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.
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