Trust Deficit

Judges Scientific and Elektron Technologies are so similar that they could easily be confused for each other.

Well, except for this:

Got that? Owning 13.4 million shares makes one’s interests more aligned with that of all shareholders than does owning 9.7 million shares.

Who says that irony is dead?

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.

Hornby Plc -- Toys

Hornby is the stuff of nightmares. An iconic brand with the very simplest of business models brought low by persistent management incompetence. No investor in 2003 could have foreseen what came next. I look at Hornby and I think, “that could have been me”.

Just marvel at this 2011 piece from the Torygraph: 

“It makes for a curious, and rather fun, office. How many corporate headquarters share their building with toy train sets and day trippers?

Mr Martin doesn't seem to revel in this quirk. He's very laid-back for a chief executive, but there's no bounce in his step as we wander around admiring the 1950s corgi models, and German 0-gauge trains. And he clutches the controls of the latest Scalextric set with the enthusiasm of a tea-totaller (sic) in a pub.

But then he never had a toy train set as a boy. Nor did he have Scalextric – he had to pop around to his neighbour's house in Manchester if he wanted a play with a slot car.

The fact he wasn't a fan as a child gives him "perspective", he reckons. It also helps him smile at the absurdity of some of his customers, the majority of whom are adult collectors, rather than children. He recently received an angry letter from one, who complained that a tiny fire-stocker's shovel, on the model of a historic train, only had one rivet in the handle when it should have had two.

I suggest his customers aren't just enthusiasts, they are nerds. He smiles and says: "We don't like to call them that. They are consumers who recognise the true value of this wonderful collectors' range we have created for them."

The nerds should have kept Hornby's profits puffing along quite nicely during the recession – not many businesses enjoy such a loyal customer base. But in recent years it has, if not hit the buffers, then certainly got stuck in the sidings. High raw material costs (plastic, zinc for the die-cast), rising labour rates in China and a difficult supplier, who consistently failed to deliver products on time, have hit profits.

Martin says the issues with the supplier have been sorted and the outlook is looking far more promising. That is mostly down to Hornby securing a licence to manufacture a range of London 2012 merchandise

A difficult supplier. Can you imagine?

Hornby is yielding 20% on 10 years average operating profit. It’s not cheap at that price.