Milton Hershey sees his first chocolate bar assembly line at the world’s fair in Chicago. Discover how he transitioned from Caramel to Chocolate.

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Dave Young:
Welcome back to the Empire Builders Podcast. Dave Young here alongside Steven Semple. Steven, you just told me the subject of today’s podcast, and I don’t have a lot for you. I know it’s in Pennsylvania. I know I’ve eaten probably a metric ton of it over the course of my lifetime…

Stephen Semple:
A proper ton.

Dave Young:
Time without even giving a thought as to how this company ever started and how they built this empire. I just gobble it down. In fact, we keep a basket of those in the Wizard Academy classroom and oh my God, they’re the bane of my existence.

Stephen Semple:
They probably go well.

Dave Young:
So let’s hear the story.

Stephen Semple:
Well, Hershey’s is the great American chocolate bar, right?

Dave Young:
Yeah.

Stephen Semple:
So Hershey’s was founded in 1894 in Pennsylvania by Milton Hershey, and today you can buy their chocolate in 60 countries. They’ve got 19 plants, 16,000 employees. They make 70 million candies a day.

Dave Young:
70 million a day.

Stephen Semple:
A day. They do 8 billion in sales.

Dave Young:
I’m going to give up. I’m never going to keep up with that. I can’t eat 70 million a day.

Stephen Semple:
That’s definitely a Lucille Ball moment at the end of that to that assembly line. They’re estimated to be worth close to $2 billion, and they do 8 billion in sales. So big deal. Big, big, big deal. And a crazy story. When I came across as was like, this is nuts. So Milton started as an apprentice to a candy maker, and in 1873, he opened a candy shop. His first candy shop he opened was in Philadelphia, and he had it for six years and it failed. Then he moved to Denver where he became an apprentice for a confectioner where he learned to make caramels.He returned to New Jersey to do business with his dad making cough drops, and that failed. So he decided to return to selling candy to make some money, and his plans were to make caramels.

But the way he learned them in Denver, so who he learned from in Denver was how to make caramels with milk, not paraffin, And the result tastes better and frankly has a longer shelf life as well. So it was creamier, smoother and lasted longer, and no one in the east were making them that way. So in the summer of 1886, he asked his family for a loan because he’s broke and he’s a dodging deck collectors and he’s had many failed businesses. So guess what the family…

Dave Young:
Family could…

Stephen Semple:
Guess what family said?

Dave Young:
Yes?

Stephen Semple:
No, they actually said no.

Dave Young:
They said no.

Stephen Semple:
They said like, “Dude, your track record is really not there. We’re not going to give you money.” But he pushes ahead and he decides the start the Lancaster Caramel Company in Lancaster, Pennsylvania. He starts small, he’s walking the streets to sell the caramels. Then he grows a little bit and he gets a cart, and then he gets a location. And by this time, the family’s seeing the success in this, and the family backs alone for him to build a factory.

Dave Young:
They want a piece of it. Now I see how they are.

Stephen Semple:
So they lend him some money to get a factory and he gets overextended. In 1887, he’s close to failing. He’s literally on the edge and he gets an order from it importer to England for $2,400, $2,400 worth of caramels. And to put that in a perspective, up to this time, he’s been selling small bags for a penny. So $2,400 order is huge.

Dave Young:
I’m thinking $2,400 worth of caramel is. That’s a lot of caramel today. More than I’m going to eat, anyway, unless it’s really expensive. $2,400 back then, wow, that’s a lot.

Stephen Semple:
Well, this order’s enough that he clears his debts and he starts to expand and he starts making different products. He makes square caramels and circle and bean-shaped. He also makes a different line. He makes an expensive whole milk caramel that sells for a dollar a box along with his less expensive skim milk. Ones that are 10 for a penny. So he does, here’s a really fancy one, and he makes one with cocoa and nuts, and he’s now exporting as far away as Japan. Within five years, he’s employing 700 workers. In the early 1890s, Milton Hershey is one of the richest men in Pennsylvania, and he’s the biggest caramel maker in the United States.

Dave Young:
But so up to this point, it’s mostly Caramel.

Stephen Semple:
All Caramel.

Dave Young:
Okay.

Stephen Semple:
Until 1893, 7 years after starting the carmel business, he’s at the World’s Fair in Chicago.

Dave Young:
There we go again. The World’s Fair.

Stephen Semple:
This famous world’s fair that has impacted so many businesses, this huge thing that had 27 million people visited in a year, and he’s walking through one of the pavilions and he notices the smell of chocolate, and he sees this fully functioning chocolate bar assembly line, and this is new. People have been drinking chocolate forever. But the first chocolate bar was in England in 1847, about 50 years earlier. But it remained in a very expensive luxury. But now, he sees his fully functioning chocolate bar assembly line, and this machine makes chocolate more affordable on the spot. Hershey’s buys the equipment, says when the fare’s over, I’ll take the equipment, buys the equipment. Because what he feels is that, people will eat chocolate every day. A year later, he has the equipment up and running and he starts the Hershey Chocolate Company.

Dave Young:
Who invented this machine and why was it at the fair? Was it just fair food? Was somebody just making chocolate bars for people to eat?

Stephen Semple:
Yes. They were making fair food. I don’t know who invented the machinery, but they were making fair food. And basically, but he said is you don’t have ship that equipment back to where it came from. I’ll take it.

Dave Young:
Okay. No, he saw that this… He’s going to take this mainstream. This is not just Turkey leg on a stick.

Stephen Semple:
So he is making chocolate bars and little cigarettes and gems and flowers and it makes way less money than the caramel business. But he feels like it has more volume potential, and long comes 1884, 4 years after starting to make chocolate, Milton notices that the sales of Caramel is really starting the drop in the UK. He discovers tastes are changing. People are losing interest in caramel, but there’s also this new chocolate that has come along that they want that is even less expensive, and that is milk chocolate.

Dave Young:
Yeah.

Stephen Semple:
Not the dark chocolate that Hershey is making now, but milk chocolate. He notices, others have figured out how the Swiss are making that chocolate. Because originally it was the Swiss that started with the milk chocolate, that was Nestle and Cadbury, an English company, figured out how to do it. Cadbury has become so big in England that they’ve built a huge factory in a whole town and housing project. Cadbury’s built this whole industrial town to support this making of this milk chocolate. And this inspires Hershey. He decides it’s what he’s going to do. He’s going to do what Cadbury did. But making milk chocolate is a heavily guarded secret, but he figures if Cadbury can figure it out, so can he. Here’s what Hershey decides to do. He decides make milk chocolate in the United States, and in 1900 he sells the caramel company for a million bucks, says, “I’m out of caramels. I got to focus all my attention on milk chocolate. He’s all in.”

What’s crazy? Here’s how all in he is. This is pushing all the chips across the table. So you sold the caramel company, you got a million bucks, you’re going to do this milk chocolate, you don’t know how to make it, but guess what you’re going to start doing? Your goal is you’re going to make this milk chocolate for a nickel. You start building the factory and the town just like Cadbury did. You’ve not got a product, you don’t know how to make it. You don’t got sale. I’m building a huge factory in a town.

Dave Young:
Welcome to Hershey, Pennsylvania.

Stephen Semple:
Welcome to Hershey, Pennsylvania. And by the way, I don’t know how to make milk chocolate, but I figure I’ll figure it out.

Dave Young:
How hard could it be?

Stephen Semple:
How hard can it be? Here’s the problem. The water and the milk doesn’t want to blend with the fatty chocolate, cocoa butter. It’s like water and oil. When they come together, the bars are crumbly and spoiled quickly, but he knows it’s possible. So while the town and factory are being built, he’s quickly trying to figure out how to make this milk chocolate. It takes him three years to figure it out.

Dave Young:
I can picture him sending his. It is like slug worth spies going into Willy Wonka’s plant.

Stephen Semple:
Well, imagine the pressure of trying to figure that out. You’re watching the factory being built, you’re watching the town being built, and the only thing that stands in your way is, how do I make this? I mean, insane. And finally he figures it out. And the key is to use condensed milk because condensed milk has less water in it. It’s a slightly different flavor than the European chocolate, so it’s not the same formulation. But Americans haven’t tried the European chocolate, so he’s like, there’s not going to be a comparison. They don’t know any better.

So by 1905, he’s got the chocolate bars in the store and they sell hot cakes. In 1907, he launches Kisses, 1908, almond bars. The town grows, he builds a zoo in the town. He builds a leisure park in the town. He was an orphan. So he opens a school for orphan boys. And in March, 1915, his wife Kitty dies from pneumonia and they had no kids. So what Milton decides to do is give the company to an orphanage. So he starts the Orphan Boys of America, and he gives the company in its entirety to the charity. That charity today is still the largest shareholder and owns the majority voting stock of Hershey’s Chocolate is owned by the Orphans Boys of America.

Dave Young:
Oh my gosh.

Stephen Semple:
Is that crazy?

Dave Young:
That’s amazing.

Stephen Semple:
It is amazing. So every time now that you open up one of those chocolates at the tower, a good chunk of that profit is actually going to a charity.

Dave Young:
I feel so much better now about eating chocolate.

Stephen Semple:
But what a crazy story. You’ve got this successful business that is high margin, and yes, sales are starting the drop off. You’ve got this other business that you haven’t figured out yet, but you know as lower margin, but you believe has the potential to be higher volume. You sell the one and roll the whole way to the other one. That’s kind of like Andy Grove and Gordon Moore with Intel back in episode 31, where they ask themselves the question of, if we didn’t have all this history holding us back, what would we do?

So often we see businesses, especially where there’s a high margin one that’s declining, and the new business with low margin that so often they can’t make that pivot. It’s so hard to give up that high margin business. Now, I admire the fact, and I think it was brilliant that he sold the caramel business because that meant he’s all in, he’s focused, he’s burned, he’s landed on the beaches and burned the boats. There’s no going back, and I admire that. That clarity is fantastic. The crazy part was building the factory in the town before you had it figured out. I think that was a little nuts.

Dave Young:
Well, he seemed to have seen and believe what was going on in the chocolate world with Cadbury and Nestle, at least in Europe. And man, the brilliant move to me is he saw the decline in caramel and found a buyer instead of riding that thing right into the ground.

Stephen Semple:
Well, yes, because he saw it early enough that others would still see the potential in that business.

Dave Young:
Somebody would look at it and say, “Oh, this is a profitable business right now, and he’s probably not telling him what he sees as the future of Caramel.” And I don’t know if is the… What was it, the Hershey… It wasn’t the Hershey Caramel company. It was…

Stephen Semple:
It was the… What the heck was it again? The Lancaster Caramel Company.

Dave Young:
Lancaster Caramel. Are they still around?

Stephen Semple:
I don’t know because I don’t even know who bought them and whether they would’ve changed the name. They’re on that rabbit hole.

Dave Young:
They’re not an empire that comes to mind, I guess, is my point.

Stephen Semple:
Very true. They are not an empire that comes to mind. But you also point out a couple of interesting things, and again, we’re always talking about this from innovation and building empires. He saw things in other places. He saw what was going on in the UK, both in terms of what was happening with Caramel sales, but also what Cadbury was doing and said, “Wow, I could do that in America.” But his first exposure to the chocolate was walking into that pavilion and sort of going, Wow, what is this? What is this thing? And buying equipment? So he didn’t have the blinders on of, “Oh, I’m in the Caramel business.”

Dave Young:
Yeah, you’d know that he’d been sampling a lot of chocolates by the time he built that factory, right?

Stephen Semple:
Oh gosh, yes.

Dave Young:
He had all the confidence in the world that this was going to work.

Stephen Semple:
He sure did.

Dave Young:
And the fact that they were doing it, the fact that Cadbury had built a town in England to do this, that had to give you a little confidence.

Stephen Semple:
Oh, for sure. The first year of innovation would’ve been fun. The second year would’ve been, the third year, man. You wanted to talk about pressure.

Dave Young:
Yeah.

Stephen Semple:
Man, the town and the factory are almost finished.

Dave Young:
We got to find a formula.

Stephen Semple:
We got to find a formula right now. We are going to do an episode on future on Eastman Kodak, and when we do the one on Eastman Kodak, I want people to remember this story because the question will be really asked about if Eastman Kodak had acted like Milton Hershey, would their future have turned out differently? A little preview of things to come.

Dave Young:
Good story. I’m going to go have a Hershey nugget, Steve. Thank you.

Stephen Semple:
There you go, and you’re going to feel good about it now.

Dave Young:
I feel great about it. I’m helping the orphan boys. That’s all I’m doing here. Standing here, eating chocolate.

Stephen Semple:
Just like giving money. All right, Thanks, David.

Dave Young:
Thank you. Thanks for listening to the podcast. Please share us, subscribe on your favorite podcast app and leave us a big fat juicy five star rating and review. And if you have any questions about this or any other podcast episode, email to questions at the empirebuilderspodcast.com.

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