Is the Chocolate Monopoly Under Siege?

"Hershey's and Mars do 75% of the chocolate revenue in America... and they don't innovate." - James Stephen Donaldson, aka MrBeast

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"Shelf space is diamond-encrusted gold. It's exposure to the consumer and everyone wants exposure to the consumer." - Retail analyst in 2005 on the merger of Proctor & Gamble and Gillette

Last week, a fierce new competitor to Mars and Hershey, James Stephen Donaldson, went on a popular YouTube channel and attacked the chocolate duopoly for bullying rivals and buying up shelf space. Here’s what he said:

“Hersey’s and Mars do 75% of the chocolate revenue in America. It’s kind of monopolistic, almost. Like if you have a successful chocolate company they’ll just buy you or just bully you so you don’t get shelf space. These guys just own all the chocolate space, and they don’t innovate. Like a Hershey’s bar to me just tastes very processed, I don’t really like it, at all. So it’s fascinating to me, why are there not new innovative cool snack products coming out? It’s because these guys have all the shelf space, so there’s no need to innovate. You’re just going to buy what’s there, and no one’s really threatening them. To me it’s fun to put pressure on them and try to take up as much shelf space as possible and try to figure out what they’re doing but do it better.”

Donaldson is better known as MrBeast, the most popular YouTube influencer in America. Donaldson’s empire, and that’s increasingly what it is, rivals Amazon Prime in terms of reach - he has more than 160 million subscribers on his main YouTube channel, and 270 million across all of them. His video recreation of the popular TV show Squid Game, for instance, has 456 million views.

I have great admiration for Donaldson, a 25 year-old college drop-out who is simply obsessed with business strategy. He is clearly one of the best young businessmen in America. Unlike most YouTube professionals, his goal isn’t to be famous, but to compete aggressively, in every realm that he can, to make goods and services that please the public. He’s been obsessed with commerce since he was 13 and started to crack the YouTube algorithm.

One result of this obsession and talent is that his videos regularly exceed top grossing movies and TV shows. Donaldson uses his fame strategically, asking random pedestrians whether they subscribe to his various social media channels - many do - and incorporating this feedback into his work. Over the last few years, Donaldson has branched out into ancillary products, doing experiments such as opening hundreds of MrBeast Burger restaurants using ghost kitchens two years ago. That didn’t work, but a year and a half ago, he created a line of snack foods called Feastables, headlined by organic chocolate bars with internet-infused marketing.

And this expansion led him straight into the maw of dominant snack food companies, whose purchase of shelf space with giant retailers, keep firms like his excluded from the market. The power of exclusive arrangements is something I’ve written a lot about, and it’s not a function of ‘the market,’ but law. Donaldson cites two problems with getting into chocolate as a small rival - acquisitions by dominant firms, and exclusion of rivals via the purchase of shelf space.

This problem is pervasive across the economy - the Department of Justice Antitrust Division is suing Google, for instance, for buying up all the shelf space in search, and the Federal Trade Commission got involved in a series of mergers in the razor blade space, which were also all about shelf space. Meat monopolies, business software firms, soft drinks, pesticides, pharmaceuticals, and movie/TV streaming are all about distribution. The current merger case over Microsoft-Activision is about distribution.

We eat unhealthy food because of these monopolies, are charged too much for medicine because of these monopolies, get paid less than we should because of these monopolies, and have less credible information about our world because of these monopolies. Indeed, it’s not too extreme to say that the core social problem in America, fostering everything from obesity to the dominance of big tech, is control of shelf space.

What’s ironic is that much of this bullying behavior is technically unlawful. Here’s a section of the Robinson-Patman Act, a law passed in 1936 to stop the same business behavior being used by the A&P giant in the 1920s and 1930s. In this particular paragraph against kickbacks in the supply chain, the law says that middlemen can’t pay or be paid to exclude rivals.

It shall be unlawful for any person engaged in commerce, in the course of such commerce, to pay or grant, or to receive or accept, anything of value as a commission, brokerage, or other compensation, or any allowance or discount in lieu thereof, except for services rendered in connection with the sale or purchase of goods, wares, or merchandise, either to the other party to such transaction or to an agent, representative, or other intermediary therein where such intermediary is acting in fact for or in behalf, or is subject to the direct or indirect control, of any party to such transaction other than the person by whom such compensation is so granted or paid.

This law is still on the books, and would seem to indict all the games played by retailers, which are known in various ways as category captains, trade spend, and so forth. So why is MrBeast encountering exclusionary behavior? Well enforcers stopped enforcing it in the 1970s/1980s, as part of the reversal of the traditional American policy framework against monopolies. (They also killed anti-merger law.) One key argument for not enforcing this law was that the internet made fights over shelf space irrelevant, since you could sell things online and get around retail bottlenecks. But that clearly isn’t true. After all, it’s impossible to find someone with more expertise in the internet than MrBeast, and he’s encountering the shelf space bottleneck.

There’s good news. Today, the Federal Trade Commission, under 34 year-old Lina Khan, is resurrecting the Robinson-Patman Act. A whole series of business groups, from the National Grocers Association to National Association of Convenience Stores to the National Beer Wholesalers Association are lobbying for it. But another reason is Khan is exquisitely aware of the problems Donaldson cites. Here’s an article Khan wrote ten years ago, when she was working as a business journalist, on the candy oligopoly.

Through the 1960s America’s candy market was largely regional. “You ate the candy that was produced in your town,” recalls Dave Wagers, owner of the Idaho Candy Company, one of a dwindling number of independent candy makers in the country. Candy was a sprawling and diverse industry at that time, run by confectionery tinkerers who tirelessly stirred and tweaked to dish up new sweets. To distinguish their creations, producers pegged treats to national sports stars, disgraced politicians, or even the local preacher. There was the Winning Lindy bar for Charles Lindbergh, the Dr. IQ bar for a ’30s radio quiz show, and the Oh Henry! bar named after the guy who moved barrels of corn syrup at one manufacturer’s candy plant.

But the diversity didn’t last, as the bigger players began eating up their smaller rivals. Hershey bought up Reese’s in 1963, a prelude to later purchasing Twizzlers and Almond Joy. Nestle followed suit, snapping up brands like Goobers, Baby Ruth, and Wonka Bars. The companies that escaped or resisted the buying spree found themselves now competing with fattened giants. In one instance, the Heath Bar – enormously popular by the late 1970s – caught the eye of Hershey, which asked for rights to produce the candy. When Heath declined, Hershey bought the original recipe from another company and introduced the Skor Bar to compete head-on. Heath Bar sales fell, and the company struggled until it was acquired, first by a Finnish company and then, ultimately, by Hershey.

This pattern of consolidation has helped thin the market down to around 150 candy producers today. From those 150, Mars and Hershey control around 75 percent of the national chocolate market, and 60 percent of the US candy market overall.

Their size tilts the playing field, enabling them to dish out huge sums in “slotting fees” for shelf space, ensuring that you’ll see the same pattern of brands prominently displayed in any Wal-Mart, Giant, Kroger’s, or 7-11. Retailers, too, have consolidated dramatically, empowering chain stores to demand discounts and deals from candy makers, terms independent producers can’t afford.  “We’re lucky to get one or two boxes in the store, and that’s only in areas where we’re well known,” says Wagers of the Idaho Candy Company, whose business has gone from producing 50 different types of candy over the years to four today.

Steve Almond, author of CandyFreak, says bringing a new candy bar to mainstream markets as an independent producer today is “virtually impossible.”

That’s the current Chair of the FTC, explaining the problem in the same way as Donaldson. Now, MrBeast will get into the market, since his brand and distribution capacity is so powerful. But it’s harder than it should be for him, and if it’s this hard for him, then imagine all the other innovators that find it impossible. Or don’t, and enjoy the endless sea of boring Hershey bars.

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cheers,

Matt Stoller