5 Mar 2012

Hotel Chocolat: business is sweet

With flexibility, resilience and innovation, successful businesses such as Hotel Chocolat are a mid-sized firm well placed to survive challenging times, as Xenia Taliotis finds out

Peter Harris, co-founder (with Angus Thirlwell) and development director of Hotel Chocolat, is buoyant about the future. Of course he’s heard the economic forecasts. And he’s seen at first hand the shattered hopes and closing-down sales of some of his high-street neighbours. But for Harris 2012 promises to be another profitable year of business as usual.

And business as usual means “absolutely no slowing down”. It means new stores throughout the UK (two have already opened in London, bringing the total to 62); further growth in the US (where there are shops in Boston and New York); and taking confident steps into Europe (with launches in both Copenhagen and Amsterdam). It also means welcoming more visitors to its luscious cocoa plantation hotel in St Lucia, which is called, not surprisingly, the Hotel Chocolat.

The company’s success in such stricken times sounds exceptional but Harris doesn’t think so. Thousands of medium-sized companies like his are prospering even as the recession tightens its grip on customers’ purses.

The beauty of businesses in the middle sector, he says, is that they’re not so small as to be ruined by a downturn nor so big that they can’t adapt to change without having a widespread negative impact. “Successful medium-sized companies are resilient and agile, which is why they can still find ways of growing even when the economy stalls,” he says. “Conglomerates react to financial uncertainty much like a juggernaut would – they slam on the brakes and cause havoc all around them. Their priority is to safeguard shareholder interests, so they make economies in brutal ways – by pulling out of an area, say, or making thousands of people redundant. We’re much more flexible – more like a nippy convertible. We respond to challenging times in more subtle ways, by manoeuvring, by being more innovative, by coming up with something new that will excite our customers.

“Our flexibility means we can keep producing, keep growing, which is what makes middle-sector companies so crucial to the economy. We’re a driving force for growth and will, I believe, prove instrumental in leading Britain to more stable ground – though we need more government support and less red tape.”

Hotel Chocolat has had a presence on Britain’s high streets since 2004, but the story did not begin there. It started in 1987, when Harris and Thirlwell, who’d worked together at Cambridge-based company Torch Computers, decided to start their own business selling corporate mints.

“We saw an opportunity to offer companies something different – something more interesting than pens – which could be produced in large volumes relatively cheaply. So we each put in £5,000, secured a £15,000 overdraft from Lloyds Bank, and set up the Mint Marketing Company (MMC) in Angus’s front room,” says Harris.

Within a year, MMC had achieved a turnover of £283,000. Within five years – and with BA among its clients – it had reached sales of £1m. As Harris wryly puts it, “Going from very sensible salaries at Torch to zero income when we started MMC was a great motivator.”

By 1993, and with MMC growing healthily, the pair were ready to expand into the consumer market. The idea they came up with was beautiful in its simplicity: they knew people liked to give chocolates and flowers; they knew companies had been delivering flowers for decades; and they knew no one was sending out confectionary. So they started mail-order chocolates business, ChocExpress.

“It was a simple idea,” explains Harris, “but we were the first to do it. Also, we showed innovation in our packaging, which was designed to fit through the letterbox. We put ourselves in the position of our customers and thought how much nicer it would be to find a beautifully packaged gift sitting on the mat, rather than a ‘missed delivery’ note.”

A ChocExpress offer for readers of the London Evening Standard (paid for through a percentage of the sales rather than up front) gave the company a welcome injection of cash and a more extensive database. It also proved that the potential demand for its chocolates was enormous, giving the business the impetus to expand its operations.

Talking to Harris, it becomes clear that he and Thirlwell only take calculated risks. They never overreach; instead, they “incubate” ideas and products, testing how high they are likely to fly before setting them loose. Only once they are sure of a take-off do they let go of the tethers.

“Yes, we are circumspect about how we approach development,” says Harris. “I’m a chartered accountant by training and more cautious than Angus, but we both want a business that is sustainable in every sense of the word. That’s why our ideas always come way before our overheads – we don’t saddle ourselves with huge costs before seeing that an idea has a very good chance of success.”

This has always been the company’s approach. “Remember we started MMC in Angus’s house,” says Harris. “Even now when we’re developing a product we’ll start by maximising our resources to the full. We don’t employ more staff, move premises or spend on technology until we need to. Once a product or new part of our business settles down and begins to grow, that’s when we allocate more resources to it.”

With ChocExpress growing, it was time to introduce customers to another incubated idea, the Chocolate Tasting Club, which was launched in 1999. This monthly, flexible delivery service sends members a box of exclusive new-recipe chocolates, tasting notes, a newsletter and an all-important scoring card.

The club helped to take the company’s 2001 turnover to £7m. Now costing customers £18.95 a month, it remains a sophisticated yet easy-to-manage device for giving regular customers more while garnering invaluable market research. “We have 100,000 members, most of whom are extremely communicative,” says Harris. “Their feedback is crucial because it gives us a great insight into what they’ll want to buy.

“On our website, we say the Chocolate Tasting Club puts ‘members at the forefront of chocolate development from the bean to the box’, which is absolutely true. We launched the club in Scandinavia in 2010 ahead of this year’s store opening in Copenhagen, and are trialling it in Germany. It’s an excellent means of finding which chocolates will prove popular in new countries.”

It was partly due to feedback from members that Harris and Thirlwell rebranded ChocExpress as Hotel Chocolat in 2003. “We were ambitious and keen to grow, yet our name was at odds with the values we wanted to embrace, which were all about indulgence and enjoying something luxurious,” he says.

Harris describes the rebranding exercise as cathartic. It proved a terrific opportunity to redefine the company’s three core ideals – originality, authenticity and ethics – and to come up with a name that would carry it through developments both in Britain and overseas. The name they chose, Hotel Chocolat, was a perfect representation of what their brand stood for – the promise of spending a little lavish but affordable time on one’s self.

The first shop opened in Watford in October 2004, with a second in Milton Keynes following swiftly in 2005. To maximise the branding, the shops were designed to resemble the reception area of an elegant hotel.

As the company grew, so did the attention it was getting from supermarkets and private equity firms – though neither sector has had much of a look-in. “We don’t want to compromise our product or our principles,” says Harris. “We do sell through John Lewis, but supermarkets aren’t right for us. We wouldn’t be able to monitor sales as closely as we do when we sell direct and we would lose the first-hand relationship with our customers. Supermarkets might want your product one week and de-list you the next.”

As for venture capital or private equity, whenever Hotel Chocolat has needed finance for growth it has turned to its long-term banking partner, Lloyds – or on one notable occasion to its customers. In 2010 it raised £4m by offering Chocolate Tasting Club members a three-year chocolate bond, which offers returns payable in delivered chocolate.

Asked about his Hotel Chocolat highlights, Harris picks out three from many that have made him immensely proud.

“Opening that first store and watching customers come in and buy our chocolates with such gusto was a truly fantastic moment,” he says. “Second, we came fourth this year in a survey of Britain’s most advocated brands by management consultancy Bain & Company.

“Customer care is at the heart of all we do, so to discover we are one of the companies people are most likely to recommend to friends – and the only British company in the top 10 – is extremely gratifying.

“Third was buying Rabot Estate, the oldest cocoa plantation in St Lucia, reproducing and replanting the rare Trinitario trees and then opening our boutique hotel there last year.”

Bookings for the Caribbean hotel are already looking strong for this year and both it and its restaurant have had visitors stumbling for superlatives in their TripAdvisor reviews. In buying the Rabot Estate, Hotel Chocolat became the only British chocolatier to grow cocoa on its own plantation, and though the 140 acres only produce a relatively small yield, its fine cocoa – the best of all – is used to make some of Hotel Chocolat’s premium Purist range.

The rest of its chocolates – it has been making its own since 2006 – are made from cocoa grown primarily in Ghana by communities that Harris and Thirlwell continue to support.

The company advocates the concept of engaged ethics, says Harris – it provides a ladder for farmers to climb rather than giving them a crutch to lean on. That way sustainable benefits can be brought to a community, which can then survive with or without the success of
Hotel Chocolat.

Not that the company is likely to do anything but prosper. Its turnover for the year ending June 2011 was £60m, a 13% rise on the previous year, and it has 800 employees in the UK and another 130 overseas.

While Hotel Chocolat faces the same pressures as the rest of austerity-age Britain, Harris is happy that he is leading a more specialist business that sells what he sees as “affordable luxury”. He is happier still that the luxury he is offering is chocolate – a product that’s proved more recession-resistant that most.

Nonetheless, he knows the company will have to work harder than ever to maintain the kind of growth it achieved in the 2000s. It is planning more exciting innovations for its customers – the new store in Edinburgh has a lovely cocoa (as opposed to coffee) bar, while those visiting the new London shop on Monmouth Street, near Covent Garden, will be shown how cocoa is roasted and made into chocolate. And there are other ideas incubating all the time.

In other words, it’s business as usual.


Surviving in an age of austerity

Peter Harris shares his advice for surviving the downturn:

  • Always limit overheads to the absolute necessities. Don't take larger premises until you are bursting at the seams and don't spend on upgrading your equipment until you reach a stage when not doing so would stifle your growth
  • Similarly, don't pay for expensive market research. Your customers are your best focus group - find ways of canvassing their opinions and listen to them
  • Maximise opportunities. Recessions drive down commercial property values, so renegotiate your lease. Leases with six-month break clauses are a good idea in uncertain times.
  • Always offer good value, particularly if your products are expensive. People are often happy to pay more for high-quality ingredients or products. Compromise on that and you will lose your customers.
  • Stay in control of your business, and watch your stock levels. Getting the right stock into the right place at the right time is critical, particularly if your margins are tight. Getting your merchandising wrong can cripple you


Do you agree with Peter? Our Squeezed Middle campaign has sparked debate on the economia website at icaew.com/economia/sqzmid and you can follow on Twitter at #spzmid