Hot Chocolat

How a terrific retailer illustrates the challenges of operating in the current market

First of all, I’d like to offer a huge welcome to the many new subscribers who have joined the Moving Tribes gang following last week’s post on Oliver Bonas which has unexpectedly become my most read post ever.

Substack is light on league tables and statistics, but I think it is fair to say that whether or not Moving Tribes is the biggest blog in the UK devoted to retail and consumer business it certainly has, in you, the best audience. Your fellow readers include everyone from CEOs, investors and analysts right out onto the shopfloor itself, and you are all very welcome.

Now, to business. And it is a tough time indeed for anyone trying to do business in a consumer market right now. Any analysis of the headlines attached to results presentations will reveal that. Back in July, I wrote about the spookily rapid journey from “look how well we are doing” to pre-pack administration for Hotter Shoes:

Running Hot(ter)

All of that happened despite that fact that (at least in my view) Hotter was running an effective retail operation in an attractive part of the retail market (the grey pound).

Well let’s look at a similar fall from grace for another excellent retail business and use their journey to understand just a few of the things that are making it challenging to run a retailer at the moment, particularly one on the stock market with all the public filing requirements which that brings.

Our subject today is Hotel Chocolat. Let’s consider this set of headlines from Retail Week, the UK’s paper of record for retailers:

• March 22 - Hotel Chocolat on a high as profits outstrip sales

• July 22 - Hotel Chocolat issues profit warning

• Sept 22 - Hotel Chocolat closes US as it pulls out of country to focus on UK

• Dec 22 - Hotel Chocolat pins hopes on stores in tough trading conditions

• Mar 23 - Hotel Chocolat profits and revenue fall

• Apr 23 - Hotel Chocolat cools expectations as Easter sales lower than expected

• June 23 - Hotel Chocolat warns on profits as inflationary pressures bite

• Oct 23 - Hotel Chocolat swings to loss

Grim reading, no? Even more so if you are a shareholder - on the date of that first press release the shares were over 400p, and now as I write they languish at about 137p.

The (current) end of the story is nowhere near as bad as the fate that befell Hotter, of course, and hopefully things will never get that bad. Hotel Chocolat has been one of my go-to examples of a terrific retail business for many years, and hopefully that core strength will see it through this difficult period.

You can see both sides of the story - the challenge but also the strength of the business - by examining the cashflow. In June 2019 the business, then much smaller, finished the year with £5.8m of cash. As at June 2023, they still only had £11.2m of cash, and that is despite raising over £65m in the intervening period by selling new shares.

The difficulties they’ve been having, then are starkly illustrated by the fact their core operating and financing cashflow has been very strongly negative over that period. Ultimately, it isn’t lack of profit that kills a business off, it is lack of cash and burning at the rate they have been is painful (cash dropped by £6m in the last year, so having only £11m left is not much wiggle room).

But their strength as a brand and as a retail operator is also illustrated by the fact that they could plug that gap selling new shares - that shows a confidence from investors in the future of the business and is testimony to the fact that this is (rightly in my view) seen as a well run business.

But if it is so well run, what’s going wrong? What has created the sequence of events that led to the rapidly changing tone of the headlines we started this piece with?

My contention is that the business has been through something of a ‘perfect storm’ of things going wrong all at once. Each of them in their own right is probably manageable, but taken together they have presented a real challenge to the leadership of the business, and each of them is a point we can learn from in our own businesses.

In no particular order, these challenges include:

• the perils of overseas expansion - read the detail of the press releases and you can see the business go from ‘all guns blazing’ on its US and Japanese operations to basically walking away from them. There are a long list of UK retailers who have fallen foul of overseas subsidiaries going wrong. The reasons probably warrant a post in themselves, but there is no question that a big part of the fall from grace for HC was the failure of those ventures and the expensive write-offs which followed

• Covid - it obviously goes without saying that Covid was disruptive to every retail business in one way or another. What we see in HC’s results, though, is one of the more long term effects - as everyone shifted into online purchases when stores were closed it was easy for retailers and investors alike to assume that those sales levels were some kind of ‘new normal’. In the years since lockdown ended, however, online sales have dropped away and in Hotel Chocolat’s case by more than store revenues have grown, taking the shine off what should otherwise be a strong UK operation. Which of course is also a case of:

• Expectations management - there has definitely been commentary by those who buy and sell shares that Hotel Chocolat was guilty of continuing to push out very bullish messages and forecasts after the point where it should have been calming things down. It is notable, for example, that the retailers who did well during lockdowns but were careful to point out that it was only a temporary thing have fared better in the long term than those who were too quick to declare victory for themselves.

• Inflation - there can be no question that inflation has proved a challenge for the business and it is visible in their gross margin declines. Every retail business has faced a challenge over the last few years about whether their prices out to consumers could rise as fast as their costs were increasing, and this has proved challenging for many not least because of:

• The cost of living crisis - which has impacted every retailer. In the case of HC there is always a question about how a retailer of premium, branded and non-essential products will do in a tough economy, and there is evidence of that in some of the margin write-offs they have reported as they have produced stock but then had to sell it off at a discount as sales didn’t meet forecasts.

All of these are real challenges which have faced many retailers, and indeed some of them are inevitable given the times we are living in. I have no doubt Hotel Chocolat will weather the storms it has been through and come back stronger. It is a fantastically executed product with colleagues in store who obviously care about the product and the business, and at some level you can’t go wrong if you have those ingredients in your business.

But nonetheless the business has had some of the gloss taken off it by these last couple of years, and many of us in the sector will share some or all of these experiences.

What’s the lesson for us to take out of this analysis? Firstly, of course, it is that the tangle of issues coming from the state of the wider economy are not over yet, and I’ll be writing more about that in subsequent posts here at Move Tribes.

The second, which I hope is apparent from the Hotter Shoes and Oliver Bonas posts too, is that we have a huge amount to gain by paying attention to the ups and downs of other retail and consumer businesses - by learning from their experiences we can hopefully short circuit the process of gaining our own.

There is much to ponder in the Hotel Chocolat story - what is your main take-out and how do you think you might apply these observations and lessons in your own business? Comments are open!

P.S.

New readers may also have missed another fascinating retail business story from just a few weeks ago on the contrasting fortunes of Majestic Wine and Naked Wines following their demerger. As this post goes to press, I notice another profit warning and CEO departure from Naked which is now worth about as much on the stock market as one of its cases of wines. There is plenty more of that story to come, I suspect.