Thorntons suffers for supermarket success

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When Mike Davies and John von Spreckelsen arrived at Thorntons in 2006 as chief executive and chairman respectively, they decided that the company’s chocolates should have a bigger presence in supermarkets to add to sales from its own stores.

“If we’re not present at the supermarket shelf, we’re playing into the hands of the competition,” says Mr Davies, pointing out that if brands such as Lindt and Green & Blacks are available in the supermarket, customers are unlikely to make the extra effort to visit a Thorntons store.

Now supermarket sales contribute more than a third of revenue and have risen by 38.5 per cent in the first three quarters of Thorntons’ financial year.

That supermarket success has come at a price, however.

When the company gave a trading update for the third quarter on Tuesday, it reported that supermarket sales were eating away at its own stores’ higher margin sales.

Investors were concerned because, with 377 stores and a significant manufacturing facility, Thorntons has a large fixed-cost base.

In response to the update, Investec, the company’s broker, cut its sales forecast for the current year by 1 per cent to £216.7m ($333m), but its pre-tax profit forecast by 14.5 per cent to £7.5m.

“There’s a bit of ‘damned if you do, and damned if you don’t,’” said Andy Wade at Numis Securities. “If Thorntons wasn’t in the supermarkets, it would be missing out on a significant revenue opportunity and, particularly given the operational gearing of its manufacturing capability facilitates, volume is important to the business.”

Mr Wade thinks that Thorntons may have to reduce the number of stores it owns in order to keep costs down.

But Mr Davies said that although the company will review the retail estate when leases come up for renewal, it has no significant plans for closures. The stores have an average lease of five years, so leases on 50-60 come up each year.

Instead, he believes that Thorntons needs to appeal to new customers with promotions, offering cheaper products and by using the stores to build the brand in the future.

He said that stores will still be an important contributor to a more diversified business as they offer 10 times the number of products that are available in the supermarket as well as the opportunity to personalise gifts.

Analysts say that the new management has improved the product mix, moving away from the traditional boxes to bags of wrapped chocolates that appeal to younger customers.

But with new contenders arriving in recent years, from the ethical Green & Blacks to the upmarket Hotel Chocolat chain, and its own store sales declining, Thorntons has had to deal with a changing competitive landscape.

“It is quite happy to be right in the middle, not quite premium posh but not totally commercial,” said Natalia Marisova, at Investec.

Since Kraft’s acquisition of Cadbury, Thorntons, which celebrates its 100th anniversary next year, is now the UK’s last independent listed chocolate company.

“[Heritage] is something we’ll be able to use with some target markets but not generally across the board,” said Mr Davies. “There was a lot of noise when Kraft took over Cadbury but most people buy products because they love the taste ... most don’t buy because it is made by a specific company.”

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