'Chocolate Bonds' Offer a Uniquely Tasty Dividend

Hotel Chocolat Bond Issue
Hotel Chocolat Bond Issue

When Hotel Chocolat, a British confectionery company, needed £5 million for a major expansion, it faced a dilemma. The sum, while impressive, was too small to justify a traditional bond issue; on the other hand, a bank loan would likely have carried high interest rates and stiff fees. Faced with two unattractive options, the candymaker decided to try something new: It issued its own promissory note that pays dividends in chocolate.

One benefit of this move lay in the pool of potential investors. In most cases, a company that wants to borrow money has to convince investors of its value, but Hotel Chocolat decided to bypass that process by only offering its bond to people familiar with its product.

To buy the notes, prospective investors must be enrolled in the company's "Tasting Club," a program in which subscribers pay a set fee, in return for which they get a monthly box of chocolates in the mail. Prices for the program range from £49 to £190 ($70 to $274); with shipping and handling, this averages out to £18 ($26) per delivery.

The Tasting Club has approximately 100,000 members, which means that Hotel Chocolat should have no lack of prospective investors. Members who purchase the company's £2,000 ($2,870) three-year notes will get a fresh box of chocolates every two months, which works out to an impressive 6.72% return. For those who really love their cocoa, the company is also offering a £4,000 ($5,740) bond that carries an even more attractive 7.29% return. The program's success will largely depend upon how many customers enroll in it, and Hotel Chocolat has announced that it will only go forward if it receives £500,000 worth of applications by July 12.

Some Risk of Taking a Bite Out of Revenues

The notes will be administered through BDO, an accountancy firm that developed a similar program for shaving cream manufacturer King of Shaves. While the program has just been unveiled, Hotel Chocolat has already pre-marketed the bonds to 5,000 potential investors; according to a company spokesman, the response has been "overwhelming." Hotel Chocolat hopes that, in addition to raising money, the notes will also help consumers build "a strong bond with the company."

As for the money itself, Hotel Chocolat hopes to use it to fund four major business development projects. It plans to expand its existing chocolate factory, build a second factory near its chocolate plantation in St. Lucia, open more shops in Great Britain and expand overseas. Currently, it only has two stores in America, both of which are located in Boston. When asked if Hotel Chocolat was focusing on Beantown out of a fear of facing New York's cutthroat chocolate culture, the company's spokesman laughingly refused to comment.

But the bond issue, while potentially attractive to all parties involved, is not all sweet. Hotel Chocolat's spokesman acknowledged that, by marketing the candy dividends to their regular customers, the confectioner might potentially cannibalize its regular sales: "We could lose cash revenue from people who would otherwise have bought our chocolates." However, he stressed that the company weighed the bond issue against the costs of raising capital by other means and ultimately determined that this process would be the most attractive.