Strategic Management: Thornton Plc - Case Study Example

STRATEGIC MANAGEMENT – THORNTON PLC INTRODUCTION Thornton Plc is one of the leading confectionary and chocolate manufacturer end retailer in United Kingdom. Its product line focuses on chocolates, fudge, and toffee and also include other candies. The company targets the high-quality and high-end market. The company is one of the most popular brands in UK and has a very strong commitment to quality. The company has a very strong retail network in which it operates more than 500 retail shops out of which it owns around 400 while the rest operate as franchises The company also retails its products through large supermarkets and malls and large-scale department store chains such as Marks and Spencers. Most of its own stores also have cafes through which the company sells it chocolates, coffee and other specialized desserts. As per the first quarter trading statement by the company -- The total sales grew by 28.5% to £43.0 million and its store sales (owned by the company itself) increased by 10.3% to £25.4 million. Similarly the Thorntons Direct also showed an increase in sales of 46.5% to £1.1million. This turnaround came after the company decided to focus on its core strengths of a strong brand and innovative and unique products. This is quite remarkable considering the fact that in 2003 , their profit after tax had become the lowest in last seven years.(Jennings, 2004) and it has been found wanting in terms of profitability since the start of 1990s. In the pages below, we will take a brief look at the strategic issues and challenges faced by the Thornton Plc in its journey so far. BACKGROUND The company Thorntons Plc was founded in 1911 by Joseph Thornton. He was a traveling candy and confectionery salesman who opened his first shop in Sheffield. Till now the Thornton family owns more than 30 percent of the company’s shares. In 1927, the company opened its first full-fledged factory in Sheffield and by 1935, the company had opened 15 stores. (Company history) This increased to more than 200 stores by the 1960s and they were located across the Midlands and Northern regions as well as in Scotland. After owning and managing its stores , the company decided to use franchisees and thus expanded its reach across the country and even beyond UK. It bought stores in Belgium and France as well as United states but its overseas activities were not too successful. As a result the company changed its direction once again and started focusing on its own domestic market of UK. The main rivals or competitor of Thorntons include Cadbury Schweppes PLC, Nestlé Holdings (UK) PLC, Mars UK Ltd; Kraft Foods UK Ltd and The Wrigley Company Ltd. Today, Thorntons has an annual turnover of about £180m and has around 400 shops and cafes and about 200 franchises in addition to mail order and other commercial services. They have also successfully built up their internet business with special and user friendly order services. It has tried to counter the seasonality factor in its sales by offering other all year round gifts and items to its customers. But greater challenges lie ahead as Thorntons try to boost its profitability after tax. The key factors in the current scenario include the need to understand the ever growing convenience culture , the dominance of multiple grocers or the supermarket chains, and increasing use of internet by shoppers. UK CONFECTONARY MARKET The UK confectionery market is valued at an estimated £ 4.41bn in 2006. But it seems to be heading towards decline or a slow rate of growth because of growing pressures from health conscious people. (Business wire, 2007) The lifestyles are changing and people are now more health conscious and value fitness and health above indulgence. Even then the chocolate confectionery still accounts for the major share of sales in the confectionary market. The remaining share is held by sugar products, desserts etc. But now it is important to look and explore healthier options with the increased use of alternatives to sugar such as sugar-free or reduced-sugar products. The idea is to adopt a more balanced approach to eating. Besides the sugar-free products there are others such as fruit juice and vitamin-supplemented drinks and use of skimmed milk in milk products. But chocolate confectionery has always been associated with indulgence and gift giving occasions. Thus its appeal is undying and sales figures show that the people are still buying chocolates and even more as part of their gift giving shopping. But the manufacturers and advertisers will have to catch up fast. But the options are really limited with freshness and taste being two qualities which cannot be compromised. The UK market is still dominated by Cadbury, Mars and Nestle and Thorntons. And most of them follow the strategy of brand extension rather than bringing new products to the consumer. And till now the strategy has been successful. Moreover children and young adults who are the main consumers do not seem to be overly conscious of fat and sugar levels. See Table 1 for the UK chocolate market indicators for 2004-2008 Table 1 : UK Chocolate Market value (€m), 2004-2008 Future profit opportunities and growth indicators Segment 2004 2005 2006 2007 2008 Boxed 1332.6 1350.2 1367.6 1385 1400 Countlines 2152.3 2176.4 2200.6 2224.6 2244.4 Moulded bars 982.3 996.3 1010.3 1024.2 1036.3 Other chocolate confectionery 18.1 18.1 18 17.9 17.7 Seasonal chocolate/novelties 885.2 899.5 913.8 928.1 940.8 Straightlines 732.9 743 753.1 763.4 772.1 Total 6103.4 6183.5 6263.4 6343.2 6411.3 Source: Chocolate Confectionery Industry Insights, 2006 Thus as seen above almost all categories are expected to increase their sales except for other chocolate confectionary items such as candies and toffees. Another survey done by Chocolate confectionary insights shows that the new product development is one of the critical factors that can help a company attain competitive advantage. The seven factors that were rated were Economic downturn, Increased brand recognition, New Product Development, Discounts/promotions/special offers, Consumer acceptance of pricing strategies, Increasing retail consolidation and Foreign travel/entertainment. They were rated as of Exceptional importance, Above average importance, Average importance and Very low importance. And New product development was voted as the factor of exceptional importance by 71% of the respondents. (Chocolate Industry insights, 2006) THORNTONS VISION AND STRATEGY Thorntons have always followed a mission to be the most popular confectionary shop in the High Street and Shopping Centers. And they have focused on high quality products and excellent customer service. To do so they have followed the strategy of expansion right from the beginning. Starting from manufacturing for a small number of shops, they have now moved on to about 400 plus company owned retail shops and 200 franchisees. But till 1990s, the main thrust was on manufacturing only. They realized the importance of retail and also took a strategic direction towards consolidating and expanding their retail network Thus they began franchising their shops, which helped them to increase its retail stores to about 350 plus. See exhibit 1 in Appendix At the same time the company made forays into French and Belgium markets. But this turned out to be wrong strategy as it was unable to profit from these acquisitions and thus in 1996, the company sold off its Belgian subsidiary as well as its 21 French stores to a rival retailer in that market. But their core strategy of expansion continued unabated in UK. In October 1996, the company announced a £30 million investment program to open up more stores in UK It wanted to reach the figure of 500 stores by 2001. But the pace was too much and the company could not sustain its ambitious plans. The profits plummeted and the net profitability started to decrease. The crucial mistake was of zero consolidation and virtually no new product or new innovation for the consumers. Moreover, the franchisees were also not contributing in the same way as the company owned stores as the environment could not be reproduced there and customers were not sure if they were getting the real Thornton products. Moreover, the manufacturing and production could not equal the demand of the newly opened stores and the company ran out of stock in 1999 during the crucial Easter season. This happened since the company guards its manufacturing expertise and the key manufacturing functions are done in house to assure the quality of ingredients and exclusivity of its main recipes of specialized chocolates. Another factor that aggravated the company’s woes was the seasonality of demand. The chocolates confectionary is more in demand during festival seasons such as Christmas, New year or Valentine’s day and the freshness of the chocolates specially the boxed chocolates is the key to success. Thus a combination of strategic and non strategic decision and factors led to the fall of Thorntons profitability. Expansion without consolidation and without gearing up or increasing the in house production was responsible for decline in company’s fortunes. Moreover, there were no new product innovations to keep consumers’ interest and running out of stock at crucial demand time made matters worse. Thus, while the full year sales rose from £141m to £154m (increase of 8.7%), profitability before tax fell by 50% and halved from £ 11.1m to £6.6m.(Eurofood, 2000) The company finally realized its mistake and blamed product mix, heavy investment and over-fast expansion for its poor performance. They then decided to focus on their strengths of strong brand name and unique and innovative products for its future growth. Thus the period after year 2000 has seen a cautious approach to expansion with lot of other alternatives being explored and more focus on consolidation and product innovation. The company then tried to position its products according to market segments and identified four main customer market segments -- gifts, personal treat, family share and children. But there are several problems that needed to be handled such as general decline in UK chocolate consumption patterns, an increasingly health and weight conscious public and differentiating itself as a specialist store providing quality products for important occasions and getting customers to visit them. Freshness of chocolates has long been the distinctive feature of Thorntons chocolates and company has steadfastly refused to use vegetable butter instead of cocoa butter to increase the shelf life of its products. Thus many corner shops and retail outlets cannot be used by the company to retail its products. And this factor of freshness combined with strong seasonal demands is another key challenge that company needed to overcome. Current Strategy Models and Thorntons As Robert Grant (2005) put it – clear goals, understanding the competitive environment, resource appraisal and effective implementation are the key components of any successful business strategy. Thus Thorntons also need to do a SWOT analysis and study its threats and opponents plus the strengths to gain the competitive advantage once again. Moreover, they need to redefine their core competencies and build their organization around it. The Core Competency concept was given by Hamel and Prahalad and it focuses on the core strengths of an organization. Instead of the outside-in approach (such as Porter’s five forces model, 1980) that needs to examine the outside environment of market, the competition, and the customer at the center of the strategy process, the core competency model starts with examining and identifying the key strengths of an organization or looking at the internal environment. In their article “The Core Competence of the Corporation” (1990), Prahalad and Hamel argue that a corporation should be built around a core of shared competencies. But a core competency can take various forms, including technical/subject matter know how, a reliable process, and/or close relationships with customers and suppliers (Mascarenhas et al. 1998). But it is seen that in retail industry it is important to outsource any or most of the non core functions of an organization to focus on the core competencies only and convert it into its sustainable competitive advantage. Although first established by Porter (1985), it was actually given its present definition by Barney (1991). As per him a firm is said to have a sustained competitive advantage when it implements a strategy that is not being used by its competitors and is not easily substitutable. Thus Thorntons also needs to focus on its core competency of manufacturing quality chocolates and maintaining its brand value. It will be more meaningful to outsource some of the other functions such as distribution and packaging to reduce costs. This is exactly what Thornton does now by partnering with outside producers for non core products such as Solid chocolate bars or basic liquid chocolate. Packaging had also been outsourced to achieve efficiency and cut costs. This alone saved a whopping £250,000 m annually. Thus they invested in a new factory, ware house systems. To create their sustainable competitive advantage, Thorntons needed to forge long term relationships with their suppliers and consumers. Morgan and Hunt (1996) also advocate the role of relationship building as a means of obtaining resources in order to create a sustainable competitive advantage This is what they have now done by using supermarkets and large retail stores to retail their products. They already have a supply arrangement with Marks and Spencers and later they also entered into agreement with Sainsbury and ASDA to outlet their products. The product range is also being broadened and differentiated according to retail outlets. Some of the chocolate products have been altered to suit the supermarket shelves. Similarly they improved the distribution channels to increase the sales. There was an increase in the rate of product development and innovation. They brought out new range of Awesome American chocolates and further repackaged and reintroduced the Classics range. (Jennings, 2004). The introduction of cafes in the thorntons stores have brought in some relief in form of increased sales due to impulse buying and a less seasonal pattern of the demand. The three phase growth plan introduced in 2000 outlined strategy of stabilization and consolidation. It also focused on reducing costs and increasing efficiencies by closing extra products which were out of line from its core business of chocolates and toffees. This led to a reduction of up to 15% in the product range. Extensive market surveys were carried out and it proved useful as it pointed to its core competencies to be based on gift purchase. Moreover, it also showed that consumers were more keen to buy bulk confectionery from supermarkets. Thus they focused on gift indulgence and on retail side they moved to open outlets where much better experience could be provided to the consumer via better product display and addition of specialized services and other products such as desserts , ice creams etc. Thy also introduced internet, telephone and mail orders and they were combined with wines, perfumes, other toiletries etc for individual and wedding gifts purposes. This endeavor was a success with more and more people coming in for the orders. See Exhibit 2 in Appendix for the market share of Thorntons. Thus as of today, company’s sales margin have improved immensely. As per reports the sales revenues have increased by 5.3 per cent to £186m for the 53 weeks ended 30 June, compared to £176.6m in 2006. (Willmer, 2007) There has been growth in all businesses. There has been an increase in sales all through and the seasonal pattern of demand has ceased to be a major problem now. See Appendix for the first quarter results of Thorntons this year. As per the company their main objective of increasing sales and the profit margins seems to be within their grasp for this year. The various marketing strategies and marketing mix of improved retail and distribution and a better innovative product range seems to be paying dividends. Thy have not only broadened the product range but also the availability of these products beyond their own shops. They have entered into agreement with Tesco stores in addition to the ASDA, Sainsbury and Marks and Spencer groups to sell Thornton’s branded confectionery in these stores throughout the UK. Thus the share of thorntons have increased in the UK markets. Thorntons have overtaken Masterfoods to take 4th position in manufacturer SOT in 2003 MANUFACTURERS' VALUE SHARES IN THE UK BOXED CHOCOLATE MARKET 2002 2003 Change £m % £m % % Nestle 170 19.9 175 18.7 +2.9 Cadbury Trebor Ba 174 20.4 163 17.4 -6.3 Kraft Foods 102 12 116 12.5 +13.7 Thorntons* 68 7.9 103 11 +51.5 Masterfoods 100 11.7 86 9.2 -14.0 Ferrero 46 5.4 54 5.7 +17.4 Bendicks 23 2.7 36 3.9 +56.5 Lindt 7 0.8 14 1.5 +100.0 Elizabeth Shaw 13 1.5 13 1.4 - Guylian 10 1.1 7 0.8 +4.4 Other 46 5.4 64 6.9 +39.1 Own-label 91 10.6 95 10.2 +4.4 Total 844 100 918 100 +9.1 * Includes sales through high street shops SOURCE: MINTEL CONCLUSION Thornton's is the only major chain in the luxury confectionery market. It should capitalize on this and try to turn it into its core competency. (Pragma, 2005) The product range could be further renovated to include luxury purchases for special gift occasions such as anniversaries, or birthdays etc. the emphasis should probably be on the special item or a very thoughtful purchase. Moreover the Thorntons store should be a place where consumers should be willing to come more often due to the special experience or environment. It should be a sort of luxury or self indulgence trip for them. The stores do not communicate this effectively now. The store environment should be made more contemporary and promote special, and not mass market. It would be much better if thorntons reserve their core delicacies for their special stores where cutomers will feel like indulging themselves. The normal ware should be lerft to mass markets or supermarkets. Thus besides such innovations, they should concentrate on protecting their brand value and should focus on product innovations rather than simply expansion. References: Barney, J., 1991. Firm Resources and Sustained Competitive Advantage., Journal of Management 17 (1): 99-120. Business Wire, 2007, Research and Markets: The UK Confectionery Market Remains Dominated by Cadbury, Mars and Nestle, and New Product Development is Firmly Centred on Brand Extension Rather Than Bringing New Names to the Consumer, Chocolate Confectionery Industry Insights Company History, 2006, Retrieved From : http://www.fundinguniverse.com/company-histories/Thorntons-plc-Company-History.html Eurofood, 2000, Thornton's poor results cause disappointment - Thorntons PLC - Brief Article - Statistical Data Included. Retrieved from http://findarticles.com/p/articles/mi_m0DQA/is_2000_Oct_12/ai_74488761 Grant, R M, 2005, Contemporary Strategy Analysis: Concepts, Techniques, Applications  Blackwell Publishing Hamel, G. and Prahalad, C.K., 1990, The Core Competence of the Corporation, Harvard Business Review, vol. 68, no. 3, May-June 1990, pp. 79-91 Jennings, D, 2004 , Thorntons plc: corporate and business strategy, Nottingham Business school Mascarenhas, B., Baveja, A., and Jamil, M., 1998, Dynamics of Core Competencies in Leading Multinational Companies, California Management Review, vol 40, no. 4, pp. 117-132. Morgan, R M. and Hunt. S., 1996. Relationship-Based Competitive Advantage: The Role of Relationship Marketing in Marketing Strategy.-- working paper. The University of Alabama Porter, M., 1980, Competitive Strategy, Free Press, New York.. Porter, Michael E. 1985. Competitive Advantage: Creating and Sustaining Superior Performance. New York: The Free Press. Willmer, K., 2007, News brief: Confectionery roundup from around the world. Retrieved from : http://www.confectionerynews.com/news/ng.asp?n=79764-thornton-s-cadbury APPENDIX 11 OCTOBER 2007 THORNTONS PLC FIRST QUARTER TRADING STATEMENT Thorntons PLC (‘Thorntons’ or ‘the Company’) today reported its first quarter trading update for the 14 weeks up to and including 6 October. Highlights: • Total sales grew by 28.5% to £43.0 million as a result of continued progress in all sales channels. • Own store sales increased by 10.3% to £25.4 million benefiting from increased product innovation and improved store environments. Like for like sales during the period grew by 9.6%. This increase was partly helped by the unseasonable weather in July and early August. Like for like sales growth in the last six weeks was 6.2%. • Franchise sales were up by 39.0% to £3.4 million as a result of the continued enhancement of our product range. • Thorntons successfully increased its business with a number of retailers. This resulted in a 80.8% uplift in commercial sales to £13.1 million. • Thorntons Direct continued to perform well with a sales increase of 46.5% to £1.1million largely benefiting from the significant investment made over the course of the last financial year. Company information from 1994 to 2003 The market share of different companies in UK Read More