Abbeycrest PLC
The Charm Offensive

By Gordon Hamme

I was very pleased to get a phone call from the Commercial Director of Abbeycrest PLC, Richard Oldroyd, to invite me to Leeds and explain to me the current position Abbeycrest, the largest jewellery company in the UK.

The company has had a torrid time for the last couple of years but having survived the walk over the hot coals is in a very strong position to take advantage of the changes the management has made. Richard very openly explained, ‘G & A, the groups UK sales and distribution company and its largest subsidiary, experienced a significant decline in sales in 2005. Although this mirrored the overall decline in the UK jewellery industry this had a direct impact on the performance of the group and was a major factor in the need to seek new banking partners”.

For the year ended 28th February 2006 Abbeycrest Group turnover reduced by 15.0% to £70.2m. Loss before taxation on continuing operations was £7.1m (2005 - £0.1m). Loss before taxation and exceptional items was £3.6m (2005 - £1.5m profit).

The June 2006 London Stock Exchange Announcement made for difficult reading by Abbeycrest shareholders, it continued, ‘The Company has completed the disposal of the Group's Leeds headquarters for a gross consideration of £3.3m. The company refinancing was contingent upon the disposal taking place. The company has repaid its existing facilities to HSBC. Burdale Financial Ltd has been appointed as the Group's ongoing bankers. Burdale has provided a £33m facility which will be available for the Group's UK operations and is secured on the Group's debtors and inventory.'

Michael Lever, Abbeycrest Chairman explained, ‘The overall state of the jewellery market in the UK has been, and remains, extremely challenging. The UK Assay Office statistics have not improved. The weight of gold hallmarked in the calendar year 2005 was 25% lower than 2004.

As well as the general downturn in discretionary spending in the UK retail sector, a major factor in demand has undoubtedly been the extraordinary rises in gold price experienced over the last twelve months. At the time of writing, June 2006, this has risen 50% in the last year. Whilst this obviously makes stockholding more expensive to fund, it also has a negative impact on demand as retailers and end customers scale back spending.

Other points made in the announcement covered the transfer of the business of DRT Jewellery Ltd to its management, the halving of the sales force in January 2006 and the ceasing of 18ct jewellery production in Leeds.

The announcement finished by saying that sales levels since the time of the statement were broadly in line with internal expectations. On an optimistic note a jewellery trial with a major UK retailer had progressed to roll-out phase. ‘The Group is now much leaner and is operating on the substantially lower cost base target identified prior to the restructuring.'

Richard explained the simplified structure of the group where by in the UK G & A, B & N and Eric's retail all operate autonomously with their own management teams and business objectives. Abbeycrest Thailand, developed as a primary supplier for G & A also has the capability to deal with 3rd party customers worldwide and this is seen as a significant growth area.

G & A

As previously noted G & A suffered particularly badly in the year ending February 2006 and was responsible for all the group's trading losses. In an extremely difficult marketplace and against the background of a generally depressed retail environment the company was unable to keep costs in line with the shortfall in sales and the resulting loss served as a sharp wake up call for the business. In October 2005 a full structural review was carried out within G & A which resulted in significant reduction in the workforce and overhead spending.

Whilst carrying out this rationalisation programme the business undertook a full review of how it worked and developed relationships with its customers and came to the conclusion that whilst the market had been tough, G & A's inability to weather the storm was driven by inherent weaknesses in its operating model. Richard takes up the story, “G & A's success in the past was built on great product, great service and great value, when we looked critically at what we were doing we came to the conclusion that we had lost the edge in all these crucial areas and this was the fundamental reason that the business had been unable to respond positively to difficult market conditions. We set out a plan to reverse this trend and over the last few months have seen this impact directly on our trading performance, which is in line with our internal expectations.”

One of the key areas the company recognised was market sector differentiation. As market leader G & A has a presence in all areas of the market and having talked and listened to its customers determined that a key weakness was a failure to recognise the different requirements of each market sector. This led to mediocre performance across the board, whilst at the same time being vulnerable to attack from smaller niche competitors.

The business is now developing 3 specific business areas, Independent specialists, multiple specialists and general retailers. This means tailor made business models for each sector clearly identifying and addressing the key requirements to be successful. Building on the core values of great product, great service and great value G & A aims to reclaim its position as the number one choice for all jewellery retailers and promises that customers will see the impact of this quickly.

Abbeycrest Thailand Limited

Formed in 2003 to carry out assembly work on component kits supplied from the UK, Abbeycrest Thailand has rapidly become a key element in group strategy going forward.

Such was the success of this business, with a commercial office in Bangkok and a 7000 square metre manufacturing facility in Lamphun, Northern Thailand that the group took the decision to merge it with Essex International, the gemset manufacturing business acquired in 1998 and with factories in Bangkok and Thailand. This was completed in May 2005 and in June 2005 the remaining production processes from G & A Birmingham were transferred to Abbeycrest Thailand.

Abbeycrest Thailand offers the group tremendous potential as a primary supplier to G & A with the capability to deal with 3rd party customers worldwide, including direct import to UK customers who prefer to work in this way. Richard believes that this gives the group a tremendous advantage in the UK and outlined a model where by UK customers will be supported by a UK “front end” with sales and product development expertise but all orders would be made and shipped direct from the factory. He says, “ Our aim is to make it easy for our customers where by they would get the benefits of dealing with an off shore supplier without the risk. Obviously this wouldn't suit everybody, but for customers who already deal direct or are looking to do so it offers a more effective alternative.”

Abbeycrest Thailand employs 208 people in the gold jewellery factory and 500 in the gemset factory. Under the management of a combined local and ex pat management team with seamless communications links to the UK it has the potential to produce 3 million items of gold jewellery per year and 1 million pieces of gemset jewellery per year employing the most up to date manufacturing equipment and processes. Whilst the investment in Thailand forms a substantial part of the group's exceptional losses in 2005 Richard believes that the business provides the platform for future growth and the return to profitable trading.

Brown & Newirth

Richard spoke about the specialist wedding ring maker and the effect on the balance sheet, “B&N has not been immune to the overall downturn in the market with both sales and margin suffering such that cash gross margin was some 11% lower than the previous year. However I am pleased to say that trading for B&N in the 2006 wedding season has been very pleasing, representing an uplift on the previous year and B & N remains the strongest performer of the group.”

Finally Richard commented, “During the past year, we have completed the final stages of a fundamental restructure of the Group and also incurred the added complication of delivering the rebanking process. Our management and staff have risen magnificently to these challenges and we now a business operation in far better shape going forwards, they deserve our thanks and great respect for their achievements in this period. Our costs have been reduced dramatically and this has put the Group in a good position to cope with challenging trading conditions. I would also like to thank all our customers and suppliers for their unanimous support during a difficult period, it has been much appreciated and we are looking forward to being able to devote our energy to growing the business and restoring G & A to it's rightful place as the UK's number one jewellery supplier.”