The grandson of the firm’s founder Joseph Thornton also told FoodManufacture.co.uk that current chairman John von Spreckelsen dismissed his turnaround plan for the business last year, telling Thornton he was too old and out of touch to contribute.
Hot Easter weather dented Thorntons sales for the crucial third quarter sales period up to April 30 2011, with the firm predicting a slump in full-year pre-tax profits to June 2011, which it said would range from £3m to £4.5m (£6.1m 2010)
Store sales at 370 high street stores fell 13.9% to £31.4m, while franchise sales fell 21.4%. Thorntons’ share price fell 12% as a result of the profit warning (the firm’s fourth in 12 months) and now stand at 70p against a high of 152p in April 2010.
Asked when and where he believed things had gone wrong for the UK’s largest independent chocolate maker, Thornton said:“It’s quite a long story, it goes back to 1995 when they decided to expand the shop chain quite considerably.”
Falling net profits
When Thornton was chairman (until 1987) he said the company had calculated that 270 shops was its upper limit in the UK based on catchment areas, “shops where enough people were close enough to provide enough turnover to contribute to profit”.
“But in 1995 they opened a lot more shops, and added capacity at the factory [in Alfreton, Derbyshire]. But the shops didn’t take enough, so net profits fell, while there was a surplus of production capacity.
“Then they made the move into supermarkets in 2000, which increased ever since and has affected the brand [for the worse, said Thornton] and sales in shops.”
However, David Stoddart, research director at FinnCap, said he didn’t think Thorntons had erred by pursuing listings with major multiples:“They can talk all they like about premium appeal, but when they’re in Tesco and Asda, and have around 600 stores then, by definition, Thornton’s is a mass market brand.”
“They’re becoming a brand like Cadbury in boxed chocolate, and pursue sales based on volume and margin, but mostly on volume as the margins aren’t massive.”
Poorer quality chocolates?
Thornton said that although he thought the firm’s chocolate was still “quite good, it’s not nearly as good as it used to be or the competition. And if it’s available everywhere it doesn’t feel as good”.
Stoddart said Thorntons was also suffering because ‘premium’ rivals such as Green & Blacks and Hotel Chocolat had a more modern image, with the latter distinguishing itself via relatively few stores (which suggests exclusivity) with contemporary styling.
“The simple fact is that something new always seems to do better, it’s seen by consumers as the new, hot thing,” Stoddart said.
He added that Thorntons was failing to connect with a younger audience, and that marketing slogans such as 1995’s memorable ‘Chocolate heaven since 1911’ appealed less to consumers in their mid-20s, although it resonated with older consumers.
Bad retail marketing
Thornton said that “extremely bad retail marketing” was also responsible for the firm’s doldrums and that its status as a public limited company (plc) – Thorntons was floated in 1988 – had led to a harmful “short-term demand to be instantly profitable”.
He said he first met Thorntons chairman John von Spreckelsen at the Institute of Directors in London last year, and “we had a pleasant lunch together”, where he seemed to keen to listen to Thornton’s thoughts about the business.
However, at a further private meeting when Thornton presented von Spreckelsen with a turnaround plan drafted with business associates (he runs a business consultancy) he said the latter was “very angry [at Thornton] for reasons I didn’t fully understand”.
“He said I was too old and out of touch to contribute, and that he’d be laughed at by the City [if he implemented any of Thornton’s ideas],” which included a focus on its status as a British heritage brand, international expansion and an end to drinks sales.
As for what Thornton would do to improve the business around now? “One of the reasons why Thorntons used to be successful was excellent relations with the workforce, which is common in many family businesses,” he said.
“I don’t think that’s happening anymore. They need to empower employees, use their ideas since they’re the ones who know what’s wrong with the business.”
Thornton described the “top-down, management-incentive controlled” UK business model as a “hobby horse of mine” and said he believed a “bottom-up” model where all staff are consulted would be more effective.
“Everyone is creative, I believe this management style in the UK stems from the comparatively high power of the public company sector.”
Stoddart said he expected around 200 of Thornton’s retail outlets – a combination of franchise- and company owned stores – to close as part of the malaise facing the high street in the next 10-20 years, but said the firm could focus on retaining franchises.
The majority of the firm’s stores were small in size, Stoddart said, which made them relatively expensive to operate. Profitability would involve increasing sales and/or margins, but Thornton’s wasn’t doing so due to declining high street footfall.
He said commercial sales (up 25.1% to £27.7m in the third quarter) could offset retail declines, but in the long-term he envisaged a “decoupling strategy that will result in more of a manufacturing/branding business with less of a retail presence”.
Thus, Stoddart said the the arrival of retail expert Jonathan Hart (former Café Nero md) as chief executive was an “interesting appointment”, and that the firm’s long-term challenge was to restore profitability within a smaller retail business within 150-200 prime high street locations at affordable rents.