FTSE AIM 100 stock Hotel Chocolat (LSE:HOTC) is a premium chocolatier. It started in the early 1990s as an online subscription business. Subscribers received a box of chocolates delivered to their homes regularly.
Today, the online portion of the company still represents around 24% of the revenue stream. The remaining income is brought in from physical stores or partnerships with third-party retailers such as Ocado and Amazon.
The business model is fairly straightforward — it sells chocolates. However, the multi-channel approach to marketing its 400+ flavour catalogue has turned the stock into a debt-free cash cow.
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Furthermore, Hotel Chocolat has also expanded in addition to its 127 UK branches to include a café-style lounge. In a similar fashion to Starbucks, it sells various flavours of chocolate-based beverages — including a delicious iced-chocolate shake that I’ve personally tried.
A deliciously innovative capital raising strategy
As previously mentioned, the firm is now free from all debt obligations and has been since 2018. But the original debts themselves weren’t exactly traditional.
Its bonds were famously referred to as “chocolate bonds” because they didn’t pay any interest – at least not in cash. Instead, lenders who bought the £2,000 bonds would receive six boxes of chocolates per year whose value was equivalent to a 6.7% interest rate.
The scheme was actually a huge success. The innovative approach to raising capital demonstrates not only intelligent leadership, but also a product that must be desirable, I feel.
A chocolate-craving customer community
Retaining customers in any business is quite a challenging feat, and the chocolate industry is certainly not short on competition. Therefore, customer loyalty is an essential aspect of the company.
As of July, Hotel Chocolat had over 1.3 million active members in its VIP club that offers a 10%-15% discount on all purchases. It actively engages with its customer community through social media to analyse what flavours are driving the most interest. And behind the scenes, there’s software keeping track of customer spending. This subsequently allows the firm to update customers by mail if a product they like is being revamped or a collection is being expanded.
How much can the FTSE AIM 100 company grow?
The multi-channel approach to doing business exposes the firm to four key markets.
- Chocolate-based gifts with a £195bn estimated global market size.
- Chocolate-based leisure products with a £224bn estimated global market size.
- In-home chocolate-based products with a £3bn estimated global market size.
- Premium chocolate-based alcohol and beauty products with a £102bn estimated global market size.
So far, despite its strong performance, Hotel Chocolat controls less than 0.1% market share in all four.
The bottom line
Chocolate hardly seems the most dazzling investment opportunity within the market when compared to some soaring tech stocks this year. But what it lacks in dazzle, it makes up for in flavour.
The business has a delicious product that is curated with the help of the people buying it. Combining this strong customer relationship with solid financials is a recipe for success, in my eyes.
I’m currently seeking a new addition for my portfolio, and Hotel Chocolat is definitely looking like a stock I’d buy.
