HORNBY ON THE RIGHT TRACKS

Hornby trains, Corgi cars and Airfi x model planes are the totems of traditional British childhood. So it’s ironic that one of the biggest threats they’ve faced in recent years came from the nearcollapse of a Chinese manufacturer.

The trouble started in 2004 when Sanda Kan, the Dongguan-based firm that had been Hornby Group’s primary producer for nearly a decade, was the subject of a heavily leveraged buy-out by a JPMorgan private equity affiliate. As so often, servicing a massive debt took its toll: by 2008 Sanda Kan was struggling to pay its suppliers, and clients such as Hornby found their supply chains severely disrupted.

In this case, the story has a happy ending. Kader, a leading Hong Kong toymaker, bought Sanda Kan at the end of 2008 and by September 2009 Hornby’s supply problems looked to be over. Profits for the financial year to March 2010 will be squeezed by the earlier disruption and also by sterling’s six-month slump against the US dollar, but analysts are expecting a strong recovery from next spring.

The supply-chain issues have been particularly galling for Hornby: whereas other firms have spent the past year trying to offload large inventories to disinterested consumers, it has had more demand than it could cope with. According to chief executive Frank Martin, the adult collectors who make up the largest part of the group’s market – accounting for 70% of sales for Hornby, 50% for Airfi x and 90% for Corgi – spend on their hobby as long as they have disposable income.

They are also, he says, less price-sensitive than some consumers. “Obviously there’s a limit to what people will pay, but if somebody wants to collect a Hornby locomotive or Corgi diecast there is a limited number of sources. It’s also a slightly emotional purchase and in that context price becomes less of an issue.”

In the toy market, the group’s policy of pursuing licensing agreements has also paid dividends. Hornby’s Harry Potter and Thomas the Tank Engine ranges have proved hugely popular with children, while tie-ups with Formula 1 and the James Bond franchise have boosted sales of Scalextric racing sets, the group’s only product primarily aimed at the junior market.

The group’s increasingly broad base – it acquired Airfix and paint manufacturer Humbrol in 2006, and added Corgi in May last year – makes it particularly appealing to companies looking for licensees, says Martin. “We’re now the first port of call for any licensing company seeking to get into the hobby end of the business because we can speak across the whole spectrum.”

The biggest prize came this July, when Hornby won the contract to produce souvenir items for the 2012 Olympics, from mascot keyrings to Scalextric velodromes. Hornby was the obvious choice – it already makes London souvenirs such as buses, black cabs and high-speed trains – but the announcement was nonetheless welcome and the group’s shares surged by more than 50% to a 52-week high of 166p per share on the news.

The first item – a Corgi replica of the London bus that featured at the closing ceremony of the Beijing Games – launched at the end of October, and a steady stream of products will come on line between now and 2012. Getting them to market will require significant investment in staff, and further acquisitions are unlikely for the next three years, says Martin – particularly as there’s work to be done on Corgi, which he wants to take back to its roots as a mass-market brand. “We’ve set the platform to be the largest and most broadly based hobby company in the world, and we’re a long way along that track. There’s still a lot more to go but you have to do things in a way you can digest rather than overreach yourself.”

After a couple of years of frustrating slowdown, it looks as though Hornby’s growth plans have finally got the green light.