What does Mars want from Hotel Chocolat?

The confectionery giant Mars announced it would acquire the British chocolate specialist Hotel Chocolat. According to the Snack and Bakery.com website, Mars is the world’s biggest seller of candy and chocolate. With revenues of $20 billion, Mars is 40% bigger than Ferrero or smaller rivals Mondelez or Hershey. On the other hand, Hotel Chocolat sells only chocolate and revenues of £204,5 million.

So what does Mars look for when acquiring company #74 on the same list of Snack and Bakery? Indeed, Mars doesn’t expect significant revenue growth potential from the acquired company.

However, Hotel Chocolat does have something that’s Mars does not have: data.

The price of data

As a direct-to-consumer brand, Hotel Chocolat does have a lot of first-party data. Even though both companies were adamant that Mars wouldn’t influence the product quality or range of Hotel Chocolat, there will certainly be synergies.

The first-party data that Hotel Chocolat collects can be valuable for Mars despite the small scale of the business.

Mars can directly see how customers respond to new products with that data. The big difference for the first-party data is that customers respond with their wallets in first-party data, unlike the survey responses.

Armed with that data, Mars could use Hotel Chocolat in product development. Even though the customer base of Hotel Chocolat is small and skewed to more affluent customers compared to the average Mars or Snickers buyer, it will still generate lots of understanding of customer behavior.

Mars can try out new flavors, marketing tactics, or anything they hypothesize could work in the chocolate market. These results can then be leveraged as learnings to the broader Mars ecosystem.

Besides data, a direct-to-consumer channel offers more flexibility in experimentation. No middle-man (aka retailer) needs to be motivated (with money) to experiment with something.

The Mars machine produces efficiencies and higher profits for Hotel Chocolat

The premium chocolate category, where Hotel Chocolat operates, enables the company to generate higher gross margins from the product. A good comparison is provided by Mondelez and Hershey, the two American candy and chocolate giants. Where Mondelez operates on a 30+% gross margin, Hershey operates on a 40+% margin. However, Hotel Chocolat’s gross margins have been above 60% for many. Lately, they have dipped slightly below 60%.

Customers are willing to pay a premium from the Hotel Chocolat products. However, Hotel Chocolat has been unable to generate Operating profits from the high gross margins.

Where Mondelez and Hershey's operating margins hover around 20%, Hotel Chocolat's margins peaked at 11,4% in 2017 and have declined significantly since. In its last fiscal year, the company made only 0,9% EBIT margin.

Mars's efficient and vast supply chain can most probably turn the high margins of Hotel Chocolat into healthy profits.

Mars can also take Hotel Chocolat International quite easily. As the biggest confectionary and chocolate brand, Mars has one of the best marketing and sales organizations and supply chains in the FMCG world.

The closest example is how the Coca-Cola Company has turned mediocre brands with mediocre supply chains into flourishing and profitable parts of the business. Coca-Cola, for example, turned Honest Tea from a $23 million business with struggles to grow into a $170 million business in eight years.

The Hotel Chocolat brand can be exported to many other countries. With a global D2C business generating troves of data, Hotel Chocolat would be worth much more than the amount paid now.