Comment: Saving Thorntons

1/3

11 June 2012

Most people in Britain would consider Thorntons to be a national treasure, and national treasures need to be preserved.

But we are in real danger of losing this hundred year old company unless something is done urgently. Should the company fail, the press will be asking me to comment. I feel it better to say these things now in the hope that change might be achieved rather than being asked to provide an obituary for company in a few months’ time. I am expecting a big loss for the current year ending on the 30th of June. The company’s strategic plan announced a year ago seems to have had no effect at all on arresting the continuing downward trend of sales and gross margin continues also to decline.

In tandem with this decline the share price which stood at 67.3p on the 31May last year is now at 19.25p having reached a high of 203p in May 2007. Dividends which had been maintained at around 6p for many years were reduced to 2.2p last year with no interim dividend declared this year and no final dividend likely. It is easy to see that without some dramatic change in the strategic direction of the business, it cannot last much longer before becoming terminal. And that will be a sad day for all of us.

I was raised in the company that was started by my grandfather, and made a household name by my father and his brother. I had managed every aspect of the company’s operations until I resigned as Chairman in 1987. I had been party to the decision to seek a public listing of the business in that year, and it proved to be a tragic mistake which I have always regretted. The company did reasonably well until 1995 but the family control inevitably weakened and the family formula for running the company was gradually forgotten. Thorntons turned more and more into a formal corporate entity with little passion for its products and performance declined. This is often the case when families sell out into a faceless corporate marketplace dominated by individuals with a passion for personal gain, but no passion for the product. Failure becomes inevitable.

I have been desperately concerned about Thorntons’ spiralling decline for some time, and in 2009 I joined forces with several business colleagues, and as a team we have studied the situation in great depth. We have done our utmost to assist the current management by offering our services; I personally have met Chief Executives, the Chairman and I have applied for the role of Chairman. One of our team – an acknowledged and well known expert on “specialised retailing” - had applied for the CEO’s job. All these offers have been rejected by the company. We are confident that we know what needs to be done to stop the decline and turn the company around, but no one so far has listened.

Over the past few years every single prediction we have made about the company’s declining performance has proved to be precisely accurate. We have now calculated using reasonable assumptions and trends, that the company will make a loss before tax and including exceptional items for this current year of £8.9million. This is a calculated estimate and can be relied upon only as far as financial information is publically available. Audited accounts may well come out with something different.

The fundamental problem for Thorntons for many years now has been the decline in like-for-like retail sales. Between 2004 and the end of last financial year this decline was 29%. This year it is a further 5.5%. It is no coincidence that 2004 was the year when Thorntons began their substantial push towards selling to other retailers - particularly the supermarkets. In those 8 years, sales to other retailers have gone up by £50 million and sales in their own retail stores have gone down by £54 million. All those lost sales in their own stores were at a much higher gross margin than the new sales to the other retailers, where we have calculated that many of these sales are below the cost of production.

It seems to be only the current management of the company who think that it is possible to operate a chain of specialist and exclusive retail stores whilst at the same time selling the brand in supermarkets, discount chains, garage forecourts etc at heavily discounted prices. Everybody I speak to thinks that it is a crazy idea. Not only does the availability of the products everywhere and anywhere mean that customers no longer need to go to the shops to buy the products but the exclusivity, perceived quality and specialness of the brand is intrinsically diminished. Indeed if Thorntons have to make a box of chocolates to sell at £5 in Tesco's can it really be possible to do this without reducing the quality? I know how Thorntons’ chocolates were made. I knew every ingredient and recipe. The products currently being produced now appear to be a sadly diminished shadow of their former selves, as the discounting of the brand has impacted heavily on how they are made and the quality perceived by the consumer.

It is not just selling across the whole retail universe that has caused the decline in sales in the Thorntons shops; the British public remember with great pleasure how a Thorntons shop used to look with its wonderful window displays, products deliciously displayed without packaging, sensible sized chocolate boxes - not huge cardboard containers with hardly anything in them, and importantly friendly and motivated staff who knew everything about the product and who knew every customer personally.

The conversion of the store in central Birmingham to a completely new style during this current year was a step in the right direction. I am very pleased that it appears to have been successful and has been short listed for the ‘New Store Europe Retail Week Interiors Awards 2012’. The Chief Executive told me at the last AGM that it was my concepts that had been used, so I am happy that I have had at least this much influence. However, using part of my ideas is not a good way to achieve improvement in the performance of a company however, as improvements to the retail environment constitute only a small part of our alternative strategy.

Many of those who work for Thorntons still really love the business. They are proud to work for the century old company and they identify with it. More and more of these employees have been contacting me recently, and they are clearly frustrated and afraid of what the future will bring. One said to me recently ‘Bully boy tactics will never prevail. If you feel part of something you will always want it to be a success’. Our team believes that involving them in a participative way will be the cornerstone of a culture change that would drive the company forward. We have worked out the mechanisms to achieve precisely this.

A public company theoretically exists for the benefit of the shareholders, and in principle this is a good thing. But this system has failed Thorntons. Only the largest of the institutional shareholders have had any effective say in the appointment of directors. In practice, this seems to have resulted in a self-perpetuating system, managed exclusively by and for the benefit of the existing directors. This is in itself is very unhealthy, but appears to be not uncommon within the British corporate world and is the result of the unsatisfactory legal framework and wholly complacent and unquestioning shareholders.

Logically but not legally, the company exists not just for the benefit of the shareholders but also the employees, customers, suppliers, the environment and the local and national financial and cultural society. And when the company is a treasured national institution, it carries an even greater moral responsibility.

I do fear that if Thorntons survives at all, it may well finish up as another 'Cadburys' - a tiny part of some huge foreign multinational with employees thrown out of work, factories closed, shops closed and the usual and unseen damage to the locality and the country. Alternatively, Thorntons may go into administration to be picked up by some Private Equity company and further emasculated.

Certainly if the current crazy strategy of selling what is perceived to be exclusive and special products in run-down Thorntons retail stores (and they are being discounted even here) and the selling and discounting in supermarkets continues, then disaster is inevitable. A new strategy needs to be implemented urgently.

As soon as practicable the company needs to return to its original proud and desirable status of offering high-quality, exclusive and aspirational confectionery products at a reasonable price through its own stores. And that would mean returning the quality of the products to where they once were. The strategic change needs to be profound - particularly the workforce must be empowered by a new management who believes in and operates a completely participative system, and as many elements of the original 'family business formula' need to be restored as is practicable. The products need to be properly positioned in what has become a very competitive market. The current management’s strategy has been superficial, focused more on appearance than substance. But this is only to be expected without a passion for and an understanding of the products themselves.

Under our strategic proposals, it would not be necessary to close all those stores and it would not be necessary to spend massive amounts of money refurbishing and opening new stores. Relatively small and inexpensive changes together with all the other changes would produce very large increases in retail turnover, and restore profitability. Ideally, the company would be taken private and become in part an Employees Co-Operative and in part owned by private investors. There is a way forward for this once-great British company, and our team would be willing to actively and enthusiastically lead the recovery. But will a white knight appear in time with the financial backing to allow us to rescue Thorntons before all is lost? Now is the time for such people to make themselves known.

Peter Thornton

Part of the founding family and former chairman of Thorntons

Comment: Saving Thorntons

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