Enterprise Initiative - Thorntons Chocolate - Case Study Example

Enterprise Case Initiative: Thornton’s Chocolate BY YOU YOUR SCHOOL INFO HERE HERE Thornton’s Chocolate (a) Analysis Thornton’s Chocolate is a long-standing brand in the United Kingdom, founded in 1911. The business’ main advertising slogan, Chocolate Heaven since 1911, shows Thornton’s premium positioning in an effort to make the brand appear superior in relation to quality. Thornton’s long presence on High Street, a famous commercial area with many expensive and luxury retail stores (such as Gucci and Christian Dior) has given Thornton’s much more importance as a quality brand. Thornton’s is a medium-sized organisation, supporting 360 different stores and cafes that are both stand-alone and operating in many malls. Many of these stores are operated by entrepreneurs under franchise agreements. As of 2011, Thornton’s had £218 million in revenues that came from self-owned stores, franchise outlets and Thornton’s Direct, the company’s online sales model (Thornton’s 2012). This business operates in a very saturated environment. Major competition includes Cadbury (which is also positioned under premium quality and pricing), Mars, Nestle, and Ferraro, as well as other private label chocolate brands provided by major supermarkets such as Morrison’s and ASDA. Currently, Thornton’s holds only 7.7 percent market share in the confectionary industry (Thornton’s 2012). The main problem with Thornton’s is the value of its brand. In the next three years, due to declining sales, Thornton’s is being forced to close between 120 and 180 of its stores (BBC News 2011; Daily Mail Reporter 2011; Hawkes 2011). Popularity of the High Street, an area that has provided much of Thornton’s historical sales volumes, is fast on decline. Stores such as Jane Norman and Habitat have gone into administration due to this change in consumer spending in the region. Many consumers are changing their shopping habits by visiting upmarket malls and hypermarkets that are now offering many diverse products and services, such as Tesco and Sainsbury. Thornton’s has relied too much on its traditionalism as a historic chocolatier in the UK that no longer provides values to a changing society and set of consumer characteristics. This quality and premium positioning is no longer sustainable and now the business needs to completely reposition to change its negative market position (Thornton’s 2011). Michael Porter (2011) tells about five external market forces that create risk or opportunity to businesses. Two of these that are relevant for Thornton’s are the buying power of consumers and competitive rivalry. Buying power of consumers involves the level of control that consumers have related to the brand. Many grocery stores in the UK, such as Morrison’s and ASDA, now have private label chocolate brands. This would not seem to be a large problem for Thornton’s except that both of these supermarkets have a great deal of brand loyalty because of service excellence or diversity of product and service offerings. Tesco, as one example, saw a 100 percent growth in revenues for private label brands between 1982 and 2004 (Coriolis Research 2004). Private label growth has exploded since 2004. Consumers do not have to pay high prices for quality chocolate products now that many competitors are offering lower-cost products backed by brand preference and the ability of these competitors to use their strong brand to project quality. For example, a box of chocolates from Morrison’s would cost £9 whilst the same variety of assorted confections at Thornton’s would be £22 or even more. Consumers can easily defect to other brands that are able to express quality with very little switching costs in a saturated market. Major companies in this industry such as Cadbury have been excellent at using modern promotional efforts to build loyalty and trust in their brands. Cadbury recently had a viral marketing campaign using a gorilla that spread quickly throughout the United Kingdom. Backed with even more resources by its new parent company, Kraft Foods, Cadbury has been more aggressive in using television advertising to gain market attention. The slogan Chocolate is Cadbury helped to give the impression to target markets that Cadbury is the foremost authority in chocolate confections. The Dairy Milk Bar from Cadbury, as one example, sells for only £1.70 (The Cadbury Chocolatier 2012), whilst Thornton’s similar bars can exceed £6. Many other confectionary companies are getting more intelligent about using social and viral media using psychographics and behavioural concepts that are close to consumer lifestyles and characteristics. Thornton’s, however, still stays devoted to using its rich history in the UK as a selling point which is obviously being outperformed by more flexible competitors that know how to use modern advertising ideas. Thornton’s still has a High Street set of values that are no longer important for UK consumers when there are many low cost options available throughout the country and also available in more convenient locations such as the hypermarket. Using the PEST framework for analysis, there are two important macro-level issues facing Thornton’s. These are the social environment and the economic environment. The United Kingdom is still battling problems related to the 2009 recession, facing unemployment problems and austerity packages directed by the government. Austerity measures have forced a 3.4 percent increase in taxations for businesses on the High Street which has reduced some of the business’ profit and has led to some other retail business closures in the area. It is the social environment that is the most critical. Today’s markets between 25 and 34 years old (the most important market for Thornton’s) now has much confidence and often turn to luxury brands as a means of reaffirming their identities (Executive Digest 2008). These markets are also involved with social media as a lifestyle tool to develop meaningful relationships with brands and others in the social environment. Companies such as Apple Inc., the major technology leader, uses social media as one of its primary marketing mediums that has improved its market standing (Goodson 2011). Research did not show any evidence that Thornton’s was using social media to create viral buzz or improve relationships with these markets. Instead, the business still holds onto its stuffy and traditionalism focus that was effective in the 1960s and 1970s before growth in shopping malls and hypermarkets. Thornton’s is not adapting well in areas of advertising and other promotions to fit the needs and emotions of important target markets. (b) Ideas Generation A major problem for Thornton’s is that the company has very high costs for selling the product (cost of goods sold). According to the company’s most recent annual report, these costs were approximately 50 percent of total revenues (Thornton’s 2012). In most industries this would be unacceptable. Thornton’s purchases top quality cocoa beans from such countries as Ecuador, Mexico, New Guinea and some from West Africa (Thornton’s 2008). There is no consolidation along the supply chain to procure top quality products creating many increased operational costs. According to Copacino (1996) one of the best methods of reducing supply chain costs or improving performance is to set up strategic alliances with important vendors. Thornton’s should be more entrepreneurial in trying to identify potential alliances that can enhance distribution effectiveness. These alliances would also help Thornton’s to gain more control over the supply chain by improving their bargaining and negotiation power for cost controls. Porter (2011) warns of the risks associated with a diversified supply chain where suppliers have leveraging power and high pricing influence. Starbucks, a major multi-national company, has set up similar procurement agreements and alliances with independent bean growers to help them build better productivity and sustainability. Through these alliances, Starbucks now has more cost negotiation power. Thornton’s should be putting more executive activity into identifying alliance opportunities that would reduce the cost of goods sold. Theory of entrepreneurship also tells about the importance of corporate social responsibility which can be used to build a brand. A major supermarket, Sainsbury’s (one that has high market share in the grocery industry) has built a great deal of trust and loyalty through its social responsibility programs (Sainsbury 2011). Healthier eating in the UK has been dominating some purchase decision-making in many markets as they switch to lower calorie, lower fat products. Sainsbury takes advantage of this opportunity by the creation of Sainsbury Diets, an online service that helps consumers manage their weight (Sainsbury 2011). The business also assists youths under the Active Kids program to help balance food intake with exercise (Sainsbury 2011). Sainsbury’s success in CSR is important as an opportunity for Thornton’s. The business is currently looking for new distribution channels since High Street is losing much of its popularity and revenues. Thornton’s once believed that using grocery retailers as an outlet for sales would cheapen its premium brand. However, Sainsbury’s social responsibility could provide opportunities for Thornton’s to develop lower-fat versions of its products (which could also reduce supply costs) and promote its own CSR. Using Sainsbury’s as a strong brand supporter in CSR, Thornton’s can strengthen its values as it is related to changing consumer trends. Noonan (2010) also promotes the bioactive properties of chocolate products that improve health and well-being emotionally. Changing consumer values would support Thornton’s using promotion about these properties to give its chocolate products a new image. Brand-building helps a company to “nurture and innovate market-based assets” to create perceived brand value (Abimbola 2001, p.99). There are many opportunities for the business to promote life enhancing properties to appeal to new markets or regain loyalty from lost markets that now are considered about health and wellness in food consumption. Thornton’s can also take advantage of growth in vending machine sales across the UK, which is valued currently at £1.85 billion (AVA 2012). Consumers are buying not only snack products, but grooming products and even gold bars as the popularity of these machines takes off. There are over 550 vending machine operators in the UK (AVA 2012). (c) Opportunity recognition The most likely opportunity to gain sales and brand-building success for Thornton’s is to consider using vending machines as a distribution option. Hot drink sales in vending machines provide an average profit of 70 percent for each glass sold (Hickman 2011). In a recent effort to diversify, Thornton’s opened its first hot chocolate bar in Nottingham. This shop offers indulgent cakes and luxury hot chocolate drinks in this business model (PR Web 2008). There is promise that this new innovation to diversify will produce positive sales results. Consumer acceptance of this model provides opportunities for Thornton’s to operate its own vending machines that offer luxury products, including hot chocolate, gourmet coffee drinks, and even luxury cakes. Recent innovations in hi-tech vending machines include face recognition software, touch screens, and even videoconferencing to speak with representatives of businesses (Hickman 2011). Thornton’s does not have to lose its luxury positioning but can apply this to the profitable vending market using these innovations to show the difference between Thornton’s quality and lower-quality of other competition. What makes this strategy so important is that vending purchases are extremely common in China and Japan. In Japan, there is one vending machine in the country to every 23 consumers (Hickman 2011). In the UK, it is one vending machine for every 55 consumers (Hickman 2011). Chinese consumers value hedonism, which is about maximizing one’s own utility where outward presentation of wealth through consumption is a primary social need (Veenhoven 2003; Overskeid 2002). This makes an ideal market for selling Thornton’s products without having to change positioning strategy. This change in promotion can be quite expensive. Growth in consumer acceptance of diverse product sales in vending machines creates excellent long-term expansion and growth opportunities to improve sales domestically and internationally. Measurement of return on this investment can be conducted with revenue analyses for takings occurring from Japanese, UK and Chinese vending machines. Market research both qualitative and quantitative can be conducted to measure customer satisfaction. These instruments can also be used to gain views on current attitude toward Thornton’s brand and the convenience of luxury product sales in the vending environment. (d) Exploitation The business can seek out strategic alliances with vending machine operators to leverage pricing negotiations related to volume purchasing. The average cost of modern vending machines ranges from £5,000 to £10,000 depending on features and technologies. The first step in this vending diversification strategy is to set up a distribution network that can replenish products quickly and cost-effectively. Thornton’s has operational capacity for bakery goods, however this is domestic. When entering China and Japan, the business must contract with local bakeries or establish a turnkey project, which is allowing a contractor to develop a facility from start to finish under contract. This will ensure that top quality products are produced that are alike with luxury cakes made in the United Kingdom. Various alliances or joint ventures with foods suppliers will provide advantages to the business. Maintenance and restocking of vending equipment represent the most complex operational areas that need to be considered. Thornton’s currently does not have a strong cash position which might require taking long-term loans for start-up of this new venture. This would represent operational costs increases that could be offset by vending sales improvements. The business will need to invest a great deal into early promotion prior to market entry in China and Japan to build brand recognition. Thornton’s is not a well-known brand in Asia. There are risks that consumers will remain devoted to such luxury producers as Godiva (which has a strong presence in China and Japan) that could cause problems with gaining brand awareness and preference. The ambiguities in China and Japan also include lack of knowledge about foreign consumer characteristics, however market research could offset these risks. Place marketing, or selecting the right environment for putting vending machines, will demand a need for understanding consumer attitudes and lifestyles. The business could consult with other companies in these countries that have a long-standing vending model to find out what locations are most profitable and why. Otherwise, this new diversification strategy can allow the business to focus on its chocolate business in the UK without having to make significant changes to its promotions and operations model. (e) Evaluation Thornton’s should be conducting surveys and questionnaires with random samples of consumers to find out their attitudes about vending services. Thornton’s can pilot various vending machines in known regions in China and Japan where vending sales are high to test the program before making a full-scale diversification model. At a time where the company’s cash position is poor and operational budgets are strained for facilities management, keeping start-up costs low is very important. Joint ventures with bakers, vending operators and other coffee houses/drink bars in Japan and China also allow Thornton’s to share resources by creating a new business entity and sharing responsibility for managing them. Thornton’s can contract to have more control over these businesses to make sure promotion and advertising is premium-minded to avoid cheapening the brand through poor promotion. Starbucks has been very successful in building alliances in China and the business can benchmark these success factors through research. This can also lead to more growth in understanding foreign supply chains that could have advantages for the UK chocolate division. It was mentioned previously that supply chain costs for cocoa beans are very high because suppliers are halfway across the world. Alliance partners that have streamlined supply chains for dairy, cocoa or other necessary ingredients can improve its competitive and capital positions. If the business is able to purchase very hi-tech machines, such as ones with real-time videoconferencing, Thornton’s can devote a new customer relationship management model. Using real-time sales support refs, they can respond to customer inquiries about product pricing, quality, ingredients, and any other question. Improving relationships with buyer markets is a very important part of a successful retail business model and something that is lacking at Thornton’s currently. Modernized vending equipment as the most important purchase choice could greatly enhance Thornton’s ability to engage with consumers internationally. This would represent a very unique innovation among competition by having real-time chat options with sales support staff to give Thornton’s a new reputation for customer service excellence. 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