The just-food interview - Jonathan Hart, Thorntons
Thorntons' CEO Jonathan Hart was speaking with just-food following the release of the firm's second-quarter sales figures
UK confectioner Thorntons is undergoing something of a transformation. The chocolate and toffee producer, which has been hit hard by the consumer downturn, is midway through a strategic shift to close the bulk of its store network and focus on commercial sales. Since taking the helm in May 2011, Jonathan Hart has had a mountain to climb: rebalancing the portfolio while tackling weak consumer demand. Nonetheless, the chief executive tells Michelle Russell that the firm is now on the right road for its strategy re-think to deliver improved results.
"This self-help we've applied over the last year is beginning to pay off for us. I'm certainly not calling the turn of the market, I'm not saying we've turned the business either, I'm just saying this is a helpful step on the journey of transforming our business over the course of the next few years. It gives us encouragement we are on the right rack and that we can press on and deliver a strong season in the spring and finish the year with good profit growth."
Hart was speaking with just-food following the release of the firm's second-quarter sales figures yesterday (16 January).
While own store like-for-like sales declined by 1.3% due to the planned closure of three more stores in the quarter, the confectioner saw its commercial sales grow by 26.4%. Total sales were also up, growing 5.4%.
"I suggest any business that can deliver over 5% top line growth into the consumer market at this point in time is a robust brand," Hart tells just-food. "Our market share has improved so a lot of good headline details there that give us encouragement."
A sense of relief from the CEO maybe, given that he sounded a cautious note ahead of the Christmas trading period at Thorntons' first-quarter results back in October.
"In the context of the economy and the impact it has on our core customers, these figures are encouraging, they're our best second-quarter sales figures in terms of growth and very much demonstrates the effectiveness of our multi-channel approach and our strategy of rebalancing and revitalising our business."
As with most confectioners, the majority of Thorntons revenues are made during the key Christmas trading period. However, in 2009 the company unveiled a long-term goal to reduce this dependency. While this is something Hart says Thorntons continues to act upon, he emphasises that the company is also eager to seize any opportunity to grow Christmas sales.
"We don't want to take less money at Christmas than we currently do. Do we want to grow more sales at Christmas? That would be very nice and indeed. We have done that, and particularly as we go into commercial, there are significant opportunities at Christmas for us and indeed the key seasons."
Hart says that beyond Christmas, Thorntons also has four other "seasons" it depends on: Valentine's Day, Mother's Day, Father's Day and Easter.
However, he adds: "That leaves a lot of the year when there is far less demand for our product... We've been clear about where our brand is going to be, and that's about evolving the positioning so that our brand is a way of communicating sentiments and emotions to our customers. That provides us with opportunities to offer products and propositions that extend all year round."
Innovation, which has become a necessity in the fiercely competitive global confectionery market, will be key to this drive. It could also help drive margin improvements, Hart suggests, as Thorntons adapts its offer to meet changing consumer preferences.
In fiscal 2012, the group's gross margins came under pressure, falling to 44% from 46.2% a year earlier.Hart, nonetheless, sounds a confident note on the year ahead and suggests improvements are likely.
"There are a number of things that impact our overall margins in our business but in terms of the upfront trading margins and the improvements we were observing through the course of 2012, it's fair to say they continue through our trading season.
"If 12 months ago at Christmas time we were somewhat surprised by the way the consumer behaved and the focus on certain price points and promotions in the market place, this year we had a run of it and we planned for it. The market was no less promotional, particularly in the course of the key Christmas period, but we were able to deliver it at a level of profitability that we were happy about. It was as tough and promotional as we expected and we were happy that our plans were robust enough for us to cope with that."
Adapting Thorntons' product range to suit changing consumer tastes and budgets may also be vital if the confectioner is to retain its presence, albeit small, on the high street and grow its sales through supermarkets and franchised outlets. A doomed high street that has seen HMV, Blockbuster and Jessops all admit recent defeat, should be enough to unnerve any CEO in the food or retail scene.
Hart, however, says Thorntons is actively developing products and ranges that he is confident will "attract people to our business and put us on the consideration list for buying [seasonal] gifts. That's our challenge for growing the business all year round".
For Easter, Thorntons' next seasonal hurdle, Hart says the company has "substantially refreshed" its core Easter line-up.
"We've got, as usual, a lot of new in our range for Easter ... a couple of brilliant heritage eggs ... a marvellously magnificent kilogram giant of an egg in an old mould, an artisnal hand-crafted lace egg ... so we're trying to make sure we keep the specialness of Thorntons in the eyes of our customers as well as meeting the need for great quality products at value and promotion."
While own store sales are important and commercial sales have become a key focus for the group, online, a growing and less mature part of the business, should undoubtedly also be priority given the rapid growth of internet sales.
However, Thorntons Direct sales dropped by GBP0.7m in the quarter as the late deployment of its new website combined with operational issues had a significant impact.
"Unfortunately, for various reasons, our website was late and ran into operational issues over Christmas, which impacted sales. I don't see this as anything other than a self-inflicted pain for us. We have plans to fix the the issues, to deploy our new website well and to see the benefit of that in substantial growth in our online business over the coming years."
Beyond home shores, the company has been successful in growing its business overseas. Six months ago, Thorntons presented an international strategy that identified three regions of focus: Australia, the Middle East and Africa. The company chose English speaking or expatriate markets it had export relationships with as a starting point, running the operations through commercial distribution.
Hart says he is "pleased" with the company's performance in such a "reasonably short period of time" and that the brand has been "well received". In the second quarter, international sales climbed 69%.
"We've created relationships and we've started to see orders flying from the major grocers in South Africa and Australia, both on a seasonal and hopefully on an all-year-round listing basis.
"As you might imagine, it's GBP2.1m [sales in Q2], so a reasonably small part of our business today, but I believe it can make a significant contribution to our profits in a three to five year period."
Nonetheless, Hart is cautious not to get over-ambitious about any major successes abroad until Thorntons is sure its domestic business is secure.
"It's an encouraging response to our efforts, nothing more, nothing less, but our UK business remains the core of our focus and we remain committed to restoring the profitability and revitalising the brand in our core markets before we can be overly ambitious on an international basis."
A doubling of annual pre-tax losses in 2012 after a profit warning in December 2011, which prompted a series of long-term institutional investors to abandon Thorntons stock may still sit uncomfortably in Hart's mind. He is confident, nonetheless, that the renewed strategy is the right one for the company.
The turnaround plan will see Thorntons eventually shut a minimum of 120 outlets, the majority of which will be replaced by a franchisee, the creation of a "profitable and sustainable" own-store network of around 180 outlets, and finally developing the commercial arm to become Thorntons' main sales channel.
Is there a risk, however, that this strategy re-think and focus on mass market sales could, in the long-run, undermine Thorntons' ability to extract a premium for its product?
"We are very clear about our price positioning, which is to position ourselves above the mass market brands and sit in a space that is occupied by a number of our competitors like Ferrero and Lindt.
"We are confident our brand positioning can work in that environment and is supportive of our brand values. We are the man and woman in the street's affordable treat, so it's about being accessible. In the days of old, being on the high street was accessible to everybody. Now you need to be accessible in the grocers because that's where our customer wants to shop and we are very pleased we are there and that our customers are happy to find us there."
Will Thorntons' ambitious kilogram or artisnal hand-crafted lace eggs be enough to win over the right consumers this Easter though and give the confectioner something to smile about come the third quarter?
"We're cautious about the outlook because the economic prospects don't look any better and we know how that can significantly impact a business like ours," Hart says. "On the positive side we're encouraged by this recent performance, we have the order book for our commercial customers for our Spring season so ... as long as the grocers take the stock they ordered, and generally they do, touch wood, then we look forward to another good Easter in commercial."
Hart is less optimistic about retail, but remains relatively upbeat.
"You only have to look back at the last couple of years [in retail]. It can be a tricky time for us for a number of reasons. The economy isn't helping us, but again we've got good plans, exciting new products, which are clearly always the lifeblood of a business like ours and we are confident in our own plans but we're cautious about the environment in which we're trading."
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