More on Hornby

From Adrian Slywotzky's The Art of Profitability:

 

“Yes, the pyramid. Here’s how it works at Mattel. You sell a Barbie doll for $20 to $30. But imitators can come in below you. So you build a firewall. You develop a $10 Barbie to seal off that space. It’s barely profitable, but it prevents other companies from establishing a connection with your customers. And even girls who start with the $10 Barbie usually move on to buy accessories and other dolls that make them profitable for Mattel.

“But in order to achieve a real breakthrough, Mattel had to look in the other direction. Looking hard, they saw the opportunity for a $100 or $200 Barbie.”

Steve was dubious. “Would parents really give their six-year-old daughter a $200 doll to play with?”

“Absolutely not, but that wasn’t what Mattel envisioned. Forget about the little girl. Instead, think about her mother. She played with Barbies twenty or thirty years ago. She remembers those dolls with incredible fondness. And now she has money to spend. Maybe Mom will buy a designer Barbie—finely crafted, exquisite. Not a toy but a collector’s item, like the china teapots or African sculptures or rare postage stamps that enthusiasts will pay a great deal to own. Providing enormous satisfaction to the customer and enormous margins to Mattel.”

“A great concept for a toy that Baby Boomers are nostalgic about,” Steve commented. “But how does it apply to other businesses?” 

“Here’s the real beauty in Mattel’s idea,” Zhao explained. “Suddenly, Barbie wasn’t a product any longer, but a system, a carefully crafted, coordinated, and integrated system. A firewall of defensive product at the bottom of the pyramid and powerful profit-generators at the top. Brilliant!” Zhao picked up his silver pen and drew. Four strokes, one long rectangle; then three smaller boxes, three strokes each.

Substitute Hornby for Mattel, model trains for Barbie dolls, and boys and men for girls and women. Collectors, fathers and sons, quality, and brand purity. Dig your moat at the low end, with entry level products priced for pocket money budgets, and earn your margins at the high end, with collectors pieces and extravagant models and sets that will appeal to the "father-son bonding" market. That's the business model as it could have been and should have been.

Suppliers, video games, recessions -- these are nothing more than excuses.

If I were a private equity firm, I'd buy Hornby today at twice the price. But as a minority, outside shareholder, I wouldn't touch it.