Monday, April 26, 2010

An interview with Lawrence Allen, author of Chocolate Fortunes

On Friday I spoke with Lawrence Allen, author of Chocolate Fortunes: The Battle for the Hearts, Minds, and Wallets of China's Consumers. As a former executive at Hershey and Nestle, Allen was in the thick of the chocolate war, fought between the industry's "Big Five" -- Cadbury, Ferrero, Hershey, Nestle and Mars -- who all jostled for position in this virgin market. "To the victor of the chocolate wars would go the spoils of over a billion potential customers for generations to come," Allen writes. You can read parts of my interview with him on the Beijinger.

Part instructional guide for those who want to start a business in China, part paean to chocolate, Chocolate Fortunes is the sort of "niche" book that we may see more of in the future. Just as Time's Jeremy Wasserstrom lamented -- rightfully -- that "big picture" China books miss the point, more room should be made on bookshelves for works like Allen's.

Below, more of my interview with him:

When did you get the idea to write this book?

Actually it's been a work in process for almost the last 10 years. When I started working for Hershey -- when I first got into the chocolate business -- that was in the fall of 1998. I inherited the country management role from an executive who started with a rep office in importing product in 1995. At that point I realized there was this remarkable story that was occurring, and I'd say the real inspiration came... at the end of the book there's an anecdote about a couple that's shopping together, and to see the passion with which people in China were adopting chocolate -- I guess that would be the first moment that I really said, Hey, this is a great story to tell.

There weren't a lot of China business books out there at that time. There are now.

(Allen left the chocolate business in 2006.) Do you think, while entrenched in the chocolate war, you would have been able to write this, or would you have needed the distance?

No, and the reason is, if you noticed, there're quite a few anecdotes but also observations about how these companies behaved, how they viewed the market, so that's something you really can't research. Having been in the industry and worked in the industry and worked within two of these companies, and had Mars as a competitor -- and others -- it really did help to understand what was at stake, the approaches and philosophies. For example, Nestle: understanding why they didn't make it a priority to build chocolate, it really hit home as I watched the way the company handled this massive task of bringing in thousands of products, two dozen factories, and realizing that chocolate was a low priority. I wouldn't have that kind of insight had I not been within the company.

What was the most interesting part of the process for you?

Learning about the publishing industry and media. I had no idea that books were sold -- 80 percent or 75 percent of nonfiction books are sold -- on proposals. I had the movie image of a guy sitting there with a pile of empty paper on one side and a typewriter and shopping around the manuscript, I thought that's how books were sold (and I guess fiction to some degree is sold that way). But realizing that nonfiction books are really a business -- the proposals go to a committee, with sales, marketing, they have their meetings to decide which book titles to pick up... I thought learning about the mysterious world of publishing was probably the most fascinating part.

Who is your target audience?

This book is targeted to two, potentially three audiences.

First is anyone who is either currently doing business in China or who is interested in learning about doing business in China, an executive for a small-, mid-sized American company that's looking to do a startup in China, or market and sell to China -- that would be I'd say the primary target audience. That would also include the academic realm, international business students who would want to learn about doing business in China. So that whole China business sector is the primary audience.

However, there is a great deal of interest in China from a wide variety of sources. This was pre-Olympics. So for an American audience, there was probably pretty big learning about some basics about China. They had one image of China, but after the Olympics there was so much exposure and focus on China, I think that there was a lot of general interest in China. So that general trade audience would be a strong second primary market.

And then, third, if we're lucky and it was compelling enough, chocolate lovers. If you google chocolate or you go to Amazon and look up chocolate, there're quite a few books out there about Mars, about Hershey, about the history of chocolate and the chocolate wars in the U.S. There're a couple dozen titles on chocolate itself, so that would be a potential third (audience).

Niche books...

I think there’s room for a lot of books. There's an old fable about the king and three blind men and the elephant. Easy and simple: King had three blind men standing before him and an elephant. He said go over and touch the elephant and tell me about it… (one person felt) the trunk, "long," and so forth. That's China. If you spent the last 15 years in southern China, you'd have a very different story than up here in Beijing, which would be very different from Shanghai, which would be very different out west in Chongqing. So who can tell the China story? There is no one story, so there should be quite a few titles.

What this book did is it told a story about five companies… how many places in the world do you have one billion people who have never seen or touched or tasted chocolate, that suddenly have the financial means with which to buy them? So this was a great story. I promised myself not to burden my readers with a lot of statistics and a lot of details that were going to be irrelevant. I wanted to tell the story so they developed the right mindset for doing business in China.

You write about how one of the keys to success for Mars -- what ultimately made them the market leader -- is their commitment to the long term. They lost money for the first 12 years of their operation in China. How unusual is that?

That's very unusual. I don't know any company that's consistently lost money. But be careful of that last statement... they needed to lose money for another five years. They had to. They did things in this market during that five-year period that has made this now one of their premier markets in the world. You've got to make that investment.

And Nestle, they weren't dumb, Nestle was smart... from 1978, as soon as Deng Xiaoping said, Heimao, Baimao (black cat, white cat), repeated heimao, baimao, they were here. They sent their executives, and they were exporting to China. They had people on the ground learning the market and they said milk powder is the number one priority, coffee -- which I thought was pretty brave -- number two, culinary number three, bang bang bang. And they knew that the chocolate market, because of the distribution channels, was going to be a long, long, long haul. And they said, You know what? We don't want to invest, we don't want to do this for 12, 13 years. We could probably do it, but we just know we won't get a return on investment that's satisfactory. Coffee they certainly did, milk powder, as you saw, they did.

(Speaking about a Mars executive that came in 2002:) I would say that the guy came in after him also lost money for five years, and it's interesting, they were breaking even in 2002, but the new managing director came in and put them back into an investment mode, said, No no, don't stop yet, keep this momentum going, and he expanded the organization, he put in a significant number of sales people, he added a lot of layers and cost. He built the organization. But those first three years (afterwards), they had 59 percent year-on-year growth. That's over-doubling every two years. It just exploded. So he came in at the right time and said, It's not quite time yet to take profit from this, keep driving. And they did. By 2005, they were clearly number one. They had a huge business relative to any competitor. They're now 40+ percent of the market, and they're clearly way ahead of anyone. So what do you take from that? My lesson is China was not like any other market. It needed that level of commitment to succeed.

There was a question you posed in your book: "What is the right way to do business in China?" Would you be able to answer that now?

I'm still answering that today. And everyone is. Chinese, foreigners, everyone is learning every single day because it is changing. (In) '93, I met a guy who was trading commodities in forex. Excuse me, two of the most capitalist, speculative things, you're doing it, and it just came up, bang. Franchises are illegal in China. December 11, 2007, suddenly, now franchises are legal. So that's just two examples, but every year, every month, something is changing -- a deregulation, a new regulation, a new competitor. Think about the automotive sector, Geely and these local companies, Scoda, they're popping up within a matter of four, five years, coming up out of nowhere, right? So what is the right way to do business in China? I can't tell you. I don't think anyone can. Everyone is learning as this economy continues to evolve.

What I can say is, I do admire Mars, and I'm glad I showed that face in the book because you can walk into any Mars office or warehouse around the world and you'll see a big sign up there that says, "The customer is our boss." That has been the philosophy of the Mars company for years, that has been the philosophy of the Mars company for years. So they put the customer first. And I think that is probably one universal factor that will help you succeed in China. You've got to understand your consumer or your customer and meet their needs and go beyond. Meet and exceed the needs of your customers or clients, that's No. 1.

No. 2, be prepared to have a long-term vision for China. It's going to take a long time to get yourself where you expect to be. You're not going to come in here and set up a plant and be making money in three years. Maybe if you're an export-only company, but if you're dealing with consumers in the consumer market, it's going to take years. I mean, it sounds a bit strange, but if you've been in the United States for 50 years as a brand, what makes you think you can walk in here in three years and take No. 1 market share and run the business? You couldn't do that in the United States, why would you be able to do that here? And you look at companies like the PNGs and the big guys, they stuck it out for year and year and year, built the brands, built the names, invested heavily, and now they're enjoying that profit and the success. But it took years and years of consistent investment.

I would say another key lesson is leadership. That's going to be your most important decision, who you put in charge. The reason is -- and not so much for technical abilities. Fairly typical, you had, Okay, we’re going to set up a plant in China, export but also domestic sales -- who are we going to send over? Well, John Doe is our engineering director, he's been to China many times working with suppliers, he knows China best, we'll send him over. So you actually literally had engineering or production people coming to China and they're sitting in the GM chair. What are they dealing with? State regulations, licensing, zoning regulations, dealing with the local government, HR, hiring... suddenly they’re wearing a CEO's hat, literally. They're dealing with all the same issues. Some of those guys did extremely well. Some of them didn't. So it's not necessarily their background that’s important -- you want as best a fit as possible -- but you need what we call behavioral competencies. They have the ability to be a leader, to understand, to, No. 1, find the right people, because you never do anything by yourself, No. 2, to provide the right kind of leadership to those people in the form of -- not directive, leadership -- selecting the right people to surround yourself with in an organization that understands the market, understands the challenges and will address those issues in a professional and best-possible manner.

One of the criticisms of Chinese companies, for example, in terms of leadership, is some of them are very successful but they don't get past the laoban. Still big boss, he's very directive. It's not that the people around him are incompetent, they're just never given the opportunity to become decision-makers. So my advice is, pick the right leader and have that leader pick the right people on his team. That's going to be essential.

If you could add a coda to your book -- it's been a year and a half since you finished it -- what would you say?

I think the epilogue that I have in the book currently is still relevant. It's still wait-and-see on the Mars-Wrigley merger. Are they really going to turn that into this powerhouse that we expect? Nestle is still selling the wafer KitKat, and they don't have any other retail chocolate right now. They haven-t changed. Ferrero-Roche is still stacking it high and watching it fly. Cadbury, their chocolate business is just flat, basically. Hershey, again, has made a rebound -- wait to be seen whether they're actually able to make that go any further. I really couldn't add anything to that. It's a wait-and-see situation.

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