Hornby's financial updates to the Stock Market

[Bernard Lamb]

Such a system is too rigid for the variable market that Hornby are in. It causes them a lot of pain as predictions (estimates) will be rarely correct meaning that they either fail to make enough to meet demand or they over produce. This approach will eventually kill the company especially at a time when great variety is the mode.

So, what is the alternative?

If you are in control of production as Hornby were when it was in house, then prices will rise significantly.

The lesser of two evils is to under produce, that way lies maximum potential profit but some lack of goodwill with the customers.

This approach seems to be the way of the modern world and not just the world of model trains.

There are far larger companies than Hornby who are adapting to it and getting their clients on board in accepting it as a best compromise.

Would pre orders 2-3 years in advance be better?

Probably the best next viable alternative.

Bernard

[Andy Hayter]

Such a system is too rigid for the variable market that Hornby are in. It causes them a lot of pain as predictions (estimates) will be rarely correct meaning that they either fail to make enough to meet demand or they over produce. This approach will eventually kill the company especially at a time when great variety is the mode.

From a customer perspective, you are right it is too rigid.

 

The saving grace is that with the exception of Bachmann, every other main stream producer is in the same rigid straightjacket and Bachmann have their own problems that means as of now, Hornby look to be very reactive to the marketplace. When/if Bachmann resolve their issues, then there could be a problem for Hornby, but by then they may have built up relationships with their producers that will give them some flexibility in production numbers.

 

But in the final analysis, it may not matter that much, since despite the obvious commonality of both companies producing 00 gauge models, in most areas for a modeller there is no competition. If you want a Peckett it comes from Hornby. If you want an L&YR 2-4-2T it comes from Bachmann. I think there are relatively few modellers who would buy the other one in the absence of their first choice.

[Silver Sidelines]

Not quite sure what you are saying

 

.. with the exception of Bachmann, ..

Surely the big difference is that Bachmann are still in control of their own production.  If I am correct with this guess then they have a little bit more leeaway on adjusting when and how many they produce.  Must be better than this sub contract business?

 

Ray

[Andy Hayter]

Not quite sure what you are saying

 

Surely the big difference is that Bachmann are still in control of their own production.  If I am correct with this guess then they have a little bit more leeaway on adjusting when and how many they produce.  Must be better than this sub contract business?

 

Ray

That was exactly the point, Bachmann in theory have flexibility, but as I also said they have other problems at the moment which is limiting their ability to capitalise on that advantage.

[Coryton]

That was exactly the point, Bachmann in theory have flexibility, but as I also said they have other problems at the moment which is limiting their ability to capitalise on that advantage.

 

Not sure how much flexibility they have - they may own the factory (or rather the other way round) but I think Bachmann UK is pretty small fry so far as the factory is concerned.

[Hroth]

I had read that Bachmann have to compete for factory space and as their runs are on the small side, they get elbowed out by other profit centres who order product in rather larger quantities, which may explain some of the extended periods between announcement and delivery.

[Roy Langridge]

I had read that Bachmann have to compete for factory space and as their runs are on the small side, they get elbowed out by other profit centres who order product in rather larger quantities, which may explain some of the extended periods between announcement and delivery.

I can well believe that. Modern ways of working have each part of companies effectively being separate entites whch bid for work etc. from each other. This mainly stems from cost+ work (which still exists in places) and is a means of moving money about.

 

Roy

[Andy Hayter]

Well I am sure that Bachmann UK do not have absolute flexibility and cannot do whatever they want, whenever they want. I did not think I had implied that.

However, if they want to shorten or even cancel a run, I doubt that there is any penalty, except perhaps to their credibility.

Equally I would be surprised if, when they were able to put a strong case forward, they could not negotiate an extension to a run. But yes they would have to demonstrate the worth of that over the other projects in the plan.

 

In all of this we are not talking of making changes a couple of days before the run starts. There will be cut off points in the planning process and points of no return - for example once the orders have been placed with outside suppliers for materials.

 

Edit for typo

Edited January 15, 2017 by Andy Hayter

[RJS1977]

However I can't help thinking that in these days of pre-orders, the manufacturers ought to have enough information to be able to know if they need to extend a run well before it hits the shelves. i.e if the dealers pre-order books are getting so full that they can see they're going to have very few left for general sale, it's a good indication the dealers would be able to sell more if they had them available to sell. Particularly in the case of a completely new loco (like the Peckett), there are probably plenty of people like me who were waiting to see reviews etc of how one runs before ordering. Likewise there will be people who weren't going to buy one but seeing one in a shop/in a magazine changed their mind. Maybe the retailers aren't giving the manufacturers enough feedback on how their sales are going, maybe they are but the manufacturers aren't (or can't) act on it. Either way, having customers who want to buy a model but can't because they've all sold out isn't good for manufacturers, retailers or customers (but appreciated neither is having models that you can't sell).

[The Stationmaster]

However I can't help thinking that in these days of pre-orders, the manufacturers ought to have enough information to be able to know if they need to extend a run well before it hits the shelves. i.e if the dealers pre-order books are getting so full that they can see they're going to have very few left for general sale, it's a good indication the dealers would be able to sell more if they had them available to sell. Particularly in the case of a completely new loco (like the Peckett), there are probably plenty of people like me who were waiting to see reviews etc of how one runs before ordering. Likewise there will be people who weren't going to buy one but seeing one in a shop/in a magazine changed their mind. Maybe the retailers aren't giving the manufacturers enough feedback on how their sales are going, maybe they are but the manufacturers aren't (or can't) act on it. Either way, having customers who want to buy a model but can't because they've all sold out isn't good for manufacturers, retailers or customers (but appreciated neither is having models that you can't sell).

 

Which of course leaves Hornby in a right quandary.  in the distant past they ordered for manufacture quantities which would meet retailer pre-orders plus, probably an amount above that to take into stock.  Now we can forget taking anything into stock at their level (although retailers might do so) for the simple reason that they have identified the holding of stock as financial drain and overhead they wish to be rid of = good financial management of the business.

 

But what we don't know, and can but wonder about, is the extent to which they have to pre-otrder production slots before they know what the retailers want from them.  Now it could well be that the answer is that factory orders have to be placed before they know levels of demand so they might, especially in their present financial circumstance, tend to exercise prudence in the quantities they order.  Next of course we only have to look at their recent history and the appearance in the retail market of steeply discounted items to see that they have managed to get their numbers wrong and have ordered more than they could shift or were prepared/could afford to warehouse 'for a rainy day'.  So yet again they no doubt decide, very sensibly, to exercise caution in the quantities they order.

 

Overall their biggest problem is probably us - the end purchasers - because we are an easily swayed fickle bunch who can be put off purchasing for all sorts of, usually, minor reasons or might similarly suddenly decide to buy.  Part of it is down to trust and as a  'manufacturer'  if they gain our trust they might sell more because we, at the end of the chain. know it will be 'good'.  But it is still in some respects going to be guesswork for them.

 

Let's take a hypothetical example and say they announce a GWR 'Bulldog' in early condition or a Midland 2-4-0 of similar era - many will buy because of the novelty value and pretty liveries and some will buy because they 'need' such an engine.  But then there is a call for suitable coaching stock - so now what do they do and how many of each vehicle type do they make - the same number as the number of matching loco they sold, or more, or fewer - an d how do they establish what the demand is?  Not an easy job because all they have to go on area sales figures for the engine but they don't know whether that engine is in a showcase or working on a layout in need of suitable stock.  Look at the annual wishlist poll and the number of whatever which actually have votes running into four figures - none; the highest polling loco got 443 votes so by what factor do you multiply that number to turn it into a business case for research, design, and production?  Difficult job I think.

 

And one final thought - what we don't know (and might never find out) is how many Pecketts Hornby made for the three versions introduced in 2016.

[dibber25]

None of this takes into account what actually happens in China - that a 'factory' may simply be what we would call an 'assembly line'. From what I hear, start-to-finish production all in one place is not the way it works. There is increasingly, plenty of evidence that there are sub-contractors of sub-contractors producing parts which all have to be brought together in one place at the right time. A may own an injection-moulding machine, B a zinc-casting factory, C may turn out motors, D - PCBs and so on. Increasing the production quantity requires getting all these small operations to increase quantities at the same time, while each has pressures from other 'manufacturers' to prioritise the work for them. Think clothing, shoe or ceramic production methods at the turn of the 18th/19th century......(CJL)

[Legend]

It is fascinating stuff. One thing that just struck me as I peruse the catalogue is that there's no modern image trainset. The Pendolino and Eurostar sets are no longer there. They also make reference in the large A4 and A3 trainset that it's for people returning to the hobby. So it does look to me that the trainset market has changed and there is recognition that junior no longer wants a trainset . The sets are primarily steam locos with three coaches or beginners sets with 0-4-0.

[RJS1977]

But if they don't produce the train sets, nobody will buy them....

 

The number of families I see visiting the smaller exhibitions, and the number of people who ask me for advice about buying/building a model railway/train set for their children/grandchildren suggests that potentially there is still a market there. I think the issues are

 

(1) Price. As I mentioned in another thread, the cheaper-end products should have dropped in price when Hornby moved to China as production costs were lower, but they never seemed to. As a result, even the 0-4-0 and a couple of wagons type sets are pushing £100 RRP (yes, I know they're usually on sale for much less than that). Modern image sets cost more almost by definition. The preponderance of superdetail/premium price models in the Hornby range are also likely to put parents off. Someone walking through the ModelZone counter of WHSmith and seeing all the £100 plus locos is likely to think the hobby is too expensive and try to find a cheaper hobby for their children.

 

(2) I think the not-always-deserved bad press the real railways have might put some parents off buying models of contemporary trains.

 

(3) Limited follow-up items. There is very little in the Hornby range now which is aimed at juniors (and concessions etc don't tend to sell much in the way of accessories - Hornby or otherwise), so the trainset doesn't grow into a model railway in the same way mine did. So the train set remains a train going round in circles, which maybe lasts a year or so tops until the children get tired of it and it goes in the bin. Friends of the parents, who have slightly younger children, hear about this and don't buy one either....

 

Ultimately people can only 'return to the hobby' if they've already been in it - that flow can't continue indefinitely if children aren't getting into the hobby.

[Phil Parker]

(1) Price. As I mentioned in another thread, the cheaper-end products should have dropped in price when Hornby moved to China as production costs were lower, but they never seemed to. As a result, even the 0-4-0 and a couple of wagons type sets are pushing £100 RRP (yes, I know they're usually on sale for much less than that). Modern image sets cost more almost by definition. The preponderance of superdetail/premium price models in the Hornby range are also likely to put parents off. Someone walking through the ModelZone counter of WHSmith and seeing all the £100 plus locos is likely to think the hobby is too expensive and try to find a cheaper hobby for their children.

 

Hornby moved production to China a decade and half ago. I don't remember the prices but not sure it matters now how much or little they dropped. It was a long time ago.

 

A quick look at the Hornby website shows a Thomas set at £64.99 and Christmas set £54.99 - all well away from the £100 RRP you've quoted. The Thomas one is discounted further.

 

I'm not convinced that "we must think of the children" either. Looking at Facebook, there are plenty of adults buying train sets to get into the hobby. RMweb is not at all representative of most of the hobby in this respect. I suspect Hornby and others know where their market is thanks to some serious market research rather than best guesses on forums. If they don't then they won't be open for much longer...

[RJS1977]

I have seen sets of the types I have mentioned being sold on 'Half Price Sale' at £49.99....

[30801]

I have seen sets of the types I have mentioned being sold on 'Half Price Sale' at £49.99....

Like sofas. Try and find one at 'full price'

[jjb1970]

I can well believe that. Modern ways of working have each part of companies effectively being separate entites whch bid for work etc. from each other. This mainly stems from cost+ work (which still exists in places) and is a means of moving money about.

 

Roy

 

I worked for an employer where I used to have others in the company whinging because I charged them for telephone calls. I used to tell them I didn't like it either but if I spent 20 minutes on the telephone giving them advice then I had to log my time which was chargeable, like it or not. And in the energy business it was quite normal to buy services from external bidders because they bid below internal resources, for all that struck me as crazy I was held to account for my budget and I got no brownie points for spending money internally if it pushed my spend up.

[ruggedpeak]

Whether or not to sell direct is, I would think, a very difficult decision to make.

In Hornby's case the decision is problematic as the previous management built their entire strategy and infrastructure (warehousing, ERP, trendy offices in Shoreditch etc) around a primarily direct sales channel. As silly as that was predicted and turned out to be, the current team cannot simply stop selling direct without incurring massive write offs and further expensive reorganisation. The company is not in a position financially to do that. So they will be slowly unwinding the previous strategy, and they have made clear their new approach, but it will take time to get there.

[Silver Sidelines]

It might be nice to think that part of this 'unwinding of strategy' might include a greater degree of Quality Control which judging by the Three Kings I had through my hands this Christmas is at an abysmally low level..

 

I am not holding my breath.

 

Ray

[Ozexpatriate]

... the current team cannot simply stop selling direct without incurring massive write offs and further expensive reorganisation. The company is not in a position financially to do that. So they will be slowly unwinding the previous strategy, and they have made clear their new approach, but it will take time to get there.

There's no reason for them to stop selling direct. They just need to make sure that they do not undercut their other channels - like the retailers - with their direct channel.  Hornby were lured by the siren song of increased margins (during a time where they desperately needed to demonstrate better profitability) by cutting out the middle man.

 

Bachmann has a very healthy direct sales business - under the umbrella of the their Collectors' Club.

 

Hornby's Collectors' Club sales were a disaster in recent years. They couldn't move them and then started flogging cut-priced 'exclusive' items through retail outlets. At one point they did this better. Things like LSWR liveried items and the Portishead terrier in GWR livery were very popular in their time. Doubtless there were overproduction problems not to mention poor choices of prototypes. I do think Bachmann does this well, and the mantra 'direct selling = bad' is misplaced. It's all about how it is done and for what purpose.

Edited January 16, 2017 by Ozexpatriate

[Clearwater]

There is an argument that Hornby would be ill advised not to have a direct channel. We all read on other threads about model shops closing. If you were the CEO, I'd suspect you would have on your list of risks, model shop closure reducing your channels to market. To not have a channel open yourself and to rely on other small businesses staying open could be viewed as reckless.

 

Let's not forget that one of the key sources of stock for the discount shop in Swindon is defunct shops. They'll have the data and the trend rates of closures by that source as well as their rep network (such as it is).

 

If you think that is extreme, and it is, dial back one level where most local model shops disappear leaving a few large national (and international) retailers. Not implausible I'd say. If I was Hornby, I wouldn't want to get to a position where I have a very limited number of box shifter customers. In porters five forces terms, the buyer power of the supplier would increase. Their own sales channel helps keep those relationships balanced.

 

Clearly a separate issue how you use that capability but to not have could be fatal.

 

David

[Mike Storey]

There is an argument that Hornby would be ill advised not to have a direct channel. We all read on other threads about model shops closing. If you were the CEO, I'd suspect you would have on your list of risks, model shop closure reducing your channels to market. To not have a channel open yourself and to rely on other small businesses staying open could be viewed as reckless.

 

Let's not forget that one of the key sources of stock for the discount shop in Swindon is defunct shops. They'll have the data and the trend rates of closures by that source as well as their rep network (such as it is).

 

If you think that is extreme, and it is, dial back one level where most local model shops disappear leaving a few large national (and international) retailers. Not implausible I'd say. If I was Hornby, I wouldn't want to get to a position where I have a very limited number of box shifter customers. In porters five forces terms, the buyer power of the supplier would increase. Their own sales channel helps keep those relationships balanced.

 

Clearly a separate issue how you use that capability but to not have could be fatal.

 

David

 

Fair analysis, and replicated so far by the continentals. Model shops stocking railway products are close to extinction in France (outside Paris), Spain and Italy, despite domestic manufacturers, compared to the UK anyway, but the majors have not really promoted direct sales, as far as I can detect, other than Hornby International of course. They do have direct sales, but don't really promote it. Instead, a few independent box shifters do the bulk of sales, primarily French, German and Swiss, if the modelling press is an accurate guide. You don't see much discounting, but then the domestic laws somewhat constrain that - in France you cannot have a "sale" continuously, just in two specific periods in each year. I am not sure about Spain or Italy (where." Forza, Forza" does seem to be a continuous factor in ladyware shops,  but not in others), or indeed elsewhere.

[jjb1970]

I think we have to accept that the world has changed. I grew up in a small Northern City very close to Scotland. When I was at school there were two excellent dedicated model shops, one of which offered a large range of railway items along with plastic kits and figures, the other of which concentrated on RC and speciality model cars along with kits and figures. There were two toy shops who had model sections which were as good as most dedicated model shops. There was a dedicated model railway shop (which is still there although ownership changed, and still offers excellent service). There were two department stores that had decent model sections, not equivalent to what you’d find in a model shop but worth visiting regularly and far better than the token gestures of Hawkins Bazaar and Toys R Us in today’s market. Now it still has one model shop, primarily a model train shop, and it is fortunate to have that as most towns I visit don’t have anything and many large cities don’t have much.

Whether we like it or not, the market relies on on-line sales, which only really made the pre-existing mail order concept quicker and more attractive. Whilst the Hornby flirtation with prioritising direct sales was botched, I think that the future for speciality, niche products (and also products much less niche) is increasingly with on-line sales. I tend to think that manufacturers will increasingly offer a direct sales channel, Hornby are far from unique in that. Provided this does not undercut their retailers then I see no problem with it. In the long term my own feeling is that small speciality items like model trains will increasingly move towards a pre-order, direct sale model. My own personal view, and it is only my own personal view, is that I’d rather accept higher prices and make my decision whether or not to buy a model after having had a chance to see the model (even if only via the internet and magazine reviews) but I also accept that in an inflationary environment which is price sensitive then a pre-order model as practised by companies like Rapido is eminently sensible from a commercial perspective. The problem I see is that once you move to such a model then why support retailers? The problem Hornby had was producing models which sat on their shelves and which they struggled to sell, leading to fire sale clearances which in turn created a market expectation and led to people deciding there was no point buying at normal prices if you could wait a few weeks and get the models for half price. If you go to pre-order and manufacture to pre-orders only, then the models are made, delivered to the distributor and go to consumers, as per what Locomotion are doing along with others. In such a case then retailers add nothing. The problem then is that this works perfectly for big ticket items but is less great for paints, adhesives, scenic materials and the 1001 other things modellers need, but although I dislike it I believe that the market for locomotives and rolling stock will increasingly move in that direction.

On prices and sales, in a way I think that the model suppliers have engaged in the same psychological sleight of hand as furniture manufacturers of offering a nominal SRP that nobody ever pays so that people think they’re getting a bargain. The Bachmann SRP is really SRP – 15%, as why would anybody pay the advertised SRP when just about every on-line shop at least offers a 15% reduction? This has created an odd scenario where consumers see the absence of a discount as indicating rip off pricing, rather than appreciating the discount as a nice bonus. In this models are different from the other hobbies I indulge in, where discounting tends to happen at the end of season or new model transition time and where people accept that if they want the latest gear when it is released then they have to pay for it.

I’m very interested in Italian HO and it is interesting that the Italian market seems to suffer many of the same issues as ours. Duplication is rife, some models seem to sell out instantly while others linger for a long time, most models seem to be supplied by box shifters. Older established suppliers have been caught napping by smaller, more agile players (and especially in Italy with its history of model manufacturing there seems to be a bit of a merry go round with people moving around and setting up new companies) and a lot of focus on locomotives. That said, they do seem a bit more joined up in terms of coaching stock, and many coaches seem to be sold in packs with additional extension packs which make it very easy to acquire a complete train. That said, unlike OO RTR the Italian market is a mix of domestic producers (I’ll include Hornby in that camp even though the parent is British and Hornby international are in Spain) and non-Italian companies such as Roco and LS which offer a selection of Italian models.

[The Stationmaster]

Interesting view about manufacturing to pre-order although thus far I think the only UK outlets doing it seems to be Locomotion and possibly Realtrack both of whom buy in from Rapido, who work entirely to that business model.  So perhaps for now, and potentially for some time to come with Chinese manufacture for the 'mass' market being the way it is and timescales and production slots being what they are it might not catch on all that quickly.

 

In addition of course the fickle, often price driven, British model railway buyer is going to take a lot of converting to buying everything that way especially after years of - exactly as you have said - basing their valuing of items largely on the prices charged by the deep discounters and adjusting their purchasing habit to that very model.

[brushman47544]

As usual I've just had an email from my local model shop here in Portugal, inviting me to review some of the European manufacturers' catalogues (attached to the email in digital format) and inviting me to pre-order. The shop calls it a pre-order "campaign" as in most cases the shop will only order those models that are pre-ordered by customers and they say explicitly that the manufacturers will decide their productions runs based on the pre-orders received. The catalogues included in the email were Marklin, Trix, Roco, Fleichmann and Piko.

 

A few years ago I pre-ordered a model and it didn't appear; I was told that Roco had had insufficient pre-orders so had cancelled production.

 

In all cases the price was quoted in the catalogue and this was maintained on delivery (with a shop discount) and all arrived during the catalogue year.

 

I personally would be happy to see this approach being adopted by UK manufacturers, but only if the advertised price for a model is maintained, which in turn really means that new models are only advertised when close to production and that the manufacturers can make changes to their production schedules until quite a late stage. The catalogue descriptions and images would also need to be much more detailed and accurate than they are at present.

Edited January 17, 2017 by brushman47544