Acquired - Mars Inc. (the chocolate story)

0:00Okay, David. How many current varieties of M&M's can you name? Ooh, wow. Okay. Well, plain peanut butter. Uh-huh. Actually, plain is technically now called the milk chocolate. Ooh, interesting. There's dark, right? Yep. Which I've got right here. Uh, they had mint for a while. Did they discontinue mint? Mint is a holiday-only theme. Hmm. So that's a seasonal one. Oh, what else?

0:28I mean, at the end of the day, it's kind of only plain and peanut that matter, right? I think in sales numbers, are there pretzel ones? There are pretzel ones. There are also almond. Oh, almond. See, yeah, I'm allergic to almonds, so I never think about almonds. There's also some weird ones, caramel. Yeah. I don't want that at all, but they make it crunchy cookie, which replaced crispy of our youth.

0:54Do you remember the blue packaging, crispy M&M's? Oh, yeah, I remember the crispy's, yeah. And then there's some specialty ones, dark chocolate, peanut, which I really want, fudge brownie, campfire s'mores, and caramel cold brew. Oh, I don't know about any of these. And then there's these really wild, the minute edition ones, an edition to holiday mint, birthday cake, chili nut, and pumpkin spice latte. Oh, that sounds disgusting. I know.

1:20But yes, I think you are right, the milk chocolate and the peanut are the sales drivers. Yep. Alright, 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.

1:53David Rosenthal. And we are your hosts. Listeners, we were thinking, what episode would be fun to do before the holidays? We picked M&Ms, thinking this will be just some nice lighthearted fair about the candies and the characters on commercials that remind us all of our childhood. But as we dug into Mars Incorporated, the parent company, we realized that the story is totally thrilling.

2:17It's got World War I, World War II, new technologies and inventions and serious, serious family drama. 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. Yeah, seriously. Maybe it's because we just did it, but I feel like there are a lot of echoes of IKEA and this one too. Absolutely. And the Mars family is way more quiet and reclusive.

2:47than the Comprod family too. They're way more quiet and reclusive than anybody. 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&Ms or perhaps you know they're in the pet food business, 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. Do you know?

3:16Mars now does more revenue than the Coca-Cola company. I know. 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. Well, listeners, after this episode, come listen to ACQ2. We just had...

3:41One of my favorite conversations ever on the show in part because I just love talking computer architecture with Renee 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.

4:08Totally, it was a great computer science lesson and history lesson, sort of all rolled into one. So go subscribe to the ACQ2 feed and the podcast player of your choice to check it out. 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? Well, we start in September 1883.

4:36There's some debate about whether it's in Pennsylvania or Minnesota, but there's a lot of 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 Joel 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 ever. 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? 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. Okay. So.

5:32Back to 1883, and let's just call it Minnesota. One, Frank Clarence Mars is born. Now, Frank's father is a flower grist mill operator, and his mother, Elva, is a housewife. Both of those trades are going to become very important here. So Frank, sadly, when he's very young and in what I think was also very sadly commonplace at the time, he contracts polio.

6:00And he has a mild case luckily he survives, but it does affect his legs and he has to wear orthopedic braces all growing up. 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? 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.

6:29They're baking bread, they're baking pies, they're baking cakes, and most enjoyably for Frank, they are baking candy. 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, gum drops, licorice, all sorts of sugar-based sweets.

6:58And they were typically unbranded. Like there were no big national or really even like local brands of candy at this point in time. And they're sold wholesale by small regional bakers to local retailers and drug stores who stock them for kids. Like the main market here is selling sweets to kids. And that's what Frank is doing. You can think about the candy industry at this point in time, sort of like the baked goods industry today. You've got some local Baker that's making a distributing to a bunch of coffee shops and like you don't really know except in really bougie ones who the Baker of that particular scone is it's just oh I go to that coffee shop and they have scones there 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

7:52He's experimented with some of his own 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 goes into business selling his creations and other people's creations wholesale to these local retailers, merchants, drug stores, etc. for kids to buy. In that same year, in 1902, he would also Briefly Mary, a woman named Ethel Kisak. 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 Forest. Forest Mars. Are real protagonists this story? Yes. But put a pin in Forest, we will come back to him in a few minutes. So his dad, Frank, starts this candy business, you think you're like, yup, this is it. This is the company, you know.

8:48Mars, Snickers, Eminem's Milky Way. It's all to come here out of this one company named Mars. Yes, 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. Milton Hershey has started selling his Hershey's chocolate bars in Pennsylvania, which he started in 1900. 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. Yep. 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. Hershey had just figured out by the skin of his pants production and the recipe at all. He almost built an entire factory

9:47to produce milk chocolate without knowing how to produce milk chocolate. That was like a lucky diving save at the last minute right before they needed to turn everything on. 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. There's also another problem with the penny candy business, a bigger one, which is in those days, it was all pretty highly perishable. And there's not air conditioning yet. 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. So in 1910, Frank's now bankrupt. His wife Ethel divorces him and takes their six-year-old son, Forest, and sends Forest off to live with her parents

10:46in a remote mining town in Saskatchewan, Canada. 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? What, I think because nobody had any money to support him, right? And in particular, Frank actually owed her $20 a month for child support for forest 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. I mean, I 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. Unbelievable. Specifically, they move to Seattle, where Frank does, what else? He sets up another candy business and starts talking his candy again.

11:42This Seattle candy venture goes about as well as the Minneapolis one. Within one year Frank is bankrupt again. The creditors are coming after him. 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. He's running the business out of his kitchen. That's right. And that business also fails after a couple of years.

12:12So three down, three strikes. 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, candy company number four now in total if you're keeping track at home. And against all odds, this candy company would go on.

12:40to become the globally famous 50 billion dollar annual revenue private family business Mars incorporated. Sort of. It's not totally Frank that is the reason for its success. Yes. Okay. So what's different now about this fourth candy company that Frank starts? It's chocolate. And chocolate is a completely different universe than these penny candies than caramel.

13:08The 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. Like, very few people are importing it from South America. We're at 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 for one American entrepreneur, Milton Hershey. Yep.

13:35So 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. He had his own shares of failures, but he started eventually a caramel company that became quite big, regionally in the Philadelphia area. Yep, he sold it for a million dollars.

14:02In 1900, which is 3637 million today with inflation. Yep. He is among the most successful of this kind of generation of pre-Chocolate candy entrepreneurs. Before he sold the business though, in 1893, Hershey traveled to Chicago, where at the Colombian 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.

14:31in 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 as I want this shipped back to my production facility in Lancaster, Pennsylvania out in the Philadelphia countryside and I am going to set up a chocolate making operation. Now, this is not milk chocolate. This is just plain chocolate. And it's worth noting to 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. And so this notion of a machine that makes chocolate as bars at the Columbia Exposition is quite novel.

15:29Yeah, I mean, chocolate is a very rich, very complex food, very difficult to make, and the history goes all the way back to Montezuma in the Aztecs. And even before the Aztecs, about 5,300 years ago, around Ecuador. Wow. I didn't even know that. So we're talking about a 5,000 year old tradition here. Yes. But like you said, until, call it the late 1800s, this is a drinking activity. Yes. And...

15:59It'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. It's better than everything else, but it's not a bar of chocolate like you know today. Yeah, 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. 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. 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. So first of all, how do you make chocolate?

16:55And 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. 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.

17:23It's kind of a football looking thing. 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. That all comes from the seeds or the beans. Yep. Yeah. The fruit itself is actually quite delicious, but it's like a pulpy sort of milky type thing. 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.

17:52You first ferment those beans in wooden boxes. The yeast eats the sugar that creates alcohol. 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. 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, 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. 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.

18:46They then get sorted, sterilized, debacterialized. 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. So just like the core, like meat of the bean after it's been roasted. Yes. You can press those nibs into create two separate things, cocoa powder and cocoa butter. Both of those come from the nib, but There are many reasons why different chocolateeers will first separate them out and recombine them in different ratios later. You grind the nibs down to the right particle size and then goes through something called conching. Conching is awesome. It's basically like these big cylinders right that like spin around and around and smooth out all these particles. Yeah. And there's a great story back in 1879 that Rudolph Lint, which is another name you may recognize the Swiss chocolateeer.

19:40discovered it by accidentally leaving his cocoa in a roller grinder over the weekend instead of shutting the machine off. So it accidentally pressed the beans for a 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. 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. So 1879 is when Conching is 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. 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.

20:35For 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 it. Chocolate bar snapping. 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.

21:02to make it so that it forms into that shiny, breakable chocolate that you know of today. And this is an incredible process, right? 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. That's exactly right. Right. 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 go on and get like just the right seed crystals to set the right crystal in structure for how it'll come together. That's exactly right. When you're super heating it, you're eliminating all crystals so that 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.

21:49Believe me, I appreciated chocolate before doing this episode, but now, like, knowing how it's made, right? 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. Oh, shots fired on wine and coffee here. 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. You're not getting any of these steps here.

22:16chocolate 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&Ms and the Snickers bar, we sort of just assume, oh, this is an industrial thing that just sort of comes off the line. 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.

22:43desirable out of that pure agricultural product. Yep. 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. 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. No one's going to eat that. Most people max out at 85%.

23:12chocolate and the rest that 15% is sugar or you're getting a 70% bar and the 30% is sugar. 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. But in reality, most of the time you're eating chocolate these days, unless it's a bean to bar producer, like a dandy lion or something, you're ending up with all sorts of stuff added in that process, you know, more cocoa butter, sugar, soy, less of thin. Oftentimes you'll get vanilla.

23:40that's added in part of this process to kind of create a chocolate taste you know of. Yep. Okay, so we're still in the dark chocolate world here. Let's talk about Nestle and milk chocolate. 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-nimate something like we needed to come up with a name and we're like, oh, it's dark chocolate. 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. This is before he started the Hershey Chocolate Company, 1866, on re-nessly, David, to give some credence to your comment, is researching infant feeding as a means to solve infant mortality. He invents a new type of food for babies who are unable to breastfeed, there in Switzerland.

24:32And remember, at this point in time, something like one in five babies died before their first birthday. 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. 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.

25:00a proprietary serial mix he created, and this is effectively the first baby formula. 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. 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. Totally. It's great. It's in the same way that Hermes...

25:26The Birken bag was a bag for baby bottles. Yeah, right. Who knew that baby formula literally leads to the modern chocolate industry. Yep. So incredibly, one of his neighbors who desperately needed this formula because his baby was rejecting breast milk happened to be a chocolate tier guy by the name of Daniel Peter. So he had this idea for milk chocolate in 1867.

25:51by 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, but he sort of said, well, can I create this as a pre-made product? Yep. And again, to the issues with creating baby formula and then now hear 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. 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. Totally. 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. 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.

26:46Eventually, 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. 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. That he finally was able to create this marketable milk chocolate flaky stuff.

27:16that 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. Interesting. I didn't actually know that it was condensed milk, not the formula milk that ended up working for Nestle. 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.

27:43Two 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. 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. 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. Anybody who likes chocolate knows it's just absolutely delicious. 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 mouth feel that just massively increase the market. 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. Yep.

28:41Totally. 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. 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.

29:11He 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. 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 then.

29:41And in the process, effectively, the milk does spoil a little bit. Which is why I'm sure all of our, you know, European and other international, not American friends who are listening to us here and are saying, like, Hershey's that is so disgusting. 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.

30:11Yeah, so there are two versions of the story and we don't know which one is true 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 so two Americans that's chocolate Okay, account number one and this is all in the Cadbury book that I just mentioned after a series of laborious failures Schmalabok, who was a scientist working with Hershey, seized on the initiative and tried a slow evaporation of non-fat milk over low heat. 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. 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.

31:07There'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. 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. Amazing. Thank you, Deborah Cadbury for all that. If written by a member of the Cadbury family, you can imagine why that story is preferred.

31:36Regardless, here's the amazing thing though, that this illustrates when it comes to candy and specifically when it comes to chocolate. 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 Hershey's chocolate is disgusting and Americans are like, this is chocolate. 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 an nostalgia element to this too, because the taste are so strong, so powerful, so complex, you bite into a Hershey's bar and subconsciously or not, your brain is going right back to childhood when you first ate that. 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

32:33penny candies at the checkout counter. 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, he was able to set this taste for the country, which basically locked him in as what chocolate was in America. Fascinating.

33:02And he's smart about this too, from a business perspective. Ben, you mentioned the nickel Hershey bar. 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, five in dime stores, grocery stores, gas stations, news stands, standard oil stations. He's pushing Everywhere, I mean, he basically invents the modern candy industry by doing this. 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. 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,

33:59I'm rich, I'm gonna go big immediately 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 bigger go home strategy where if it works boom mass production mass distribution I set the flavor profile in America and I set the brand in America for chocolate and if it fails it fails pretty catastrophically yep so putting the final pieces on this initial Hershey's success story. Right after Milton Hershey figures out milk chocolate, it starts this production and it's expanding distribution nationwide. Well, more one happens. 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. So millions and millions of American GIs

34:58Now get introduced and hooked on the slightly sour hersy chocolate. And it's great. It's a super dense store of energy. It triggers an emotional response in the brain. 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 One, you could use a little of that. Yeah. It's got caffeine totally. So these soldiers then come home.

35:27and right after the war is prohibition in America so you can no longer buy alcohol, or at least legally, buy alcohol. 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. So all of these former penny candy entrepreneurs all around the country, they're like, wow, you don't.

35:56Chocolate is amazing. You know, we can market to adults, et cetera. It's expensive. Hershey's selling their own bars. What if I take just some chocolate and some other stuff and also make a bar? Well, that I could make a lot cheaper because the other ingredients, whether it's nuts or new Git 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, there are more than 40 thousand different candy bars being made in America. Oh my God. 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? No. So it's still available today. Baby Ruth candy bar, named, I think, for President Grover Cleveland, I think, daughter Ruth, baby daughter Ruth, to introduce the bar, the Curtis candy company, which made it chartered an airplane.

36:55to fly over the city of Pittsburgh and drop bars down with a little paper parachutes over the city. It is like a literal drop. It puts the visa drop to shake. Wow. Amazing. We're going to have to do that for an acquired marketing stunt at some point. I know. I know. Charter at Airplated. I think we would get a lot of trouble if we did that these days. I think so too. Oh, man.

37:20So okay, 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. 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. They've become the blue jeans and pickaxes company in this gold rush. Yes. So like if you've ever wondered how the heck did Milton Hershey build a town and how do you become like Rockefeller's or Carnegie's or Vanderbilt's like, this is how? 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. 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. And yeah, Hershey also makes a chocolate bar. But in America, this is really the

38:18creation of the wholesale business of chocolate. 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. 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. And so you put a wrapper around it, you send it off at the troops and, you know, you've got eggs in the nougat, which has protein, you've got nuts, which is protein and fat.

38:47I mean, all of this, you're delivering these kind of complete meals, complete, and 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 and it's all because the chocolate seals up the ingredients inside. 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.

39:15When Frank first gets back to Minneapolis and starts up the fourth company, 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. He calls them Victorian buttercreams. And I believe started coding them in chocolate using Hershey's chocolate, which makes sense given everything that's going on.

39:43That becomes pretty successful. 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. So like, really, really well. We're not talking Hershey levels of entrepreneurial ambition here, but that's not the ambition that Frank has. And then in 1922, he decides that he's going to get in on this.

40:13candy bar craze that is sweeping the nation and he introduces his first combination bar or candy bar called the Marrow bar. 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. Interestingly, all chocolate before was measured by weight.

40:42And once somebody kind of rolls their first candy bar off the line, what we now know today, the Snickers bar or the Milky Way, all these things, 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. And so these lines where you'd manufacture these candy bars were measured by count of bars.

41:07So, they're called count lines. So, these manufacturers are spinning up count lines instead of, I don't know, wait lines or whatever they were before. 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. No one's eating maro bars today. Correct, correct indeed. But then...

41:36The next year, in the summer of 1923, a fateful reunion occurs in Frank's life, which is that his estranged son, Forest Mars, 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. Or at least that's the legend. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, LaGora, the agentic operating system that is redefining how the world's best legal teams work.

42:26Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. LaGora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus.

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43:22And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over a hundred thousand lawyers on the platform from 1200 legal teams in 50 countries. And crazily, they went from one million to a hundred million in ARR in about 18 months. Truly insane numbers. And that is the real test.

44:14Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company, you can learn more at logora.com slash acquired and just tell them that Ben and David sent you. All right, David. So forest emerges into his father's life and somehow we end up with the Milky Way. How does that happen? Well, let's tell the legend.

44:44So summer 1923, young Forest 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. Time sure were different. Time 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.

45:13They really got to blow it out. They need to hit big time sales numbers here in Chicago. Forest, you got to go blitz the whole city with posters, marketing camel cigarettes. So Forest goes around and he puts billboards up all over downtown Chicago, supposedly like every storefront window on State Street. He's plastering with camel cigarette posters.

45:36which certainly gets attention, it actually makes the Chicago Tribune the next morning that this happened, 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 illegal, yes. And it lands young forest in jail. So from his Chicago prison cell, forest makes his one phone call to the only soul that he knows.

46:04In the area who could possibly bail him out his estranged father, Frank Mars. 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. By the way his dad lives in Minnesota.

46:28There's the whole state of Wisconsin between Minneapolis and Chicago. But we're giving you a flavor of who forest is here. If forest 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. And as we'll see, forest is in charge of everything. So Frank shows up at the jail, father and son are reunited after 13 years.

46:56during which, yeah, bed. Like you said, they've had no contact with each other. The forest has his phone number to call him. Frank Bale's out forest. By now it's early afternoon at the next day. And he says, all right, son, let's go out for a lunch. And they go to a lunchenette to share a meal at which young forest who is selling cigarettes orders a wholesome, malted milkshake over this lunch reunion with his father. They get to talking. They're getting reacquainted.

47:26And Forest learns that his dad is now this middlingly successful candy entrepreneur. And his dad's telling him about this Marrow bar that he's introduced. And Forest says, well, hey, I got an idea for you. 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. I bet I can go sell that.

47:55all around the country. So they get to talking, jamming father and son, and with that, the Milky Way bar was born with the marketing of a melted milkshake in a candy bar. And this is the story. There's so much in between. I have an idea that you should put a melted milkshake in a bar and actually what a Milky Way is. It's nougat and caramel inside of chocolate. It's a pretty different ingredient set than a melted milkshake.

48:25There had to be quite a bit of R&D experimentation, flavor development to figure out how to make the inside of your candy bar tastes like said malted milkshake. But here is the exact quote from forest as recorded in the family archives that Joe got access to as part of her access to the company. He says, quote, I'll be damned. If a short time after our lunch, the old man has candy bar and it's a chocolate malted drink.

48:52He put some caramel on top of it and some chocolate around it. Not very good chocolate. He was buying cheap chocolate back then, but that damn thing sold. No advertising. No forest. Regardless of how all this happens, Frank Mars does release in 1924, the Milky Way bar, and it does become a big hit. That year alone, the first year that it comes out, it does $800,000 in sales. Yes.

49:19the Mar-O-Bar Company went from 73,000 to 793,000 in one year. And that is all the Milky Way, like undeniably huge success. And effectively what they were doing was they were the first ones who said, wait a minute, if we're going to make a count line, we should do it in a mechanical way. 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. Yep.

49:48Now, it was early industrialization, but it was still much more industrial than the rest of the manufacturers at this point. Totally. Now, first question you should be asking here is, wait, forest is in college? Now, it ends up in jail in Chicago. Like, what the hell happened here? Okay. So when forest is six years old, as we said, he gets sent off to live in Saskatchewan in Canada. It's like a hard, scrabble, rural mining community with his grandparents.

50:18Unlike I imagine most of the folks around him, Forest 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. Deborah Cabri has a good line in her book, Noah's flood wouldn't have deterred Forest Mars. Yes. So when Forest 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 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 him 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

51:15study to become a mining engineer and go back and run a mine instead of just being a laborer in a mine. 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 an incredible efficiency and thought through it as sort of a systems thinker. 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.

51:43And supposedly he finagles a deal with the head cook that if forest can go source meet another ingredients for the meals cheaper than budget from local wholesalers that he and the chef would split the savings and just pocket the difference. And of course you might get a sense that forest is a good negotiator here. This works like a charm and supposedly He's soon taking home like $100 a week, which if you annualize that to you know $5200 a year, that's about double what the average American was earning at that point in time. So he's making bank. 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. I mean, all these guys, it feels like it's a part of their childhood story that as a teenager or college student or something, they were out earning

52:38the average head of household. Totally. And you know what? It is still true these days. Remember the Zuckerberg story of he and Adam D'Angelo are coding up sit apps and people want to buy it for a million dollars. Yep. Just turns to software instead of candy bars. Yeah. Anyway, this is all during forest 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. 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, regardless of whether Forest 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 forest ambitions even higher than just being an engineer who can now go run a mine. He's like, oh, I should run a business. I should run.

53:37my family's business. I should run my dad's business. 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. And just seeing an existence proof of a successful business has got to be a reorientation for him. Yeah. 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.

54:05Even if they're 10%, he's making 4x5x, what the average American is, this is eye-opening to forest. So his literal words about this when he gets back to Berkeley are the hell with running some minds in the backwards. I'm so glad you have these forest quotes. Oh my god, they're so good. Like supposedly in the Mars family archives, there's a video.

54:29of forest of like forest chatting with one of his longtime lieutenants from the company after he retired but before he died and it's like in the family archives and Joel got access to go watch the video which is where all these quotes are from it's amazing so he does a sophomore year at Berkeley but he's got his sights set higher now he with his father's help and presumably money for forest junior year he transfers to Yale and He's going to Yale with the goal of, I want to learn about business. He's like focused. It's like the Zuckerberg story of going to Harvard. Yeah, far as I 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. Wait, really? Yes, really. That Pierre S. DuPont, his nephew.

55:27is Forest, Rumi, at Yale. Whoa. And Pierre, 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. And that is a crazy story that we will save for a future episode of acquired on how that came to be. Oh, we got to do DuPont. It's an incredible, incredible story.

55:57But back to Mars, Forest worms his way through his roommate into getting to know Pierre and starts just pumping Pierre for lessons on how he runs his businesses. How does he run Dupont? What is this Dupont planning system that you have? How do you run a chemical industrial manufacturing process? Exactly. How do you do accounting? How do you do planning? I want to know everything about this business.

56:23It'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 one of the greatest business men of that era right up there with Rockefeller and Carnegie. Yep. Amazing. So after a couple years when Forest graduates from Yale, he's ready to go put all this knowledge to work in.

56:51his dad's candy business. 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. 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 free distribution to the rest of the country. Yep. If you want to go national, Chicago is a great place to do it. Yep. And why else, David? You said it's the center of the candy industry. Why else is that true? Well, I think, yeah, definitely at this point already, the Riggly Company is there. Yep, you bet. Yeah, if you want to know how good a business gum is, you should just ask yourself, why did the Cubs play in a building called Riggly Field? And why is there an entire neighborhood called Rigglyville? 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.

57:50Mars now owns Wrigley. 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 Forest is. Like he doesn't have anywhere near the same level of ambition. He likes being wealthy now, 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 forest designs. On the outside he spends $500,000 in whatever this is 1928-29, buying attractive land next to a golf course to put a factory in. The outside of the factory is like this beautiful Spanish style building with stucco and cupolas and like raw iron ornamentation. It looks like a Hollywood studio building.

58:48Dude, you're building a factory. Yeah. Must have been great margins on those Milkyways. Yeah, exactly. It shows you the difference of where Frank's head is out and where Forest's head is at. And probably its differences over this factory I would assume start to shape the relationship here a little bit. Shape 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, Forest is pushing the workforce super hard. He's like, we have this factory, we have these state-of-the-art lines. We need to run these lines 24-7 with multiple shifts. Like, everybody else is just, you know, oh, we run our lines during the day. Like, hell no. We spend all this money investing in this factory. We need to crank out as many Milky Way as possible. Scale economies, baby. Totally. So, by 1929, which I think is the first year that the factory is up and running.

59:43They're producing 20 million Milky Way bars annually. And a forest is just like, go, go, go, go, go. 20 million of anything at this point in history is massive. Yes. Now, one thing that they are not making in the factory, of course, is chocolate. 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.

1:00:10We 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. Which my understanding at this point in history is still that Hershey's like, great, we love being an industrial wholesaler supplier to other candy companies. This is only good for us. Yes. I mean, I think the right way to think about Hershey...

1:00:39at this point in time is like Amazon. They are both Amazon.com and they are AWS. Yeah. They're very happy either way as long as chocolate is being sold in America, they're taken their tax. Yep. 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.

1:01:04He buys a $2 million horse ranch in Tennessee that he names the Milky Way Ranch. He buys his own airplanes so that he can be flown around to all of these places. Forest hates all of this. He's trying to reinvest as much into the business as possible. Exactly. He wants to be DuPont. He doesn't care about a horse ranch or airplanes. 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 after his favorite beloved horse at his Tennessee Ranch. Ben, you are opening it right now. He'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. Thank God they bought the horse ranch. I've been waiting for you to get to this part because

1:02:00I'm just trying to be satisfied, you know? I just needed to grab a Snickers. Amazing. It really is so good. It's so good. I massively prefer the bean-to-bar style chocolate, the dandy lion, 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?

1:02:25I mean, we're talking about two totally different products here of like high-end chocolate versus mass market chocolate, but like Snickers are so good. I feel like I go play in the NFL after a bite of this. 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. Supposedly, forest was thinking about what.

1:02:52would be like, you know, an incredible product to build on the Milky Way success and market to all of America and the world. Because by the way, a Snickers is a Milky Way with peanuts. 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.

1:03:21Sugar. It's a lot of energy super dense. So the other story is that that was the inspiration for Snickers was putting what the Roman army fed their leads in there into a candy bar. In practice, it's actually a great energy bar. It was being tongue in cheek up at the NFL because they're a partner of the NFL today, but there's a whole industry around cliff bars and things like that being marketed as energy bars and Snickers being marketed as candy. But really, what's the difference? Snickers launches in 1930.

1:03:50in 1932, they add three musketeers to the lineup. Now, three musketeers originally was something very different. 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. I see you're eating a three musketeers way to be in theme.

1:04:14it was actually sold as a package containing three separate bars each with a different flavor chocolate vanilla and strawberry and due to restrictions during world war two they had to cut production to just the chocolate version i think part of it was also a spike in uh 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 no no it doesn't so if you're paying attention here and thinking They'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. 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. Mars revenue.

1:05:09goes up to $25 million in 1932. 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. 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 a...

1:05:38Addictive or addictive like activity, where you sort of incorporate it into your habitual everyday life. 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. That's exactly what I was going to say. You know, Forest, I don't think it probably really was. Forest here was closely studying Hershey and what they did and realized, oh yeah, this is a scale business.

1:06:05If 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. And by the way, they want to sweet treat more than ever because their lives are depressing. Brilliant. Yep. Absolutely. The other interesting thing is nowadays you've got all these variations of candy, I mean, M&Ms, peanut, M&Ms, all of them in dark M&Ms. The Milky Way, the three musketeers and the Snickers.

1:06:35are 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. 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. Yep. And actually, you know, I think to be fair to Frank, I think that is really like Frank's influence on...

1:07:03the business and company there. Forest as great as he was at so many things. He was never a product innovator in the way that Frank was. 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, Eminem, so which we will get into. That was Forest's big contribution. Yep.

1:07:33Depression, sales are going great. Here we are, 1932, the worst years of the depression, and forests 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. We're going to go compete with Hershey. We're going to become huge. Frank, though, has no interest. According to forest, quote, my father says we're making enough money. We have an airplane.

1:08:01We've got the fishing place. We've got horses. Why do we need anymore? And forests reply to that is, quote, I want to conquer the whole goddamn world. So he issues his dad and ultimatum. Look, obviously you want to just go enjoy life. Let me run things. 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 them down.

1:08:30And I think he turns him down in 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. Yeah. And you know, of course there's more behind this. Forest was not liked within the company. He's driving everybody hard. Frank is this kind of a distracted leader. You can imagine that if you're a line worker or even if you're a manager within the company.

1:08:57That's great. Which boss do you prefer? Right. 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. 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 forest walks out.

1:09:27And in the process tells his dad to, quote, stick his business up his ass. There's no missing words in the enemy of these direct quotes. It's crazy. Yeah, literally. I mean, this is what he said he said. So, Forest leaves town, not to Chicago, but leaves America entirely, goes off to a new continent to build his own business, his own way, leave Mars incorporated, totally behind him, leave them in the dust. Almost. He takes with him a right. Yes.

1:09:55He has the right to what, David? 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. Yes. But I don't think the Milky Way name. No, not the Milky Way name, just the recipe. You can't market this as Milky Way, but you can sell this recipe internationally. Yep.

1:10:23So, Forest 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. Yeah, this is the last time that Frank and Forest would ever speak. Yeah, the next year when Frank is just 50 years old, he collapses in the Chicago factory and dies of kidney failure, and Forest doesn't come back for the funeral. Yeah, yeah, that was it.

1:10:52Now, granted in the 30s, much harder to come back from Europe on short notice, but still. Yep. 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.

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1:13:06All right. Forest Summer in Europe. A little longer than a summer. Summer or, you know, close to a decade in Europe. So we're here at the end of 1932. Forest and his young family now, by the way, with his young son, Forest Junior, land first in Paris. And Forest tries a couple little things, but eventually he decides that if he's really gonna 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. He needs to learn how to make chocolate. Yes. No better place than you're up to learn. Here's his quote on it. 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. They'll only make it for themselves. True that.

1:14:05Forrest 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 gotta know how to do the scarce thing. Totally, so important. 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 Toblerum.

1:14:33and then at the original itself, Nestle. In the factories without disclosing to anyone who he is. So yeah, when I say he goes to work there, it's not like he calls them up and is like, I'm Forest 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 rules. He goes and gets jobs on the line as a factory worker learning directly.

1:15:02how these machines work, how these chemical processes work, how to make chocolate. Amazing. 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. I'm friends with the Duponts. Not only that, I basically feel like I've already built a $25 million business.

1:15:30But 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. I imagine they didn't speak English in the Swiss factory. Yeah. 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 the scarce skill.

1:15:59that I know is the key to building a world dominating business. It's a big trade-off. Big, big trade-off. And totally on-brand for forest. 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. Well, I think not only is Hershey super secretive, the sense I get, at least from Emperors of Chocolate, is they knew how to...

1:16:27production is their recipe, but they didn't actually know the science of how it worked. 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, and Hershey sort of in an industrial sense knew what they were doing, but nobody there really knew the science behind it. 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. Because they don't exactly know how they get that specific sour note in the taste. That's so interesting. But anyway, back to Forest. 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. And then toward the end of the year,

1:17:22when he feels like he's learned everything he needs to know. He moves the family to England where he uses the $50,000 to open up a small factory in a slough England, which is a small industrial town about 20 miles west of London. It's right near where he throw airport is today. 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.

1:17:52Which basically means more sugar, right? Yep, more sugar and less malt. Malt is not as big in British taste. So he has the recipe to the Milky Way that he's adapted now for British taste. But he doesn't have the naming rights. And so he names it the Mars bar. And this, of course, goes on to become the most popular candy bar in the UK. I think still to this day. The funny thing is the lineage of this weird family split.

1:18:20and 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 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 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. Ooh, the Mars Bar is Cadbury, right? Well, in these early days, yes. So, Forest 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. Everything we talked about in chocolate making, it's like an insane amount of cat-backs, really hard, easy to screw up, potentially low yield. Yup, totally. And like, you know, how are you gonna get...

1:19:14the supplier relationships for the beans and like that requires a lot of capital, et cetera, et cetera. And this part of the value chain really wasn't well established yet, where there are these companies specifically to go buy commodity beans from. It was starting, but it was early. Yep. Cargill wasn't the like massive giant with global liquidity for commodities by and selling that it is today. Speaking of gigantic US privately held companies. Yes, exactly. We'll have to do that someday. Yep.

1:19:41So as you said, Forest goes and does deal with Cadbury's to supply the chocolate for the Mars bar just like her she had supplied the chocolate back in the US. This is also important because remember, we're saying their 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. But it's just a matter of time and forest mind until the operation eventually grows big enough that he can and will make his own.

1:20:11Chocolate. David, there is a Milky Way that you can buy today in the UK. Do you know what that is? 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. That is the brand that they decided to use for three musketeers overseas. And Snickers originally was marathon, I believe, in the UK. Yes. But now globally, Snickers is Snickers.

1:20:39So yes, farce, 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. 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. So by 1939, five years ish after they get production up and running.

1:21:08Mars UK has become the third largest candy company in Britain behind Cadbury and round trees. So like they go from nobody to third largest player big industrial scale pretty quick. 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. And so there was a pretty intense Spirit behind the company of looking after your community. Yep. This is Cadbury's in Roundtree, right? Yeah, in particular, Cadbury built their factory outside the city in sort of this almost attempt at a utopia. 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

1:22:02duty-bound religiosity to the existing UK chocolate companies and incomes brash forest 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 in many ways it feels Bernard or no ask like you guys look what I learned in America yeah yes very very much so it's funny I was I wasn't even going to tell this story because Hey, I don't know how true it is. It's just ridiculous. But we'll tell you because I didn't realize the religious element of the competitors. So forest. Oh, yeah. Oh, man. Eventually flash forward. He will come back and he will retake over Mars and Ken America. And when he does his first thing he does is he goes in the boardroom. It's a manager meeting. It's to his executives. And he falls down on his knees.

1:22:56and says, I'm a religious man, and he clashes his hands together and starts to pray. I pray for Milky Way. 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. Yep. And dog food. Yes. To this Empire thing.

1:23:20So 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, nobody fed their pets pet food.

1:23:44Oh, really? Pets, dogs, cats, they just ate table scraps. This whole idea that you feed specific pet food to pets, they all started in the thirties. 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. That's the way you clean the table. Right. So.

1:24:06I 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? 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. We have almost no information about the pet business. And who are you gonna ask? The chapel brothers are long dead.

1:24:33Mars isn't going to tell you, but I'm so curious, how did forest get the idea, hey, I should go buy a dog food company, when the market for dog food is new and unclear and. Yeah, well, I think, you know, look, he was visionary and he got so many things and I think he probably thought, or maybe the chapel brothers thought and convinced forest that, you know, in the post depression era, you know, the coming modern world.

1:25:02People's relationship with their pets would change and that they would start feeding them dedicated pet food. I mean, and obviously that was a huge huge trend. And there's kind of economies of scale to the manufacturing of this making canned dog food isn't that different than making snacks. Yeah, it's a manufacturing process. So yeah, interestingly enough, like I learned this.

1:25:26And 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. I thought this was like a recent diversification hedge, but here it is effectively at the founding of Mars or at least forests, modern Mars. And he's in the first second year of business buying and diversifying to pet food.

1:25:52It 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. Yeah, it's good margins in the pet food business. Apparently even in 1935. Yeah, so that's a huge success. So as this company is getting set up, I mean, would you expect any less of forest, I guess? You know, he's hidden it out of the park with Mars bar on the candy side. He's building a whole new industry on the pet food side.

1:26:22And 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. 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 that you religiously. It's like the Amazon leadership principles. Totally. It's like, oh, that's principle number five freedom. Oh, that's principle number three, mutuality, et cetera, et cetera.

1:26:51I think how he started maybe even back in England. Forest started a document called the Mars Way where he was like codifying all this and I think and after he retired in the business past to his sons in the next generation. 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. Forest 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. He knew the candy was an impulse purchase and the way the product actually looks, how it's displayed, what the packaging is, what the placement is and the shelf and the retailer. How consistent it is. How consistent it is. These were like,

1:27:47big big drivers of purchases. And there's of course the famous story about he finds a defect in a rapper and then he calls his executives into a room and he hurls at the glass and says, yeah, it's his temper and his obsession with quality all combined into one. Yeah, I'm laughing. You say famous story. I'm like, which one? I think they're a million of these stories. But even here in the 30s in the UK, he basically implements the Toyota production system.

1:28:17in the Mars factory. This is long before the Toyota production system exists. Any employee in the factory could stop the line for any reason at any time. If there's anything that's out of place, anything that could impact quality, anything is dirty, anything is not perfect. Every single worker in the entire facility can stop the whole line.

1:28:41And he also if something had a defect he would throw out the whole batch right yes as like a let's scorch the earth around the defect 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 so anytime if there was a mistake that forest then found that hadn't been caught on the line he would just be great whoever should have stop the line and feel like You needed to have stopped and fixed this. 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 sake. It's quality for money. It's quality at a given price, value for money. We've already been talking about how this is the ultimate scale business and scale economy's business in candies. Forest knows that if you can offer a higher quality for a given price,

1:29:34than your competitors, you're just going to build a leading compound forever and ever and ever in this business. Interesting. So quality, principle number one, most important, two, this is awesome. Responsibility is the second principle. Anyway, I feel like a responsibility like, okay, whatever. For all of his crazy intensity, Forest was not a micromanager. He wanted to like know how to do everything in the business, including making chocolate.

1:30:01But he knew that if he was gonna scale like he wants to be Dupont here. He wants to be General Motors. 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? How do you incentivize them? He's like, well, I'll just pay them a lot. So for years and years, the...

1:30:27Standard within Mars was that you should make three to four times the normal salary for your job. That's so insane. And I think that's come down over the years. It's now like two X, but it's still true. I even saw numbers that say they try to pay their employees a minimum of 10% higher than other companies in the industry. 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.

1:30:53I also know they try to type a aggressively to the performance of the company, so high bonuses rather than high salaries, which also means in tough years they would just cut. 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. Exactly. Okay. So, you know, I said salaries. It's not salaries. It's bonuses. This is what your take home pay should be. Everyone's salary in the company, again, starting in the earliest days there in slough.

1:31:20tied to overall company performance and hitting overall company metrics. 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? You get a 10% bonus if you are never late in the entire year. And it's everybody. From far as himself on down, everybody has a time card. You punch the time card when you go in.

1:31:50I'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. So even more, I don't think this terminology starts until they get back to America, but everybody in the company is an associate. 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.

1:32:19There's no executive offices. Boy, Forest really wants to rebel against his father. 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. 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.

1:32:49There are just a small number of conference rooms in any given Mars office. Oh, yeah, because they hate presentations, right? They hate presentations. They hate meetings, but like sometimes you have to have a meeting. The conference rooms do not have doors. 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.

1:33:19And forest is doing this in the thirties. This is crazy. I was going to save this for later with this 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. 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 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. I think that's the standard decoration. Yeah, you can tell how pissed forest was it is dad about the Chicago factory specifically, but also just like how deep seated this is. Yep. Okay. So then principle number three is.

1:34:17mutuality. So far as obviously is like a 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. Everyone needs to make money and everyone needs to be incentivized for the long term. And as long as his partners are making money and making more money selling Mars products or supplying Mars, then they are any of Mars's competitors, that's going to be a compounding advantage. Yep.

1:34:46So 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. Forest is crazy about studying business and management literature. Like I don't think anybody was reading business management literature in the 1930s and 1940s. It's a good point. It's true both for management and for investing.

1:35:15If you think about the way that people were even investing back then, it was like stocks were gambles. Buffett was one of the first people to believe the intelligent investor. You can tell something about the quality of revenue in this intrinsic way to build to a value of a business. 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. Totally. Buffett had to go study with Ben Graham to learn this stuff. Yep. So while he's in England, Forest reads a textbook called Higher Control in Management by TG Rose. 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. It's quite academic.

1:36:08Yeah, 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. And again, if you talk to anybody in Mars today, rota, rota, rota, rota, rota, everything is about rota. It's funny. I came across this researching. I had to look up the term we've never studied in on an episode before.

1:36:37All right, so what is return on total assets? It is net profit dollars divided by the total dollar value of the company's fixed assets. So it's effectively an efficiency metric of your profits divided by your fixed cost of your assets. Yep. Now the textbook way to do it is by the cost of your assets as measured on your balance sheet. The way forest does it though and the way the company still does it today is no, that's insane.

1:37:07whatever 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. So they are constantly re-valuing what the replacement cost is of all their fixed assets, all their factories, et cetera. I'm like, okay, if this factory disappeared. What's the market value if we were to sell this thing and get rid of it? 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 the 10-20 years ago. 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 the very modest tangible assets that we have in this business. Actually, I think if we were to use this, we would divide our profit dollars by the value of the acquired brand.

1:38:02and we would value the acquired brand sort of as highly as possible. 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. I'd argue David that for acquired we'd actually want to use our time value to some certain amount as the denominator what's our profitability per unit of time which is our fixed resource.

1:38:28Well, it depends, I think, what you think is more valuable our time or the acquired brand. We should probably do both, actually. Who knew this would turn into an actual holiday special? Yeah. So anyway, supposedly, Forest 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.

1:38:56Which means essentially that every investment needs to pay for itself in less than five years. So if you're making 18% of your value back every year, you know, that would be like five, six, six years. If you're using the textbook definition, but they're always increasing the value of their assets. So it's like, in effect, anytime forest is making a decision to invest in something, he's like, I want like four year payback on this four to five year payback. 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. If you're higher, then you're taking too much profit. You're taking too much profit, which is bad for your customers, or you're not reinvesting aggressively enough. Yeah, you should be spending more on advertising and marketing, et cetera, et cetera. 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. Yeah, let's do it.

1:39:51So this one comes from friend of the show, Arvin Navaratnam at Worldly Partners, who writes this great research that we link to from every episode now. 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.

1:40:13In 1990, for example, Mars' revenue averaged 429,000 for employee compared to 228,000 at Hershey. So they're just doing more with less. Yeah, miles ahead. And I think part of this comes from the fact that they're just amazing at the industrialization of production. David, you've 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 5500 bars per minute. It was a stat that I saw. They just run at incredible efficiency and production. But they also then do effectively share this increase in efficiency with employees by doing the higher pay and the bonus based pay. 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 terms retains people for longer.

1:41:11which keeps tribal knowledge around which decreases recruiting costs. I mean, it's very Costco-like in that way. It is. It's totally a flywheel type reinforcing structure where it all fits together. 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.

1:41:34That's the primary benefit. 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. Yep, totally. It's very John Belon asked. They want to keep as much capital in the business as possible and not recognize a lot of it as income. Yep. Malone and Buffett too. Yep. 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 forest 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. 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 a forest and beyond, it means being incredibly private. We've alluded to the privacy of the family. Like for years, the family refused to have any photographs taken of them for fear that they might get published. They've really, really needed about being private. In fact,

1:42:33When Joelle wrote the Washington Post article, do you know the thing about the photographs? I think it was the first time that John and Forest Jr had ever been photographed in public. It was, but then Mars didn't like the Washington Post article. It didn't like the way it came out. So not only did they then fire their PR consultant, they went and found the newspapers freelance photographer and paid off $20,000 for the rights of the photos to be sure they couldn't be reused. Yeah. Wow.

1:43:03This is wild. 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. 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 sub optimize the short term. And for Mars, that means private ownership. Yeah. 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 Forest Mars story in progress. Starting up in the 30s, 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. And then the end of the 30s brings something else, which of course is World War II. Yep.

1:44:00Now, to hear Forest 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 Forest and Lamar's family. We're just 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. Right. And so he would also claim that he believed that it was Cadbury's and round trees that actually lobbied Parliament to implement this tax expressly to run him and Mars out of town because they were threatening their business. Chocolate was a big national business. They were among the biggest companies in the country. Donally.

1:44:51It'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 seem like a pretty good time to do it. In fact, it was a very, very good time to do it. So in 1939, he leaves all of his businesses running in the UK, and he moves with his family back to the US.

1:45:20Also, that's crazy. The fact that you can trust someone in the UK as world war two 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. I wouldn't be confident that when all the dust settled, I would continue to own those businesses. Totally right, which if cabbaries and round trees was actually behind trying to run forest out of town, clearly they didn't know the loyalty of his employee base well enough. Yeah.

1:45:50Yeah, totally wild in 1939 that forest could do that. So he moves back to America, and of course he has his sights set back on Chicago and Chicago Mars. Honey, I'm home. Yeah. Remember Frank had died a few years before, and at this point Chicago Mars is being run by forest's widowed stepmother, the other Ethel, and her half brother, who is the president and CEO.

1:46:20of the business. And they, of course, detest forest, and they won't let him anywhere near the company. And who owns the company at this point? So forest 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 forest half-sister Patricia, her daughter, also holds a large stake. And then I think the employees of the business Oh, and equity at this point. So far, I don't know. I'm guessing he probably owns maybe 10, maybe 20% of the business, not enough to be controlling shareholder. Okay. So far as does what far as 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, 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.

1:47:17Now he's here in America. Can he start a from scratch candy company on the world's greatest stage? 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. Right. And he hasn't lived here in close to a decade. Right. But he's confident in his chances because he has brought back a secret weapon before Forest leaves Europe.

1:47:47He 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. 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 hands.

1:48:15Interesting. And so what is drug A? Well, drug A is small round pieces of chocolate coated with a candy shell to prevent them from melting in your hand or in hot weather. And confectioners call this hard panning, the colored candy shell, which is effectively hardened sugar syrup. Yes. And so far as to as he's heading back to the US things, you know, I think there might be some global appeal here.

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1:50:24So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. All right, David, M&Ms. Let's do it. Hell yeah. Let's do it. I'm going to eat some dark chocolate and some almond M&Ms to celebrate. Oh, nice. I think I'm going to pop a peanut butter. Okay. 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 U.S. is because forest junior and John Mars, the sons of forest senior 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. Is that like a uniquely American? Yeah, it's an American thing. Fascinating. Reese's kind of invented it. There's a whole great Reese's story.

1:51:16Reese's was a separate company from Hershey that was built down the road. And I think it was a former Hershey employee. Former Hershey employee started it and then Hershey's later acquired the company. Great story. Yeah. Anyway, here we are in August of 1939. Forest 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.

1:51:45And by pays of visit, in typical forest fashion, I mean that he shows up there anonymously and unannounced and he signs up and does the public factory tour. So awesome. So far so freaking awesome. After the tour is over, however, he asks the tour guide if he could please go see Mr. William Murray. William Murray, of course, being the president of Hershey.

1:52:13and Milton Hershey's longtime number two president and COO type. But the guy who actually ran the company, Milton by this point is like very much focused on the town and the orphanage and the Hershey Trust and all that. And the just here is, I need to buy some chocolate. Well, let's keep telling the story. So the guys like, excuse me, who are you? And why do you want to see Mr. Murray? To its forest replies, just tell him Mars is here. That's all he needs to know.

1:52:43Because at this point, while Hershey was still a supplier to Chicago Mars, they were really starting to be a competitor. 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. Yes, they're starting to wake up to that. But if this story is true, Forest is saying, tell Murray that Mars is here.

1:53:03Obviously the implication being Chicago Mars is here, which is totally not true. Right. Because his father's passed this point. So the Mars that it probably is is whoever is running the Mars company. Right. It's Ethel number two's half brother who is installed running the company. Either way, Forest does get in to see William Murray. And Murray has never met Forest before, but of course, knows who he is once Forest introduces himself. And Murray is like, um, great. Okay.

1:53:33You're back in the US. What can I do for you? 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 our draget candy-coded chocolates. This is so Steve Jobs. So Steve's showmanship. It's amazing. It's amazing. Forrest is like, try one. So Murray does and he's like, yeah.

1:54:02It's pretty good. 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, 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? Did they taste melted? They don't taste melted, do they? And Murray's like, oh, all right, you've got my attention. So Forest and William Murray work out a deal to start a new joint venture candy company that will be 80% owned by Forest and 20% owned by Murray's son Bruce. And Forest says, I've even got the name for it. We're going to call it Mars and Murray, M&Ms. And it's a new company. That's what's worth noting here. Well, several things are worth noting. Obviously, Forest is totally brilliant.

1:55:00This is probably his most brilliant scheme on so many levels. 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. 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.

1:55:30There's a reason, though, that he specifically goes to Murray to make this proposal not to Milton Hershey. 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. He's now at this point, I think Murray is 66 years old. So Mars is dangling something he wants.

1:56:00The forest is offering Murray the chance to have wealth and a legacy and a business to pass on to his son. Do you know what else Bruce Murray had access to? The military. Yep. Purchasing division. Yes. Okay. We will get into that. It's so brilliant. So this deal is nuts because Hershey has an exclusive arrangement to supply chocolate to the US military.

1:56:28The exclusive agreement. And Forest Mars has this thing that God, if you think the military liked count lines, they're gonna love these non-melt candy-coded chocolates. And so 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. We're only gonna sell this to the government.

1:56:56I'm gonna own 80% of it. Your son's gonna own only 20% of it. I'm showing up with just the idea. And Hershey's gonna provide the chocolate, the sugar, and the technical expertise. And capital. Yep. And it's gonna be an 80-20 deal. I don't understand how this deal got done. 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...

1:57:23Hershey. And in fact, I would guess it's to avoid a conflict of interest for Marie himself to say, my partner is actually your son, not you. Yeah. So his employment contract is an in violation. And he's only a 20% owner blah, blah, blah. Yeah. When you think about if forest 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. But by saying, no, your son, yeah. He's just so freaking brilliant.

1:57:52What a G. So, Murray agrees to this. And in the spring of 1940, Forest and Bruce Murray, the son, set up M&M Limited as a partnership. 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. 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. 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. Yep. So of course, now what else happens in 1941, right? As they set up the factory and start production, the US enters World War II.

1:58:50Which means significant chocolate rationing for all the consumers in America and significant chocolate consumption by the military. So all of a sudden, the US 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. And the only one producing milk chocolate at significant scale in America, which means...

1:59:16that they start severely limiting their wholesale chocolate supply to all of their enterprise customers like Chicago Mars 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. Yep. Sort of. In minority. Yes, 20% of it is Bruce Murray's company.

1:59:46Now, 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&M's during World War II. 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 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. 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. There's the army and the Air Force and the Navy. Okay. Yeah. They're not selling it to the public yet or at any sort of real value. Now, there's an interesting little sidebar to the M&M's story here.

2:00:42and I suspect many of our British friends are listening to all this and saying like, hey guys, what about Smarties? Forest of course was not the only one to spot the potential of DraJ chocolates for military use and then eventually for public consumption. Well, like all things with forest history, it's a little bit hard to untangle truth from fiction. But one thing that is undeniably true is that round trees introduced Smarties to the British market in 1937. So three to four years before M&Ms start up in the US and two years before Forest even leaves the UK. 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 got to go back to America and launch this quick. There is no way that Forest did not see Smarties in the UK before he left. And the early M&Ms

2:01:40came in tube packaging just like Smarties. It's suspicious. 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 US market. 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.

2:02:08about this in the Nestle Archives, apparently forest and George Harris of Roundtree had both learned about Drageys 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 Drageys candies.

2:02:34forest who was at this point in time starting to plan to go back to the US anyway, he could have the American market. And in return, forest supposedly gave roundtree the rights to manufacture and market Mars bars in other British Commonwealth countries like Canada and South Africa. So supposedly there's evidence to this effect in the Nestle archives, but we can't know for sure.

2:03:02Regardless, 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. Okay, meanwhile, during the war, as M&Ms is starting up, and the US military is big customer, and far as to sort of rebuilding his empire in America, he's on the lookout for his chappy's equivalent to bring into the US.

2:03:31You talk about rice. Time to talk about rice. Another business that can provide, you know, diversification and cash and resources to build up the candy business. 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. Yes. In Houston, Texas. So.

2:03:58There 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 Forest was in England, he had gotten to know a chemist who had invented a new method for milling rice that was called parboiling. 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. And in 1942, This chemist and forest form another joint venture company in Houston, Texas, and they patent the method in America and start producing rice to sell just like M&Ms to the military. Because what's the military need a lot of? 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

2:04:57product in America was crazy. I mean, it's not as crazy as like the pet food business, but there were no brands in the rice category before Uncle Benz. You just bought rice to commodity. So this is the first brand at least in rice ever launched in America. Fast forward. Today Benz original does over a billion dollars in revenue annually. Crazy.

2:05:24Listeners you can tell all these did become one company at some point but at first they weren't right it was all these puzzle pieces that forest was assembling so back to M&Ms After the war forest and Bruce Murray of course now need to find new customers for M&Ms They're gonna relaunch it as a consumer candy like obviously that was the plan use the military bootstrap up the production her sees resources, but like obviously this is gonna be a consumer candy 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 two. Yep. 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. It's going to make M&M's be far as big success coming back to America. Nope. Consumer launch. Pretty tepid. Doesn't.

2:06:22get a lot of pickup back with consumers in America for years. For years. This, of course, as you would imagine, creates quite a lot of tension between forest 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. So did you hear about what supposedly forest did to Bruce here? No. Oh my gosh. So the story is...

2:06:53as sales are not going well. Forest orders Bruce to produce a daily report of the past days sales of M&Ms in a written form to him every morning in the office and every morning where the previous days sales did not hit forest target. He would write in big letters in red ink, failed on the paper and then he would go tape it up.

2:07:20in the men's bathroom in the company. We've obviously been very lotatory of forest and he was incredible, incredible genius. The dude also had a temper to match his genius. Is he trying to get Bruce to leave the company at this point or is he just trying to motivate him? Well, yes. So here's the thing. You know, you read about lots of people who worked for forest and lots of accounts and numbers of chocolate and elsewhere about his temper and how awful he was and he clearly was awful.

2:07:50He's also 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&Ms 100%. So in 1949, four years after the end of the war and middling sales at best of M&Ms, Forest finally succeeds in pushing Bruce out. And supposedly it comes down to a confrontation one day where Bruce is like, I can't take it anymore with Forest, how you're treating me, you know, posting these reports in the men's bathroom.

2:08:20Supposedly, they get into a literal fist fight in the office in New Jersey. Forest kicks Bruce out of the plant as security or whatever come and take him out. And Forest is his boss. I mean, this guy owns 20% but Forest is the CEO. So you can take a shares but he can fire him. Exactly. So Bruce resigns and then once Bruce resigns, after this, this starts the negotiations of Forest buying out his 20% stake. They settle on $1 million for the 20% stake. So they're valuing the M&M's business at $5 million, which, you know, this is 1949. So if you adjust for inflation in $20, $24, that would be like valuing the business at $65 million and buying Bruce out for $13 million. So, you know, $13 million payout, you know, in today's dollars for Bruce to walk away. For a company that like it's not clear, it's going to catch with consumers. Right. Exactly.

2:09:19Okay, you worked on it for, well, it's nine years of work. 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, but... In fact, they hadn't even started having the M's printed on them yet. No, they hadn't. As soon as far as completes the purchase and kicks Bruce out of the company, it takes 100% ownership.

2:09:48He goes in 1950 and hires the ad agency Ted Bates and Company to perform a comprehensive market study for the product. This is also another genius innovation on forests part. So other big diversified CPG companies like Procter and Gamble, they were starting to do the sophisticated kind of market research here like we're talking about, you know, the legendary Procter and Gamble product management function.

2:10:16This was starting to happen. But nobody in the candy industry did this. Like the candy industry still operated, see to the pants, Frank Mars type entrepreneurial stuff. This is emblematic of the industry. Hershey had a strict policy of not advertising at all. No advertising whatsoever. They did not.

2:10:40Do any advertising until 1970? That's so insane. Which is absolutely freaking insane. Bit of sales targets, either, right? The story about sales targets and revenue growth targets in Hershey was that in some file card and 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%. Yeah. I will say it is pretty incredible.

2:11:09how 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. Like who won chocolate between 1950 and 2024 is a story of marketing and distribution? Yes, 100% 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.

2:11:39It really is the discipline of marketing, of which at agencies, I think we're a lot more consultative in this function back in the day than today, they're much more execution oriented. Really, this is like the creation of the modern marketing discipline. Yeah. So, the Ted Bates agency goes off. They do this product study, market study of who do M&M's appeal to.

2:12:07And they find that actually, M&Ms are super appealing to kids. Now, this is interesting. The candy industry had obviously started as a kids market, but by this point in time, it's an adults market. Everybody's marketing to adults. That's where everybody thinks the market is. 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.

2:12:36Here's the problem, though. Kids don't buy the candy. The parents buy the candy. So you've got to market to the parents to buy them for the kids. 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. The milk chocolate that melts in your mouth.

2:13:06Not in your hand. And it's become like water these days. Everybody knows that's looking. 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. 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. David, how do you know all this information? I'm just reading about this that they could have like, oh my god, imagining myself as a parent in, you know, 1950, 1951 when this comes out. The last thing in the world I want is my naughty nodes kids.

2:13:59running 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. 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. 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-Duty television shows and Boy does it work by 1956 so they start this campaign and call it 50 51 so five years later M&Ms have become the biggest selling candy in all of America doing over 40 million dollars

2:14:58in annual sales and growing super fast. Bigger than stickers, bigger than Milky Way, bigger than the Hershey's bar, incredible. Wow. Five years from basically zero to $40 million in sales, they're just crushing it. And they're starting to get worried about copycats, so they start adding the little M's. Actually, they were black at first. And then in 1954, they transitioned it to white. And they ran a second ad campaign telling consumers, look for the M on every piece.

2:15:27to verify the authenticity. So they're saying we're building IP here. We're not just making candy. We are building a frame of mind and a nostalgia point and a trust with consumers. Yep. And of course today, I say as a pop some M&Ms into my mouth, M&Ms are not just kids candy. Kids still love them, but adults love them too. But it's back to this nostalgia thing like everybody today who is an adult eating M&Ms grew up eating them as kids.

2:15:56Yup. 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. 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 is they're pretty early. Yep, totally. Speaking of copycats, M&Ms.

2:16:25We're so successful that Hershey's really was getting worried. David, as you said, it became the better selling candy than Hershey's bars. So Hershey's launched something called Hershey ets. 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 Hershey ets is people would say, what is it? 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.

2:16:53I mean, you nailed it earlier when you said being first to market is really important and then markets where it is important to be first to market getting scale quickly. So you become the product of record or a reference when people are trying to describe the category. M&Ms was that to a T. Totally. Totally was. Hershey'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.

2:17:19But here in 1954 land, there's just a lot of fun dialing in happening of all the marketing. The peanut M&M's launched, but first only in 10, they then realized what are we doing that we need to change this. So in 1960, they added yellow, red and green right around the same time in 1955 TV started becoming a real factor in American's homes. And it was just perfect timing. I mean, it was a match made in heaven for these candy companies.

2:17:47to utilize and create demand for their products after the war. 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 and she says, one great TV campaign could shift decades of customer loyalty in a matter of weeks. Especially in a new category like candy coated chocolates. Yep. 1955 Mars also gets into the vending machine business.

2:18:14Interestingly, over in England, they start this business called vend pack, which created the earliest vending machines. 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. Yeah. They also got into change makers like you put bills in and you get coins out. Oh, interesting. Yeah. So speaking of empire minded, at this point, Forrest Empire is pretty much complete. 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. I think they had started making their own chocolate instead of buying from Cadbury by this point. 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&Ms, which are now the number one candy in the US. He's crushing it there.

2:19:12He'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, 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. One of course is.

2:19:42His father's company, Mars Inc., Chicago Mars. And he owns what, 10-ish percent around this point. 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. Right. Because if Hershey's cut him off, Eminem's would be screwed. He has a big liability there. Now, of course.

2:20:07Hershey's doesn't want to do that because then they lose a whole lot of business. They lose their biggest customer. Yeah. Exactly. And probably also knowing Forest 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. It would be like Forest to plan all that out to a tee. Yeah. Anyway, like I said, at this point, Forest Empire is doing call it 200 millionish of revenue annually around the world. And Chicago Mars had about 50 million of revenues. So far as to his 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. 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. Yep. I think that's right. And I think maybe

2:21:05Forest and Patricia got some small stakes at that point in time. Okay. 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 Forest per Frank's original will. Ethel had two-thirds, one third goes to Patricia, one third goes to Forest. As we get on into the 1950s, And Forest has now turned M&Ms into a big success. He starts turning his attention to Chicago Mars. 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. I think they are like, Sure, this seems like an easy demand to give this guy like whatever. We'll make an office for him.

2:22:02There's a fox that wants to hang out in our henhouse. Is there anything anybody sees that's an issue here? Nah, just build them in office. Clearly, they did not know Forest 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. He starts writing memos to the board.

2:22:24About everything that is wrong at the company. All the big mistakes that William is making is CEO and why William should be fired and for us should take over. This is not so different than how Elon ended up owning Twitter. Yeah. Yeah. It actually is very similar. Oh, just a five percent position. Oh, I should be on the board. Oh, I have recommendations. Yeah. Before you know it. This is exactly the same way. Oh, boy. Still though.

2:22:52William and Patricia and the rest of the management isn't going to get on board with selling the forest or letting him take over. And in fact, in 1959, William retires his CEO. Forest 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. 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. 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,

2:23:49Okay, a 20% decline. On the other hand, this is a very, very high fixed cost business. Yeah. So a 20% decline in revenue on a significant fixed cost base is catastrophic. That would be a huge, huge change in the negative direction on your return on total assets. Yep. It is a disaster for the company. Now it's also a very convenient disaster for forest who...

2:24:15wants to pressure everybody else into selling and being able to take things over. So finally, as this is happening in 1963, Forest 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. And they didn't have Zoom then. No, they didn't. And it's a manufacturing business. Anyway, Forest finally convinces Patricia to sell.

2:24:43He says, like, look, if we don't do something here, this company's going to go bankrupt. I can save it. I will take it over. I will run him. 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 a CEO, far as it's like, okay. Are we putting that in writing or for how long? 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. And he says, sure, done. Which is probably what he wanted. Anyway. 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. See you. So Patty sells out in

2:25:411963, Forest 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. And by mid 1964, he has full control of Mars incorporated, 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. 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. And just as a like a side note here, it's pretty insane that forest 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. I mean, it's just because he owns M&Ms 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

2:26:40large and dominant. Right. You need some other way to get the money. Yes. Now, it was a distressed business at this point, but like, yes, still. I'm going to 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. 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.

2:27:10He demolishes the executive dining room. He sells the company art collection and the company helicopter and he hands everybody, including James, a time card. He may as well have walked in with a sink. 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.

2:27:38And once that happens, Forest fires James and makes himself CEO of the entire empire, all united. Finally, under Mars, incorporated. 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. Yes. Oh, no.

2:28:03I'm not 100% sure. He may have kept James still employed in the business or something, but yeah, he was out of CEO. Forrest is the captain now. Yeah. I am altering the deal. Pray I don't alter. So, so, so great. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig. Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what

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2:29:24Okay, this now brings us to forest final conquest, which is making his own chocolate in America and fully ditching hercies. 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 the used to make a Snickers bar in a day and now they can do it an under an hour. I mean, he's just going. He's going. So his first active 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. I just want to let you know that we are going to start phasing out our chocolate purchases from you all. 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.

2:30:22We have literally an entire town here that is dedicated to making chocolate and we are supplying it to you at a competitive price. Yep. 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. And okay, 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 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. Totally. So Faris 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. But there are obviously other reasons that Faris is doing this too. One is the quality principle.

2:31:21which, you know, I really do think the quality principle is number one in Mars for a reason. And 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. Anyone who's serious about software should make their own hardware. Yes, yes. Alan Kay for the win. The other reason that I think Forest always had the dream of making his own chocolate is to be able to scale as large as possible. Like we've been saying all episode. This man so deeply new 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. I think in any CPG business, it's a scale economies business. But here, we haven't talked directly yet about

2:32:20how important shelf spaces for candy. Yes, I was about to bring up supermarkets. Yes. So for candy especially, it really is a zero sum game. 90% of all candy purchases are impulse purchases. Only 10% of candy purchases are planned purchases.

2:32:45So 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 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. Interesting. So it may indeed be 90% now in part because of those efforts by Mars. Yes. They were like, how do we lean into the idea that 70% in 1979 of our candy is purchased on an impulse basis? 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. Maybe in smaller shops, but that's, I think, especially with supermarkets when that changed. Interesting. Interesting. Well, so given the impulse nature of purchases here,

2:33:42I mean, it really is whatever candy is right in front of your face, tempting you to buy is what you're going to buy. 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. There's another interaction with supermarkets where the power actually flows the opposite direction.

2:34:12It'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. 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. 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. We want to market a uniform set of candy and a small number of skews 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 going to stock them in the store if you're really doing marketing campaigns because televisions blowing up and.

2:35:10We know that that moves product in our stores, so tell us whatever you're going to do big campaigns on and that's the shelf space that's going to get allotted. Yeah, you're totally right. 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. And what's so frankly, just kind of sad is with the exception of advertising, her she had been benefiting.

2:35:38from this for its entire life as a company. I mean, this really was Milton Hershey's strategy from the get go. Lower prices, get distribution, go nationwide, get shelf space, get placement, build a big company. He just didn't put his foot on the gas. 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.

2:36:07At all, 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. 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. 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.

2:36:37Yep. You know, we haven't talked yet about Hershey's ownership structure. So it wasn't as a public company, but the controlling interest is owned by the trust. 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. Reflecting back on this period of time, thinking about forest Mars.

2:37:03This sort of was the moment in world history for the global scale economy's founder to rise. If you think about the early 1910s, you couldn't take advantage of economies of scale in the way that you sort of can now with the rise of globalization. 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.

2:37:33and beyond that internationally you sort of have the potential for this personality type that Forest Mars was to really succeed. And you can advertise and market and brand nationally for the first time via television and then in the coming decades internationally. Yeah, it's the rise of the scale economy's entrepreneur I think is sort of a way to summarize it. Yeah, totally. So now that Forest finally has his own chocolate making means of production. How do they finally knock off Hershey's? 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. 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.

2:38:32What? They never changed the price. I didn't realize it was that long. 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 melding her. She's legacy. We can't change the price. So what did they do? How did they manage inflation?

2:38:57They just kept shrinking the bar size. 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. Yup. So what do they do? Rather than changing the price, they change the quantity. They just keep shrinking and shrinking and shrinking the size of the bar. Consumers are gonna love that. Oh, yeah, they're gonna love that.

2:39:26The original Hershey's Bar was 1.25 ounces, one in 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. How much is a Snickers today? 1.86. 1.86. Now, that's not all chocolate. A lot of the mass of that is cheaper stuff, like peanuts. But you can see in the consumer's mind, you'll like, wait, I've got this paper thin.

2:39:54Hershey's bar that like yeah, it's a nickel, but compare that to the big meaty, satisfying Snickers. This looks ridiculous. Consumers don't care that the nuke it's 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. Yep. So finally in 1969, Hershey can hold out no longer.

2:40:23commodity prices spike and they make the historic decision to raise the price of the bar to 10 cents. 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 wash here. Both were about double. Okay, so it doesn't solve their problem.

2:40:48It's just totally brain dead. The problem is inflation. And I think the thought process probably was, okay, consumers are going to be outraged when we double the price of the bar after 70 years. Oh, the first time we raised the price of the bar, we should give them some value. So in the second time, well, this is where not having a marketing department or doing consumer surveys or anything, a way to communicate with customers at all. 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. 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 shrink flation. Oh no. This is like a presidential thing in our country today where the president is railing against shrink flation by

2:41:47keeping prices the same and making CPG food smaller. Amazing, amazing. So yeah, I believe that people were outraged by it. People were pissed. So forest is like, oh man, boy am I ever glad that I started my own chocolate making process here? 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 going to increase the size of his bars while giving price the same. And he starts a price in size war with Hershey. Now interestingly, in response to this, Hershey counters by actually finally starting to advertise for the first time here in 1970s. The first time in the company's history that they advertise and surprise, it works great.

2:42:44But 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. So they do two years of advertising. It works great, but profits are down. So they say, nope, we got to stop that unbelievable. And as a result, In 1973, the combined Mars, which is all of the legacy Mars ink products, snickers, Milky Way, three Musketeers, et cetera, plus M&Ms, passes all of Hershey to become the number one candy company in America. There it is. I don't think they ever looked back. Well, Hershey did eventually retake the lead in America from Mars much later, but Mars is...

2:43:41by far the largest candy company globally, like Hershey is basically just in America. And I think Mars's 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 to. Yep. 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. 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 good sold is way lower. I mean, it has no get at peanuts. 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. And so it's going to squeeze everyone's margins, but it's going to hurt Hershey the most.

2:44:41So what is Mars do? They announce bigger bars at cheaper prices. What can Hershey do? They're just getting boxed in from all angles. 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. Yep. The other thing that Mars builds up through this and maybe even starting in the 60s, but definitely in the 70s, ladies, is a very very sophisticated commodities trading department that Hershey doesn't have. Oh, really? Of course they do, hedging. Of course. This is 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 heard from multiple places. Mars has actually made many billions of dollars of profit from commodity trading over the years.

2:45:38So, whereas for competitors like Hershey's, commodity spikes in prices are like a big risk and impact to the business. I'm sure Hershey's hedging also. These days they are, but like back in the 70s, 80s, nada, 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. Here we are, 1973. Mars passes Hershey.

2:46:07to become the number one candy company in America. And a pretty surprising twist happens here in Forest's story, which is the end. He retires. 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. 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. 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. He gives the company to his three children, a third each to Forest Junior, John Mars and Jackie Mars.

2:47:05And totally walks away, and retires. At this point, the Empire is doing about 800 million in annual revenue, and he's just done. He no longer owns any part of it, for the moment. So, Forest 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.

2:47:34with her and taking care of her. 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 forest is 76 years old, he decides he's getting back in the game. He is his father's son. What's he gonna do? He's gonna start a candy company. He's gonna start another candy company.

2:48:03which he names Ethel M. Chocolates after his dear mother Ethel, who of course he considers the real Ethel Mars and matriarch of the family. By the way, I ate some Ethel M. Chocolates last night. I ordered some to prep for this episode. They're great. Delicious. Oh, I have never tried any. I need to get my hands on some. It's extremely different than the rest of Mars products. It's like a specialty chocolate. Yes. Well, so for a business plan and starting Ethel M is basically to build a competitor to seize. Oh, that makes sense. He sees just like Warren and Charlie did back in the day that seize and high-end chocolate is actually a really, really good business. And the plan is the way they're going to compete with Seas is they are going to specialize in liquor-filled chocolates. So they'll make regular non-alcoholic chocolates. You know, high-end chocolates just like Seas, truffles, and the like.

2:49:01But they also will specialize in alcohol-filled chocolates, which were going through a moment of popularity here in the go-go 1980s. So, Forest, as always, decides he's all in on this. Licker-filled chocolates are not legal in every state, and Nevada is the epicenter of them. So he moves to Nevada. I did not realize that's why FLM is in Nevada. That's so funny.

2:49:31That is why Ethel M is located in Henderson, Nevada, which is a suburb just outside of Las Vegas. And for us, 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. And this dude is like in his late 70s. It's a success.

2:50:01Within a couple years, FLM is doing $150 million in revenue. Unbelievable. Look, get out of here. Unbelievable. Now, as you said, Ben, it's not competing with Mars and anyway, it's competing with Cs. But the business gets so big and Mars and Forest Children decide that they want to own this business. So in 1988, after Forest has been running it for 70 years, Mars acquires FLM for an undisclosed amount. I would love to have been a fly on the wall for those negotiations between forest and his children. 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 to unbelievable. It is like the best Coda ever to the story. So shortly after

2:50:58The Ethel M acquisition is when Forest Junior 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. But yeah, Ben, as you say, they weren't happy with it. And they never gave anyone access again. And today, their CEO does speak publicly, like does give quotes and statements. They do release press releases. They have a website.

2:51:27They 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 and we live in 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 to 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. True. But what they don't do is allow books to be written about them, or any sort of in-depth piece. No one knows what their balance sheet looks like, including their bankers. They don't produce financial statements for their bankers. Yep. And some product stuff that happens in this time in 1974, they start producing skittles in the United States after it becomes the success in the UK.

2:52:24They bring twigs over from the UK. They bring starburst over, which was Opal fruits in the UK. Yeah. 1986 Mars acquires Calcan 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. Calcan dog becomes pedigree. Calcan cat becomes whiskers or whiskers. Also in 1986, they acquired Dove, Dove bars, Dove chocolate. Yes.

2:52:52They enter the frozen snack business. And then later launch Dove promises and Dove chocolate bars on the brand. So Dove was a ice cream bar company when they bought it. And then they launched the chocolate bars and chocolate pieces after having acquired the company, which I think works reasonably well. 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.

2:53:21The really big story though I think of the brother's tenure and Jackie too as a third owner of the business and eventually later she does also work in the business herself is globalization 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 forest left to 20 billion in revenue 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. 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. Yeah. And so the brothers took it from 800 million to 20 billion. Yes, over 28 years, I believe.

2:54:18What's their tenure? A 25 X 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. But the early story is where the Maverick is. I mean, we told this whole story about for a senior, we're going to spend 10 minutes here on the next generation. And the next generation took it from hundreds of millions to 20 billion dollars a year. Incredible.

2:54:47Now, that's it. 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 forested Bill. Yeah. So speaking of M&A, and we were also talking about C's and Warren and Charlie a minute ago, in 2008, Mars buys. Riggly.

2:55:15with the help of Uncle Warren and Uncle Charlie. I love that they come into this story. It's the best. 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 Rigley and they both passed the test. 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. Yeah. He actually is a really insightful quote in the 2011.

2:55:45Berkshire 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. It has produced enormous and sustained profits for Coca-Cola since 1886 and Wrigley since 1891. It doesn't say this, but like obviously this is the Mars formula too. Sell commodities buy brands buy commodity sell brands.

2:56:13Oh, not as an investor. Yeah, not as an investor. Companies that buy raw products and then sell them as a branded product. Basically, you're allowed to create margin. Yes. 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 by brands, that's a good mentality for an investment portfolio. Yes, definitely. In fact, I thought that's what he meant. I want to buy this because it's a durable brand or house of brands.

2:56:42Interesting. Yeah, no, it's the operating paradigm for a company of purchasing raw commodities and selling them as branded products. Right. If you have cocoa beans backed up to one side of your factory and then stickers bars coming out the other, it's a good business. Yeah, you're gonna do good. Interesting. So it goes down in the middle of the financial crisis. They announced the deal in April 2008, but it closes in October 2008, like right after Lehman collapses.

2:57:12buys the Riggly Company for $23 billion, 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. Well, they may have, but they didn't want to use it. I've 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 and how they decided to deploy it. I mean, this is the trade-off with efficiency freedom.

2:57:40return 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 yes, so Mars pays $11 billion itself. They get $5.7 billion in bank debt from Goldman Sachs. And then Berkshire comes in with the rest of the financing about six and a half billion dollars total.

2:58:02and 4.4 billion of that was a loan and then 2.1 billion is an investment into the newly created Riggly subsidiary over time. Riggly will use the profits from all their businesses to buy out. Berkshire 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 dollar equity investment indeed that is correct so. What happens five years later in 2013.

2:58:31Mars repurchases the debt portion of Berkshire's financing. And man, this debt got the financial crisis. 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. So during the five years that it was outstanding, Berkshire earned two and a half billion dollars 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. They paid a six hundred and eighty million dollar premium. So all told for the four and a half billion dollar debt investment, Berkshire gets its money back plus another call it three point one, three point two.

2:59:29billion just on the debt. Over five years. Over five years. Now 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. He more than doubled the money in five years on that in addition to almost doubling the money on the debt.

2:59:57Even 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. It's interesting that they did the bank debt from Goldman Sachs and this dual instrument from Berkshire. Yeah. Why not go all one or all the other because you would think they would have the option to well.

3:00:26I think this gets back to the value that Warren and Berkshire always provide, but we're especially providing during the financial crisis, which is just the reputational guarantee and solidity. Oh, you think getting Berkshire was what they used to be able to pull in the bank debt? 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.

3:00:56No, in fact, they classically never do acquisitions with outside banks. They're obsessed with using only their own cash. Yep. And Goldman was Berkshire's preferred bank, so probably put Goldman in. The other aspect to this is the Riggly Shareholders. You had to give confidence to the Riggly Shareholders to vote for the deal to get it done. 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. That's really interesting. Given what was happening in October 2008. Wow. All told Berkshire puts in six and a half billion and about doubles its money in the whole eight years. So five years on the data and then another few years on the equity.

3:01:52How much do Goldman make on the deal? I doubt that much. Right. Definitely, Berkshire got some sort of premium for using their reputation in this deal. Yeah. Now, interestingly, we didn't dive super deep on Riggly 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.

3:02:21Is it really? Yeah, so for a long time, I don't know if this is still true. Good year, the tire company was one of Riggly's major suppliers. And it was like unused byproducts from petroleum. That if you can brand that and sell it to consumers, you're going to have pretty good margins. So, Riggly, I went back and looked at their old 10Ks before Mars acquired them. They had about 50% gross margins and 20% net income margins in the last sort of decade of the company.

3:02:50Pretty good for a business like that. Not bad. Not bad at all. They also own mints like Altoids and lifesavers. That's 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. Okay. Other things that happen 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. That's right, because most of them are actually in PetSmart's. Yes. That partnership is now ended and Mars now owns Banfield outright 100%. And I believe in 2007, they took a large stake. And then in 2015, they fully bought out PetSmart for 100% ownership. That's interesting. It is worth noting we did some slight of hand there. That's a completely different business.

3:03:50pet hospitals than dog food. 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. 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, which is even bigger, right? Yes, they were the largest independent that hospital operator in America for nine billion dollars 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 we're talking about a services business like this is not manufacturing yeah so very very very different DNA I think a big part of the strategy though like you said about distribution of pet food

3:04:48In 2002, Mars had bought a French pet food company called Royal Canaan, or I've also heard it pronounced Royal Canaan. And Royal Canaan makes prescription pet food, like, especially if it's like an aging dog or a mobility challenge dog. And as dogs became more and more family members and people started...

3:05:15Caring for the more and more like humans prescription pet food became a really really big business So I think real canon was like a grand slam acquisition for the company And I think that's partially what led them to then get involved with Banfield and VCA of like oh well Let's consolidate a lot of the distribution and value chain here in this Prescription pet food business 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 and you're not having people who are making candy trying to run a veterinary clinic. 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. I'll pull up playbook theme forward which is that this company obviously

3:06:12grows through inorganic acquisitions, so in buying rigly, royal, canine, vca, all these. Mars itself. Mars itself. They've kind of overpaid on a price to earning spaces. I mean, rigly was a 35x and a 27% premium over the public valuation. Royal canine was a 39x, but if you kind of think about, especially with Banfield Pets hospitals, they really understood what they were buying.

3:06:39So they were able to underwrite better than anyone else. And I think this is very similar to the idea that Honom 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. 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. So when they want to come in over the top, at a 35x for rigley. Maybe they know more about rigley than other bitters do. Interesting. Yeah. Or at least the case on Banfield was we've own 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. Yep. I totally buy it. Arvin from Worldly Partners had a good comment to me about this that they shoot bullets not cannonballs. And when you sort of see that in an acquisition strategy, you should be

3:07:34Careful not to judge too harshly when people overpay for things because they're taking these little baby steps to try and understand first and maybe they know something you don't. Yep. Speaking of, they ran this playbook again with their most recently completed big acquisition of Kindbar. 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. I didn't realize how big Kind was.

3:08:03Kind was doing one and a half billion in revenue. I believe almost completely domestically in America. Yeah, and Mars took a global. And Mars took a global. Yeah, so I think that has been a big success for the company as well. Do you know how they grew so big domestically? Ooh, I don't. Starbucks. Ah, makes sense. Check out counters at Starbucks in Pulse Purchase. There you go. There you go. And it fits with Starbucks brand ethos. It's like healthy. 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 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 there on a good trend there which leads us to the final piece of the story maybe

3:08:57which is the biggest deal that the company has ever done. Yep. Or is attempting to do. So in August, Mars announced that they have entered a definitive agreement with Kelenova to purchase the company for $35.9 billion. So what is Kelenova? Right. Yeah, as we are researching this and getting into this, I was like, Mars is paying 36 billion dollars. What is Kelenova? It's like Mondalez. You're like, ooh, what's Mondalez? That sounds interesting in foreign and you're like, oh, it's craft. It's like a weird corner of craft. Yeah. So Kelenova, do I have this right? Is Kellogg's minus the American cereal business? That is correct. So it's all the snack businesses and international cereal. So the snacks are like,

3:09:42Rice Krispie Treats, Pringles, Eggs, Pop Tarts, RX Bar, which is going to be interesting as they'll own RX Bar and Kind Bar. It is the largest CPG transaction since the merger between Kraft and Heinz in 2015. And so... Another Berkshire Hathaway special. I mean, if you think about it, the family is worth $117 billion today, which essentially means the company is worth $117 billion, which is kind of interesting. It's a $50 billion company that at least...

3:10:12Forbes, 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? Right. And when you say $50 billion company, that's their annual revenue. Annual revenue? Yep. So they have started reporting in recent years, or at least alluding to what the top line revenue number is. Yes, that's correct. They're going to get a lot bigger, I guess, the takeaway from this. 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. That is transformative. Yes. It also basically makes them look like Nestle. Yeah. Which Nestle has been the real competition for years now. And Nestle is huge.

3:11:03They're over $100 billion in revenue, and they're extremely diversified. Extremely diversified, yes. Which obviously again, Mars has always been diversified, but nowhere near the extent that Nestle is, and now with the Kelanova acquisition, they're gonna look a lot more like Nestle. And Mars is gonna be selling, I just looked it up, investment grade bonds to help with its planned sale of Kelanova. So they are raising some outside capital for that, not just using their cash. Interesting, interesting.

3:11:32So that brings us to today. David, we were just talking about it in 2021. They did 45 billion in revenue. 2022 was 47. 2023 was 50. And to your point, they're now saying over 50. 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 dollars in revenue. That is a segment of their business that includes all the candy.

3:11:58So, 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. 59% of revenue comes from the pet care segment and of their 140,000 employees, almost 100,000 work in pet care. Yep. Of course, services business. They own thousands of hospitals. Yep.

3:12:27So 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. 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. In many ways, they are a pet food company that also makes candy.

3:12:56And always has been. 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. 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?

3:13:22Mars 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 players in vets in the entire country. 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, see that stuff like that. Yeah.

3:13:51Looking at the market, at least in the US, 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. Internationally, it's kind of a different story. It is a very fragmented industry. Mars is the whale with 11%. But the next highest are 7% and 5%.

3:14:16And only a third of the market is made up by the top five companies, Mars, Mondalez, Ferreiro, Hershey, and Nestle. 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. Because there's already been huge consolidation. Yeah. So that is the shape of the business today. You've got a pet business, masquerading as a candy business. And we continued to perpetrate that narrative. Yes. 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 there at least equal if not bigger on the candy side. Oh, man, I could be totally wrong. I don't know.

3:15:11I don't know the economics of pet hospitals. Yeah. I would love to know that. If your last name is Mars, please reach out or join us in the Slack. Or you'd love to hear from you. Yeah. Power? Power. So this is segment we do in analysis in every episode based on Hamilton Helmer's excellent seven powers book and framework. And the idea is that there are seven ways that a business can sustainably generate significantly more profit than its closest competitors. And those seven ways are through counter-positioning, scale economies, network economies, switching costs, process power, branding, and cornered resources. We have spent a lot of this episode talking about the biggest and most obvious one here in scale economies. Actually, I like a lot of the businesses we study on this show. Scale economies is the biggest deal.

3:16:06It is actually kind of crazy. It's almost always scale economies is a big part of it. 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 space and then have great operating leverage. Can you amortize your high margin sales in huge volume across a comparatively small fixed cost space?

3:16:35Manufacturing businesses are like that, software businesses are like that. Cloud competing is like that. Exactly. And the businesses that get the biggest tend to benefit from this principle. Totally. Okay. Scale, Commis, 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. 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 for the one with the better brand, you know, the Tiffany ring versus the unbranded ring? Yep. I think there's another way that branding shows up. Okay. We said that IKEA doesn't have brand power last episode. That's obviously not true. It might be technically true in that they don't take margin because of their, but

3:17:33They 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. 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. Definitely. I think it's got to be a version of our Costco episode scale economy shared brand power shared.

3:18:01There 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. 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. I totally buy that.

3:18:29So by that definition, they absolutely have branding. 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. Hmm. I think the candy industry used to have cornered resources. I don't really think it does anymore. Same with process power. I'm not convinced that anyone's actually developed a superior way to make something that is not known by others in the industry.

3:18:55I think Mars has always had the best technology and the best equipment and the best resources. There's actually great stories about forest, perhaps both himself, but also through 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 make total sense, keep a trade secret. Yep, totally. No, none of the others jump off the page to me. So obviously we did not do a deep dive on the pet business.

3:19:25despite it being the larger business. I think, though, the main power in the pet business is switching costs. Oh, if your dog doesn't have problems with its current food, you're never changing to another food. 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. Imagine if you only ate one food for years and years of your life, and then all of a sudden you started eating. What are we doing? We should be feeding them table scraps so they get a well-rounded diet.

3:19:54Just like the 30s, exactly. Exactly. 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, that's like huge, huge switching costs. 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? Yes. The first one that I have.

3:20:22is that you actually can build a durable, sustainable business through great marketing, not just great product. 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. 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 after the advent of television. Yeah. And of course paired with distribution paired with grocery stores paired with actually, let's talk about the ET thing. Yes, let's talk about the ET thing. This is really fun. So in the

3:21:17Late 1970s, early 1980s, when Spielberg is making ET, the movie ET. He's written into the script that ET is going to be lured into the house by a trail of M&Ms. And anybody who remembers the details of the movie remembers that it is not M&Ms. And M&Ms passed on the opportunity because it had to come with a guaranteed million dollars of co-marketing consumer promotion, trade promotions, displays featuring ET, 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. Yep. This was relatively early in the brother's tenure, so I wonder if Forest would have made a different decision and also be if the brothers would have made a different decision had they had a little more confidence in their own

3:22:16security in their own place as CEOs. So I think there was a timing element to this. Hershey almost passed to 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. So Hershey leadership was also going to pass on it. Yeah. I mean, this was one of if not the biggest deal up into this point for product placement. Yeah. It was a paradigm setting deal. And it worked.

3:22:43in a huge way, multiple sources cite that it three X to the sales of Reese's pieces when this came out. And Reese's pieces, they'd 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. 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. But, at least in my experience, I haven't been to a movie theater much lately.

3:23:12I believe there is a lasting legacy of this, which is Reese's PCs are a mainstay at movie theater, concession stance. And it's all because of this. Totally. So maybe the takeaway is actually M&Ms 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. And maybe that this whole postulate is wrong. That marketing can create durable brands. And the reason why all these sneakers and Milky Way and M&Ms are victorious is because they're just better products. Well, I think they're good products, but I think it's like the nostalgia element is just so huge. Right. There's somewhat commodity products or could have been either product 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. I think the candy industry is much like the luxury industry in that once you have an established product and product brand.

3:24:09It is impossible to kill it. You just can't. 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. 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&Ms has run. In fact, They operate a M&M store in Disney World or in Disneyland. I can't remember which one. But they associate with the holidays. They've got that commercial where the two M&M's characters come in the house. Santa's just come down the chimney. They run into them at the Christmas tree. They do exist. It's so great. I mean, it's a classic. 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. I can't get no satisfaction.

3:25:06bad, obviously the Olympics. 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 premiere brands that everyone loves that you have nostalgia for. In fact, NASA, they went up on, I think it was the space shuttle. NASA can't obviously endorse because the 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 and zero gravity. It's been a strategy for Mars to chase known loved universal brands. Well, sounds like we've learned a lot here at acquired from the Mars playbook. Yep. Another one just like the innovation on commercials. Think about how long they've had those computer-generated M&Ms characters.

3:26:01I looked it up, the first one I could find was in 1994. 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. 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.

3:26:31in all these other facets. And ultimately, the ET things 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. 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? Is that when they were replacing it when there was a vote, right? Yes. Which color to replace it with and blue one? Absolutely.

3:26:59Genius total genius. 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, but they got millions and millions of Americans to call one eight hundred fun color which by the way I called yesterday is no longer in service. You call one eight hundred fun color to vote.

3:27:27So 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. 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. Yes. Totally. All right. That's all I got on their consumer marketing. I'm sure you read to Mars is constantly rebalancing the ratios of colors in M&M bags to suit current tastes. 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. But I think they're adjusting it constantly. 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.

3:28:26Pet. Pet food is one, too. 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. 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. Yep. A corollary to being recession proof is being universal. A survey done by the Food Institute says that 98% of households by candy every year And of those, 97% are reoccurring purchases at an average of 35 times a year. Wow. Again, good, good business if you can get it. It's just like our Starbucks episode two. 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. In fact, I feel

3:29:21pretty crappy after eating all these M&Ms and stickers. I probably ate more than a recommended amount because we were sitting here for five and a half hours doing this, 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. So I can see why they're diversifying away from those core franchises. Into kind and Kelanova, et cetera, et cetera.

3:29:51More kind bars are in my future, maybe some detox tomorrow. All that said, no matter what happens, I don't think M&Ms and sneakers, they're not going anywhere. Even if everyone starts taking ozemic, I don't actually think chocolate sales are going to fall. 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. Yep.

3:30:18I think this is a good place here in playbook. There are a couple of 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. 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 100 years of Mars marketing and Hershey's marketing and all that. But really, really, when you are describing the production process of chocolate, earlier in the episode, like it is one of the most complex rich foods on the planet. When Milton Hershey shut down and got out of the Carmel's business, he thought Carmel's is a fad, but chocolate is a complete food. Chocolate is a food exactly, and like he was totally right. I don't think chocolate is going anywhere in the ozemic risk for chocolate is way lower. Far lower than like gummy candies. The other aspect about chocolate, though, and I think here is the right place to talk about it.

3:31:16is the industry and what chocolate is is changing hugely. 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. 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. It's like these football-sized pods that just go right off the trunk of the tree. Yeah, and it's something like only 25 years of their full hundred and something near life, they actually can produce the fruit in a way where you can use it to make chocolate. 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

3:32:14temperature and climate ban that they can be grown in. 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. That's the first order effect on the industry. The arguably as bigger, bigger is the second order effect of how the industry has responded. 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. All of which is good, ensuring continued production of chocolate. As long as it doesn't come at the expense of taste. Right. So that's the downside. It has not been optimizing for taste, either preservation of the current taste or just good taste in general.

3:33:12So like actually the taste of chocolate has changed a lot in the last few years as the plants themselves have been engineered and changed a lot. To be more resilient and productive. 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.

3:33:40I 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. Yeah, that is the correct takeaway. Whenever you talk to people in the industry, this is what they're talking about. Yep. All right. I have got a couple more. The first one is conglomeration and doing it well. They very early on learned how to acquire and conglomerate.

3:34:08How to do acquisitions, which parts to centralize, spoiler alert, very few, which parts to decentralize, actually most of them, 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. And so I think it's very different than these companies that later in life are like, we're going to get into XYZ. Mars always has been a diversified conglomerate.

3:34:37They actually look a lot like LVMH in that they aren't a private equity firm. They're a buy and hold. Yep. I think they've made 30 acquisitions since the 90s and they've only sold two things since 2015. It's very Bernard Arno style. They also don't rebrand things. They keep the original brands even in the pet hospital business. Yeah, that's super interesting. You think of anywhere where you would want to centralize the brand is like, no.

3:35:05VCA, Banfield, they're separate. Yeah, that's super true. And then my last one is duration. If you look at them over the last 100 years, they have grown revenue at a compound annual growth rate of 14% for a century. Pretty good. The question sort of comes back to what conditions enable a business to grow like that for that long? It's global applicability.

3:35:31It's the margin structure you're talking about where you can take in commodities and spit out brands. It's the operational efficiency of doing it. It's the reoccurring purchase that has a habitual, if not addictive component to it. It's the scale economies of being able to achieve and maintain number one dominant market share over many decade long periods. Yep.

3:35:56It's pretty amazing that those things come together in a way that make it possible to grow at 14% for a century. It's executed well. Wow. Alright, David, we are into the quintessence. Quintessence. 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? Great. I'll go first. A couple things about this company. One.

3:36:24Man, Forest Senior was such a freaking G. And because the company is so private, like nobody knows about him. But he should be right up there with Sam Walton, Henry Ford, with the very, very greatest American entrepreneurs of all time. He was truly a genius. I think probably had a lot of complications and faults in his personal life. Which is the same thing as basically everyone we cover on this show.

3:36:51Rockefeller, all of them. Yes, but when it comes to business, an entrepreneurial leaders, he's one of the greatest. Yeah. For sure. 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. To though, you know, we have not yet studied Coca-Cola. We haven't studied Procter and 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 forest was doing back in the 30s when he was starting were like radical and now are just completely widely accepted. Yeah. 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.

3:37:47Maximizing yield on equipment for efficiency. 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. I mean, he got the market research in the positioning that they did with M&Ms, 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 and then tailoring marketing messages appropriately for that. Way, way, way ahead of its time. 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

3:38:45that Forest Mars did to create a company like this today. No, you could not. It required being in that place in that time with that technology and that competitive set. 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.

3:39:10Oh, 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. Yes, so many path dependencies here. Right. He happened to be a American capitalist competing against British quaker and British quaker inspired competitors, industrialization and mechanization.

3:39:37the timing of television and commercials and grocery stores when it did. All of these were brilliant decisions executed within the context of his time. 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? Yep. You don't. You build your own company because all of the great companies that we study are their own companies. Yep. Exactly right. Love it. All right. Before we get to carve out, I have one piece of trivia for you.

3:40:06Oh, I love trivia. So you mentioned that the Hershey Trust is responsible for maintaining the Milton Hershey School, which started as a school for orphans and now as 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. David, how big is the endowment of the Milton Hershey School? 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. Yep. 17.4 billion dollars for 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. It is totally incredible. I mean, we debated when we first set out.

3:41:04to 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, but the Hershey story is freaking wild. Milton Hershey gave the whole company to the Hershey Trust. Yeah, which operated a school for orphans, like a high school for orphans, that owns the company. The primary shareholder has a primary purpose that is maintain the school. Right. It is a very specific mission.

3:41:30to support this school. 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. Just think about what 4% of 17 billion is a year and think about what the required budget is to run a 2,200 person school. Yeah, totally wild. Love it. Okay. Carvouts. I got three. One we've already talked about, Dan DeLion chocolate. These people are the best. The factory is so freaking cool and the chocolate is absolutely amazing.

3:42:00They 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 remove any imperfections. And then in a very craft way, they make some of the best chocolate you've ever tasted. It really is like the wine industry. Yeah, I think I speak for you too. We're both very grateful to Todd, Elaine, and the team there for just kind of.

3:42:26taking us through it all and explaining how chocolate is made. It was very cool. So, if you're looking for any late holiday gifts or just any good chocolate, I can't recommend Tandy Lion enough. Ah, well, you stole one of my car vats, Tandy Lion was one of my car vats. But specifically, the Tandy Lion Advent Calendar. Didn't you buy that for Jenny? Which, thanks to our relationship with the company, yes, I got the opportunity to buy about the double so that Jenny and I can both enjoy every night. Oh. Oh my god.

3:42:53This is the single greatest advent calendar that has ever been created in the history of mankind. The artwork, the design, the presentation, it's like, this is if Hermes made an advent calendar with all of the presentation and the objectness, so like every day is an ornament that can go on the tree, it's so great, and then the chocolate inside. They partnered with chocolate tears all over the country. I think maybe even internationally, all over the world, too.

3:43:21Just highlight some of the very best talent in the chocolate making industry globally. Anyway, amazing. Dandelion. They're so great. 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. When out the other day, notice that there was a bolt sticking through the tire that we had driven over and the tire was flat. I opened up the app and within 90 minutes, there was somebody at my house.

3:43:51that was taking off the wheel, throwing it in a truck, putting on a temporary wheel. So I was good to go immediately within 90 minutes. 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. And the whole thing cost me like 120 bucks. Wow. It was like the best car service experience I've ever had in my life. That's pretty awesome.

3:44:20It 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. Yeah, it totally is. So great. Okay, that's number two. Yeah, one more. Last one. I think last year I carved out Silo. Silo season two is here on Apple TV and it is excellent. Yeah. Her usual part for the course for me, I have not watched Anyway, but I did read the book and the book is excellent. You read wool? I read wool. Yep. It's great though. I mean, a lot of times shows I think have a hard time maintaining their season one and a momentum into two and two into three and there's no problem with that here. Didn't you get to meet the author a while back? Hugh. Yeah. He's great. He's really great. All right. I had one other besides the dandelion advent calendar, which is the movie Home Alone. This is sort of a humorous one.

3:45:16But since this is an nostalgic episode about our childhood and the holidays, home alone was my very, very, very favorite movie going up as a kid. I saw it in theaters when it came out. I was the perfect age. I think McCulloch and I are roughly the same age. Give or take a year. Loved it so much. After Thanksgiving holiday traveled this year, I have a whole new appreciation for that movie, which is the perspective of the parents.

3:45:45Did you leave one at home? No, but I almost 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. Nice. Yeah, Thanksgiving travel was pretty wild this year. We went back to Pennsylvania to visit my parents and it was exciting.

3:46:14On the plane right there. I'll put it that way. And the most awesome moment though. I mean, it was this was one of those playing trips as a parent where oh man, like the lowest of the lows, shall we say? You're sorry for everyone around you. 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 causing ruckus the whole time and kicking his seat, etc. He turned around. He said, are you David from acquired? I'm sorry. I've been listening to you the whole flight. Some other people in the road started popping up and be like, oh, I've been listening. It was a multiple people were popping up and saying, yeah, that they listened to acquired and either had been listening on the flight or these are their favorite episodes. It turned what was like.

3:47:09Truly, one of the lowest lows of my parenting journey into a wonderful memory. So thank you to you all on that flight from SFO to Philadelphia. Good day before Thanksgiving. 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. Yeah. Yeah. Yeah. That was my first reaction to him. Like, oh, no. But no, it turned into the most wonderful turnaround of the day. Wow. Wow. All right, listeners.

3:47:39Well, with that special shout outs to Arvind Navaratnam at Worldly Partners for his awesome, awesome right 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, 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. Arvind is so great. So great.

3:48:06To Todd at Dandelion chocolate as we mentioned. 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. Yeah, to Gary Gatard who I'm sure many of you have eaten Gatard 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. Including the world famous C's candies. Yes.

3:48:34which I didn't know how much I enjoyed guitar chocolate until well, I realized how much of it I'd eaten through seas. Yes, speaking of trivia, I've got one for you related to guitar before Milton Hershey started making chocolate in 1900. There were three chocolate producers in America who predated him and I believe all of which are still operating making.

3:49:00dark chocolate, not milk chocolate, obviously at the time. One of which was guitar, here in San Francisco. Do you know who the two others were? I don't think you will get the one on the East Coast, but the third was also located here in San Francisco. Gerardelli. Gerardelli. Yup. Yes. And then the East Coast, I don't know. The one on the East Coast was Walter Baker's in Massachusetts, I think. Oh shoot, I did know that. Yeah. Yeah, Baker's sort of like the godfather of chocolate in the US, right? I think that's right.

3:49:30I think that's right. But it's super interesting how two manufacturers popped up here in San Francisco in the 1800s. Nice climate for it before air conditioning at least. And then one more big thank you to say on multiple fronts to Joel Glenn Brenner, the author of Emperors of Chocolate and the only journalist ever to get access to Mars. One for just writing the book. We read a lot of business books, business histories here on acquired and Emperors of Chocolate.

3:49:58is 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. 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. Great. Well, if you like this episode, go check out our other episodes on LVMH, Sony or Berkshire Hathaway, if conglomerates are your thing, or for more complex manufacturing, Nova Nordisk, the makers of Ozembek.

3:50:26Or, if you want something more recent, check out ACQ2. We just have that awesome conversation with the CEO of Arm Holdings, Rene Haz, if you're looking for more Sebi conductors in your life. 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. We'll see you next time.

3:50:53Is it you? Is it you? Is it you? Who got the truth now?