American petcare-to-confectionery giant Mars Incorporated has agreed to buy British chocolate producer and retailer Hotel Chocolat for £534 million ($662 million) allowing the U.K. company to drive forward with international expansion, a path it has found difficult to tread in the past.
A cash offer, today, of £3.75 per share from Hive Bidco, a subsidiary of Mars, resulted in the valuation, which will give co-founders Angus Thirlwell and Peter Harris, who own 27% of the company’s equity according to Reuters (based on LSEG data), a nicely-boosted bank balance. The offer is at a premium of almost 170% to Wednesday’s close of £1.39.
The stock has been on a slide since March 2022, having reached a high of £5.32 in November 2021 during the pandemic. In mid-October, the company reported an annual revenue decline of 10% to £204.5 million in FY23 (ended June 2023). Of that, international channels accounted for £7.2 million, heavily down on £11.6 million the year prior.
One of the main reasons for the international decline was that the U.S. business was closed for the majority of FY23, while a new operating model and approach were being put together. That has now been relaunched with direct-to-consumer sales led by the drinkable chocolate category of Velvetiser.
Through this deal, Mars—the owner of the Mars bar, Snickers, Twix, M&Ms as well as Pedigree and Whiskas—gets to place a relatively upscale chocolate retailer that has mass appeal and an ethical focus within its portfolio. How it manages this unique addition remains to be seen.
The privately-owned multinational says it is well-positioned to support Hotel Chocolat’s next growth phase. This is expected to be led by a bigger international footprint; an improved global supply chain; and better commercial relationships. In the past, Hotel Chocolat has seen strong online sales in the U.S. market which it had identified as one of six “fast-growth” opportunities around the world.
Susannah Streeter, head of money and markets at investment manager Hargreaves Lansdown, commented: “This is the latest big company to take a bite out of the UK-listed market and is likely to continue to rattle nerves about an exodus from London. The Mars owner clearly sees Hotel Chocolat as an appetizing addition to its shelf of confectionery brands.”
While Mars has better access to long-term capital and an entrepreneurial mindset, it does not have a contemporary, premium chocolate brand with its own stores (more than 120 in the U.K.), so this could be a useful learning experience. Putting shops on the ground in the U.S.—and elsewhere—will almost certainly be one of the asks of Hotel Chocolat at some point, something it tried in the past but which did not work out. Now with the financial backing it needs, the story could be different.
The brand, founded in 2004, also has a strong subscription platform and customer database through its Velvetiser product, a home-use hot chocolate maker that has been a solid performer. Hotel Chocolat is close to achieving one million British households owning a Velvetiser and is confident it will surpass that number during its current financial year which started in July.
Finances to fuel international growth
Hotel Chocolat’s CEO Thirlwell believes that the brand’s destiny is to become a leading premium chocolate name in major markets. In a statement today he said: “We know our brand resonates with consumers overseas, but operational supply chain challenges have held us back. By partnering with Mars, we can grow our international presence much more quickly.”
He added: “The pillars on which we have built the Hotel Chocolat brand—originality, authenticity, and ethical trading—is precisely what brought Hotel Chocolat and Mars together and our intention is to strengthen and invest behind these.”
Thirlwell has a “people and nature” stance. He commented: “Our Gentle Farming program has got off to a promising start and we truly believe it can help make cocoa agriculture right for nature and for people. Joining forces with Mars to achieve an increased positive impact, is a huge attraction for us.”
Mars pays a premium price
On the sale itself, Hargreaves Lansdown’s Streeter described the price being paid as “a hefty premium” but added: “The weakness of the pound would have helped fuel hunger for the acquisition. Hotel Chocolat has a loyal customer base of cocoa lovers, helped by its tasting club and its strategic locations across the travel network. Although the company posted two profit warnings earlier this year, the recent update has been more encouraging, showing a turnaround bearing fruit, with stronger sales, particularly at its new shops.”
New store formats, some with Velvetiser cafés, are said to be trading “well above” Hotel Chocolat’s expectations. Four have opened across the U.K. from Glasgow to Bournemouth, with 12 locations planned for next year.
But the overseas market remains the goal. Streeter said: “International expansion has proved super tricky for Hotel Chocolat, with its Japanese joint venture forced through insolvency. The clout of the Mars operation should help ensure Hotel Chocolat’s future ventures are far slicker, and the company clearly sees great opportunity for the brand’s expansion into other markets, particularly in the airport retail sector.’’
She told me: “Travel hubs present a captive market given that business and leisure travelers appear happier to splash the cash on their trips. Look at WHSmith’s success in this part of the business, which is offsetting disappointing trade at its struggling high street stores.”
However, in a statement on the deal, Andrew Clarke, global president of Mars Snacking, made no mention of international market expansion, saying only that “Mars has a long and proud history in the U.K. and today’s announcement further strengthens our commitment to this important market by bringing an exciting brand into our portfolio and deepening our relationship with consumers.” This suggests that the British consumer will remain the main focus for a while longer, as Hotel Chocolat rebuilds its D2C business in the U.S. before opening physical doors.
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