Hotel Chocolat reassesses UK growth opportunity, finding the market is ‘a lot bigger’ than it thought

The British chocolatier is rowing back on its international expansion and investing in its proven growth levers, as it warns of lower profitability in the short term.

HotelChocolatHotel Chocolat believes it has uncovered a “significantly larger” addressable market size in the UK than previously estimated, after investing £40m of new equity to support growth investments in the year to 26 June.

As the retailer now navigates the difficult economic climate and record inflation levels, it plans to focus its efforts on loyalty, digital and in-home drinks over the next three years to grow profit in the long term. These areas have been identified as the “most proven and lowest-risk” strategies, with the “greatest potential” for increased profitability.

“We have discovered that our UK market can be a lot bigger for us than we thought a year ago, thanks to the new drinkable chocolate products (Velvetiser and Velvetised Cream alcohol) and the way our digital and stores businesses are performing,” says co-founder and CEO Angus Thirlwell.

Hotel Chocolat’s online business is now more than three times larger than in 2019, the retailer claims in a trading update ahead of announcing its full-year results. It credits its multichannel model and brand strength with driving sales growth of 35% over the past 12 months, a rise of 68% compared to pre-pandemic 2019. 

After a year of investing into its VIP Me loyalty capabilities, loyalty customers now account for 71% of UK direct-to-consumer sales by value, up from 44% last year.

Meanwhile, Hotel Chocolat’s new categories of in-home drinks and alcohol are enabling the business to access new incremental markets and new channels, the company says.Hotel Chocolat talks up ‘direct marketing skills’ as profits soar

The lifetime value of customers (CLV) who have purchased a Velvetiser hot chocolate system is more than double that of non-Velvetiser customers, even though CLV has dropped compared to 2021 due to a lower mix of early adopters. Some 85% of Velvetiser buyers remain active, the company claims.

However, after insisting in March it had a “clear line of sight” as to how it could achieve profitability in its international business, Hotel Chocolat now plans to “materially reduce” investment levels in the USA and its joint venture in Japan.

Overall, total group revenue increased by 37% to £226m over the full financial year, ahead of expectations and up from £165m in 2021. Unprompted brand awareness also jumped up, from 17% in October 2020 to 23% in April 2021.

However, although the business is anticipating underlying profit before tax of £22m for the year, it is also expecting to make a statutory loss.

As it focuses its attention on its “profitable drivers”, Hotel Chocolat warns of lower sales growth in the short term, with the goal of reaching higher profits thereafter.

“The way the market has rapidly changed for all businesses in the second half certainly emphasises the resilience value of investments that we have made over the last 20 years: in building a differentiated brand with strong customer loyalty, a unique and desirable product range, and our own, dependable UK chocolate factory,” Thirlwell says. 

“While we expect a temporary lower sales growth rate and profit margin for FY23 as we carry through our adjustments, the result will be a business delivering greater results, with less risk and an even stronger balance sheet with a higher profit percentage growth in FY24 and FY25.”