Hornby steams ahead

MARGATE on a cold December day is, like most English seaside towns out of season, a fairly grim sight. But the Kent town holds a hidden jewel. It is home to the UK's smallest and arguably most successful train company, run by chief executive Frank Martin.

There is a catch. The trains run on rails that are just five-eighths of an inch apart. And the company owes much of its success to Harry Potter and Bart Simpson.

It is, of course, Hornby - the legendary toy manufacturing company that includes Scalextric and has delighted children and adults for almost a century.

During Martin's tenure Hornby has steamed ahead, using Harry Potter and The Simpsons licences to develop products for a new generation of customers.

In 2001 the shares were 117p, this year they hit a high of 1132 1/2p. Full-year accounts for 2003 reveal sales up by 20% to £34.1m, and a 45% leap in pre-tax profit to £5.4m. At the half year, profits were up 33%. Martin is looking forward to a bumper Christmas, boosted by sales of The Simpsons Scalextric sets.

Yet three years ago, Hornby appeared to be running off the rails. Sales were dwindling and the management team put the business up for sale.

'The board could not see a way for the business to continue as an independent. Much of this was because of the dotcom boom,' says Martin. 'There was no one vision for the company.'

After Martin failed to merge Hornby with Humbrol, the paints and models company he was then running, the board decided it would have to continue as a plc. But Martin had got to know the Hornby board and he was offered the job of transforming the company.

'From the outset I saw the opportunity to cut costs and improve quality and detail,' he says.

Making tracks in China

He outsourced production to China, retaining only the design element in the UK. Since then sales have climbed by 75% and the stock has rocketed.

'The China move started before I came to the company. Over six years 600 jobs went. It was handled sensitively. If change had not happened, there would be no employment,' says Martin.

'We have 150 people now, all of whom are well paid, respected and have a secure future. It is much more biased towards the 'brain' side of the business. We outsource what we don't do well.'

Hornby's head office is initially a disappointment. There is no train outside, no Bart Simpson statue and not even a poster of Harry Potter. Instead it is a shabby low-rise building that has more than a hint of neglect about it.

But step inside and a magical transformation begins. Hornby is heaven for boys - and probably a similar nirvana for a large number of middle-aged men who have never outgrown their childhood fascination with trains.

Think Willy Wonka's chocolate factory. Wherever you turn there are men testing out models on bits of track, checking books to compare their paper designs with the real thing, or designing tiny motorbikes and sports cars by computer, with breathtaking accuracy.

'The people who buy Hornby models write to complain if they are not 100% replicas of the real thing,' said one of the designers.

Martin says one of the keys to success is to employ enthusiasts because they understand the brand's heritage and the nostalgia that people associate with it.

'Before my arrival there was a 'this is what we do and this is all we do' tendency,' says Martin. 'But you have to create some excitement. It is no good saying we are only about model rail enthusiasts, because that is a declining market.'

A new generation of customers

To survive, Martin had to attract a new generation of customers. He had already used Harry Potter licences at Humbrol, which included the Airfix brand, and thought it would work well with the Hornby brand.

'Harry Potter provided a publicity platform. People thought we were successful because of Harry Potter, but it has never been more than 5% of sales,' he says. 'But it is important for image, in terms of introducing a new generation of model rail enthusiasts that will pay off in years to come.'

Martin sees Harry Potter's Hogwarts Express as a permanent part of the Hornby range. ' Compare it with Thomas the Tank Engine, which has been part of the range since 1983,' he says.

In a similar way, a licence to use The Simpsons has proved a publicity platform for Scalextric. 'The Simpsons appeals to the widest age group of all cartoon characters,' says Martin.

At £30 a set, The Simpsons Scalextric will be the biggest Christmas seller for Hornby.

Hornby has faced an uphill struggle as the traditional toy market came under siege from ever-more sophisticated video games. It can't have helped that many children are often more interested in mobile phones than model railways.

But the firm has always been a survivor. During the 1980s Martin watched as British toymakers were hit by high interest rates and a weak pound, which made it tough for them to export their products.

'The early 1980s were difficult for Hornby because the first flush of video-type games came out and sales halved. It is a testimony to the business that it managed to keep going,' he says.

He says the novelty of video games is beginning to wear off and traditional toys are coming back in.

'Twenty years have passed and video games are no longer new. There is a recognition from parents that kids need more than sitting in front of a video screen. And look at the age of fathers now. They remember Hornby from their youth. We can sit alongside video games because we offer a difference. We don't see a conflict,' insists Martin.

Innovation is the key

Despite the nostalgia appeal of train sets, he insists success is also about product innovation.

The advent of Live Steam, a miniature reproduction of the Mallard fast train that gushes steam and whistles like the real thing, is a significant step forward. 'This is the Holy Grail for model rail enthusiasts,' says Martin.

'It has taken three years of development to bring a prototype to the stage where we can manufacture in volume. It is an absolute working replica.'

Martin is convinced sales of the £500 train set will soar and bring in a new market for Hornby.

'One of the things that has limited Hornby growth is that it is all based on UK railways, so there is no interest overseas except for expats. We believe this is different. People from all over the world are contacting us to say they have to have one.'

The first batch of orders have just been sent out in time for Christmas, and some 2,500 will be sold in the current financial year. Martin believes sales will reach 10,000 a year, making it a £3m product line.

'It doesn't surprise me at all that guys in their forties and fifties are passionate about model railways because a lot of them have grown up with Hornby, but probably not the model they wanted.

'These guys are older now, with more time, money and space. People have more disposable income.'

Like his target audience, Martin was given a Hornby train set when he was a small boy - but it was not the one he wanted.

Martin, who is married with two daughters and lives in Broadstairs, Kent, has a wealth of experience in traditional brands.

He worked for Raleigh bikes, and at Hasbro he launched My Little Pony and Transformers in the UK. He then became managing director of Denby Pottery.

But Martin has found his forte at Hornby.

So would he want to sit at the helm of a larger rail company? Not a chance. 'I wouldn't want their job,' he says. 'I am glad I am running this railway.'