Chinese Chocolate Wars & Doing Business in China

Cocoa and chocolate date back at least 2,000 years -- maybe up to 4,000, according to the latest evidence -- and have, in relatively recent history, enjoyed institutional appeal in the West as a symbol of sensuality and decadence, a cultural mainstay, an aphrodisiac and, most essentially, a delectable treat. That makes this fact all the more incredible: until the last 30 years, the vast majority of China's billion-plus people had never experienced this melt-in-your-mouth goodness.

Lawrence Allen, who will speak tomorrow at the American Chamber of Commerce's offices as part of a special AmCham event (3 to 6 pm, including chocolate and wine reception), tells the story of the companies principally responsible for bringing this confectionary into China -- their struggles, rewards, failings and successes -- in the book Chocolate Fortunes: The Battle for the Hearts, Minds, and Wallets of China's Consumers.

A former executive at Hershey and Nestlé from 1998 to 2006, Allen draws upon his observations as a "foot soldier in the "chocolate war'" to craft a narrative centered around the market-entry strategies of the industry's "Big Five" companies -- Ferrero, Cadbury, Hershey, Nestlé and Mars (which, along with Philip Morris, own 80 percent of the global retail chocolate market). Chocolate Fortunes is a fascinating case study into how to do business (and how not to) in this complex, confounding, ever-changing place that presents unique challenges (for example, in the '80s and '90s, a lack of air-conditioning in warehouses and stores made chocolate a cold-season product). Each of the Big Five stood a roughly equal chance of winning this war in the beginning, but as the years passed, obvious winners and losers emerged.

Allen, a "passionate" chocolate lover whose favorite is Hershey's Special Dark with Almond, recently spoke to us from his current office at the executive search firm Heidrick & Struggles.

What lessons can we learn from the chocolate war, and how did Mars come out on top?

The success and failure (of these companies) wasn't due to China; everyone had to deal with the infrastructure. It wasn't the consumer -- everyone had to deal with the consumer. It was internal. That was the decisive factor of the chocolate war -- internal management, internal decision-making and leadership.

There's clearly an indication that privately held companies had a competitive advantage against publicly held companies. Both Ferraro and Mars (privately owned) achieved their objectives; none of the others did. And the reason they did is the family-owned business had a much longer vision -- no publicly owned company is going to lose money in China for 12 or 13 years the way Mars did. The Mars family knew what was at stake.

And as a business person, with all the complications and all the complexities and all the company politics, at the end of the day your main job is to understand what the customer wants and give it to them. And Mars did that more effectively (you can walk into any Mars office or warehouse around the world and you'll see a big sign up that says, "The customer is our boss"). They realized you can't cram M&Ms down people's throats. That's not what (consumers) want. They want a serious, indulgent chocolate (Dove), so (Mars) switched gears.

Now, that was not without difficulty. After I wrote the book, I befriended the man who set them up in 1988, '99, 2000. He was the general manager from '88 to '97. And he told me it was a battle. He fought like hell because head office said, M&M, Snickers, M&M, Snickers -- these are our core products. Dove is brand new, it's not a priority product, it's secondary. And he's saying, No, no, no, this is what they want. They're not going to sit down and chew on a bar of Snickers for hunger fulfillment. It's culturally inappropriate.

When he left in '97, he said there were still people saying, "Well, finally you got rid of this guy, we can finally drive M&Ms and Snickers." And the guy who replaced him came in and said, "Oh, Dove is 75 percent of our business and it's growing 110 percent... uh, okay, let's push Dove." It was really a classic example of corporate politics.

You write, "If penetration of the China market were a 10K foot race, the Big Five might be viewed as having run only about 1 kilometer of it so far." Care to offer any predictions for the future?

The one to watch, in my opinion, is JinDi, i.e. Le Conte. Le Conte is part of COFCO, which is a huge food conglomerate, very powerful, with very deep pockets. They've been in this market now for 20 years and I think they have a commitment to winning that I have not seen with the multinational companies. They brought in foreigners to help develop a better chocolate and improve their taste. It's a good product. It's a bit nutty, not quite my preference, but they're developing a solid consumer base at a price that's 30 percent below Mars.

I think in the future it'll be a Mars-Le Conte battle. In five years they'll be a lot closer (with Mars still holding the lead).

Would you have done anything differently as an executive if you knew then what you know now?

With Nestlé, I think I would have been a little more forgiving. I was a frustrated business manager. Why can't I get the kind of support I need for my chocolate business? I'm seeing the big potential, I'm eager to succeed, I want to win in the market -- Mars was walking all over us and others -- and had I really understood at the time what the priorities were for Nestlé as a company, I think I would have been... a happier manager, let's put it that way.

How has the business environment in China changed?

Absolutely it's a better business environment today than it was 20 years ago or 10 years ago. It's constantly improving. There's a legal system, there's enforcement, there is a structure that you can work with that's familiar to the multinational companies. It's still Chinese characteristics, but the basics are there. The talent pool (is expanding). The infrastructure... in the first 10 years after the doors were opened, where were you going to put your chocolate bars, in a wet market next to the bloody chopping block? Now you have a retail and distribution environment that's benefiting the locals and multinationals both.

Air conditioning, retail distribution: that was the challenge of my generation. It's not going to be the challenge for the next generation. But there are in that story many lessons that they can apply to their challenges.

The AmCham special event, China's Chocolate Industry, Unwrapped, begins at 3 pm Tuesday at the AmCham-China Conference Center (The Office Park, Tower AB, 6th Floor, No. 10 Jintongxi Road). Online registration is recommended (RMB 100 for members, RMB 250 for non-members if you register before noon today).

Chocolate Fortunes won't be available on bookshelves here for another 2-3 months, but you can order online.