Italian giant Ferrero this week snapped up 30% of Thorntons for £112M ($177m) to strengthen its position in the UK.
The UK confectionery market may have declined in the past year – down 1.2% to £5.22bn ($8.2bn) for the year ending May 2015, according to IRI – but Ferrero has enjoyed growth in the market on the strength of its Kinder brand.
The firm’s UK sales were up 19% to £235.9m ($372m) over the period, but Thorntons wasn’t so lucky. According to IRI, Thorntons sales slumped 7.3% to £113.4m ($179m) and its CEO Jonathan Hart announced plans to stand down last month.
Why has Thorntons flopped while premium confectioners Lindt and Ferrero have profited in the UK?
Poundland for premium
Thorntons, the fourth biggest UK chocolate confectioner, according to Euromonitor, has been limiting its own store count in the past few years to reposition itself as a fast moving consumer goods company.
The firm had traditionally been perceived as a high-quality confectioner of luxury gifting items, but its products are now stocked in pound stores and it has even moved that one step further downmarket to 99p stores.
Ken Odeluga, a market analyst at City Index, previously told this site that Thorntons had to “follow the herd downmarket” as UK supermarkets lost market share to the discounters. But has Thorntons cannibalized its premium brand image?
Sales drop while Lindt excels
Revenues for the business were flat last year and in the first half of 2015 fell 8% to £128.2m ($202m). Net profit also dropped 8% in the first half of fiscal 2015 to $4.8m ($7.6m).
Meanwhile, premium confectioner Lindt excelled in the UK market. The Swiss firm grew UK sales by 14.7% in fiscal 2014, according to its annual report.
Thorntons’ former chairman Peter Thornton, who left the firm in 1987, has been calling on his former company to rediscover its premium roots for some time and told The Evening Standard only yesterday that the firm should target retail stores and “bring it back upmarket”.
A 2014 survey by market analysts Canadean found UK consumers were more likely to trade up in chocolate than in other categories. Around 38% of buyers surveyed said they buy premium chocolate either “regularly” or “all the time” compared to 35% in coffee, 33% in alcoholic beverages and 32% in ice cream.
Thorntons’ international penetration
Ferrero is the UK’s number six chocolate confectioner with a 3.2% share, according to Euromonitor International. By adding Thorntons, Ferrero has grown its share to 7.7%.
But Thorntons is weaker in export markets compared to its Italian parent. It commands just 1.2% of the Western European market compared to Ferrero’s (the number two player’s) 12.7%.
International sales accounted for just 4% of Thorntons’ total revenues in H1 2015, but the export division clearly has potential. During the period, international sales rose 19.9% to £5.4m ($8.5m).
Thorntons has been targeting mainly English-speaking British expat markets such as Australia, South Africa, UAE and the USA. But Ferrero’s larger distribution network may allow the UK firm to seize on the world’s fastest growing chocolate markets India and China, which are also blossoming premium chocolate destinations.
“It obviously seriously strengthens Ferrero’s foothold in the gifting and sharing market and gives them a breadth of range across the premium spectrum. However, as the fourth biggest player they will still have a limited presence in everyday confectionery (albeit with a successful and growing brand in Kinder), which will be required to seriously compete with the big three for overall share, especially as the big three increase their focus on gifting and sharing occasions.”
Richard Anderson, senior insight manager, Business Insights, IRI
“The Thorntons store network will provide the company the opportunity to add a more directly experiential approach to its strategy. If all goes well with absorption of Thorntons stores in the UK, we could see similar happenings around the world in years to come. It is somewhat ironic that Ferrero’s acquisition of Thorntons was most likely based on the very assets that Thorntons had been actively disposing of.”
Lamine Lahouasnia, Head of Packaged Food Research, Euromonitor International
Premium British chocolate for China
According to Euromonitor, Ferrero has doubled chocolate sales in China over the past five years to reach $190m in retail value sales in 2013. The company also intends to open a factory in the Zhejiang Province , which could provide Thorntons a strong distribution network and springboard in China.
A recent report by Mintel found British-branded products were proving popular at home and abroad, allowing companies like chips firm Tyrrells to capitalize on its quirky British image in international markets.
Thorntons may appeal to Chinese consumers as quintessential British chocolate brand – akin in luxury to Lindt’s Swiss appeal or Godiva’s Belgian charm. But it may need to rethink its strategy of reducing its own-store counts as a retail presence in the market could it boost the brand’s image.
At 0.1 kg per capita in 2014, China’s chocolate consumption is incredibly low by Western European standards, which vary between 4-9 kg per capita depending on the country, according to Euromonitor figures. But consumers in China are becoming increasingly affluent. GDP per capita grew 7.7% in China in 2013, according to the World Bank. Ferrero may hope Chinese consumers find money to spend on a luxury British chocolate brand.