The customer is always premium

Since Davies took over the helm at the upmarket chocolate manufacturer and retailer in October 2006, the strategy that he and chairman John Von Spreckelsen have instigated to turn around the business and return it to long-term sustainable and profitable growth certainly appears to be paying off.

The strategy has involved refreshing the Thorntons brand to give it a more premium feel; it has meant a lot of product innovation and investment in its own stores to improve customer service, while growing its other retail and online sales.

Thorntons reported six consecutive quarters of sales growth, culminating in its last third quarter trading update to April 19 showing sales growth of 8.5% to £52.4M during a period of some weakness in retail sales. Its own store sales grew by 5.1% to £33.8M with like-for-like sales growth of 0.5%. Franchised store sales grew by 12.6% to £3.6M. Over the same period, sales to other retailers (commercial) grew by 14.5% to £12.8M driven by new seasonal product listings, while Thorntons Direct - its online business - saw its sales grow from 27.7% to £2.2M.

And it is probably because things have progressed so well that Davies expresses not a little pique at certain press reports following the update. These concentrated on the extra overtime and weekend working production and labour costs that Thorntons incurred getting products into stores in the lead up to the busy Easter trading period.

Davies accepts that the early Easter this year, coupled with issues associated with the relaunch of its flagship Continental chocolate selection range last October, resulted in production delays in the lead up to the busy Christmas period. Unfortunately, this had a knock-on effect for Easter. "We started production for Christmas quite late," says Davies. "That, combined with the very early Easter this year, meant that a lot of the manufacturing had to be squeezed into a shorter period of time than we might have done in a year when Easter wasn't quite so early. That resulted in the slightly higher overall manufacturing costs."

Despite some negative press and analyst reports, Davies emphasises that Thorntons' strategy remains the correct one, which will be proved when it reports its full-year results in September: "We are on course to deliver a satisfactory outcome for this year."

Davies adds: "You don't deliver six consecutive quarters of growth if the strategy isn't working. And what we are determined to be doing now is more of the same."

New product development

Although Davies points to Thorntons' historical record of product innovation, new product development (NPD) has evidently moved up a gear under his direction. A few months back Thorntons launched its Moments range, which is now being sold to other retailers as well as through its own 378 store estate and 252 franchised stores. "That is working extremely well," reports Davies.

"We've got a new ice cream on a stick, which we are rolling out now in two different formats," he adds. Toffee Temptation is a toffee dairy ice cream swirled with Thorntons toffee sauce covered in Belgian milk chocolate and Thorntons' special toffee pieces. The Chocolate Trio version is creamy half-white dairy chocolate ice cream, swirled with a rich dark chocolate sauce and half-dark chocolate dairy ice cream coated in a thick layer of Belgian milk chocolate.

Although niche areas such as diabetic, single origin, and organic chocolates are likely to become more important in the future, Davies is cautious not to get ahead of what consumers want. "The trick is giving the customer the choice and it's identifying the choices and the more popular ones," he remarks. "We don't want to be playing in a market which is too much of a niche because we are not a niche player."

Despite these reservations, Davies expects interest in "personalised products" to grow. These are already available through Thorntons' stores and its online business where customers can mix and match chocolate box selections and designs to suit their own tastes and even customise names in icing on the products.

Thorntons also plans to introduce a Fairtrade chocolate range this summer and as the public's knowledge about chocolate develops - as it has done with wine and coffee - Davies expects demand to increase for more specialist and products with provenance, such as single origin chocolate. "It's an evolution, it's not going to happen overnight," he predicts.

So, what about the potential for functional products - that offer health benefits through the chocolate's reported antioxidant properties and such like?

"It's certainly something that we will consider," says Davies. "It is part of our development. But it's a question of understanding and, once again, I can't emphasise enough that we've got to put the customer at the forefront of our thinking."

However, any plans he might harbour could well be scuppered if the impending EU Nutrition and Health Claims regulation adopts a nutrient profile clause. This could mean that chocolate's high fat and sugar content debars it from making any health claims anyway.

As a premium, indulgent brand, Thorntons emphasises its extensive use of cocoa butter rather than the vegetable oils associated with other confectionery brands. And while Davies is wary about developing low fat and low sugar products, in response to public pressure, Thorntons removed hydrogenated fats from all its products last year.

This sensitivity to the public mood is evident in other areas too. "Last year all of our children's range was reformulated with no artificial colours or added preservatives: that's working very well for us," adds Davies. "But again, I emphasise the point that you've got to have great tasting products."

Production efficiency

Like other manufacturers, rising ingredient costs have been an issue over the past year. "Given the innovation that we are bringing out with our products, we have so far been successful in passing on those price increases that we deemed to be necessary," says Davies.

However, it has also worked hard to contain rising ingredients costs; helped by economies of scale in purchasing as the business has grown in size.

In conjunction with its two main chocolate ingredient suppliers: Barry Callebaut and Cargill, Thorntons has made use of 'hedging' on forward commodity purchases of cocoa and suchlike to offset price rises.

But the company has also recognised the need to raise its own production efficiency to reduce costs. "The challenge is also to reduce waste," says Thorntons' operations director Barry Bloomer. "There are huge challenges to the efficiencies of the processes within the supply chain and we are also working a little bit cleverly with our suppliers; taking advantage of new processes they have, new ways of working in terms of ingredients and new products and making sure we have the right specification for the customer."

Thorntons' site in Alfreton in Derbyshire occupies 65 acres and employs around 1,100 full-time employees, rising to 1,700 during peak production periods. This includes some agency staff. Davies claims that the company has no problem in attracting and retaining staff, adding that Thorntons is an employer of choice in the region.

"Last year we retained 100 of our temporary operators and converted them into permanent staff," says Bloomer. "This year we have just converted 200 from temporary to permanent. So the opportunity to progress within the business for the good performers is proven. And that drives good loyalty as well."

24/7 culture

To expand its production capacity and improve response times, Thorntons plans to move from 24-hour working, five days a week to seven-days a week, adding weekend working from July 1. According to Bloomer, the next step after that in raising overall equipment effectiveness will be to reduce changeover times in its batch processing operations.

While its high volume core products such as its Classics and Continental selection chocolate boxed ranges are manufactured on its high production lines, more niche products are made on lower volume lines or outsourced to the "ever-growing [third-party] supplier base", says Bloomer. Some of these are used to provide specialist individual boxed chocolates - "pawns", as Thorntons calls them - plus organic products and some tablet chocolate bars. Around 5% of production is outsourced.

Although Thorntons has obtained accreditation from organic certification body the Soil Association for its packaging, it has yet to start producing organic chocolates at Alfreton until demand increases. "We make single origin products quite regularly on our sites; we make it on a dedicated line. And the same with diabetic type chocolates," says Bloomer. "So it is always a decision on investment and capacity versus utilising our good supplier base."

While it is a relatively new production facility, capital investment is directed where it can be justified. Although not prepared to identify precisely how much is spent where, Thorntons invested around £8.5M last year on both refurbishment of its stores and in the factory, claims Davies.

Bloomer continues: "The main areas of investment will be customer driven, so as we launch new products - whether you label them niche products or whatever - those areas require capital investment to support NPD plans, or take us into a new capacity envelope."

So there you have it: the customer is definitely king at Thorntons. And if you had any doubts, Davies concludes: "I firmly believe that if we continue to innovate and keep the customer at the centre of our decision making, that the customer will reward us." Let's raise a chocolate truffle to that. FM

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