Hotel Chocolat: A Comprehensive Analysis of UK Chocolate Market

This report provides a comprehensive analysis of Hotel Chocolat, a British chocolate company operating in the UK market. It begins by outlining the company's basic characteristics, including its functional organizational structure, main activities, and production and cost factors, such as economies of scale and financial performance. The report then delves into a detailed market and economic environment analysis, examining the type of market (monopolistic competition), degree of competition, market concentration, entry barriers, product differentiation, availability of substitutes, and complementary products. It also assesses the economic environment, including domestic conditions, macroeconomic factors, international trade conditions, exchange rate volatility, and institutional and regulatory aspects. Furthermore, the report evaluates Hotel Chocolat's recent and likely future performance, focusing on profitability, market share, innovation, and growth strategies. The analysis covers the period since 2008, with a look at the firm's performance from 2016 and outlines strategies for the future, concluding with a summary of key findings and recommendations. The report uses data from 2018 and 2019 to support its analysis, providing a well-rounded view of Hotel Chocolat's position within the UK chocolate market.

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Content Page
1. Introduction....................................................................................................... 4
2. A description of the organisation’s basic characteristics..............................................4
a) Main activity................................................................................................ 4
b) Internal organisational structure......................................................................4
c) Production and cost....................................................................................... 4
i. Economies of scale................................................................................... 4
ii. Financial performance..............................................................................5
iii. The state of technology..........................................................................6
3. Market and economic environment analysis..............................................................6
a) Type of market.................................................................................................... 6
i. Degree of competition...............................................................................6
ii. Number of firms...................................................................................... 6
iii. Market concentration............................................................................7
iv. Entry barriers...................................................................................... 8
v. Product differentiation............................................................................. 8
vi. Availability of substitutes.......................................................................8
vii. Complementary products.......................................................................9
b) Economic environment................................................................................... 9
i. Domestic environment..............................................................................9
ii. Macroeconomic conditions......................................................................11
iii. International trade conditions...............................................................13
iv. Exchange rate volatility.......................................................................13
v. Institutional and regulatory environment...................................................14
vi. Policies............................................................................................. 15
4. Assessment of recent and likely future performance.................................................15
a) Performance since 2008................................................................................ 15
i. Profitability.......................................................................................... 15
ii. Market share and penetration..................................................................16
4.1.3 Innovation........................................................................................... 17
b) Strategy to growth....................................................................................... 17
5. Conclusion....................................................................................................... 18
Reference:............................................................................................................... 19
1. Introduction
The report aims to analyse a British chocolate company, Hotel Chocolat in chocolate market
of UK. The report will first describe the organisation’s basic characteristics, then make an
analysis of markets and economic environment in UK. Finally, the report will assess the
firm’s performance from 2016 and outline the strategies in the future.
2. A description of the organisation’s basic characteristics.

a) Main activity
Hotel Chocolat is a premium chocolate company in UK. The first shop of Hotel Choclat was
opened in 2014 by Angus Thirlwell and Peter Harris. Until now, Hotel Chololat has operated
103 shops as well as cafes and restaurants. The company also has three boutiques in
Copenhagen and a hotel on their working coca plantation in the Caribbean (Hotel Chocolat
2019).
The main activity of Hotel Chocolat is manufacturing and selling innovative and accessibly
priced luxury chocolate. The key products include self-purchase chocolates, gifts, cakes and
drinks (Hotel Chocolat 2018).
b) Internal organisational structure
Hotel Chocolat operates in the functional organisation structure (Fairfield 2016). The
departments include retail, finance, production &engineering, corporate &wholesale,
marketing, information technology and public relation
The board has established audit, remuneration and nomination committee to discharge its
responsibilities. The board is comprised of a chairman, four executive directors and two
independent non-executive directors.
The division of roles is clear, however, there is a 4:3 imbalance between the execs and non-
execs, which weakens the check on decision by the Executive (Hotel Chocolat 2018).
c) Production and cost
i. Economies of scale
Hotel Chocolat expands its economies of scale through technology improvement and
production expansion. The company planned to invest £1.4 million on storage and handling
capacity. Meanwhile, the company optimised the production with high level of flexibility.
Additionally, Hotel Chocolat increased the inventory of 36.6% with processing much more
finished goods, which shows their determination of expanding scale economies. While this
behaviour also increases the risk of liquidity (Hotel Chocolat 2018).
Figure 1: Inventories of Hotel Chocolat in 2018

(Hotel Chocolat 2018)
ii. Financial performance
Both scale economies and new efficiencies brought the increase of earnings for three years.
Although the scale of economies has not reduced the cost, the operating profit of Hotel
Chocalat has kept growing for three years.
Additionally, the company organises in safe and reasonable cash flow structure, as the cash in
operating activities accounts for a major proportion of total cash flow. But there is a solvency
risk with the decline of cash in 2018, because of the big payment in financial activities (Hotel
Chocolat 2017).
Table 1: Financial data of Hotel Chocolat about liquidity
(Hotel Chocolat 2017; Hotel Chocolat 2018)
2016 2017 2018
0
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
Revenue & Cost & Profit from 2016 to 2018
Revenue Total cost Operating profit
Figure 2: The trend of revenue, cost and profit of Hotel Chocolat
(Hotel Chocolat 2017; Hotel Chocolat 2018)
The variable cost takes the majority of total cost, including materials, staff cost, financial cost
and tax expense. Some fixed cost also increased in 2018, such as depreciation and
impairment of PPE (Hotel Chocolat 2018). But as the profit still grows, the increase of fixed

cost is acceptable and the output has excessed the break-even point.
iii. The state of technology
Hotel Chocolat expanding digital sales. The website sales and mobile sales has increased
14% and 8% respectively in 2018. The company is improving the online platform to provide
a better digital experience.
In addition, Hotel Chocolat is looking for new digital wholesale partners (Hotel Choclat
2018).
3. Market and economic environment analysis
a) Type of market
i. Degree of competition
The chocolate market is one of the most important monopolistic competition. As a brand with
short history, Hotel Chocolat is not competitive enough in global market. More famous and
popular brands selling close substitutes take more market share (UK Essays 2018). But as a
British brand, the firm has a good performance in UK chocolate market.
ii. Number of firms
Monopolistic competition has a large number of firms but the number is not as large as in
perfect competition. Besides Hotel Chocolat, there are over ten famous luxury chocolate
brands in UK market. From the chocolate boxes of Selfridge website, Godiva, Pierre
Marcolini and Venchi are the best-sellers (Selfridge 2019).
The market will be more competitive if there are more firms competing against each other.
Keeping price low is a common strategy for competition (Sloman & Jones 2017), but in
luxury chocolate market, most firms take differentiation strategy.
iii. Market concentration

Figure 3: Leading chocolate brands in the United Kingdom by sales value
(Statista 2015)
Table 2: 3-firm and 5-firm concentration ratio for chocolate market in UK
In chocolate market, luxury chocolate still takes a little proportion. Compared with drink
market (75%) and sugar market (99%) in food industry, the concentration ratio of chocolate
is relatively low, and more firms will benefit from the maximum economics of scale (Sloman
& Jones 2017). Therefore, although Hotel Chocolate takes a little market share, it still
operates stably and properly.
iv. Entry barriers
In monopolistic competition, the company has freedom to enter or exit chocolate market (UK
Essays 2018). However, for luxury chocolate market, the product differentiation and brand
loyalty are big barrieries for a new firm to break into that (Sloman & Jones 2017).
For the current situation of Hotel Chocolat, it is not easy for them to exit market. Although

the production expense is affordable, the total cost is still very high (Hotel Chocolat 2018).
Figure 4: Financial review of Hotel Chocolat
(Hotel Chocolat 2018)
v. Product differentiation
Chocolate market tends to be horizontal differentiation. The product could not be assessed
easily with various features, as different chocolates have different tastes (MBN 2019). Thus,
most chocolate brands choose non-pricing competition, increasing brand reputation and
consumer loyalty. For example, Hotel Chocolat design many fanciful chocolate boxes
packaging during festive seasons.
vi. Availability of substitutes
The threat of substitutes is high in chocolate market (Sloman & Jones 2017). There are
several chocolate brands can offer close substitutes so as to compete with Hotel Chocolate. In
amazon, there are at least three brands’ chocolate box to compete with Hotel Chocolate’s
with similar price (Lindt, Ferrero, Green & Black) (Amazon 2019).
vii. Complementary products
Chocolates do not have absolute complementary products. Chocolates have many pairings,
such as cheeses, coffee or wine (Byron Talbott 2016), but these products exist independently.
In addition, interaction between substitutes and complements make consumers adjust to price
changes (Econogist 2014).
For example, cocoa gin is a complement to luxury chocolate. When the price of gin increases,

the chocolate demand will drop in theory. However, unless the consumers’ demand for gin is
inelastic, there are many substitutes for gin, such as fizz and red wine (Hotel Chocolat 2018).
b) Economic environment
i. Domestic environment
As 92% (104/113) stores of Hotel Chocolat are located in UK (Hotel Chocolat 2018), this
report assesses domestic environment with PEST model.
Table 3: Macroeconomic indicators for UK environment in 2018
(Global Economy 2019)
Based on the indicators above, as one of the top developed countries, UK has an excellent
social and technological environment. The staff received qualified education and relatively
high salary. The infrastructure is relatively advanced and the network coverage provides a
good online selling environment (Global Economy 2017).
However, the economic condition is not optimistic in recent years. In horizontal comparison,
the economic growth is relatively slow in UK due to Brexit, and consumer confidence even
drop to a negative number. In vertical comparison for ten years, the consumer price inflation
keeps downturn in the past two year (National Statistics 2019). The consumer confidence has
continued dropping since year 2015, showing that British consumers have negative attitude to
the economic performance in future.

Figure 5: Consumer price inflation in UK for 10 years
(National Statistics 2019)
Figure 6: Consumer confidence in UK for ten years
(Trading Economics 2019)
For political factor, the Brexit has a big impact on regulations and policies in UK in the

future. While as Hotel Chocolat is a domestic chocolate company with few international
stores and foreign direct investment (Hotel Chocolat 2018), the affect could be acceptable.
ii. Macroeconomic conditions
Table 4: Macroeconomic condition indicators for UK
(World Bank 2019; BBC 2019)
Based on relevant indicators in table 4, UK has a good macroeconomic condition in the past
20 to 40 years.
Inflation rate has been fluctuating in the past 10 years, but keeping below 3 percent in
general. UK resists inflation with low interest rate and low levels of deflation (Investopedia
2019).
Figure 7: Employment rate of UK from 1971 to 2019
(BBC 2019)

Figure 8: GNP of UK from 2009 to 2019
(Trading Economics 2019)
Figure 9: Inflation rate of UK from 2009 to 2019
(Trading Economics 2019)
iii. International trade conditions
Table 5: International trade conditions indicators for UK in 2018
(Parliament 2019)
In 2018, imports of goods totalled £665 billion and exports totalled £634 billion, which
causes a trade deficit with £31 billion. For the past several years, UK has been running trade
deficits (Parliament 2019).

Figure 10: Balance of trade in UK from 2007 to 2019
(Parliament 2019)
Theoretically, trade deficit will influence economic stability like employment and interest.
However, UK shows a growing trend of employment for the past 40 years, and the inflation
rate also drop last year (Trading Economics 2019).
Thus the deficit is affordable in current situation but should be care for UK.
iv. Exchange rate volatility
The current exchange rate (GBP to USD) is 1.26 (XE 2019). For the past ten years, the
exchange rate of pounds has been dropping, especially from year 2016. The downturn of
exchange rate is a main reason for the trade deficit. It increased the operating cost of British
firms with global supply chain, such as Tesco.
Figure 11: GBP to USD chart
（XE 2019（