Chocolate Bonds: the sweetest way to attract investors | Hotel Chocolat | Video

World Finance reports on Hotel Chocolat, and the innovative way it found of raising capital to invest in its business: chocolate bonds

January 23, 2014

Chocolate is most people’s guilty pleasure; but when it comes to business, the industry is more guilt-free. Entrepreneur Peter Harris shows us around Hotel Chocolat, which has taken a slice of the global $100bn chocolate market and transformed it into one of Britain’s most advocated brands. And Laurent Pipitone from the International Cocoa Organisation explains the global outlook for cocoa, and what’s causing the supply deficit pushing prices up.

Peter Harris: Chocolate is an amazing thing. I mean, how people actually worked out that you would take this cocoa pod, take the beans out of it, and through a number of processes make it into this unusual but beautiful substance is absolutely remarkable.

World Finance: Chocolate. It’s most people’s guilty pleasure; but when it comes to business, the industry is more guilt-free.

Laurent Pipitone: Global sales of chocolate represent around $100bn. Then the cocoa market, which is the main ingredient for chocolate, represents around $10bn, which is the value of the cocoa produce around the world.

World Finance: Entrepreneur Peter Harris has taken advantage of this billion dollar industry, and turned his passion for chocolate into a flourishing business, having founded one of the leading boutique chocolatiers, Hotel Chocolat. But what does it take to succeed in the world of confectionary?

Peter Harris: People often say ‘that was a fantastic idea, how did you come up with it?’ But I actually think there are thousands of good ideas, and the most important thing is how you apply those ideas. And you’ve got to have an almost evangelical passion for your idea, or your business, to make it successful.

Global sales of chocolate represent around $100bn

In the very beginning, Angus [Thirlwell] and I lent money to the business, and the bank matched that with overdraft. That gave us the ability to develop the business to an early stage. But the biggest thing is to actually sell your product successfully. We did that, so we were able to then invest the profits of the business, back into the business, to then develop those ideas.

World Finance: So it really has grown organically, you could say?

Peter Harris: Absolutely, absolutely. You know, we’re one of the rare businesses that’s grown to the size we are now – we employ a thousand people, we’ve got 70 shops in the UK, we have our own factory, our own cocoa plantation – so all these are things that we’ve been able to develop in our business, and afford if you like, by reinvesting those profits.

World Finance: According to a Bain & Co survey, Hotel Chocolat was placed fourth in the top ten most advocated brands. It was also the only British name to make the list.

The company has a loyal customer base, and has found original ways to capitalise on this. The chocolate tasting club offers members a different selection box each month, and encourages their feedback, making the experience interactive. And in effect, a free and self-funded way to do market research.

Peter Harris: Innovation in itself is really important, and through the life of Hotel Chocolat, we’ve actually incubated many of our own businesses. So these are ideas that we’ve come up with, normally because of prompting from our customers, listening to our customers. And by then giving them a little bit of space within our business – in other words, a little bit of resource – we can then allow those to develop without the sort of spotlight of having to make profits in the early days.

World Finance: Innovation has played a large role in Hotel Chocolat’s success, even down to funding its expansion. In 2010 they launched Chocolate Bonds, where loyal customers could invest in the company’s future, and take their monthly yield in – you guessed it – chocolate, raising an impressive £4m.

We won’t pay you any money or interest, but we will pay you a return in chocolate

Peter Harris: We just thought it would be really nice if we could involve our customers in what we’re doing, so we said to them, would you be interested in lending us £2,000 or £4,000, and in return we won’t pay you any money or interest, but we will pay you a return in chocolate. And so you’d get six boxes for a £2,000 bond, and 13 boxes for a £4,000 bond. And this was something that people were a little bit cynical about initially, but we were very successful. And this is really about the relationship we have with our customers.

World Finance: But now the chocolate industry might be headed for darker days, with global chocolate supplies headed for the longest production shortfall in more than five decades.

Laurent Pipitone: Well, the money’s increasing. The long-term average is about three percent per year. On the other side, supply’s not following. One of the reason is that farmers are turning to other crops, which they feel are more profitable for them. Many cocoa farmers are still in poverty, so this is the main reason why cocoa producers are not choosing cocoa as a new investment.

Farmers are hedging, plantations are also hedging. Many cocoa plantations were planted 20, 30 years ago, so their yields are declining over time. So there has not been enough new investment in recent years to supplement what is existing.

World Finance: According to a Bloomberg news survey, cocoa prices may rally 15 percent to $3,200 a tonne by the end of 2014. Which raises the question: should investors be indulging their sweet teeth, and backing cocoa?

Laurent Pipitone: Cocoa prices are expected to continue to rise over the coming few years, due to the supply deficit that the cocoa market is experiencing. So, we’ve seen the supply deficit over the past few years, we’ve seen price increases over the past few years, and we expect this to continue.

Then this will also have an impact on the chocolate price. Cocoa is the main raw material for chocolate, and the price of cocoa in chocolate products represents about 10 percent. So this will impact on chocolate prices to some extent as well in the coming few years.

Many cocoa farmers are still in poverty. Farmers are turning to other crops which they feel are more profitable for them

World Finance: While cocoa prices are forecast to rise, sales in China more than doubled in the past decade, outpacing gains in western Europe – the biggest consumer. And tighter supplies will translate into higher costs for food makers.

But Hotel Chocolat’s Peter Harris is not concerned.

Peter Harris: It’s important actually to put price rises of commodities into perspective. Invariably price rises are reported, but price falls aren’t. And if you actually look at cocoa, yes it is rising a little bit at the moment, but it actually went through a period of it going down quite a lot – but this was never reported.

So the answer is, obviously we manage that. We buy forward cocoa so that we know how much we’re having to pay, so we can obviously guarantee the prices to our customers. But I believe there’s a lot of speculation goes on in the cocoa market – as in other markets – which actually is designed to try to destabilise the pricing so that people can make money. But it’s not really relevant to the source of the product and the availability of it, because that’s very good.

World Finance: So with new restaurants in the pipeline, their turnover at an all time high, and customer satisfaction their driving force, the British start-up looks like it has found the lasting recipe for success.