Image: Hershey's chocolate bar
Elise Amendola  /  AP file
Hershey retains its prized top spot in the U.S. chocolate market  — which totals $16 billion — but is facing a serious challenge from rival Mars.
updated 10/12/2008 2:28:11 PM ET 2008-10-12T18:28:11

This stretch of rolling dairy country has long been Milton Hershey's turf, where he first found success making chocolate more than a century ago and earned a name synonymous with chocolate in America.

But M&M-making rival Mars has crept up on Hershey's dominance of U.S. chocolate buyers. And now, Mars has delivered a chocolate-coated slap in the face, setting up shop in south-central Pennsylvania, just 10 miles from Hershey's flagship factory on Chocolate Avenue.

The $70 million "Dove Chocolate Center of Excellence" is the latest sign that the spotlight-shy Mars is breaking out of its shell as it tries to pound cracks into the long-held notion that Hershey is the real American chocolate company.

While Mars makes its surprisingly sharp-tongued attack, Hershey has struggled to cut costs by closing U.S. plants and blending cocoa butter substitutes into some of its chocolate candy — a step that has riled candy enthusiasts who say it dulls the flavor and feel of pure chocolate.

At the unveiling of its newly expanded Dove factory in late September, Mars Snackfood U.S. president Todd Lachman said — without naming Hershey — that cost-cutting competitors are "tricking" consumers with substitutes and outsourcing American jobs.

"The consumer is our compass, and we will always deliver 100 percent real, authentic chocolate products that have been manufactured here in the United States," Lachman said.

Hershey is closing plants
Mars also has pivoted its PR messages to chide its rival: Its premium brand Dove is "Made in the USA" and Mars can be trusted "to provide pure, rich chocolate," it says. And Mars is making its case just as it's leapfrogging Hershey as America's largest candymaker, with its $23 billion purchase of mint and chewing-gum giant Wm. Wrigley Jr. Co.

Meanwhile, Hershey is closing six plants — three in Canada and one each in California, Connecticut and Pennsylvania — in a move to cut costs and compete in faster-growing and cheaper regions. All told, Hershey is cutting about 3,000 U.S. jobs and expanding its operations in Mexico, India, China and Brazil.

While Mars will still lag Hershey's prized top spot in the U.S. chocolate market — which totals $16 billion — analysts agree that Hershey is facing a serious challenge.

Together, Hershey and Mars control better than two-thirds of the U.S. chocolate market, the world's largest. But Hershey's edge — currently about 42.5 percent to Mars' 30 percent, according to IRI/Neilsen data provided to Hershey — has slipped several percentage points in the last couple years as Mars has outmarketed and outmaneuvered Hershey, analysts say.

"I think that Mars sees a weakness and anyone who can get ahead in this economy is going to get ahead, even the secretive Mars," said Marcia Mogelonsky, a senior analyst with Chicago-based market research firm Mintel International Group Ltd.

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Hershey defended itself by saying its plant closings are part of broader changes to ensure its long-term competitiveness. The company also said consumer taste-testers approved of the substitutes for cocoa butter, such as sunflower oil and palm oil. In Mr. Goodbar, for instance, the change lets the peanut flavor shine through, Hershey spokesman Kirk Saville said.

Besides, Hershey maintains that 85 percent of its chocolate lineup is pure, including popular items like Hershey's bars, Kisses and Reese's peanut butter cups. Even with a cocoa butter substitute, a Mr. Goodbar has more chocolate by percentage weight than Mars' Snickers bar, Saville said, and a Krackel has more than a Mars-made Three Musketeers.

"Hershey is chocolate," Saville said. "We've made the world's best chocolate for more than 100 years."

‘Chocolate’ candy
Hershey would not provide a list of the products in which it uses a substitute. But under the federal government's rules for food standards, Hershey cannot call those products "chocolate," and a keen eye can scan the packaging and ingredients list and figure it out, candy bar by candy bar.

On the packaging, Hershey dances around the term — Whatchamacallit has a "chocolatey coating," Mr. Goodbar is "made with chocolate" and Kissables are "chocolate candy."

And sometimes ingredients speak for themselves: Products with the substitutes don't taste fresh and vibrant, said Cybele May of Los Angeles, who reviews sweets at http://www.candyblog.net.

"The wonderful thing about cocoa butter is that it melts in your mouth," May said. "Oils replicate that behavior, but they never get it right."

Given health scares and concerns about food quality — Chinese milk anyone? — it can be an effective marketing tactic for Mars to cast doubt on its rival's product, said Jean-Pierre Dube, a marketing professor at the University of Chicago Graduate School of Business. And with both companies strapped by the skyrocketing cost of commodities such as cocoa and milk, Mars' knocks on Hershey's quality might persuade consumers to pay a higher price for a Mars product, Dube said.

Whether Mars' criticism is fair is another question.

Hershey is not alone in using chocolate substitutes: Mars does it in countries where the rules are different. Other candymakers, including Nestle, do not use real chocolate in some of their U.S. candy.

And Mars is doing its own cost-cutting — by slimming down some of its package sizes.

Fair or not, Laurel Haring's mind is made up.

Once a daily devotee to Hershey's Kissables, Haring noticed this year that the candies had stopped tasting like, well, chocolate.

"It wasn't creamy, it wasn't sweet, it wasn't milky," said Haring, 47. "It was just nasty."

Haring's husband prowled drugstores and grocery stores near their home in Wilmington, Del., in search of the good Kissables, and came up empty. She even contacted Hershey to tell them something was wrong — and got coupons instead of an explanation.

A few weeks ago, she stumbled onto an online news item about Hershey's use of substitutes — it featured an image of Kissables — but by then she had moved on.

To Dove Promise squares.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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