Hornby Trading Statement Published 22 April

[Michael Hodgson]

On 22/04/2024 at 10:16, The Stationmaster said:

So far this morning the share price has only suffered a relatively small drop - c.8% on the bid price - but it is still relatively early in the trading.

 

 

A couple of days trading later, the share price is still above 30p, having been a half to two-thirds of that for most of the past year, and only really picked up to its current level a couple of months ago.

[JohnR]

2 hours ago, Geep7 said:

Sadly the 59ft Corridor Brakes were only ever used in 3-sets with the other 59ft coaches and never used as loose stock, afaik (i'd have to check my Southern Bulleid book to be absolutely sure). I'd be up for buying a couple at £17.99, but only if I could guarantee getting a 59ft composite to go with them, and in the correct livery too. The Southern Railway and BR Southern were quite strict about keeping is coaching stock in sets. If one coach had a defect, then the whole set was pulled. And they would go to works to be repainted as a set too..... Just one of the quirks of the Southern which makes them stand out from the rest (apart from the affection for live rail....)

 

The other thing to note is that these cheap bargains are of the Southern Malachite livery - effectively 1946-48. The BR(S) Green ones were sold out long ago. 

 

I'm guessing Hornby made too many of the SR Malachite ones. 

[Gallows-Bait]

I found this topic so interesting I ended up registering so I can comment.

 

Warning: You can tell this is written by an accountant.  If you have a problem with beancounting you may want to skip this one... TL:DR version - main points are the sentences in bold.

 

Looking at both the recent stock market update and the previous financial statements, there are some pretty clear problems at Hornby, but comments such as those by Simon Kohler in Railway Modeller actually don't touch them, they focus on the wrong problem.  In fact the final Outlook section of the trading update Hornby issued does a much better job at actually telling us what the issues are - high stock and high overhead costs.

 

It's not about the competition or the innovation from smaller entrants or any of that.  It's not about firebox lighting or headlamps or detailed underframes.  Sure those drive up the cost of the product and the sales price, but they do that for all manufacturers equally.  They're not why Hornby is in trouble.

 

Yes, there are newer, smaller, entrants to the market.  Normally smaller entrants are more agile, but the larger incumbent players have a massive advantage, which is simply size.  Being larger simply allows Hornby to do everything more efficiently and therefore more profitably.  To blame new entrants into the market for changing the focus of the market, whether it's quality features, wider liveries or larger rakes of wagons, whatever, none of that is really the point.  Hornby can make the exact same moves and do it more cheaply due to their ability to scale up.

 

Ultimately all of the companies are playing the same game, there's no secret advantage, no technology that can't be copied, no significant exclusive product that makes them unique, no monopoly on the market.  They're not Microsoft or Apple with a product you can't live without.  Whether large or small, the products and the processes are pretty much identical.

 

Research -> Design -> Engineering Models -> Tooling -> Production -> Sales (and repeat).

 

With few exceptions (Dapol and PECO) that production is largely happening in India and China, so costs should be expected to be broadly similar regardless of which company is making the model.  The only advantage the smaller companies have that the market has different expectations, they can rely more heavily on a pre-order funding model that reduces their need for costly stock holdings.  That's their agility in play, and it's much needed as they simply don't have the cash that Hornby has to invest in production runs that clear the shelves more slowly.  Of course recently Hornby don't have they money either which is why they're struggling (it is happening somewhat though and I think the TT120 market is probably a good example of this shift happening with Hornby simply not having the excess stock on hand, though whether that's by design or by mistake is a matter of opinion).

 

So if all the players in the game are broadly selling the same goods for the same prices with the same underlying costs, how is it Hornby are struggling so much?  Hornby should have the advantage, they can make larger batches, more product, have more efficient distribution, wider marketing and other theoretically more efficient overheads, so they should be making more profit than the smaller competitors, not less.

 

Fundamentally Hornby are left with two problems then, which are exactly as Hornby have disclosed in their statement.

 

1. Their higher stock position is costing them money.  This one is all about cashflow.  When you have spent all your money buying stock that's sat in a warehouse, that money isn't doing anything useful, like buying more tooling or paying more designers.  Instead Hornby are borrowing more money to pay for that, and borrowing costs interest, so it's a double whammy, your own money is doing nothing and it's costing you to use someone else's.

 

In fact Hornby have a huge and persistent stock problem caused by what I can only assume are bad decisions in their past (railways or other brands, I don't know for sure).  The latest statement indicates their stock level is around £20m (down £3m from previous disclosure which was £23m).  Based on their 2023 account they had £21.3m of stock and turnover of £55.1m that means they have a stock ratio of about 39%.  That means they have effectively about 4 months worth of sales value held in stock doing nothing for the business, not generating a penny.  This is a level so bad that they have removed the Inventory graph from the 2023 annual accounts.  If you look back over past accounts this used to be reported with a pretty graph every year.  In fact between 2004 and 2018 the average stock level was closer to 22% of sales.  And this was with a business model that Hornby acknowledged was on the princple of selling things more slowly over time (the opposite of the current market trend).  So you'd expect Hornby to be reducing stock in line with market trends, not increasing it.  In fact Hornby have doubled their stock level since 2019.

 

To even get back to their previously levels of efficiency in stock, Hornby need to offload about £9m of stock.  It's no coincidence that the level of bank debt has increased by £14m in the same time period and it's clear that the naysayers can't just blame that on tooling up for TT120.  It's caused by stock not selling.  We've all seen the fly on the wall documentary with Simon K and Montana at a fete trying desperately to offload unwanted garbage steampunk sets and the like.  Think of this as at kind of problem but on a massive scale.  It's simply stuff no one wants.  Whether it's bad or just expensive I don't know.  But it's costing Hornby money in bank interest (nearly £700k in bank and loan interest in 2023 when that debt was less than half what it is now).

 

2. Their overheads are out of control.  Hornby should be making the most profit out of the players in the market because they can do things more cheaply when they do them on a larger scale. 

 

Partly this seems to be driven by the obession with online direct sales.  We know from the announcement that around 18% of all sales are online direct sales.  These should be making the most profit out of all sales because they're selling direct at RRP and not having to sell them at wholesale prices to retailers.  Even the points discount is barely a dent in their profitability here as it's only the same as Retailers discount at and those retailers must still make something out of the deal or they wouldn't buy the products.

 

On average Hornby have around a 48-49% profit margin on the actual cost of the product that covers these overheads.  In the 2023 accounts digital sales were £8.5m, which was 15% of total sales.  So those digital sales contributed about £4.3m of profit margin towards the overhead costs of the company.  At the same time the cost of winning those digital sales in overheads went up by £1.9m, so actually those digital sales only contributed £2.4m toward the rest of the overheads - a little over half what they would have done if those sales had simply come from retailers instead.

 

Yes, this is longer term investment for the future, but between 2023 and 2024 the digital sales share of the total has only moved from 15% to 18% of total sales.  That 3% is around £1.6m of extra sales.  Yet total sales are pretty flat at only 2% growth (around £1.1m), so quite a lot of those new digital sales have come from taking market share off of retailers, not from growing new sales/new customers.  And because of this massive investment in digital, they are actually making Hornby less money, not more.

 

Ignoring the one off exceptional costs (writing off bad investments and refurbishing the visitor centre) then these two things alone would have been the difference between turning a profit and the loss they actually made.

 

Also, for what it's worth, last year when Hornby lost all that money, their departing CEO's pay went up from £241k to £617k.  So that's a £375k pay off to someone they wanted out.  Who says you need to make a profit to get rewarded eh?

 

 

[adb968008]

Welcome to the forum, what an interesting first post.

 

how do you offload £9mn of stock (at Trade price, not rrp) without a fire sale ?

 

 

 

Edited April 23 by adb968008

[Gallows-Bait]

25 minutes ago, adb968008 said:

Welcome to the forum, what an interesting first post.

 

how do you offload £9mn of stock (at Trade price, not rrp) without a fire sale ?

 

 

 

 

That is an extremely good question.  It really depends what the stock is I suppose.  Their strategy so far has reduced stock by about £3m but whether that's just producing less or selling the old stock isn't clear.  To avoid disruption it may need to be very slowly, holding back price increases on older lines for example might help.  But if it's tat like 30 year old railroad level 0-4-0s then its going to take a lot of Beatles and other gimmick products to shift them.

[1andrew1]

1 hour ago, adb968008 said:

Welcome to the forum, what an interesting first post.

 

how do you offload £9mn of stock (at Trade price, not rrp) without a fire sale ?

 

 

 

I guess you try and target different markets (geographic, types of retailer, types of purchaser) and bundle or unbundle it. And perhaps try and influence buying patterns by making it more desirable through promotion and advertising?

[1andrew1]

2 hours ago, Gallows-Bait said:

I found this topic so interesting I ended up registering so I can comment.

Really enjoyed reading your post. Thank you for sharing your insights, really helpful

 

I would be interested to hear your take on Kader/Bachmann. Their issue seems to be on the property side. 

 

[GenericRMWebUsername]

5 hours ago, adb968008 said:

Welcome to the forum, what an interesting first post.

 

how do you offload £9mn of stock (at Trade price, not rrp) without a fire sale ?

 

 

 

This was one of the Hornby CEO's stated objectives in one of their releases a few months ago. He said they were going to try reducing inventory while also not undercutting their pricing. I've seen the inventory reductions be handled in the following ways over the last 6 months or so.

1) Double points offerings- There have been multiple 2x points offerings over the last 6 months. The most recent was one last month.

2) Free gifts- Earlier this year, Hornby ran a campaign that featured a free small locomotive. They have done other promotions, like offering a free mug with a purchase. This has also extended to their international brands (Jouef, Rivarossi, Electrotren), which offered a free HO wagon or a free building depending on how much was spent. Arnold was also offering promotions for free N Scale rolling stock. 

3) Seasonal sales- If memory serves, they ran a New Years sale and a Spring sale. These were done on Hornby, Hornby USA, Scalextric, Corgi, Arnold, etc. 

4) Clearance- These have also been done by Hornby, Hornby USA, Scalextric, Corgi, Arnold, etc. 

5) Bringing in new retail partners- Restoring Rails of Sheffield was a major win for the company. 

 

I think one reason that progress towards inventory reduction did not progress further, might have to do with the shipping delays. They mention a large shipment being delayed in China due to the mideast conflict. I assume they take delivery in China and arrange for shipping themselves. That large shipment could be worth as much as several million pounds. If the inventory is stuck in China or in transit, that might explain the persistence of high inventory. I'd defer to @Gallows-Bait on UK accounting rules, though! 

 

 

 

 

[Gallows-Bait]

4 hours ago, GenericRMWebUsername said:

I think one reason that progress towards inventory reduction did not progress further, might have to do with the shipping delays. They mention a large shipment being delayed in China due to the mideast conflict. I assume they take delivery in China and arrange for shipping themselves. That large shipment could be worth as much as several million pounds. If the inventory is stuck in China or in transit, that might explain the persistence of high inventory. I'd defer to @Gallows-Bait on UK accounting rules, though! 

 

 

 

 

 
If they take control or responsibility of the stock either on leaving the factory (potentially an ex-works basis) or at some point en route to the UK (possibly a Free on Board or similar basis on loading on the ship) then yes this would need to be included in their stock valuation much earlier than terms based on arrival at the UK port or even delivery to their warehouse.  It will really depend on how their contract works.

 

 For the industry I’m in we don’t take control until the goods arrive at our warehouse, so wouldn’t include them until then, but the approach varies a lot depending on which party is willing to handle the shipping, insurance, import duties etc.  It all adds to the costs the same but often one party will have more experience in handling these things than the other.

[adb968008]

4 hours ago, GenericRMWebUsername said:

This was one of the Hornby CEO's stated objectives in one of their releases a few months ago. He said they were going to try reducing inventory while also not undercutting their pricing. I've seen the inventory reductions be handled in the following ways over the last 6 months or so.

1) Double points offerings- There have been multiple 2x points offerings over the last 6 months. The most recent was one last month.

2) Free gifts- Earlier this year, Hornby ran a campaign that featured a free small locomotive. They have done other promotions, like offering a free mug with a purchase. This has also extended to their international brands (Jouef, Rivarossi, Electrotren), which offered a free HO wagon or a free building depending on how much was spent. Arnold was also offering promotions for free N Scale rolling stock. 

3) Seasonal sales- If memory serves, they ran a New Years sale and a Spring sale. These were done on Hornby, Hornby USA, Scalextric, Corgi, Arnold, etc. 

4) Clearance- These have also been done by Hornby, Hornby USA, Scalextric, Corgi, Arnold, etc. 

5) Bringing in new retail partners- Restoring Rails of Sheffield was a major win for the company. 

 

I think one reason that progress towards inventory reduction did not progress further, might have to do with the shipping delays. They mention a large shipment being delayed in China due to the mideast conflict. I assume they take delivery in China and arrange for shipping themselves. That large shipment could be worth as much as several million pounds. If the inventory is stuck in China or in transit, that might explain the persistence of high inventory. I'd defer to @Gallows-Bait on UK accounting rules, though! 

 

but how do you sustain selling last years fashion accessories ?

they cleared c10%-15% of it in year 1….

 

fashion accessories only get more out of date the further from release they were.

 

no one is consuming LNER mk3’s… once bought they are for a lifetime, and its now 2 full years since EMR gave them up.

 

without spending money on more power cars, and with risk of a competitor emerging on something which is a fading memory I dont see that as being easy… theres over 400 rtr rolling stock sku items available now from Hornby… only 100 of them are wagons. Theres a lot more stories like that in the range.. R3171 dates back almost a decade now.

Edited April 24 by adb968008

[Fireline]

10 hours ago, Gallows-Bait said:

 

That is an extremely good question.  It really depends what the stock is I suppose.  Their strategy so far has reduced stock by about £3m but whether that's just producing less or selling the old stock isn't clear.  To avoid disruption it may need to be very slowly, holding back price increases on older lines for example might help.  But if it's tat like 30 year old railroad level 0-4-0s then its going to take a lot of Beatles and other gimmick products to shift them.

 

One thing to consider. We always say "Hornby" and look at the model rail situation on here. However, the last time they had a massive overstock, it was mostly Airfix. The stock held will be right across the brands, not just model rail. The part we are interested in only forms part of the problem.

[GordonC]

One thing I find odd about their TT:120 range is the liveries offered. We're always told that tooling costs are the expensive bit, but if you're starting a new scale and you want to encourage buyers to take it up, would you not make what tooling you have available in as many liveries as you can?

 

Things like Mk1 coaches ... crimson and cream or maroon are the options. Could they not have squeezed a blue and grey option in there too? Ok maybe they dont have locos from that era yet, but the Class 50s are being progressed. I would have thought it would have been better to offer more livery variations that tooling. Are both LMS coaches and Pullmans necessary? ok they go with the Pacifics that are available first, but it does seem a lot of tooling and therefore costs

 

[ruggedpeak]

Right now they need to be much better at selling stuff, all their stuff. And that is hard nose selling and deal making like the recent Michael's deal.

 

They have consistently made stuff they couldn't sell, but their penetration into retail was pretty weak IMHO and the online direct sales has not exactly been a spectacular success. They are too small to do it themselves efficiently but may be stuck with the legacy decisions on this for a while. With a huge debt pile and thus at cashflow risk from the interest payments, especially if interest rates rise or just don't fall, they need money through the door so Mr D's job is to flog everything and anything to anyone whilst making some money and expand the sales channels and volumes. Mr K spent too much time on product development, marketing and promotion, but neglected the core sales function IMHO as that is where his interest lies. No amount of discussions about fireboxes is going to change the fact the expanded sales team need to knocking on doors day in day out. Firebox or no firebox, a good sales person will get stuff sold. I worked in sales and was rubbish at it (!) but I've worked with people who can sell anything to anyone. Whilst Hornby could do a better job of selecting and developing products etc they still have to sell whatever they make and that is the key right now.

 

Whether Hornby look to depart from their current processes for manufacturing or sales to replicate the new entrants we shall see, the 500 or 1000 batch system may not be suitable any more. But I am also curious about the business models of some of the new entrants as I can see potential problems down the road for one or two of them as their business models are not foolproof.

Edited April 24 by ruggedpeak
added word business to last sentence

[Les1952]

15 minutes ago, GordonC said:

One thing I find odd about their TT:120 range is the liveries offered. We're always told that tooling costs are the expensive bit, but if you're starting a new scale and you want to encourage buyers to take it up, would you not make what tooling you have available in as many liveries as you can?

 

Things like Mk1 coaches ... crimson and cream or maroon are the options. Could they not have squeezed a blue and grey option in there too? Ok maybe they dont have locos from that era yet, but the Class 50s are being progressed. I would have thought it would have been better to offer more livery variations that tooling. Are both LMS coaches and Pullmans necessary? ok they go with the Pacifics that are available first, but it does seem a lot of tooling and therefore costs

 

 

That is answered pretty comprehensively by Hornby in Peachy120TT's video.  You do need to sit through three quarters of an hour or so to get the whole answer, but it is there.

 

Les

[GordonC]

12 hours ago, Gallows-Bait said:

I found this topic so interesting I ended up registering so I can comment.

 

Warning: You can tell this is written by an accountant.  If you have a problem with beancounting you may want to skip this one... TL:DR version - main points are the sentences in bold.

 

Looking at both the recent stock market update and the previous financial statements, there are some pretty clear problems at Hornby, but comments such as those by Simon Kohler in Railway Modeller actually don't touch them, they focus on the wrong problem.  In fact the final Outlook section of the trading update Hornby issued does a much better job at actually telling us what the issues are - high stock and high overhead costs.

 

It's not about the competition or the innovation from smaller entrants or any of that.  It's not about firebox lighting or headlamps or detailed underframes.  Sure those drive up the cost of the product and the sales price, but they do that for all manufacturers equally.  They're not why Hornby is in trouble.

 

Yes, there are newer, smaller, entrants to the market.  Normally smaller entrants are more agile, but the larger incumbent players have a massive advantage, which is simply size.  Being larger simply allows Hornby to do everything more efficiently and therefore more profitably.  To blame new entrants into the market for changing the focus of the market, whether it's quality features, wider liveries or larger rakes of wagons, whatever, none of that is really the point.  Hornby can make the exact same moves and do it more cheaply due to their ability to scale up.

 

Ultimately all of the companies are playing the same game, there's no secret advantage, no technology that can't be copied, no significant exclusive product that makes them unique, no monopoly on the market.  They're not Microsoft or Apple with a product you can't live without.  Whether large or small, the products and the processes are pretty much identical.

 

Research -> Design -> Engineering Models -> Tooling -> Production -> Sales (and repeat).

 

With few exceptions (Dapol and PECO) that production is largely happening in India and China, so costs should be expected to be broadly similar regardless of which company is making the model.  The only advantage the smaller companies have that the market has different expectations, they can rely more heavily on a pre-order funding model that reduces their need for costly stock holdings.  That's their agility in play, and it's much needed as they simply don't have the cash that Hornby has to invest in production runs that clear the shelves more slowly.  Of course recently Hornby don't have they money either which is why they're struggling (it is happening somewhat though and I think the TT120 market is probably a good example of this shift happening with Hornby simply not having the excess stock on hand, though whether that's by design or by mistake is a matter of opinion).

 

So if all the players in the game are broadly selling the same goods for the same prices with the same underlying costs, how is it Hornby are struggling so much?  Hornby should have the advantage, they can make larger batches, more product, have more efficient distribution, wider marketing and other theoretically more efficient overheads, so they should be making more profit than the smaller competitors, not less.

 

Fundamentally Hornby are left with two problems then, which are exactly as Hornby have disclosed in their statement.

 

1. Their higher stock position is costing them money.  This one is all about cashflow.  When you have spent all your money buying stock that's sat in a warehouse, that money isn't doing anything useful, like buying more tooling or paying more designers.  Instead Hornby are borrowing more money to pay for that, and borrowing costs interest, so it's a double whammy, your own money is doing nothing and it's costing you to use someone else's.

 

In fact Hornby have a huge and persistent stock problem caused by what I can only assume are bad decisions in their past (railways or other brands, I don't know for sure).  The latest statement indicates their stock level is around £20m (down £3m from previous disclosure which was £23m).  Based on their 2023 account they had £21.3m of stock and turnover of £55.1m that means they have a stock ratio of about 39%.  That means they have effectively about 4 months worth of sales value held in stock doing nothing for the business, not generating a penny.  This is a level so bad that they have removed the Inventory graph from the 2023 annual accounts.  If you look back over past accounts this used to be reported with a pretty graph every year.  In fact between 2004 and 2018 the average stock level was closer to 22% of sales.  And this was with a business model that Hornby acknowledged was on the princple of selling things more slowly over time (the opposite of the current market trend).  So you'd expect Hornby to be reducing stock in line with market trends, not increasing it.  In fact Hornby have doubled their stock level since 2019.

 

To even get back to their previously levels of efficiency in stock, Hornby need to offload about £9m of stock.  It's no coincidence that the level of bank debt has increased by £14m in the same time period and it's clear that the naysayers can't just blame that on tooling up for TT120.  It's caused by stock not selling.  We've all seen the fly on the wall documentary with Simon K and Montana at a fete trying desperately to offload unwanted garbage steampunk sets and the like.  Think of this as at kind of problem but on a massive scale.  It's simply stuff no one wants.  Whether it's bad or just expensive I don't know.  But it's costing Hornby money in bank interest (nearly £700k in bank and loan interest in 2023 when that debt was less than half what it is now).

 

2. Their overheads are out of control.  Hornby should be making the most profit out of the players in the market because they can do things more cheaply when they do them on a larger scale. 

 

Partly this seems to be driven by the obession with online direct sales.  We know from the announcement that around 18% of all sales are online direct sales.  These should be making the most profit out of all sales because they're selling direct at RRP and not having to sell them at wholesale prices to retailers.  Even the points discount is barely a dent in their profitability here as it's only the same as Retailers discount at and those retailers must still make something out of the deal or they wouldn't buy the products.

 

On average Hornby have around a 48-49% profit margin on the actual cost of the product that covers these overheads.  In the 2023 accounts digital sales were £8.5m, which was 15% of total sales.  So those digital sales contributed about £4.3m of profit margin towards the overhead costs of the company.  At the same time the cost of winning those digital sales in overheads went up by £1.9m, so actually those digital sales only contributed £2.4m toward the rest of the overheads - a little over half what they would have done if those sales had simply come from retailers instead.

 

Yes, this is longer term investment for the future, but between 2023 and 2024 the digital sales share of the total has only moved from 15% to 18% of total sales.  That 3% is around £1.6m of extra sales.  Yet total sales are pretty flat at only 2% growth (around £1.1m), so quite a lot of those new digital sales have come from taking market share off of retailers, not from growing new sales/new customers.  And because of this massive investment in digital, they are actually making Hornby less money, not more.

 

Ignoring the one off exceptional costs (writing off bad investments and refurbishing the visitor centre) then these two things alone would have been the difference between turning a profit and the loss they actually made.

 

Also, for what it's worth, last year when Hornby lost all that money, their departing CEO's pay went up from £241k to £617k.  So that's a £375k pay off to someone they wanted out.  Who says you need to make a profit to get rewarded eh?

 

 

 

I think your logic holds up if the product were all exactly the same in terms of quality and reliability and demand, but that I feel is where Hornby have fallen down.

 

I think the smaller entrants will have a couple of big advantages over Hornby. In producing to pre-orders, they're generally offering a range of perhaps 8-10 liveries in a batch but with the pre-orders, they'll be able to gauge percentages of one livery against another to better tweak production numbers to match demand. Of course there can be some left at the end, but even those tend to sell quickly certainly in the popular liveries and detail combinations. Hornby generally produce one or two livery options at a time and production quantities will be plucked out the air either by them or in response to retailer orders. It would be interesting to know what the level of pre-orders are for Hornby relative to overall sales. Personally, I have such little faith in Hornby following too many times in the past that they've snatched defeat from the jaws of victory that I want to see whats produced before placing any orders. I feel that when Hornby make an effort, they can make beautiful, well designed, well decorated and smooth running models that are a match for anyone .... I just dont think they make that consistent effort enough and there's too much "that'll do" attitude. The smaller manufacturers really care and go the extra mile to get everything exactly correct and I probably am more accepting of flaws knowing it'll be the best they could produce or a small oversight.

 

I think Hornby has certainly up until now been expecting to play the long game in focussing more on niche liveries or variations with the intention of stretching out demand for their tooling with the result of pretty significant liveries that havent appeared in 20 years on Class 31s for example. There's certainly some times they could have done with picking some 'dead-cert' liveries to cash in on and make the most of their tooling. Now that smaller manufacturers are duplicating more of their high-spec range, I think they'll struggle to offload what they've produced.

[Gallows-Bait]

26 minutes ago, GordonC said:

 

I think your logic holds up if the product were all exactly the same in terms of quality and reliability and demand, but that I feel is where Hornby have fallen down.

 

I think the smaller entrants will have a couple of big advantages over Hornby. In producing to pre-orders, they're generally offering a range of perhaps 8-10 liveries in a batch but with the pre-orders, they'll be able to gauge percentages of one livery against another to better tweak production numbers to match demand. Of course there can be some left at the end, but even those tend to sell quickly certainly in the popular liveries and detail combinations. Hornby generally produce one or two livery options at a time and production quantities will be plucked out the air either by them or in response to retailer orders. It would be interesting to know what the level of pre-orders are for Hornby relative to overall sales. Personally, I have such little faith in Hornby following too many times in the past that they've snatched defeat from the jaws of victory that I want to see whats produced before placing any orders. I feel that when Hornby make an effort, they can make beautiful, well designed, well decorated and smooth running models that are a match for anyone .... I just dont think they make that consistent effort enough and there's too much "that'll do" attitude. The smaller manufacturers really care and go the extra mile to get everything exactly correct and I probably am more accepting of flaws knowing it'll be the best they could produce or a small oversight.

 

I think Hornby has certainly up until now been expecting to play the long game in focussing more on niche liveries or variations with the intention of stretching out demand for their tooling with the result of pretty significant liveries that havent appeared in 20 years on Class 31s for example. There's certainly some times they could have done with picking some 'dead-cert' liveries to cash in on and make the most of their tooling. Now that smaller manufacturers are duplicating more of their high-spec range, I think they'll struggle to offload what they've produced.

 

I suppose the point I was trying to make was that there are no inherent barriers to Hornby doing what the other companies are doing and then having the advantage due to their scale, so Hornby's failure is not due to the other companies doing things that they can't.  Though I concede that it is perhaps harder for Hornby simply by virtue of customers having different expectations from them due to their market position.

 

I think you make a very valid point which is that Hornby perhaps have not responded to the changing trends in the market and have been slow to change their business practices accordingly.  They have relied on their long standing principles that "it'll sell in the end" to make large runs of small numbers of liveries, helping keep their costs down.  Perhaps their past experiences show that people will "make do" with certain liveries, but then buy new ones down the line when drip fed onto the market in later runs, resultiing in more sales.  In addition as a longstanding and big player in the market, customers may tend to expect Hornby to have a wider range of available products, which leaves Hornby in an even more difficult position when they are perhaps not making as many production runs as people think, instead meeting demand through past stock that they've been holding onto for longer.  I suspect if there were less limitations on scaling up manufacturing offshore then they could balance this better, but the demand for the limited number of slots in the production calendar hamper making such a shift.

 

This longer term approach to running tooling over multiple runs over several years also doesn't seem to be the approach other entrants are taking, instead favouring a big splash of a wide range of liveries in order to make bigger batches with the tooling and reduce cost that way.  It's resulted in an expectation from customers that they can get their preferred liveries and eras without having to wait for later runs potentially years down the line.  Similarly there are perhaps less expectations for newcomers to have a constant range on hand.  Consumers have knowingly (though perhaps not willingly) bought into a market model of "when it's gone, it's gone" through pre-ordering, which means no one expects a perennial range from those smaller manufacturers.  As such they can focus on individual products, sell the whole batch and move on without people asking when it'll be back in stock.

 

There's also another factor which I noticed in the various documentaries and TV shows, which is that Hornby feel an inherent obligation to introduce children to the hobby, so that in later years they come back to the hobby.  It's an obligation that newer companies don't have, meaning they're not also trying to balance their contemporary high detail ranges with ranges such as Playtrains, which appears to have struggled in the market.

[ruggedpeak]

1 minute ago, Gallows-Bait said:

 

I suppose the point I was trying to make was that there are no inherent barriers to Hornby doing what the other companies are doing and then having the advantage due to their scale, so Hornby's failure is not due to the other companies doing things that they can't.  Though I concede that it is perhaps harder for Hornby simply by virtue of customers having different expectations from them due to their market position.

 

I think you make a very valid point which is that Hornby perhaps have not responded to the changing trends in the market and have been slow to change their business practices accordingly.  They have relied on their long standing principles that "it'll sell in the end" to make large runs of small numbers of liveries, helping keep their costs down.  Perhaps their past experiences show that people will "make do" with certain liveries, but then buy new ones down the line when drip fed onto the market in later runs, resultiing in more sales.  In addition as a longstanding and big player in the market, customers may tend to expect Hornby to have a wider range of available products, which leaves Hornby in an even more difficult position when they are perhaps not making as many production runs as people think, instead meeting demand through past stock that they've been holding onto for longer.  I suspect if there were less limitations on scaling up manufacturing offshore then they could balance this better, but the demand for the limited number of slots in the production calendar hamper making such a shift.

 

This longer term approach to running tooling over multiple runs over several years also doesn't seem to be the approach other entrants are taking, instead favouring a big splash of a wide range of liveries in order to make bigger batches with the tooling and reduce cost that way.  It's resulted in an expectation from customers that they can get their preferred liveries and eras without having to wait for later runs potentially years down the line.  Similarly there are perhaps less expectations for newcomers to have a constant range on hand.  Consumers have knowingly (though perhaps not willingly) bought into a market model of "when it's gone, it's gone" through pre-ordering, which means no one expects a perennial range from those smaller manufacturers.  As such they can focus on individual products, sell the whole batch and move on without people asking when it'll be back in stock.

 

There's also another factor which I noticed in the various documentaries and TV shows, which is that Hornby feel an inherent obligation to introduce children to the hobby, so that in later years they come back to the hobby.  It's an obligation that newer companies don't have, meaning they're not also trying to balance their contemporary high detail ranges with ranges such as Playtrains, which appears to have struggled in the market.

I agree, and Hornby are still dominated by supplying and supporting retail, somethign that I'd argue some of the new entrants are taking advantage of. The feast and famine approach of some of the new entrants would make it impossible for retailers to remain in business if Hornby and Bachmann disappeared. They sell via pre-order, presumably the majority directly and a limited proportion to retailer, again much of the retail stock is pre-ordered. We know the problems that causes both the manufacturer and retailer processing the volumes, and whilst is brings in sales it does not bring in normal retail customers. If Hornby and Bachmann decided to replicate the arguably parasitic pre-order approach of some of the new entrants, many retailers would close. There would be no point maintaining the overheads of a shop if all you do is periodically pick and pack a large quantity of pre-orders. You can do that from a large garage behind your house.

 

So Hornby are a little caught, and as usual get a bashing over direct sales when their competition do it as well (without the bashing.....), and it is the competition who piggyback the full spectrum retail offer Hornby and Bachmann provide. But as others have pointed out above, retail is still the mainstay of Hornby's overall business and where there new sales drive is focused.

[Gallows-Bait]

1 hour ago, ruggedpeak said:

Whether Hornby look to depart from their current processes for manufacturing or sales to replicate the new entrants we shall see, the 500 or 1000 batch system may not be suitable any more. But I am also curious about the business models of some of the new entrants as I can see potential problems down the road for one or two of them as their models are not foolproof.

 

Certainly there are limitations to the strategy of  "burst" releases.  Primarily there will be a finite number of times it can be done before all of the viable products have been issued and there are only less profitable gaps in the market left to go after (more obscure or less desirable eras, items already made by other manufacturers and so forth).  I think the potential mitigating factors to this limitation are what we're seeing in the market at present.

 

• Manufacturers moving into new scales so that more of these lucrative gaps in the market are open to them.  Whether conventional decisions such as Rapido's first N Gauge products (quite straight forward given their North American experience in that scale), or Bachmann's (more niche and experimental) recent NG7 launch.  Even Hornby's TT120 decisions make real sense in this context and I believe if it stays even modestly successful for the next couple of years we will see other entrants looking to join in this potentially very appealing open space.

 

• Manufacturers seeking to differentiate their new toolings sufficiently to draw in a large enough customer base to justify a release of an already available product (or one that is still widely available second hand from previous production runs).  This encourages innovation and experimentation and I think the hobby is seeing a real frenzy of this activity, such as the fireboxes, lamps, underframe detailing and anything else that can be thought of to make the product stand out.

For consumers this has both positive and negative aspects.  A broader range of products across even more scales creates massive amounts of consumer choice, though this is limited by the challenges of "pre-order or miss out" production run sizes, which feeds higher prices in the second hand market as a result.  Similarly consumers benefit from more detailed, more accurate and more interactive products, but these come at higher costs and so higher prices. Additionally pushing the acceptable ceiling for prices will consquently make it easier for others to pull up the pricing of lower end products as they will still appear comparably as cheap, thus raising the prices for all.

[Gallows-Bait]

47 minutes ago, ruggedpeak said:

I agree, and Hornby are still dominated by supplying and supporting retail, somethign that I'd argue some of the new entrants are taking advantage of. The feast and famine approach of some of the new entrants would make it impossible for retailers to remain in business if Hornby and Bachmann disappeared. They sell via pre-order, presumably the majority directly and a limited proportion to retailer, again much of the retail stock is pre-ordered. We know the problems that causes both the manufacturer and retailer processing the volumes, and whilst is brings in sales it does not bring in normal retail customers. If Hornby and Bachmann decided to replicate the arguably parasitic pre-order approach of some of the new entrants, many retailers would close. There would be no point maintaining the overheads of a shop if all you do is periodically pick and pack a large quantity of pre-orders. You can do that from a large garage behind your house.

 

So Hornby are a little caught, and as usual get a bashing over direct sales when their competition do it as well (without the bashing.....), and it is the competition who piggyback the full spectrum retail offer Hornby and Bachmann provide. But as others have pointed out above, retail is still the mainstay of Hornby's overall business and where there new sales drive is focused.

 

On this I agree.  A pre-order focus is largely fine for a manufacturer, managing distribution costs would be challenging if the size and scale of the operation grows as few warehouse functions can flex capacity and workforce quite that dramatically, but for what is a relatively small industry it is appearing managable to these entrants so far, as such the only real challenge is cashflow, where sales will only be coming in periodically, you have to have enough cash to fund development and operations between those peaks.

 

For a retailer, who simply cannot flex their capacity and costs, such periodic releases result in significant challenges, especially so for bricks & mortar based retailers with fixed premises costs.  As such retailers are forced to widen their net as far as possible, capture pre-orders for as many manufacturers as possible and hope that such releases are staggered throughout the year reliably enough to keep the lights on all year round.  The one benefit a retailer might have would be a reduction in the level of cash needed to keep stock on the shelves, but empty shelves themselves are a challenge.  Retailers would also need to seek out and stock the widest possible range of perennial products such as crafting materials, paints, electronics and so forth to keep footfall up so that customers will place their pre-orders with them instead of online.

Edited April 24 by Gallows-Bait

[The Stationmaster]

14 hours ago, adb968008 said:

Welcome to the forum, what an interesting first post.

 

how do you offload £9mn of stock (at Trade price, not rrp) without a fire sale ?

 

 

 

I think the $64,000 questions about the stockpile boil down to two things - firstly what is in it and secondly will it cost more to keep on financing it instead of dumping what can be dumped (back to what's there)?

 

I know, from a very reliable source that something that is in the pile is something which has steady sales over an extended term but was simply ordered., for whatever reason, in a huge quantity.  So in theory it will continue to sell at a fairly steady rate and if it was bought in at bargain price for the bulk buy it will gradually offer an improving return due to inflation if nothing else.  But in value terms I would think it is something that isn't a large contributor to the total value - and all it might need is a push to get more of it out to retailers (at the normal price).

 

From what the previous management said - if it is to be believed? - a large element of the stockpile was goods ordered for the Christmas market but which retailers wouldn't take on price grounds.  Clearly an attempt to shift some of that appears to have happened before the more recent Christmas.  But what else - railway or non-railway - is in that huge pile and could it be shelled out at significant reductions without harming the brands?

 

Judging by past comments and what has gone out to retailers at reduced prices there are also over-ordered and some Year 2 models which simply didn't sell in the first place - mosy likely either because the market was sated or what was being offered simply didn't offer much variety on earlier liveries etc.  Here a more selective attack would probably be needed but some of it could be unlikely to ever sell because if the market was not there for it in the first place would it go for it now?  Hornby might well benefit - as in the past couple of years - from finding 'helpful' retailers who are prepared to acceptstuff at reduced prices on sale or return terms to see if that can get shot of it.  But some stuff will hang around for ever and whatever the reps, sorry Sakes Executives as they now are,  try to do it simply won't shift.   Will it better to sell it unboxed for component stripping by specialists at a giveaway price or put it in landfill and get the continuing financial drain off the books, albeit in one bad hit?

 

The stockpile clearly needs to be carefully examined for what it contains rather than what it is costing and then be tackled in a variety of ways to suit whatever markets might exist

[Michael Hodgson]

13 hours ago, Gallows-Bait said:

 

That is an extremely good question.  It really depends what the stock is I suppose.  Their strategy so far has reduced stock by about £3m but whether that's just producing less or selling the old stock isn't clear.  To avoid disruption it may need to be very slowly, holding back price increases on older lines for example might help.  But if it's tat like 30 year old railroad level 0-4-0s then its going to take a lot of Beatles and other gimmick products to shift them.

If it's 30-years old stock that's not saleable, it shouldn't be in the stock figure at all.  If they have a mountain of stock they can't sell, their current assets are overstated, and if their auditors are doing their job properly they would have looked closely at the valuation.  Holding useless stock cost you money in warehousing and insurance.  If you really are storing a lot of junk, a fire sale may well be a good idea even though the proceeds won't be enormous.

 

If they have to borrow funds to produce new stock that hopefully will sell, their bankers will look closely at the balance sheet, and bankers just don't make unsecured loans to companies whose stock-in-trade they consider to be excessive.  What constitutes excessive varies over time, and according to general levels of inflation and its associated interest rates.  High interest rates make it even more important to achieve a high gross profit margin in order to make investments worthwhile.  What is considered an excessive level of stock also varies by industry, but comparison with competing firms can often act as a good indicator to those who putting up finance.

 

 

[Michael Hodgson]

8 minutes ago, The Stationmaster said:

From what the previous management said - if it is to be believed? - a large element of the stockpile was goods ordered for the Christmas market but which retailers wouldn't take on price grounds.  Clearly an attempt to shift some of that appears to have happened before the more recent Christmas. 

If retailers won't take something, it's not their fault. 

The blame remains with the guy who ordered production of the goods in the first place.

Harry Truman got it right ...

 

[Legend]

It would be interesting to find out exactly what this slow moving inventory is , remembering it could be Corgi/Airfix/Scalextric  as well as Hornby . 
 

Standard accounting practice is that it should be valued at the lower of cost or Net Realisable Value (ie what you can get for it) - surely we must be on verge of some large write offs ? 
 

Agree with maximisation of tooling and getting as many liveries out as possible . The lack of blue/grey Mk1s this year  and more liveries on the 50 (eg Banger blue) is an example . Also by having blue/grey mk1s they could have stopped valuable tooling costs of mk2e/fs as there would be something for blue diesels to run with .Introduce mk2s later when scale has settled in . Also , while it is early days , according to their 2024 TT120 catalogue they only intend launching Class 37s initially as era 6 (green?) and era 9 (EWS) . Surely if you want to maximise cash flow you would also go for standard and large logo blue ones . TT120 needs critical mass .They seemed to have figured this into their tooling yet won’t get the benefit of it till later . This is a company that needs cash ! 
 

it looks like they’ve decided to make too much of the wrong stuff in the past . But I still think a significant issue is lack of manufacturing capacity which is stopping the maximisation of their tools . They just can’t get the manufacturing slots .

[Michael Hodgson]

This appears on another thread....

https://www.ebay.co.uk/itm/335356510561

 

Of course it would take more than 30 class 86s to get the stock figures down, but it may be an indication of the sort of thing that's needed.  This though is more likely to be a retailer who's in the same boat on a much smaller scale.

[The Stationmaster]

3 hours ago, Michael Hodgson said:

If retailers won't take something, it's not their fault. 

The blame remains with the guy who ordered production of the goods in the first place.

Harry Truman got it right ...

 

And don't overlook the fact that the 'retailers' being talked about here were almost certainly not the model railway trade but the big multiples and mail order houses where the big Christmas market lies.  One look at the sort of 'toy trains' they were selling and you can instantly see just how far off the market some of the Hornby stuff would have been - massively higher priced for less play value in many cases.

Edited April 24 by The Stationmaster