UK chocolate retailer and manufacturer Thorntons has announced it is to close up to 180 stores and revamp its retail offer. Ben Cooper asks if this will be enough to re-establish its credentials as a premium speciality retailer.
Chocolate makers are seldom overjoyed at the prospect of a long hot summer, but for UK chocolate manufacturer and retailer Thorntons this summer has proved a gruelling one even before the forecast scorching temperatures have materialised.
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Already hit by the late and unusually hot Easter, Thorntons has just announced plans to close up to 180 of its stores. Also as a result of the strategic review undertaken by Jonathan Hart, who took over as chief executive in January, the company plans to create a new in-store environment with a less commoditised product offer.
Hart initiated the review in February when the company reported a 6% decline in half-year sales through its stores, along with an 8.5% drop in pre-tax profits. Sales through its stores then fell by 14% in the 16 weeks to 30 April, Thorntons reported last month. The fact that, at the half-year stage, sales at Thorntons’ commercial division, which sells to supermarkets, rose 30.6% to GBP45.2m (US$72.7m) underlines the retailer’s dilemma.
If the Hart review can be distilled down to one central aim it is to reconcile the expansion of its sales through supermarkets with a viable premium positioning for its stores. The aim of the review is to establish over the next three years a business that is “de-risked” and positioned for sustainable growth.
Hart says the store portfolio needs restructuring both in terms of “location and proposition”. The retail operation will be “executed better but on a smaller scale”. The retrenchment will reduce the company’s annual rental bill by GBP6.5m, with another GBP2m a year achieved in efficiency savings.
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By GlobalDataWhile Hart plans to “protect the contribution” made by stores earmarked for closure by opening new franchises, notably within larger gift and card outlets, the review will establish a smaller, leaner store portfolio to complement Thorntons’ now substantial commercial operation.
However, this is not simply a question of downsizing. Precisely because the commercial arm’s business has grown so strongly, the retail proposition needs to be more clearly differentiated, with a less “commoditised proposition”, less packaging visible and more products displayed out of boxes. The need for this has become all the more pressing since the arrival on the high street of competitors such as Hotel Chocolat.
Increasing the frequency of customer visits is a crucial aim. In its review, Thorntons found that it has on average five visits from a customer each year, while half its companies only visit a Thorntons store twice a year. To increase this, Hart says, the company has to create “an appealing environment and appealing customer experience” where customers can find “attractive, affordable, exciting and fun things for those events that everybody has in their lives”. As with its online operation, catering for the gifting market will be a key priority.
Hart says he is confident that his strategy is “the right one that can position us positively for sustainable future growth”. He suggests the fact that Thorntons has secured refinancing with new facilities worth GBP57.5m through to 2015 demonstrates “clear support” for his plans.
However, while analysts generally welcomed the positive steps Thorntons is taking to revamp its business model, some clearly remain to be convinced.
“There are sensible elements within the new strategy, but that is not necessarily enough to guarantee success,” said FinnCap analyst David Stoddart.
David Jeary, analyst at Investec, welcomed the fact that Thorntons had “grasped the nettle” and believes that growth in the commercial arm and through franchises should “more than offset lost contribution from the store exits”.
While Jeary believes the strategy should yield long-term benefits, like others he has taken a cautious view. “Overall, the strategic review appears very sensible to us, but, as ever, the proof of the pudding will be in the eating.”
Sanjay Vidyarthi, retail analyst at Espirito Santo, also requires convincing. “Shares are not cheap, and new management has much to prove,” said Vidyarthi. With reference to Thorntons keeping manufacturing capacity at current levels, he adds: “The key remains Thorntons’ ability to recapture sales lost from closed stores through other channels.”
If the expansion of sales through supermarkets has created something of a brand positioning problem for Thorntons, it would appear that the new model will retain that risk. Hart says that he plans for the commercial arm to continue growing. Indeed, he says it will be the main sales channel for the business.
Thorntons’ exposure, and some might suggest ‘over-exposure’, through supermarkets will therefore only continue.
Hart accepts the central challenge Thorntons faces is to put the “specialness” back into its own stores while enjoying strong sales of its “mainstay” products through supermarkets. But he believes the revamped store offer will benefit sales in all channels, “helping to drive sales across the whole business”.
Neil Saunders of Verdict Research says the contradiction between selling in supermarkets and building a niche, premium image is an issue for Thorntons but he does not believe the two are incompatible.
“It is an issue because it dilutes the exclusivity of your brand if you’re appearing in supermarkets but it is not impossible to do,” Saunders tells just-food. “Supermarkets do sell some quite premium products and those products don’t necessarily lose their status. You just have to be very clear about the differences between what you sell in your stores and what you sell in supermarkets and that comes down to maybe sub-branding, so that there’s a clear distinction that something that’s sold in their own stores is a cut above.”
Overall, Saunders believes a rationalised store portfolio and a revamped product offer could put Thorntons in a stronger position, and that the review is moving the company in the “right direction”.
“The price of being a viable business for Thorntons is being a much smaller business on the retail side,” he says. “That’s the cost of survival, and I think the business as a whole is in a reasonably good position because they don’t have to make all of their profits or sales through retail. They’ve got a very strong manufacturing arm, and I think they need to find that balance between the two.”
The Thorntons announcement coincided with a number of other UK retail business failures, most notably iconic furniture store Habitat, along with the news that disposable incomes in the UK have seen their biggest fall since 1977.
However, the move is not a direct consequence of the economic downturn. For certain, the tough economic times have exacerbated its problems but it is far more about reconciling the dichotomy created by voracious expansion through supermarkets and the wish to preserve a positioning as a premium specialty retailer.
The slimming down of the store portfolio and the product innovations Hart has outlined should create a more niche image for Thorntons on the high street, and perhaps allow it to compete better with the likes of Hotel Chocolat. However, the central question of whether that strategy is truly compatible with selling millions of boxes through Tesco and Asda remains to be answered.
