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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