Hornby's financial updates to the Stock Market

[Coryton]

I think the advice point is, in part, also met by the Internet. I caveat with the line that not all people use the web but for me, and a lot of other people, my first thought if I have a modelling query is to post a question here and often get best in class advice from the users here.

 

 

Indeed. If I walk into a model shop and ask a question, I have no way of knowing if the person behind the counter knows what they are talking about. I'm sure we've all had the experience of a customer in a shop being confidently told something that is wrong.

 

But on here if someone comes out with questionable advice someone else is likely to wade in, and in some cases you can see from blogs/other posts that the person clearly knows what they are talking about in any case.

 

Not that I want to see model shops vanish...

 

 

[The Stationmaster]

The worrying thing is that some of the sale items are not slow sellers from previous years but very recent releases, such as the TTS 40164 which only came out at the end of February.

 

But that takes us very precisely to the likely starting point of this clearance like sale.  There has been plenty of evidence, even recently in this thread, that for various reasons but principally the risk of being undersold, retailers hung back from ordering from Hornby in the traditional way in January (which might also have had something to do with the big sales dip Hornby experienced?).  Thus potentially what was in stock and would have gone out fairly quickly after January ordering didn't move which made it into a debt and cost hanging round Hornby's neck - so the obvious thing to do is get rid at a still profitable price.

 

The 'King' I bought from Kernow last week is another recent introduction - maybe retailers would have ordered at c.£150 if they knew Hornby wasn't going to start selling them online at half that price?  But from recent past examples they couldn't be sure that would not happen, so play safe and don't or only order new 2016 items because they should sell on or shortly after they hit the shelves.

[adb968008]

But that takes us very precisely to the likely starting point of this clearance like sale.  There has been plenty of evidence, even recently in this thread, that for various reasons but principally the risk of being undersold, retailers hung back from ordering from Hornby in the traditional way in January (which might also have had something to do with the big sales dip Hornby experienced?).  Thus potentially what was in stock and would have gone out fairly quickly after January ordering didn't move which made it into a debt and cost hanging round Hornby's neck - so the obvious thing to do is get rid at a still profitable price.

 

The 'King' I bought from Kernow last week is another recent introduction - maybe retailers would have ordered at c.£150 if they knew Hornby wasn't going to start selling them online at half that price?  But from recent past examples they couldn't be sure that would not happen, so play safe and don't or only order new 2016 items because they should sell on or shortly after they hit the shelves.

 

 

The majority (not exclusively) issue that I read here is that Locomotives are discounted ad-hoc and at varying degrees of age since release.

I don't see people complaining about anything else.

 

Maybe Hornby should consider a split sales model.

The "business as usual" lines... stuff that sells regardless (track, wagons, buildings etc etc) put them to the trade as normal.

 

Low margin / High Value lines such as Locomotives, upon release exclusively sell direct from Hornby. Then if there are lines that are slow selling they can release them at the kinds of discount we are seeing in this instance, to the trade later.

 

That way Hornby can regulate the discounting, maximise their initial sales margin at the time of release, then still supply to the trade at a discounted price which gives them a good margin, access to lower priced models. (I know dealers will moan at not getting the latest release New now, but this way they are not adopting any risk of being undercut later nor are they being beaten by competition and discounting on a new release either but still getting stock to the shelves), finally they are getting a larger margin than they are currently.

 

It gives the consumer a choice, the "must have nows" buy direct, those prepared to wait, can buy from the dealer network later.. indeed this actually encourages people to goto the shop.

 

Of course the common denominator here is if there is stock left over, that needs to be sold off, there must be too much of it made or the price too high.

Edited May 8, 2016 by adb968008

[Pete47401]

I don't know where your shop is so I don't know your rep but we certainly had an email from our rep with a list of discounted items recently.  We took the decision not to order anything from it mainl because we have existing stocks of the items on the list, apart from those items we would never sell in a month of Sundays (or any other day come to that).  We've also recently received another offer to coincide with the Toymaster show, but again this came directly from our rep not Hornby Sales.  As I have said before on this forum I can only speak for us as Wicor Models but having dealt with Hornby for the best part of 20 years we have never had any real problems or quibbles and if there has been an issue it has been dealt with promptly (except on one recent occasion but that is not for public consumption yet - too soon!).  We have been assured by our rep and his managers that the retail trade is an important part of Hornby's ongoing business plan and nothing that I have seen makes me think otherwise.  Despite some of the doomsayers above shops are a vital component in he UK economy and the percentage of internet sales is very small compared to shop sales nationally.

 

That may explain it then, as we don't have a rep! We had one until last year until they parted company with him (West Midlands area, though the shop such as it is... more of a market stall these days, another long story and not a very happy one... is East Midlands, maybe covered by another rep, but we were allocated by our mail order/invoicing address), last I heard they were recruiting a replacement but he's not yet made himself known to us (if he exists).

 

I agree that they were always good and professional to deal with, certainly the best of the model companies we deal with... we have dealt with them for almost as long as you have, about 16 years. Quality control/margins/loss of some good customers/price increases have combined to reduce our purchases with them, rather than anything specifically malicious/incompetent they've done that was aimed at us particularly.

[Ozexpatriate]

... we don't have a rep! We had one until last year until they parted company with him (West Midlands area...), last I heard they were recruiting a replacement but he's not yet made himself known to us (if he exists).

Lower than usual retention in the direct sales channel is inevitably connected with regime changes and changing channel strategy. This has been yet one more trial for the independent retailers over the last few years.

Edited May 9, 2016 by Ozexpatriate

[Porcy Mane]

Lower than usual retention in the direct sales channel is inevitably connected with regime changes and changing channel strategy. 

 

Could you translate that from Corporate Speak into English please.  

 

P

[Ozexpatriate]

Could you translate that from Corporate Speak into English please.  

Sorry. I'm trying not to be rude or specific to the individuals involved and the corporate speak makes that easier.

 

When management changes (either personnel or policy) particularly when they also make changes that can impact the commissions that sales people get paid, then there's often an increase in the number of sales people who quit, or they stay in specific job assignments for shorter periods.

 

Customers (in this case the retailer) end up feeling like there is a 'revolving door' of sales people, none of whom are likely to be as good as someone who held the position for some years.

Edited May 9, 2016 by Ozexpatriate

[Pete47401]

Lower than usual retention in the direct sales channel is inevitably connected with regime changes and changing channel strategy. This has been yet one more trial for the independent retailers over the last few years.

 

The reps had their own allocation to sell... if someone asked you to order something that was shown as in stock with Hornby and the rep had sold out of his share but Hornby themselves still had it for the website sales, you could not get it! How does that look to the general public, Hornby is Hornby to them, they don't care if one bit of Hornby won't share with another bit of Hornby because of some inflexible system! Result disappointed retailer and disappointed buyer.

[davknigh]

Once upon a time there was such a thing as loyalty, to a company, to staff, to customers and from customers. Today's business model does not seem to factor loyalty into any equation and as a result the only 'loyalty' seems to be to the lowest price/maximum profit. IMHO we're all the poorer for it.

 

Cheers,

 

David

[Ron Ron Ron]

Once upon a time there was such a thing as loyalty, to a company, to staff, to customers and from customers. Today's business model does not seem to factor loyalty into any equation and as a result the only 'loyalty' seems to be to the lowest price/maximum profit. IMHO we're all the poorer for it.

 

Cheers,

 

David

 

 

Sorry David, I think that's idealistic nonsense.

The business environment today may be a colder, harder place, but business has always been business and the bottom line has always been the ruling factor.

 

 

 

.

[grahame]

The business environment today may be a colder, harder place, but business has always been business and the bottom line has always been the ruling factor.

 

Loyalty can and does help the bottom line.

 

Loyal customers mean more repeat sales. Plus it is always cheaper to retain customers than go out and find new ones. And loyalty to staff means more efficient and effective staff and a lower staff turnover with lower recruitment and training costs.

 

Many current businesses seem to forget that and the current management dogma is often to treat staff and customers like dirt.

 

G.

Edited May 10, 2016 by grahame

[34theletterbetweenB&D]

Once upon a time there was such a thing as loyalty, to a company, to staff, to customers and from customers. Today's business model does not seem to factor loyalty into any equation and as a result the only 'loyalty' seems to be to the lowest price/maximum profit. IMHO we're all the poorer for it...

I would claim there is a serious error in that statement. It's a rare business that has any loyalty to end customers beyond their strict contractual obligation. Hobby businesses tend to operate at the better end of the spectrum; because these are highly discretionary purchases rather than necessities.

 

Test it if you will. Explain that you have been a loyal purchaser of their product for 10, 20, 30 years, but are a litle skint for the next couple of years,and would they mind supplying your wants and wait for the cash until you are in funds again? Oh no, it's a strictly commercial relationship, you find the cash, we supply...

 

I had my eyes opened to this when I was about 20, and that was pretty much it for loyalty from me as a customer to any business, retailer or manufacturer. (Just one solitary exception, Hyperion Records founded by the late Ted Perry. While he lived I bought what was produced without question because he was manifestly doing it for love, as well as to make an honest living. I doubt I shall meet his like again in my lifetime.)

[Ian Hargrave]

And made some immortal recordings into the bargain....particularly of the human voice in all its beauty whether in choral or solo form.

[Ron Ron Ron]

Loyal customers mean more repeat sales. Plus it is always cheaper to retain customers than go out and find new ones......

 

With regard to Hornby and loyalty from customers. 

How does that work?

Surely it's a simple case of the customer liking or wanting a particular model, or not wanting that model. I can't see how any sense of loyalty comes into it.

Who buys models they don't want out of some sort of loyalty to a model manufacturer?

 

As for past custom, i.e. buying lots of product from a company over many past years, it doesn't count for one jot as far as their present day income is concerned.

The returning customer factor only comes into play if they can offer you something you will want to buy..

 

 

.....And loyalty to staff means more efficient and effective staff and a lower staff turnover with lower recruitment and training costs.

 

Many current businesses seem to forget that and the current management dogma is often to treat staff and customers like dirt.

I don't see any suggestion anywhere that Hornby are treating their staff in such a way.

 

 

.

[grahame]

 

Test it if you will. Explain that you have been a loyal purchaser of their product for 10, 20, 30 years, but are a litle skint for the next couple of years,and would they mind supplying your wants and wait for the cash until you are in funds again? Oh no, it's a strictly commercial relationship, you find the cash, we supply...

 

That is a silly example - asking for free goods for several years.  

 

But many companies do try to engender loyalty by giving a discount for repeat purchases, vouchers with each purchase that add up an provide a free cup of coffee or whatever, provide best prices for annual renewals to existing customers, loyalty cards that entitle a discount, and so on. My local curry house gives a sticker for each curry purchased that entitles you to a free one when you've collected half a dozen. Petrol companies have offered various collections, Waitrose gives coffee, Macdonalds have schemes, and so on . . .     

 

Ones that haven't like banks and insurance companies, who offer their best prices to new customers, have found existing customers ditching them at an alarming rate and playing fast and loose with their loyalty.

 

G.

[rue_d_etropal]

this does seem to have generated a lot of discussion, but I still don't think most people actually appreciate how much money gets tied up in the average retail shop.

How often do you find model shops successfully changing hands, most will shut down and sell off remaining stock at clearance prices. Years ago it was possible to sell a business. The shop I ran(?) was on its 3rd and final set of owners, but it was pretty obvious it could not continue .

One of the biggest problems over the past 10 years is not the increased price, but actual availability. I had been suggesting ideas for groups of modellers to club together to start up a shop, but there is no point if it can not get the models. I am not talking about the items which probably keep the shop going, the boring things like track, rail joiners, wood, metal, plastic, paint and glue, but the glamorous items such as locos. Getting the latest locos is essential, not for the profit on them, but to draw people into the shop. If it is difficult to get those then it is difficult to get people into the shop.

That comment about quality of advice in a real shop. I have a broad base of knowledge, and I used to find that my customers appreciated that. I also did try to find out and try out things I knew less about, such as electrofrogs and DCC, so I could then advice based on real experience. There might be plenty of advice available online, but I would question some of it. I would rather talk to someone at an exhibition or in a shop who can show that they have actually done what they are talking about. As well as the doing, I observe, I observe how well models run, I observe how others look at layouts.

I mention exhibitions, which are becoming even more important as alternative to real high street  based shops, but trade is still being viewed by some as a source of income, not an attraction in its own right. It is also not helped that some companies won't supply these traders, simply because they do not have a real shop, but they are becoming the majority in the market. There does need to be a good look at the way trade is actually done. A balance between real and virtual is necessary.

[grahame]

 I don't see any suggestion anywhere that Hornby are treating their staff in such a way.

 

.

 

I didn't say that had either, but I don't know for certain - do you?

 

However, I understand that they have treated some of their customers (retail shops for example) pretty shabbily.

 

G.

[grahame]

 

With regard to Hornby and loyalty from customers. 

How does that work?

Surely it's a simple case of the customer liking or wanting a particular model, or not wanting that model.

 

.

 

It's far more complex than that. Without doubt there is a higher propensity for loyal customers to purchase products from a preferred manufacturer. You need to do a little studying and reading to understand - don't really have time to explain it to you.

 

G.

[Ron Ron Ron]

It's far more complex than that. Without doubt there is a higher propensity for loyal customers to purchase products from a preferred manufacturer. You need to do a little studying and reading to understand - ...

 

I fully understand the concept Grahame, I do not need to read or study it; but I fail to see how this is relevant to Hornby's current predicament.

 

 

don't really have time to explain it to you.

Thank you for sparing us all......

 

 

.

[adb968008]

I would claim there is a serious error in that statement. It's a rare business that has any loyalty to end customers beyond their strict contractual obligation. Hobby businesses tend to operate at the better end of the spectrum; because these are highly discretionary purchases rather than necessities.

 

Test it if you will. Explain that you have been a loyal purchaser of their product for 10, 20, 30 years, but are a litle skint for the next couple of years,and would they mind supplying your wants and wait for the cash until you are in funds again? Oh no, it's a strictly commercial relationship, you find the cash, we supply...

 

I had my eyes opened to this when I was about 20, and that was pretty much it for loyalty from me as a customer to any business, retailer or manufacturer. (Just one solitary exception, Hyperion Records founded by the late Ted Perry. While he lived I bought what was produced without question because he was manifestly doing it for love, as well as to make an honest living. I doubt I shall meet his like again in my lifetime.)

Once upon a time there was such a thing as loyalty, to a company, to staff, to customers and from customers. Today's business model does not seem to factor loyalty into any equation and as a result the only 'loyalty' seems to be to the lowest price/maximum profit. IMHO we're all the poorer for it.

 

Cheers,

 

David

I thought that's what the collectors club was about, with its discount and exclusive models.

 

Years ago they used to put little wheels on the tongs of the ends of the orange boxes, collect enough you got an 86414 Frank Hornby at a discount.

Edited May 10, 2016 by adb968008

[Coryton]

The reps had their own allocation to sell... if someone asked you to order something that was shown as in stock with Hornby and the rep had sold out of his share but Hornby themselves still had it for the website sales, you could not get it! How does that look to the general public, Hornby is Hornby to them, they don't care if one bit of Hornby won't share with another bit of Hornby because of some inflexible system! Result disappointed retailer and disappointed buyer.

 

Reminds me of an experience a few years ago where the university I worked in offered an exclusive interview to BBC breakfast. The university was then contacted by the 10:00 news (or whatever it was then) but had to say no. While the breakfast people were there I heard one of them on the phone selling rights to the interview to News 24...

[davknigh]

Sorry David, I think that's idealistic nonsense.

The business environment today may be a colder, harder place, but business has always been business and the bottom line has always been the ruling factor.

 

 

 

.

Idealistic? Perhaps, but while I won't dispute your assertion that the bottom line has always been the guiding light for commerce there are still a few of us that like to be treated like human beings either as employees or customers. A company that deals in an humane fashion with dealers, customers and suppliers will always get my business above one that treats all of the above like a cashpoint. True, we live in an age where mindless consumerism seems to be the way of things but there are signs that there are limits to what people will endure and it will be the companies that can make a personal contact who will be more likely to survive.

 

Cheers,

 

David

[Legend]

Service and keeping price increases to the minimum do it for me. But it's all about perception.

 

I'll give you an example. I bought my parents an iPad to keep in touch with them. They hardly used it , but after a year the blue screen of death appeared. Just out of guarantee. So off down to Apple Store to see how much cost to repair. Imagine my surprise when the tech guy said, it's the blue screen of death, it'll take me a while to figure out what's wrong, it's just out of guarantee, how about I offer you a replacement instead. I was gob smacked! As a result my next phone was an iPhone and seriously considering iPad pro to replace my existing iPad . Yes they are expensive but it encouraged customer loyalty and overall I felt it value for money. Parting with money was turned into a pleasurable activity! The whole thing was very slick. You can tell the difference buying direct from Apple rather than through Dixons, where you are more likely to know more about the device than the assistant.

 

Contrast that with companies that put up prices 20% pa , even for superannuated mouldings. Just get the feeling of being exploited. Def not value for money as a result now haven't bought anything from them for a year.

 

I remember when younger being engrossed in the Hornby Catalogue , a great marketing device, extolling the virtues of Triang -Hornby and later Hornby. The total system. I think Hornby haven't quite realised the effect their Catalogue/Year Book shambles on overall customer loyalty

Edited May 10, 2016 by Legend

[MarkSG]

Just to dip back in here with some comments on pricing, and in particular the question of whether reduced prices mean selling at a loss.

 

Firstly, an important point to bear in mind is that, at manufacturer level (or even retailer level), you don't reckon cost at individual item level. You reckon cost at batch level. In Hornby's case, it's the cost of a container load. You can, of course, divide that by the number of items to get an average cost per item, but that's not at all the same as saying that they each individually cost that much. So you can easily sell individual items below the average cost and still be profitable.

 

Let me illustrate that with a worked example, using convenient round numbers for the sake of simplicity. Suppose a widget manufacturer introduces a new line of widgets, we'll call them the R999 model. The initial R&D followed by the first manufacturing run of 1,000 widgets costs the manufacturer £100,000. That's an average of £100 per widget. So, what's the best selling price for them? (Again, for the sake of simplicity, we'll assume we're selling direct to consumers, as that makes it easier to visualise, but the principles remain the same when retailers, or even wholesalers, are added to the equation).

 

You could say that 50% markup is reasonable, so the retail price should be £150 per widget. If all of them sell at that price, then the manufacturer will make £150,000 on the batch - a profit of £50,000.

 

However, not all customers are equally well off. Some will consider £150 for a nice new widget to be little more than pocket money. Others will struggle spare that amount. And not all customers are equally motivated. Some of them could really use this particular widget, and are willing to spend what it takes to get it. Others see it as a "nice to have, but not really a priority" potential purchase. 

 

Let's make another simplistic assumption, this time that there are approximately 1,000 potential purchasers of the new widget, and they divide approximately equally between those who are willing, able and indeed eager to buy it, and others who will hmmm and haw about it.

 

If the initial selling price is £150, then by the time the first group of 500 customers have snapped it up then the manufacturer will have made revenue of £75,000. That hasn't covered costs, so, even though each individual model has sold at above its nominal cost, the manufacturer has still made a loss. So far. If we don't do anything about the price, though, this is where it stays.

 

The obvious solution is to now reduce the price. Let's say that the second group of people are willing to pay no more than £100 for it. Drop it down to that, and the rest sell. Total income is now £125,000, meaning a profit of £25,000. Not so good, but tolerable.

 

But wait. Some of those people in the second group are even more impecunious, and won't buy until the widget really is in the bargain bucket. So if we never go below £100, we'll never sell all 1,000 widgets. And some in the first group really aren't price sensitive at all. They appreciate the quality, and are willing to pay for it.

 

So let's go back to the start. The initial retail price of the R999 widget is £200 - a 100% markup.

 

The non price sensitive enthusiasts will still buy it. Let's say we sell 250 at that price. Revenue so far, £50,000.

 

Once those sales dry up, it's time to lower the price. We can drop it now to £150. We already know that will sell another 250 of them, as these are people who would have bought it immediately had the price started at that. So that's another £37,500 in the pot, or £87,500 in total.

 

Now we're at the point where we were before, when we had to lower the price the first time round. So let's do it again, and down to £100 once more. Another 250 sell, adding £25,000 to the kitty. Total revenue is now £112,500. Which takes us into profit - not by a lot, but we're there.

 

So, finally, we drop the price again - this time, down to £75. And that clears out the remaining 250, adding £18,750 to the pot.

 

The total revenue, after all that, is £131,250. Meaning a profit of £31,250.

 

That's less that we would have earned, had we sold all 1,000 at £150. But we already know that wouldn't have happened. If we'd never dropped the price, we would only have sold 500 of them, and ended up making a loss. And, despite the fact that we sold 250 of them at below the nominal cost price, we still made more in total than if we'd started off at £150 and dropped the price to £100. Those final, low price, sales were not "below cost" at all, because by then the costs of the batch had been met. They were the icing on the cake, some additional sales from people who were never going to pay the higher price but could be tempted to pay a lower one.

 

 

-------

 

The reality is that successful retail pricing takes these factors into account. In order to maximise the value of a fixed batch of products, you have to maximise revenue from those willing to pay a higher price before expanding your market to those who will only pay a lower price. If you never reduce the price from the higher value, you'll never get the second (or third, or fourth) of customers with thinner wallets. But if you start at the lower value, you'll miss out on all the extras money that your richer customers would have been only too willing to pay you. (There's a technical term for this, "consumer surplus", and misjudging it is one of the biggest causes of financial failures in retail-market companies). The only effective solution is to have a multi-price strategy that aims to cream off as much early value before lowering the price to sell to the remaining, more price-sensitive market.

 

This is precisely what Hornby are doing, and this is also precisely why financial analysts have a positive opinion about their future (and why their bankers are willing to extend the terms of the loans). To be sure, there may well be other issues relating to their relationship with their retail and wholesale distribution chain. But their pricing strategy is spot on.

 

------

 

Another point worth making here. When people see price cuts, particularly deep ones, many of them react by saying that this is proof that the item was originally overpriced. In reality, the opposite is the case. If the price is never reduced, then it was too low to begin with. Which illustrates another common scenario facing manufacturers and retailers. if a product isn't selling (or was selling, but sales have tailed off), you can always give it a boost by cutting the price. But if it's selling like hot cakes, then it's a lot harder to raise the price without generating significant consumer opposition. So it's always better to start with the price a tad too high, and then cut it if necessary. And if you find you didn't need to cut it this time, then for the next new item in your catalogue try a higher starting price. In the long run, the market decides the price.

 

------

 

(Just as a final point, before anyone comments on it, this strategy doesn't apply so much to items in continuous production - like bread - or to special commissions sold on pre-order. There are pricing strategies for these, but they bring a different set of variables into play.)

[RJS1977]

But what happens when the people who've been happily paying £200  start to cotton on that if they wait a while, they could buy 2 for £200 and stop paying full whack when they first come out?

 

And how many potential purchasers on the other hand turn away when they see the £200 price and aren't around to see it drop to £75?