Thorntons back to profit growth

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Related tags: Thorntons, Retailing

Thorntons, the UK confectioner, has retuned to profit growth for
the first time in five years in fiscal 2004, but warned that
further measures to improve the company's finances would entail
more costs in the coming year, reports Chris Jones.

The company, which received two takeover offers earlier in the year before deciding to continue with its own recovery plan, said that pre-tax, pre-exceptional profits rose by almost 25 per cent to £8 million as sales rose by a more modest 6.9 per cent to £178.7 million - an indication that the company's new strategy is beginning to pay dividends.

"A successfully integrated retailer with a strong brand should enjoy good return on sales versus the retail industry average. Whilst Thorntons has a respectable return on sales, it punches below its weight,"​ said CEO Peter Burdon, an acceptance that while Thorntons​ had all the right tools to be a star performer, it had somehow failed to use any of them properly.

A major overhaul of the company's business was therefore begun three years ago, concentrating primarily on capitalising on the company's strength - its brand - while at the same time strengthening the weakest link in its route to market - its store portfolio.

Building on the brand name has seen the company begin selling its products through third-party outlets - Tesco stores - for the first time, a move which has proved highly successful with this particular part of its business growing faster than any other over the last 12 months.

Total sales for this operation, which also includes making own label chocolate for Marks & Spencer, rose 8 per cent to £23.7 million, of which 42 per cent (double the previous year's level) came from the Thorntons brand.

At the same time, Thorntons has expended considerable effort on finding the right format for its own outlets, including closing down a number of outlets which did not meet performance criteria.

Consumers are increasingly demanding when it comes to their shopping requirements, and Thorntons' stores suffered as a result of a combination of factors such as poor product mix and poor store layout, one factor behind the development of a new format store, Thorntons Café.

This format - which Burdon said was best suited to out-of-town retail parks, currently popular in the UK - is expected to be a major driver of growth for the company - despite initial uncertainty about its long-term future in a market saturated with coffee shops and cafés.

Cost cutting has also been an important element in the company's recovery, with greater care and attention given to such fundamental things as the rate of new product development (not investing too heavily in products which will take a long time to reap returns, for example) and forward planning (a vital part of any confectioner's business given the importance of events such as Christmas and Easter).

The fruits of this 'back-to-basics' approach are already being seen, but there is still more work to be done before Thorntons' makeover is completed: improving the quality and efficiency of the supply chain, with the first real benefits expected over by 2006. In the short term, however, the restructuring is expected to lead to one-off charges of at least £1.3 million in the new financial year.

Other developments this year will focus on revitalising the mail order business, which experienced its lowest ever level of sales growth since it was launched in the late 1990s (sales were unchanged at £3 million). This business has been grown primarily through the addition of nominative email addresses purchased from third party list providers, but in today's spam-conscious atmosphere, this is proving less effective.

Instead, the company will invest more in advertising its online and catalogue businesses - which will also be rebranded in line with the company's upmarket Art of the Chocolatier tagline.

But despite Thorntons' successful return to growth, the long-term goal will be to shift the balance of sales back to its own stores and away from commercial sales to other retailers or through franchised outlets: these channels do nothing to increase the company's margins as products are sold at wholesale rather than retail prices, and gross margins dropped from 53.1 per cent to 52.4 per cent in 2004 as a result.

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