Hornby train sales hit by supply problems

[steventrain]

See BBC news.

 

http://www.bbc.co.uk/news/business-25874992

 

[Pete 75C]

It's kind of old news, really. Something a lot of us have known for some time, either by assumption, or fact to a certain extent.

[mow]

"Hornby said Friday that it has finally agreed arrangements to cease trading with the long-standing supplier that had closed the plant, meaning that its tools and mould will be available to its other manufacturing partners. It expects final production by the supplier to be in July."

 

http://www.lse.co.uk/AllNews.asp?code=37oveis6&headline=Hornby_Hit_Again_By_Supply_Issues_But_Agrees_Exit_Deal_With_Supplier

 

"Annual model rail purchases to be about 61% of its budget in the UK and 68% in Europe. That's well below the 88% and 80% figures, respectively, it had set out in its half-year results." 

 

The test over the next year to to address the supply issues of quality and quantity, and to sort out their confusing price, promotion and distribution issues. Caught between a rock and a hard place, It is an interesting case study for business schools - pros and cons of outsourcing, and subcontactor relations. I hope that the new management team have found a way out to the morass.

[mow]

Local rag's business coverage.

 

http://www.kentonline.co.uk/kent_business/news/revenues-derailed-for-model-manufacturer-11808

[brushman47544]

"Hornby said Friday that it has finally agreed arrangements to cease trading with the long-standing supplier that had closed the plant, meaning that its tools and mould will be available to its other manufacturing partners. It expects final production by the supplier to be in July."

 

Thank you. That's very interesting because it effectively means that all the older high spec models will no longer be available until one of Hornby's new factories is able to use the SK/Kader tooling and moulds and the workforce has shown it has the skills necessary to apply all the separate details whilst maintaining build quality. I suspect not everything planned to be manufactured by July will have been and there will be some models that will disappear from the catalogue for a few years until these issues are sorted out.

 

I wouldn't want to be in Hornby's shoes deciding which models get priority - whatever gets made people will be disappointed.

 

EDIT: On the plus side, perhaps this will mean Bachmann has extra slots for its own models.

[mow]

Times as a more inventive headline than most.

 

Profit warning is the Pits for Hornby.

[mow]

Thank you. That's very interesting because it effectively means that all the older high spec models will no longer be available until one of Hornby's new factories is able to use the SK/Kader tooling and moulds and the workforce has shown it has the skills necessary to apply all the separate details whilst maintaining build quality. I suspect not everything planned to be manufactured by July will have been and there will be some models that will disappear from the catalogue for a few years until these issues are sorted out.

 

I wouldn't want to be in Hornby's shoes deciding which models get priority - whatever gets made people will be disappointed.

 

EDIT: On the plus side, perhaps this will mean Bachmann has extra slots for its own models.

This is also interesting.

 

"As a result of the end of supply agreement, Hornby will make a GBP0.6 million payment for materials, work in progress and components that will be released to it. It said a significant amount of this will be written off in the current financial year."

 

But the challenge is to meet or exceed the quality of past production. Diversification in terms of supply, how many sub-contractors who understand their philosophy can they realistically manage. 

 

It is a bit like Tesco taking the hit for using Yodel as a delivery agency, if they foul up, Tesco's reputation suffers.

[mow]

Noticed this tweet.

 

Oops -David Cameron hails Hornby in his 'reshoring' speech, but they've just issued another stonker of a profit warning

[mow]

The statement can be found on their website.

 

http://online.hemscottir.com/ir/hrn/ir.jsp?page=news-item&item=1680758141878272

 

Bit about lower debt, and being within their banking covenants is not a bad sign. 

[The Stationmaster]

Hornby's own statement makes interesting reading - click on the Interim Management Statement dated today in this link

 

http://www.Hornby.com/investor-relations/-1/rns/

 

 

The fascinating bit, as already remarked on by Brushman, is the amount and monetary value of work they still have in place with Kader notwithstanding previous comments about moving elsewhere.  And that it appears to include tooling etc work in progress suggesting far more of their model railway output has remained with Kader than we thought.  Overall I'm inclined to agree with Brushman regarding probable loss of production/models this year because of the impact of moving tooling away for one factory to - I can but presume - others, along with all the compatibility problems that brings.  

 

I do however wonder about the shortfall on budget for UK model railway sales - the figures suggest that the 27% which was not achieved (compared with what was forecast in October) might all have been Kader production but if that is not the case then they are suffering supply problems with other factories as well.  An interesting sidelight here - which might not be connected but could be is the reduction in nett debt between September and December 2013 - did the debt reduce because working capital wasn't needed to purchase product from the factories or was product not purchased because the debt was being reduced?

 

Incidentally perhaps someone could explain the £1 million loss on the sterling value of currency held to purchase product from factories - surely the £ hasn't risen against other currencies (particularly the $US) to any great extent since last summer?

[Dunsignalling]

This is also interesting.

 

"As a result of the end of supply agreement, Hornby will make a GBP0.6 million payment for materials, work in progress and components that will be released to it. It said a significant amount of this will be written off in the current financial year."

 

But the challenge is to meet or exceed the quality of past production. Diversification in terms of supply, how many sub-contractors who understand their philosophy can they realistically manage. 

 

It is a bit like Tesco taking the hit for using Yodel as a delivery agency, if they foul up, Tesco's reputation suffers.

That will largely depend on two factors.

 

What resources (staff) Hornby have in place to provide reliable liaison "over there" (either by being resident or making regular visits) and how easy it is for them to travel between the various locations if the latter is the case.

 

If Hornby want to get the best results from Chinese manufacturing, the experience of others (described in other threads and other places) suggests that good face-to-face relationship-building and communication is of great value in dealing successfully with the Chinese business community.

 

Reintroduction of the complex models previously manufactured by Sanda Kan will, I venture, happen gradually and not commence until Hornby are confident that the 'new boys' are fully up to speed. If most of the historical costs do get written off  this year, any pressure to do so will come from a need for product to sell rather than concerns about expensive kit lying idle. However it pans out, transferring production to the new suppliers will almost certainly involve some changes to what went before.

 

John

[Lady_Ava_Hay]

 An interesting sidelight here - which might not be connected but could be is the reduction in nett debt between September and December 2013 - did the debt reduce because working capital wasn't needed to purchase product from the factories or was product not purchased because the debt was being reduced?

 

 

What I found much more interesting was the final debt figure given for 2012(?). A jump from £3million to £6.5million is more difficult to swallow than the vaunted reduction from £8million in a few months.

 

I also noted in one of the statements, 'excluding Olympic material'. If you read between the lines this means that Hornby have hit a double whammy of losing a pile on Olympic merchandise and losing ( or being given notice to quit by ) a major supplier.

 

It is also damning that Hornby are pushing hard on other product. Again one could read into all this that model railway merchandise is not their major priority at the moment.

[Martin_R]

... I suspect not everything planned to be manufactured by July will have been and there will be some models that will disappear from the catalogue for a few years until these issues are sorted out.

 

I wouldn't want to be in Hornby's shoes deciding which models get priority - whatever gets made people will be disappointed.

 

I suspect the real danger for Hornby here is that by the time their older 'quality' models do finally re-appear on the shelves some of the other manufacturers may well have exploited the situation and produced even better 'quality' versions. This could effectively put Hornby on a back foot for some time to come and I suspect some hard decisions will have to be taken in the near future.

 

This is a terrible situation not just for Hornby but for the hobby as a whole as this situation could be repeated and effect other manufacturers given the growing instability with low volume speciality manufacturing in China. The first real test will be when manufacturing processes attempt to restart after the Chinese New Year.

[brushman47544]

It is also damning that Hornby are pushing hard on other product. Again one could read into all this that model railway merchandise is not their major priority at the moment.

 

"damning"... I'm not sure I'd go that far. If Hornby is going through a hiatus with model railway items caused by manufacturing problems in China, surely it's a good idea to "push hard" on other products lines and brands that are manufactured elsewhere (e.g. Airfix in India) and where the supply is reliable.

[Pugsley]

Incidentally perhaps someone could explain the £1 million loss on the sterling value of currency held to purchase product from factories - surely the £ hasn't risen against other currencies (particularly the $US) to any great extent since last summer?

It appears that the pound has risen against both the Yuan and USD in the last year:

http://www.xe.com/currencycharts/?from=GBP&to=CNY&view=1Y

http://www.xe.com/currencycharts/?from=GBP&to=USD&view=1Y

 

The pound seems to be marching upwards at the moment, I'm not entirely sure why.

[Fenman]

I suspect the real danger for Hornby here is that by the time their older 'quality' models do finally re-appear on the shelves some of the other manufacturers may well have exploited the situation and produced even better 'quality' versions. ...

 

I'm struggling to see this. You think other manufacturers will produce, say, a B17, an L1, a Britannia or a Schools?

 

I think other manufacturers would struggle to sell anything like a decent volume given that Hornby's models of those prototypes are so very good it's difficult to see how anyone could improve much on them, while still being at a credible price-point. And given that the market has only just shelled-out for significant numbers of those items in their first or second runs.

 

Realistically, what models do you think other manufacturers could take on, with any hope of turning a profit at least as good as if they'd chosen a different prototype?

 

Paul

[Dunsignalling]

I'm struggling to see this. You think other manufacturers will produce, say, a B17, an L1, a Britannia or a Schools?

 

I think other manufacturers would struggle to sell anything like a decent volume given that Hornby's models of those prototypes are so very good it's difficult to see how anyone could improve much on them, while still being at a credible price-point. And given that the market has only just shelled-out for significant numbers of those items in their first or second runs.

 

Realistically, what models do you think other manufacturers could take on, with any hope of turning a profit at least as good as if they'd chosen a different prototype?

 

Paul

The only ones that spring readily to mind are the Black Five and the rebuilt MN, the first two Hornby "new generation" models.

 

They've both been around long enough to justify some modest updating and Hornby have barely begun to explore the variations they could cover.

 

John

[Ozexpatriate]

It is also damning that Hornby are pushing hard on other product. Again one could read into all this that model railway merchandise is not their major priority at the moment.

That is not how I would interpret it.

 

Model railways (as always) is their highest priority. They just can't get enough of it manufactured and don't have enough of it to sell.

 

The "look at the bright shiny thing over here instead of the smelly mess in the corner" is just standard operating procedure for corporate communications. They have to say something positive and not all their product lines are in the manufacturing doldrums. 

[Ozexpatriate]

Incidentally perhaps someone could explain the £1 million loss on the sterling value of currency held to purchase product from factories - surely the £ hasn't risen against other currencies (particularly the $US) to any great extent since last summer?

Mike, I've not done any analysis and for me, it's too complicated to try. Historically Hornby made their Asian model railway purchases in Hong Kong dollars. Presumably the final costs are ultimately in Yuan.

 

Price of the Pound versus the $HK versus the Yuan at each of the points where transactions were made (which is not communicated) is needed.

 

EDIT: (thanks to mow's post below) from the Grauniad:

... the foreign currency it bought to pay for undelivered procucts [sic] has fallen by £1m against the rising pound, creating a £1m annual loss.

Which is all very consistent. And yes, the Guardian, did spell "products" incorrectly.

 

First public mention I've seen of "Plastech".

Making Quickbuild at the Plastech factory in Sussex worked well because Hornby's engineers were able to talk to the manufacturer easily, Canham said. He added that Quickbuild has caught on and production in the UK could increase along with the range.

[mow]

Guardian coverage.

 

http://www.theguardian.com/business/2014/jan/24/Hornby-1m-annual-loss-supply-issues

[Bulleidboy100]

I'm struggling to see this. You think other manufacturers will produce, say, a B17, an L1, a Britannia or a Schools?

 

I think other manufacturers would struggle to sell anything like a decent volume given that Hornby's models of those prototypes are so very good it's difficult to see how anyone could improve much on them, while still being at a credible price-point. And given that the market has only just shelled-out for significant numbers of those items in their first or second runs.

 

Realistically, what models do you think other manufacturers could take on, with any hope of turning a profit at least as good as if they'd chosen a different prototype?

 

Paul

I agree that it would be difficult to see another manufacturer taking on models that Hornby "were" going to produce. Reading Dennis Lovett's (Bachmann) letter in MRE this morning, it takes three years from first idea to retail shelf. So I cannot see this happening at all.

[87004]

I know it's water under the bridge now, but Hornby really should have outsourced to a joint venture rather than using a supplier/customer relationship. Then when Sanda Kan went pear-shaped a few years ago they should have made much more effort to take them over.  To have your supplier taken over by a competitor was only ever going to end one way really.

 

Do I read the Hornby announcement correctly as them having to pay to get their tooling back?

 

This whole sorry debacle could be used as a case-study in how not to outsource for Business Studies students.

 

If manufacturing is never likely to come back to the UK, why not in source the machine tool manufacture/research back to the UK?  This must be the value added work that the UK is really good at.  It would also give much less chance of the huge fowl-ups we have seen with detail/livery that the long distance communication by 'Chinese whispers' seems to have caused in the past?

[Miss Prism]

If manufacturing is never likely to come back to the UK, why not in source the machine tool manufacture/research back to the UK?  This must be the value added work that the UK is really good at.

 

There is evidence (although not for the model railway biz) that some toolmaking is reverting to the UK.

[Legend]

I'm struggling to see this. You think other manufacturers will produce, say, a B17, an L1, a Britannia or a Schools?

 

I think other manufacturers would struggle to sell anything like a decent volume given that Hornby's models of those prototypes are so very good it's difficult to see how anyone could improve much on them, while still being at a credible price-point. And given that the market has only just shelled-out for significant numbers of those items in their first or second runs.

 

Realistically, what models do you think other manufacturers could take on, with any hope of turning a profit at least as good as if they'd chosen a different prototype?

 

Paul

Actually a B17 "Thorpe Hall" has just appeared in stock at Hattons. If you remember the B17 changed manufacturers mid stream which was why there was a significant delay on release of model. The B17 is a high spec model that has already been manufactured by someone other than Sanda Kan, so we can't necessarily suppose that new manufacturers will only supply lower spec model eg DoG

 

The report is hardly a surprise. If you don't have anything to sell is it any surprise they make a loss? A couple of things stand out though. Firstly they've lost significantly in currencies again. They've lost out before ? While currencies are tricky they don't see to have hedged their bets again. The second point is they've had to pay to get use of their own tools back. Hopefully now these can be given to other manufacturers we might see Hornby get back on track.

 

The year to 31/03/14 is going to be a bad one, hence profit warning, and is largely a result of the actions or inactions of the previous management. Year to 31/03/15 should be better but lets not forget that Hornby have upped their margin while reducing those of their retailers, seem to be altering their service dealer terms ,and are still at the mercy of a market where several model railway suppliers are chasing after limited manufacturing supply. Interesting stuff . Can't wait for this edition of Pat Hammonds history!

[robmcg]

To me the delay in new models with existing tooling means I will indulge myself with the various second-hand and new higher-end detailed models which ARE available, whether by s/h box shifters or Ebay or older stock in small shops.

 

The relief is that Hornby will have the tooling and expertise (I hope) to return to highly detailed models, as SK suggested in his interview with AndyY ... there is a market for this.

 

So long as the banks accept Hornby's prospects as good, so do I.