What next for Hotel Chocolat after its sweet £534m deal with Mars?

Even for a business that deals in confectionery, the announcement this morning that Hotel Chocolat’s board had accepted a £534m offer from multinational conglomerate Mars has come as a sweet surprise.

The retailer, which has 125 stores in the UK and 21 in Japan, plus a luxury hotel on its cacao farm on the Caribbean island of St Lucia, had been going from strength to strength during the pandemic.

However, in the last 12 months or so it has faltered. In the year ending July 2, the chocolate specialist’s revenues slumped on the back of declining ecommerce performance and it swung to an £800,000 loss.

While domestic performance has stalled, internationally the brand has fared even worse. Hotel Chocolat agreed to a new joint venture in Japan in January, after its first foray into the country, launched in 2018, ended in 2022 with bankruptcy and collapse. 

The retailer also pulled out of the US completely last year, which Hotel Chocolat said at the time meant it could focus on “the more profitable parts of the business” in the UK.

In that context, Mars’ 375p-per-share offer, representing a 170% premium to Hotel Chocolat’s share price, makes the proposed deal all the tastier for the board and shareholders.

But the bigger question is whether or not Mars will prove to be a good long-term custodian for Hotel Chocolat. Mars is one of the world’s biggest food companies and owns brands ranging from Mars and Snickers bars to Pedigree dog food and Dolmio pasta sauces.

While it’s an impressive portfolio, its brands are mass market compared with Hotel Chocolat’s carefully crafted reputation for offering premium confectionery, made using higher percentages of cocoa as opposed to sugar.

Bigger owners aren’t necessarily always better for the balance sheet, either. One cautionary tale may be that of Hotel Chocolat’s one-time rival Thorntons. The brand was sold to international giant Ferrero in 2015 to some fanfare but endured years of losses before finally posting its first profit in the summer.

So will Mars’ acquisition be the cherry on top that Hotel Chocolat needs, or will it leave a bitter aftertaste?

Sweet, not saccharine

Both Hotel Chocolat co-founder and chief executive Thirlwell, and Mars Snacking global president Andrew Clarke, were both at pains to put any customer fears about the retailer’s product quality diminishing as a result of the sale to rest.

Clarke said Mars was ruling out any changes to Hotel Chocolat recipes to preserve quality, and insisted that it will keep the retailer’s UK manufacturing infrastructure. 

“We at Mars have a real track record of nurturing, protecting and accelerating brands and actually keeping that entrepreneurial nature of what that brands stand for,” said Clarke.

Thirlwell said it is “a privilege” for Hotel Chocolat to join what he called Mars’ “constellation of globally successful brands”.

However, he insisted: “In no way does it mean that there’s going to be any dilution of what the Hotel Chocolat brand stands for. That’s precisely what has drawn us together. So, ‘more cocoa, less sugar’ lives on in perpetuity. Don’t worry about that.”

Thirwell was also keen to shut down any notion that Hotel Chocolat’s stores and ecommerce website might one day carry Mars products.

Overseas, again

While Thirlwell says the brand’s recipes and quality control will remain untouched, he believes that the vast scale of the Mars corporation will help supercharge Hotel Chocolat’s expansion plans in the UK and abroad – both in terms of retail and manufacturing.

“The brand flies with consumers in different markets. The bit that we found that needs more work is about manufacturing product in-country and all the logistics behind the scenes,” Thirwell said.

He added that while Hotel Chocolat had “huge appeal” for Japanese and American consumers, the exorbitant costs of setting up manufacturing and distribution infrastructure in those regions proved too much for an independent business. This won’t likely be a problem now, given Mars’ almost unlimited resources.

“This tie-up with Mars is actually all about solving that for Hotel Chocolat. By partnering with Mars, we can grow our international presence much more quickly using their skills, expertise and capabilities”.

While nothing was said on how Mars will approach this expansion internationally, it could explore leveraging its relationships with massive international brands through wholesale agreements. Or, it could simply rehash Hotel Chocolat’s original, ecommerce-only led US strategy, but supercharge it with much greater investment. 

Thirlwell and his business partner Peter Harris, with whom he founded the business in 1993, are both set to make £144m through the deal. Thirlwell, however, has vowed to reinvest some 80% of that payout back into the business and to stay on as chief executive.

The offer has now been recommended to shareholders by the board and seems to have gone well – the shares were up 161.19% since the markets opened this morning.

While the offer may well go down a treat, it remains to be seen whether Hotel Chocolat will yet become one of Mars’ brightest stars or whether it will melt under a very different corporate structure.