The Sunday Times - Business
This is the transcript of an article in
the Sunday Times newspaper of 14th March 2004 related to the turnaround in
fortunes of the Hornby Company
March 14, 2004
Hornby starts to pick up speed with expansion.
The hobby company has made a remarkable recovery.
Matthew Goodman reports on its range of strategies for building on its success
HARRY POTTER, that hugely popular young wizard, has worked his magic in many
places, but perhaps most of all at Hornby, the model-railway company. When the
group's chief executive Frank Martin arrived to take the job in January 2001, he
was horrified to discover that Hornby had rejected an opportunity to acquire a
licence to produce a Potter-inspired range of model trains.
His first big task was to persuade Warner Brothers, producer of the Harry Potter
films, that there had been a terrible misunderstanding and that, of course,
Hornby wanted very much to market the Hogwarts Express.
"I could not believe we had turned it down," said Martin. Within four
months he had convinced Warner Brothers that Hornby was the right firm to have
the licence and a contract was signed. The deal has paved the way for the
renaissance of a much-loved British institution, which also makes the Scalextric
slot-racing car system.
Under Martin's tenure, Hornby's share price has risen dramatically. When he
slipped into the driving seat they stood at 140.5p. Today, they stand at
£10.30, valuing the business at £74.6m.
Sales and profits have soared as costs have been cut and new products have taken
off. In the summer of 2001, when Martin delivered his first set of annual
results, Hornby made £1.5m pre-tax profits on sales of £24.6m. Last year,
those numbers had climbed to £5.4m and £34.1m, and the City expects to see
further growth when the 2004 figures are unveiled in the summer.
Last Monday marked another milestone in Hornby's recovery. It announced that it
had made an ¤8m (£5.4m) offer to buy the assets of Lima, an Italian rival that
is in liquidation. Lima owns a number of market-leading model-railway brands,
including Rivarossi and Jouef, as well as the eponymous toy-train marque. If the
deal goes ahead it would be Hornby's first overseas acquisition and could smooth
the way for further international deals.
Martin is confident that, having sorted out Hornby, he can work his own brand of
wizardry on Lima. In particular, he said the experience gained from the painful
decision made several years ago to move Hornby's manufacturing operations from
Britain to China will help if he succeeds in buying Lima's assets.
"We don't expect Lima's sales to recover to their former levels overnight,
but it is a fairly straightforward logistical challenge that we have dealt with
before," said Martin.
He expects to move Lima's manufacturing operations to China, starting with the
equipment needed to make the company's most popular models.
"This is not a sales and distribution challenge," added Martin.
"The market has been starved of product so there will be a demand for it.
The focus will be on getting production running in China."
Hornby's move to China - a process that started some time before Martin's
arrival - has had one unexpected benefit recently. Hornby's costs there are
accounted for in dollars so the strong pound has made a significant contribution
to the bottom line.
That should continue this year and next, but after that the outlook is less
certain. The start of a carefully thought-out acquisition strategy may help to
offset any potential weakness if the dollar hardens.
Martin said there are a number of rivals around the world that he might want to
add to the Hornby depot. "I keep a very close eye on opportunities
worldwide. We have the chance to build, over time, a global leader in the model
and hobby industry."
He noted that unlike the mainstream toy industry, which is dominated by Mattel
and Hasbro, no one company has that kind of presence in the hobby market.
One reason for buying Lima is the opportunity to sell the Rivarossi brand in
America. "Putting that through our distribution system in the US would give
us a step change in momentum and ability to develop."
Scalextric is already popular there, but Hornby's model railways have not
exactly been moving full steam ahead. Martin favours the cautious approach.
"We are in no rush over there. We are growing quite nicely. Our policy is
to sell only to independent model and hobby retailers. By doing that, it makes
us less exposed to the likes of Wal-Mart and K-Mart, which might take huge
deliveries one year and nothing the next, or slash the prices."
This softly-softly approach is not wholly endorsed by the City. The worry
persists that independent retailers are only too pleased to stock products that
are in vogue but are quick to drop them as soon as sales start to tail off, a
problem experienced some years ago by another British hobby company, Games
Workshop.
Ian Berry, a small-companies analyst at Durlacher, a broker, said: "The US
is a big opportunity for Hornby but, on the other hand, they have still got to
really crack it - and that is easier said than done."
Analysts think Martin has got it right in one area - the renewed focus on
product innovation. A recent success for the company has been the launch of a
steam-driven model locomotive, and this spring Hornby will unveil a motorbike
version of Scalextric. The acquisition of licences to make products tied to film
and television characters, such as Harry Potter, has also been a boon for the
company.
Last year, a micro-Scalextric set, which allowed players to race characters from
The Simpsons, proved a surprise hit, and the company is also producing
Scalextric cars based on this weekend's big movie release, Starsky & Hutch.
That follows last year's tie-in with the remake of The Italian Job, which helped
to create an aura of cool for what is a pretty mature product.
Martin said: "The point underlying all this is that these are high-profile
products. When someone buys a set like that it gets them into our system. They
might go and buy more cars, more track, more accessories. And with Harry Potter,
we hope that the kids who buy it will turn it into a lifetime hobby."
Martin admitted that he was not a model-railway fan when he was a boy. He said
this was not a "particular handicap" in holding the top job at Hornby.
"Sometimes it is helpful not to be too close to the hobby," he said.
But he conceded that a lack of genuine enthusiasts had in the past been a
hindrance.
"One of the things I was concerned about when I came into the
business," said Martin, "was that although we had a good team of
people who were passionate about what they did in creating models and making
them, we did not have people who were true model-railway or Scalextric
enthusiasts in their own right.
"We brought in a number of people who have a real passion for the two
hobbies and are able to communicate on equal terms with guys out there who are
enthusiastic about them. The business tended to make great products and sell
them to retailers and have less connection with the customers."
Although Hornby seems to be on track, analysts think its share price is likely
to mark time for a while. "The stock price is up with events," said
one.
That could change if investors clamber aboard as the model-railway company's
international journey begins.