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December 28, 2006

Chocolateholic - How A Private Equity Artist Saved a Bundle Breaking Up a Godiva Gift Basket

posted by MR WAVETHEORY at 12/28/2006 03:26:00 AM
I was doing some post Christmas shopping and deal-hunting today at the mall and came upon a classic private equity deal at Godiva. Godiva, the upscale chocolatier, was having its usual post-Christmas sale with 40-50% off most items, and I crossed paths with my break up target: The Godiva Gift Basket, codenamed Golden Abundance.

The Godiva Gift Basket usually goes for $125, but since it was 50% off, it was going for $62.50 per basket. That got me excited - in a private equity sort of way. The gift basket came with 6 items and I did a quick sum of the parts valuation for it based on the list price of the items (normal price) and the sale price:

Item List Price Sale Price
Nut and Caramel Assortment 19 19
Large All Milk Chocolate Assortment 29 29
18pc Truffle Assortment 33 33
Milk Chocolate Cocoa Box 5 5
8 pc Ballotin 14 8.4
Solid Dark Chocolate Bar 3 3
Sum of the Parts
$ 103.00 $ 97.40

Some interesting findings.

Godiva charges $22 extra for the same items in the Holiday gift basket. The sum of the parts valuation of the Godiva gift basket is $103. Normally, Godiva charges $125 for it! If you put together a comparable Godiva gift basket by buying the individual pieces, you save $22.

Godiva discounted only the Christmas Ballotin boxes post-Christmas because they are seasonal items. The Ballotin boxes are the golden boxes of chocolate that Godiva is famous for. Godiva did not discount the truffles or the milk chocolate cocoa box or the chocolate bars, because these are not seasonal items. As a result, if you bought the items separately (even with the 40% discount for ballotins), you would have paid $97.40 which would have saved you $5.60.

The 50% discount on the Godiva gift basket is an anomaly that shouldn't occur in efficient markets. The Godiva gift basket fails the test of the no-arbitrage condition of the efficient market theory. The 50% discount on the Godiva gift basket is a great deal because it costs $62.50, when in fact, it would cost a shopper $97.40 to put together a comparable chocolate basket by buying the pieces separately.

So, given these facts, let me test your private equity IQ. If Godiva chocolate boxes were completely fungible and tradeable with the Godiva gift basket, what would you do to earn some riskless profits?Furthermore, what is the profit per basket under this arbitrage? Think about this for a moment and then read my answer.

Answer: An entrepreneuring private equity buyout artist would buy all the Godiva gift baskets in the store for $62.50 and break them up and return each box of chocolate to the store. He would sell the pieces separately back to the store and earn $97.40 making a riskless profit of $34.90 or a 55% return on invested capital.

On the other hand, if our private equity artist were a very generous person, he would take those baskets and break them up and give each box away separately as gifts, thereby saving himself a cool 35%, if he were to buy the items separately.

Back to Me and My Godiva
Needless to say, I picked up a few of these baskets from Godiva. They were quite a steal. I bought them mainly because each of the gift baskets came with a box of Assorted Truffles which costs $33 if you buy it separately. If I weren't such a fan of Truffles, I would have gone with the 2lb 13oz Gold Ballotin which comes with 105 pieces - going for $52.50. It's literally a chocolate shoe box.

All this blogging and sum of the parts valuation is making me hungry. I think I'm going to have one of those chocolate truffles now. Go get your own Godiva gift basket.

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10:04 PM  

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