?
Koehn: I think so. I mean, I think the fundamental thing that he did that enabled everything else was this demand-side innovation. There is a market out there. Americans don't know that they can't live their lives without chocolate or that they will have chocolate on at least a semiregular basis. By 1910 he's got kiosks, little machines, candy machines all over the New York subway system. He's selling chocolate bars with baseball cards. He has plenty of help—no entrepreneur does it alone—but I think that the demand-side imagination, then the Chutzpah to make that real, is absolutely on offer today and doable now.
Can you take the fruits of that success and say, “I'm going to build a model for how stakeholders in this enterprise can work together”? I think there's a hunger for that right now. Think of how the social and political footprint of business is now massively expanding, not just in terms of corporate social responsibility, but think about business' role politically in the last two years. From Charlottesville, and race relations, to the Paris Climate Accords, to gun control or gun safety, to the Muslim travel ban. I mean, we're seeing business get involved in all kinds of ways. I think people are very hungry in lots of different ways to see what good business can do. So, you bet I think this could be done.
Kenny: That's a pretty optimistic note to end on. Thank you for joining us today.
Koehn: Oh, my pleasure.
https://hbswk.hbs.edu/item/the-delicious-history-of-hershey-chocolate?cid=spmailing-25078499-WK%20Newsletter%2002-20-2019%20(1)-February%2020,%202019

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