FMCG
Page 40
In 1999, Forrest Mars died. He had essentially been the architect of the whole enterprise, and although he had retired and left his offspring to get on with things, he hadn’t completely gone away. In 1981, he had moved to Nevada and started up a hand-made gourmet chocolates business. The company, Ethel M. Chocolates, was named after his mother, its products based on recipes she herself had developed while still tolerating Frank in Tacoma. In the late 1980s, now in his mid-80s, he sold the business to Mars Inc., which continues to run it to this day. In 1992, much to the chagrin of his children, he had secretly taken it upon himself to enter into talks with Nestlé to discuss a possible merger after the retirement of his children. For once, he did not get his way; those children of his, legal owners of the business, totally rejected the idea. Even if it had gone ahead, the deal would have been complicated; in 1988, Nestlé had paid $4.5 billion for Rowntree’s, so the Mars merger would have raised probably insurmountable anti-trust issues, particularly in Britain.
How Is It Structured?
The combination of unbroken family ownership and the simplicity of management structure Forrest Mars originally designed means that Mars Inc. has one of the most stable and easily understood management structures of any large company. The global head office has always been a tiny affair with fewer than 100 staff and is the least ostentatious building imaginable for a global multi-corp, When the CEO of Nestlé visited, he thought he had taken a wrong turn. Individual operating companies still have a high degree of autonomy – there is no overseas structure, for example – and there are only six levels of management between the factory floor and the family members themselves. The company has long been organised by product sector, adding more as the company expanded into new categories, and by management discipline.
In the early 1990s, management experimented with combining the various product sectors into single organisations by country, but it was not a success and was quietly abandoned in the larger markets. The next biggest change came in 2001, when the siblings retired and handed over day-to-day management to non-family associates for the first time. This led to the creation of a formal board of directors – all family members together with a small number of outside advisers. Reporting to the board is the president (currently Paul Michaels), who has under him vice presidents for People, Finance, Corporate Affairs, General Counsel and Supply, R&D and Procurement, plus the presidents of each product division. The original four divisions - Petcare, Chocolate, Food and Drinks - have more recently been joined by Wrigley, although this is run as a separate unit (beefed up by the transfer in of Mars’s non-chocolate confectionery brands such as Starburst and Skittles) and what the company calls Symbioscience, the nearest Mars has to a skunk-works, a collection of development areas currently consisting of Mars Botanical, Mars Plantcare, Mars Veterinary, Mars Sustainable Solutions and Mars Biomedical. The Food and Petcare divisions have their headquarters in Belgium, the others in the US.
What Has It Been Doing Recently?
Mars Inc. is a private company, one of the largest privately owned companies in the world and one of the most private private companies to boot. It shares as little as possible with the outside world, so we cannot follow its year-by-year activities and sales performance. But although the company has reached out into new markets and launched new products, by far the most sweeping changes came, as one might expect, after the retirement of the Mars siblings and day-to-day control passed to non-family management. And the changes came soon: things were evolving rapidly on Planet Mars.
The company had made acquisitions in the past but they tended to be in either completely new areas - Uncle Ben’s - or small complementary add-ons such as the UK pet treat business. In neither case would the acquisitions be large and immediately transformative. Forrests Snr, Jnr and John Mars were all convinced that large acquisitions were a bad idea, for two reasons. First, debt, which the family had a horror of, convinced, and probably correctly, that even the most liberal of lenders would impose conditions restricting the freedom to manage and invest as the mood pleased. Second, it was completely unconvinced that a large organisation with its own entrenched culture, though bought by Mars, could ever be converted to the Mars ways of doing things without falling apart at the seams in the process.
The new regime thought differently, and soon put its plans into action. Just a year after the management handover, Mars purchased the Royal Canin pet food business for €1.5 billion. While the company could cover the asking price without going into debt – although it would take money that was needed for updating plant and funding an advertising campaign – the bigger concern was the task of embedding that very strong Mars culture in a sprawling, long-established business. Other new factors to deal with were the private label brands Royal Canin supplied – Mars had avoided the area completely – and the need to drop some brands from both companies to stay competitive. Mars had never believed that brands were something you bought and sold; every brand carried too much of the company ethos to trade it with other companies.
But these were nettles that had to be grasped if the company was to get into new, faster-growing categories in a commercial environment that was changing much faster than it had at the time those celebrated unwritten rules were first formulated. Royal Canin products – breed- and age-specific dog and cat foods prescribed by professional vets – were sold primarily to a speciality area from which Mars’ own pet foods were almost completely absent. For Mars to build up an equivalent position in the same market space would have been a long process, cost a great deal of money, and even then stood a serious chance of failure. So the move was a sound one and overall deemed a success despite some post-acquisition blues, not least the 2007 major product recall, followed by another in 2009. To the quality-obsessed Mars management, such disasters were both horrifying and, until now, unheard-of.
Indeed, so traumatic were they that Mars made three significant further acquisitions to bolster its under-performing US pet food business. In 2006, it acquired the Doane Petcare, a largely private label company but with an excellent manufacturing and distribution set-up that could be immediately deployed to improve the Kal Kan operation. A year later, it added Nutro Products Inc., a manufacturer of high-nutrition, high-performance natural dog and cat foods sold in pet speciality and farm and feed stores, followed closely by Banfield Pet Hospital, a chain of some 800 veterinary pet clinics.
The mother of all deals, however, and one that surprised competitors and commentators alike came in 2008. Mars would be acquiring the mighty Wrigley chewing gum company. The surprise lay not in the fact that two chocolate and gum companies were coming together. After all, in 2003, after a decade of small, local acquisitions, hadn’t Cadbury splashed out $4.2 billion to buy Adams gum from Pfizer? And overtaken Mars as the world’s largest confectionery company? It had. No, the logic behind the move was compelling: chewing gum was both more profitable and growing faster than chocolate. And since the two categories were sold side-by-side in most stores, selling them side-by-side was easy. It was similarly unsurprising that Wrigley saw a future combined with a chocolate company. In 2002, when Hershey was up for sale (but then withdrawn) Wrigley’s bid of $12.5 billion was a full $2 billion more than the next highest, a joint bid by Cadbury and Nestlé.
So the logic of combining a large chocolate company with the world’s largest gum company was unassailable. The only surprise was the debt. Mars had spent the previous 70 years entirely in the black – one of its five core principles – but it was now deeply in the red: the $23 billion acquisition had taken a lot of funding. But what it also bought, as well as a corporate giant, was global number one in confectionary for Mars. The deal had an unusual structure too: in addition to financing supplied by Wall Street investment banks, Warren Buffet’s Berkshire Hathaway was also in for several billion. There was also some structural change: a new subsidiary of Mars Inc. was created, combining the Wrigley business with the Mars non-chocolate confectionery brands, with Mars holding 81% share in the new
division and Berkshire Hathaway 19%.
The Mars family was deeply involved in the deal, negotiating directly with the Wrigley family. It also insisted that Berkshire Hathaway structure its input to suit the Mars family’s concerns. For which ‘foibles’ might have been another description.
Wrigley was over 100 years old, with iconic brands such as Doublemint and Juicy Fruit generating annual sales of over $5 billion from over 100 countries. To maintain control, the Wrigley Executive Chairman, William Wrigley Junior, would continue to oversee the new division, reporting to Mars’s President, Paul Michaels. But the company’s concern over the challenge of changing a deeply conservative Wrigley culture to the equally long-established Mars way was revealed in an add-on to the deal: if William Wrigley resigned within one year of the deal closure, he would receive a further $19.7 million. William’s CEO, William Perez, didn’t last three weeks before jumping ship, watching his executive suite in Wrigley’s Chicago HQ ripped out for a Mars-style ‘no office, no memo’ culture.
Perez’s replacement, Dushan Petrovich, a 30-year Wrigley man, reported directly to Paul Michaels, leaving William Wrigley somewhat under-employed. He managed to hang on for fifteen months before taking the not-too-subtle hint and the still available $19 million. Petrovich retired in mid-2011 to be replaced by the then head of the Mars drinks division; the Marsification of Wrigley could now be brought to a conclusion.
More recently, Mars has focused increasing focus on health, balanced diets and sustainable sourcing. The dietary issue is a substantial shift for a company whose historic successes have included the ‘Biggest Mars Bar Ever’ and the introduction of the pioneering the king-size chocolate bar format. But the issues are being taken seriously. The company has partnered with the US Healthy Weight Commitment Foundation in putting Guideline Daily Amount information on packaging. Its recipes have reduced sodium levels by 25% and, by the end of 2013, it has committed to shipping no chocolate products that exceed 250 calories per portion. The company has even published a series of academic papers on the risks of obesity in dogs.
What Is Its DNA?
Of all the companies considered in this book, Mars’ DNA is by far the most visible, not least because it has infused every aspect of its business since first being isolated in 1947 by the original Forrest Mars, and the company shares these ‘Five Principles of Mars’ at every opportunity. It is these principles, the company says, that ‘set us apart from others, requiring we think and act differently towards our associates, our brands and our business. These principles have always been demanding and are an essential part of our heritage. We believe they are the real reason for our success’.You cannot turn a corner in a Mars office or factory without seeing the principles on prominent display, supported by live data screens showing how the company is fulfilling them. And what Mars doesn’t share with the outside world, it more than makes up for internally. Few if any corporate workforces are so widely, so frequently appraised, in so detailed a fashion, of how and what and where their companies are doing business. Mars’ 70,000 associates are extremely well-informed.
Quality
The consumer is our boss, quality is our work and value for money is our goal.
Every company in this book would nod their heads at that, but few, if any, follow it through to the extent Mars does. From his earliest days in his start-up British factory, in a style perhaps best described as management by apoplectic fit, Forrest Mars Snr impressed on every single worker that they were actually consumer representatives inside the factory. Every single employee was empowered to stop production for any product quality reason, no matter how big or how small. Anyone who let a problem pass would find themselves rounded on by an incandescent Forrest and accused of trying to bankrupt him. A day’s production would be junked for the slightest problem. Any new machinery that could improve quality would be green-lighted with no questions asked. The factory floor would be cleaner than the average household kitchen surface. After Forrest Senior retired, the Mars siblings, visiting a factory unannounced, made it a habit to climb onto the roof. Woe betide a factory manager who hadn’t had that day’s bird droppings cleaned off. More recently, the commitment to quality has showed itself in the company’s refusal to introduce outsourcing in order to lower costs- an increasingly common practice. It manufactures itself over 95% of the products it sells: only 5% are practices it maintains as a legacy from acquisitions. This gives the company the level of control it needs to deliver both on its quality promise and, latterly, its environmental footprint.
The Mars commitment to value for money is also legendary. The Mars Bar sold outside the US is not a difficult product to make – it has no secret ingredients or proprietary processes – but no competitor has ever been able to make anything like a similar product, offer the same value for money and still make a profit. Of course, Mars benefits from economies of scale – it produces three million Mars Bars a day at its UK plant – but the product was always designed to offer superior value for money. Nowadays, with brand benefits evolving away from grams per penny towards values that are perhaps more emotional benefits, the value-for-money commitment has become more complex to manage. But a commitment it remains, and one lies at the core of the company and across every one of its brands. Whatever the trends, Mars seems to be insisting, value for money will never really die. Who’s to say it’s not absolutely, well, on the money?
Responsibility
As individuals, we demand total responsibility from ourselves; as associates, we support the responsibilities of others.
Mars puts as much responsibility as possible as close as possible to the impact of the decision; that is how the company is structured and run. The minimalist head office structure is the minimum required to run a global organisation and every business unit is fully responsible for its own results in the short, medium and long terms. Within a Mars company, there are no multiple layers of management to diffuse direct responsibility and no committees to hide behind. Memos are banned and fancy Powerpoint decks tantamount to a manager’s suicide note. Everyone has the authority, and so is empowered to do their own job. But no man is an island. Every Mars office around the world is the same: explicitly designed to foster team working. No one has an office: everyone sits at identical desks in one large open space; so, if you need someone’s input, at any level in the company, you walk over to their desk and ask. Meeting rooms are few and far between, and generally reserved for external visitors.
In its most recent rewrite, presumably reflecting the views and concerns of the next generation Mars family - all of whom co-signed the principles document - this responsibility has been explicitly extended to include the company’s responsibility both to the environment and the communities in which it operates. Very demanding goals determine attitudes and behaviour towards issues such as carbon footprint and energy and water consumption, irrespective of the impact on short-term profits.
Mutuality
A mutual benefit is a shared benefit; a shared benefit will endure.
Although in different ways, this is a principle that applies to associates, suppliers and the planet in general. For associates, the symbols of mutuality are very striking. They start in the car park, where there are no reserved spaces for management of any kind: the earlier you arrive, the closer you can park. At the entrance, even the president clocks in and there is a 10% salary penalty for lateness or a corresponding bonus for timeliness. The salaries are attractive. Mars aims to be at least a top-quartile payer; more usually it’s top-decile. There are as few pay bands as there are management levels and salaries are relatively transparent: there are no individual salary awards for individual performance, so when the company does well, everyone does well. And when it does badly, everyone tightens their belts. Staff is paid broadly the same at each level, so lateral career moves into different job functions – a Mars speciality – are salary neutral, even between divisions.
There are no share option awards, because there are no shares. There is no
fat-cat-favourable company pension scheme: Mars believes it pays enough for everyone to sort out their own pension arrangements. There is no executive suite with Picassos on the walls. It is, in short, a uniquely egalitarian workplace. Further there has been a recent move towards acceptance of variable work–life balances at varying stages of life, perhaps a reflection that the Mars work ethic has tended to be very hard-driving. But given the arrival of Warren Buffet on the scene, there has had to be a nod towards the need for shareholders to receive a fair but not excessive return on investment.
When it comes to suppliers, Mars always drives hard bargains to get the best ingredients and services, but never does deals that may ultimately damage suppliers’ businesses. Given that much of the Mars business depends on primary crops such as cocoa and rice, much more emphasis is nowadays placed on the company’s responsibility to millions of small growers in poor parts of the world. Mutuality has now been redefined as ‘doing business in ways that are good for Mars, good for people and good for the planet’. In this regard, the company been eager to work with the US Government and IBM to sequence and annotate the cocoa genome, which it then shared openly so as to provide the best long-term benefit to African cocoa growers. Mars has set itself the challenge of sequencing genomes of 100 other African farm crops, whilst Mars Symbioscience is developing rice varieties that will provide greater nutritional value, taste better, produce emit fewer greenhouse gases and require less water. The company is also committed to entirely eliminate greenhouse gas emissions from its operations by 2040.