Thursday 19 February 2009

Turnover isn't profit.

Thornton's, the chocolate people, have reported a sharp decline in half-year profits as deteriorating high street conditions forced it into extended periods of discounting. For the 28 weeks to January 10th Thorntons experienced a 39% drop in pre-tax profits despite an overall sales increase of 1.3%.

Thorntons are also blaming Woolworths for the decline in sales, something that we felt would happen last year. Woolworths effectively forced DVD/Sweets/Toys/General goods stores to slash 20%-40% off prices just to compete with the wholesale administration clearout. We thought that the slide of discounting would be particularly bad news for card retailers.
Clinton Cards has voluntarily decided to enter talks with its lenders to renegotiate its debt, believed to be around £72 million. The debts, which are held with Royal Bank of Scotland and Barclays, comprise a £60 million working capital facility plus a £12 million loan facility. 6,000 jobs are at stake.
Clinton's rivals the
Cardfair and Card Warehouse chains closed down, without the Woolies fanfare, in January of this year with the loss of 1,400 jobs.

As stated previously retailers won't sell goods for no profit. As the Thorntons example shows, generating a lot of turnover just generates a lot of VAT payments. Store prices are NOT falling. Water charges rising by 4-5% too. So
we are going to start our money printing without the hoped for - 0% inflation.


Mark Wadsworth said...

"Turnover is not profit", never a truer word spoken!

Which is why VAT is such an evil tax, a business has to pay it whether it makes profits or not.

PS anybody who still believes that 'consumers pay the VAT' needs his or her head examining.

Anonymous said...

"anybody who still believes that 'consumers pay the VAT' needs his or her head examining": well that leaves the shareholders and the employees. How is the burden split?

Steven_L said...

Sorry BQ, disagree with you about Woolies DVD prices. In fact, judging by Zavvi too, I reckon administrators in general are pretty dire at discounting DVD's.

When Woolies went under they were trying to flog old Bond movies at £10.80 a pop. Fopp sold me all 20 the other week for £40!

Tesco and Asda always have a good selection of Oscar winners in the £3-£5 bracket, Zavvi were flogging eveything off at £4.50 or more last time I looked.

Mark Wadsworth said...

Dearieme, VAT reduces level of output and is split between consumer and producer, who in turn you can split into shareholders and employees, but there is also a deadweight cost on those businesses that do not exist, but would exist if there were no VAT.

The fact that the consumer pays higher prices is as much a function of the reduction in supply as it is of the extra tax.

Old BE said...

Thorntons need to ask themselves why they are doing so badly compared with the Swiss chocmakers who are reporting booming sales... Perhaps this is a sign that far from being a recession on, people are moving upmarket!

Or perhaps this is a case of people using their cash up while it still worth something?

Bill Quango MP said...

MW agree. A really evil tax. I know of countless very small business who refuse to expand because of the VAT threshold.

Dearime.. what MW says further on.

Steven L
Deloitte worked on the standard % profit- desirability -% discount of administrators.
Fashion 50% - household 25-50%- dvd and video games 10%.
Its not smart,but its easy. The stock report gives stock holding by category by average profit by quantity. I guess sq Ft retail space for "Entertainment" at Woolies at around 10%
Agree about DVDs. Game Gamestation etc won't have noticed much damage to XBox sales as they were 10% cheaper than Woolies anyway. But Clintons were looking at Woolies dumping its entire current and back inventory of cards and stationary onto the profitable Christmas market at 50-75% off. Thats lower than the wholesale price and can't be beaten.
See the shoe story that BBC are running today we gave a heads up to last week. More footwear discounts on a sector that is performing very badly.

Thorntons is one example of why retailers won't be rushing headlong to slash markups so much again. M+S' 20% one day only is another.

Anonymous said...

The whole things a disaster obviously other than the countries grannies brought xmas cards for the next five years for about tuppence each...

Unknown said...

Or as my beloved grandfather used to say, "Turnover is Vanity, Profit is Sanity".

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