Is life easier as an fmcg retailer or supplier? Thorntons has bet the shop on the answer being the latter.
The chocolatier this morning released what looked like a strong set of annual results as profits rocketed by 60% on flat revenues. The key reason behind the improved performance is Thorntons’ shift from being a confectionery retailer at heart to becoming a branded fmcg supplier.
For the first time fmcg made up over half of its sales as it grew UK commercial revenues by 10%, while shutting 13% of its UK retail outlets during the year.
This rebalance may have boosted profitability, but it also brings a new set of problems as Thorntons becomes more reliant on the order appetite of beleaguered supermarkets and the increased volatility that brings.
The woes of the supermarkets seem to have had an effect on Thorntons’ share price, even if its bottom line has remained resilient in the face of the changing retail market.
Morrisons’ March profit warning and the subsequent escalation of the price war coincided with a poor spring trading period for the company, which has seen its share price fall in the region of 35% since early March.
Thorntons chief executive Jonathan Hart today shrugged off the idea that its changing business was more exposed to the supermarkets, noting the strength of its brand would support ongoing commercial demand.
“As a leading brand our strategy is to be where our shoppers want to buy from us,” he said. “We believe that, as a strong brand in the marketplace, we have the opportunity to work with our grocery partners to work through some of their well-documented challenges.”
He said a significant (around 40%) rise in cocoa prices over the past 12 to 18 months was passed onto its commercial customers in the spring. But BrandView data indicates the average shelf price per kg has fallen 6.4% year-on-year, although it has risen since June and July when there was a period of heavy promotions (particularly in Waitrose).
Re-education
Perhaps more of a challenge is the need to re-educate investors about what to expect from the business.
Of particular concern for Thorntons is that, as its business continues to shift towards fmcg, the like-for-like annual comparatives will become less useful as a metric of performance.
“Many people see still us as a retail business and over the last year it’s become apparent that we need to do a better job at explaining the implications of the significant rebalancing that’s going on in our business,” Hart said.
“A consequence of that is that the natural pattern of business over the course of the year suffers natural volatility due to decisions by our trade customers over when they chose to take products from us.”
In particular Thorntons has warned its first quarter of the year is likely to see particular weakness, while growth in the first half will be modest. However, it insists that should have no impact on its full-year performance and is instead simply a reflection of the changed business.
Whether investors have fully taken on board the message is another question.
Despite the strong profit growth, Thorntons was down 1% today to 104p and down 4.8% since the start of the month.
Thorntons is well on the way to shifting its business away from own-store retail and has plans to become an international fmcg brand – but it might take the market a little longer to buy into the new story.
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