Candy Wars: Mars Takes on Hershey

At first glance, it seemed like business as usual last weekend at the Hershey's store in New York's Times Square. Tourists bought Hershey-themed trinkets, and toddlers shrieked as a worker in a paper confectioner's hat helped them turn the crank of a very Willy Wonka-looking metal machine. After plenty of churning and sound effects, the machine produced buckets of chocolate goodies, prompting yet more happy exclamations. But out the window, behind the cheerful candy man, loomed a potentially ominous sight—at least for Hershey.

Directly across the street, Hershey's biggest rival, Mars Inc., was preparing to launch its own megastore operation. Mars, which is headquartered in northern Virginia, recently purchased an enormous swath of retail space—many times the size of the four-year-old Hershey's store—and fashioned a 24,000-square-foot M&M's World theme store, full of eye-catching colors and flashy technology. The space opens to the public today, coinciding with the announcement of a new color of M&M. It's a bold gambit, and caps a six-month span during which Mars has made significant gains on Hershey, the longtime leader in the $16.9 billion candy industry. Now the fight for sugary sweet market share is turning bitterly competitive.

It has been a rough year for the Pennsylvania-based Hershey Company. Pablo Zuanic, a food-industry analyst at JPMorgan Chase & Co., estimates that Hershey has lost 1.5 percent of market share to Mars since May (based on ACNielsen data). While Zuanic says the sweets behemoth still holds 44.7 percent of the U.S. retail market, as compared to 31.6 percent for Mars, the trend isn't good news for Hershey. Several factors have played into this shift, including most recently a November recall of some Canadian Hershey products after concerns arose over salmonella contamination. Meanwhile, stock in the 79-year old firm has taken a hit—falling from a high of nearly $65 per share in 2005 to just under $50 in early December 2006—and some analysts, including Zuanic, have downgraded their ratings of the company's shares. (Despite several requests, Hershey representatives were unavailable for comment.)

Perhaps what's most striking about these setbacks is how starkly they contrast the significant gains Hershey had made since 2001, when Richard H. Lenny was named chairman and the company entered a period of booming growth. "Hershey had an unbelievable half decade," says Eric Katzman, an analyst at Deutsche Bank. Katzman says Lenny rejuvenated the Hershey product line and leveraged core products in creative ways (like the miniature "Kissables" twist on Hershey Kisses). He also confronted one of the biggest challenges facing the company: its underrepresentation at convenience-store sales counters, a make-or-break element of the candy business. As a result, Hershey picked up significant market share (almost 3 percentage points) between 2001 and 2005 and was able to solidify its lead. But now, that trend has reversed and Mars is starting to eat into Hershey's business.

Analysts credit Mars's gains to the success the company has had marketing its core products—most significantly its M&M's line. In a wildly successful advertising campaign that began in the early 1970s, Mars anthropomorphized its candies, giving each of the main M&M colors its own distinctive personality. Other advertisers have piled on. Mars struck a deal with the makers of the "Pirates of the Caribbean" film this summer to launch a joint campaign that featured the M&M's characters dressed up as swashbuckling pirates.

Mars executives say the M&M's World stores, in turn, have helped jump-start the brand by using highly recognizable M&M imagery to peddle a product line that goes well beyond chocolate. The first M&M's World opened in Las Vegas in 1997 and was an "absolute home run," far surpassing growth expectations, says John Haugh, president of the Mars retail group. (Haugh declined to provide precise growth data, and none is publicly available because Mars is a privately owned company.) In November 2005, Mars opened a store in Orlando, Fla. New York will be the third. Haugh says megastores push the brand of a tiny candy well past the candy itself: the Vegas store, for instance, sells everything from key chains and sweat shirts to high-end products like M&M themed original artwork and M&M brand cufflinks.

Haugh says the New York store will be a Big Apple twist on the same general theme. In addition to the standard-fare M&M brand merchandise, there will be large representations of "Green" (the green M&M character) as the Statue of Liberty, "Red" as King Kong, "Blue" as John Travolta's character in "Saturday Night Fever" and so on. Another original element of the New York store will be its enormous "Wall of M&M's," and 35-by-40-foot wall covered with more than a million M&Ms.

And yet, for all the promotional punch of megastores like M&M's World, Katzman says that adding more of them might not make all that much difference in terms of bolstering the company's core performance. "The marginal value of these stores is limited," he says. "There's a limited number they can put up that will add brand value." Katzman says fundamentals like the development of new products, pricing and distribution are more significant in terms of solidifying a brand's long-term success.

But surely other factors also enter into a company's calculus—for instance, location. Is there a certain gamesmanship to opening a 24,000-square-foot M&M's World directly across from a preexisting—and much smaller—Hershey store? It seems a bit far-fetched to think otherwise, but Haugh, at least, says picking the spot had nothing to do with one-upping Hershey: "We wanted to be in New York, we wanted to be in Times Square, and then we wanted to be in the best location we could find," he says. "Coincidentally, that happened to be across the street from another chocolate brand."