After a tumultuous few years on the high street, chocolatier Thorntons has seen a return to profit and a successful expansion into supermarket sales. And with the launch of a new – albeit cautious – international strategy, the company has much to celebrate this festive season.
Thorntons has been through the mill. The chocolate chain issued five profit warnings between 2009 and 2011, blaming the weather as much as the wider malaise affecting the high street.
And even last year, critics weren’t convinced of the three-year recovery plan set out in summer 2011 by the then new chief executive Jonathan Hart.
But what a difference a year makes. In September the chocolatier announced a return to profit, suggesting that the slated closure of almost 200 of its 360 high-street stores and the shift to supermarket sales is finally paying off.
“It’s taken quite a while to prove to people that it’s the right strategy,” says Hart. “People couldn’t quite understand why we would make more money by selling our products at wholesale prices through the supermarkets than we would do selling them at full manufactured margin in our own stores.”
The business itself steered clear of third party sales until 2006 because of the fear that it would damage sales. Hart believes the board’s decision to follow its customers into supermarkets has been the most important one Thorntons has ever taken.
Last year, the retail business contributed less than three per cent to its margin, compared with 20 per cent from commercial sales. “The retail business comes with a huge cost base and the commercial business has a relatively low cost for sale, albeit at lower gross margins,” says Hart. To him, rebalancing the two “creates a very strong dynamic in terms of restoring profitability”.
But he is quick to point out that taking time to do this has been just as important to the overall health of the business. “We have very few loss-making stores.
But what we do have are a lot that make very little contribution or are seeing their contribution decline. There was no urgent prerogative to shut wholesale large numbers of stores,” he says.
He adds that the company was “blessed” as half of its estate had their leases up for renewal within three years of the recovery strategy being announced – and 120 stores that were identified as having no long-term future could be closed on lease expiry.
This strategy has also given the business a chance to steadily grow sales through other channels – so it could maintain, and ultimately grow, the manufacturing operation without distorting overheads.
Chocolate for all seasons
The same steady approach means it will also take time for Thorntons to iron out the seasonality of its sales – with spikes at Christmas and Easter in particular.
Thorntons has always been relatively true to its roots of being worth a bit extra
Hart wants the brand to become synonymous with personal gifting year-round. That would expand the retailer’s playing field from the boxed chocolate market, where it already has more than a 40 per cent share of something worth close to £1bn, to the overall gifting market, valued at £39bn.
He uses the analogy of florists to explain what this means for Thorntons’ remaining stores, which will benefit from increased investment.
He wants to focus on products that come out of the box, allowing people to create bespoke and personalised gifts. “It creates a purpose for our own stores – they will be a place where the gifting brand of Thorntons is brought to life and we add value to our products that we can’t do in the supermarket.”
But Thorntons has only really gone after seasonal promotions within supermarkets in the past couple of years. “Success, at least in the medium term, will see us becoming more seasonal because we’ll sell more products through the supermarkets at those seasons faster than we will fill in the gaps through any of our channels,” Hart says.
And although he pins the responsibility of the business’s decline on management that “had been very slow to react to changing circumstances” – in which he includes online shopping – it seems he is also being careful not to overcompensate in this area.
Rather than putting all his eggs in the online basket, Hart is focused on thinking about “one customer across all of our channels”, rather than running each channel independently as it had been. That transition hasn’t been easy – Hart admits that the 12 months after introducing a new website were “fairly torrid”.
But here too the new approach is starting to bear fruit. Online sales grew 14 per cent in the last quarter. However, although Hart believes online sales could grow from £6m today, to £10m or more, he is confident the rest of the business will grow faster, keeping it as a small overall proportion of sales. “It’s not going to be the thing that will transform our business,” he says.
Taking a step back
Hart has a similar attitude towards international sales – at least for the time being. “I don’t want to get too distracted by it because we have a job to do in creating a strong UK business. Without that, we don’t have an international opportunity.”
We have a job to do in creating a strong UK business. Without that, we don't have an international opportunity
When he joined Thorntons from Caffè Nero, he took a step back from the emphasis the retailer was applying to exports – he only outlined his international strategy in September. Even now he refuses to follow the rush into fast-growing markets such as Russia, China and India, opting instead for what he calls an “invest-as-you-go” approach to reflect Thorntons’ “very low experience and capability in international markets”.
The company is first focusing on reaching expat audiences and English-speaking markets, including Australia, South Africa and the United Arab Emirates.
Then, he says, there is nothing wrong with learning from, and following, its competitors, including Lindt and Ferrero. “I’m determined to make sure that we do it right because growing internationally will never be smooth. We’ll hit setbacks and we’ll learn things as we go. Therefore it’s important – I think – that we persist market by market to prove it.”
That said, he remains excited by the potential. “If we have something approaching 50 pence of every pound spent in the UK [on boxed chocolates], how much would I accept of any other market? A reasonably small share of some of these markets would add up to a fairly significant amount of business over the longer term.”
Hart clearly wants Thorntons to steer its own path through the retail challenges and exploit the opportunities in a way that better suits the business. In that context, he doesn’t like comparisons with Hotel Chocolat – or the idea that Thorntons missed the premiumisation trend. “Thorntons has always been relatively true to its roots of being worth a bit extra,” he says. “The heritage of Thorntons is in selling toffee to the steelworkers of Sheffield. It’s never been an exclusive upmarket product.”
He is keen to preserve the brand’s heritage – but he says that this has also been to blame for some of its problems. “When I arrived I think it was fair to say it had somewhat lost its way. People didn’t quite know where we were going,” he says.
Hart is adamant that Thorntons remains “committed to the high street”, but wrapped up in talk of the brand being a “purveyor of emotion and sentiment” is a more hard-edged analysis. If the momentum behind the current strategy continues to build, Thorntons will shift from being a retailer to a consumer goods brand and manufacturer. The high street has changed and this brand is following suit.
Revenues (2013): £221.1m
Pre-tax profit (2013): £5.6m