Hornby's not yet at the end of the line: In the third of a series on company survival, Nigel Cope looks at one of Britain's most famous toy makers

Keith Ness, chief executive of Hornby, the train sets and Scalextric maker, was on Friday to be found holed up in his rather drab office in the Kent seaside resort of Margate taking calls on the company's latest set of financial results.

It was not an enviable task - they were not exactly spectacular. Profits had ground to a halt at pounds 1.4m on sales that had drifted into the sidings at pounds 28m.

Sales of the core trains and Scalextric ranges have suffered as a result of the recession and the craze for video games. And Fletcher, the speedboat company acquired in 1988 as part of a diversification into the leisure sector, only broke even.

But, given the traumas suffered by the British toy industry in the past 20 years, it is surprising that a company like Hornby is around at all. Few others are.

Hornby is one of the last sizeable survivors of an industry where Britain was once an important force. Though it still has about 200 toy companies, most of the larger names have been gobbled up by foreign competition in an increasingly global business.

Matchbox is now part of Hasbro, the American company that is the largest in the world. Corgi was snapped up by Mattel, another US group. Kiddicraft, a once British pre-school toy specialist, was bought by Fisher Price, now merged with Mattel. And ownership of Meccano has crossed the Channel to France.

'The names don't die, they just change hands,' says David Horton, of the British toy and hobbies manufacturers association.

Like all toy companies, Hornby has been squeezed by three trends in the market. The rise of the American multinationals such as Hasbro and Mattel-Fisher Price has made it difficult for smaller companies to compete on marketing budgets.

Imports from low-cost producers in the Far East have also taken their toll. As late as 1978 Britain was still a net exporter of toys. Last year imports accounted for nearly half of the country's pounds 1bn toy industry.

The final blow was the rise of electronic toys, initially in the early 1980s and then the second wave 10 years later with the phenomenal success of the Sega and Nintendo video games machines.

Hornby is not the only company to survive the onslaught. Bluebird Toys, founded by Torquil Norman in 1980, is a highly successful importer of toys from the Far East, though it does have a factory in South Wales. Cassidy Brothers, of Blackpool, run by its founder Tom Cassidy, is another survivor. And in the board games sector Waddington, maker of Monopoly, and J W Spear (Scrabble) still fly the flag.

But few names evoke the nostalgia of Hornby, with its painted train sets and Scalextric slot racing cars. For years 12-year-old boys have envied friends whose generous parents included one in their Christmas stockings.

Founded by Frank Hornby as Meccano in 1901, Hornby has had its fair share of troubles. It fell into receivership in 1971 when its parent, Lines Brothers, which at one point accounted for 70 per cent of the British toy market with names likes Airfix, Tri-Ang and Hornby, ceased trading. Then in 1980 Hornby's next owner, Dunbee Combex Marx, also went under. The company's current incarnation began in 1982 when Keith Ness, Hornby's pounds 228,000-a-year chief executive, led a management buyout. Faced with the recession and the onslaught from the early computer games, Hornby very nearly went off the rails again. 'We lost 50 per cent of our sales almost overnight,' recalls Mr Ness.

He had no option but to wield the knife. The workforce was cut from more than 1,000 to 300 as the company found its feet. But it wasn't until 1985 that Hornby returned to profit. A year later it took a listing on the Unlisted Securities Market.

What saved Hornby was the strength of its brand. Mr Ness also believes trains and Scalextrix are not victims to fashion as they are sold to parents, particularly fathers who want their sons to enjoy the same thrills they did.

In the past 10 years Mr Ness has concentrated on making Hornby less reliant on the Boys' Own world of fast cars and trains. Back in 1980, it had only its trains sets and Scalextric. Now those two ranges account for only 60 per cent of sales as Mr Ness has expanded into fashion toys and dolls.

Successful lines includes Gladiators, a range of figures related to the LWT television programme, Clever Cook, an oven set that enables children to do their own cooking, and Game Genie, video games software that is played on Sega and Nintendo consoles and gives Hornby a toehold in a lucrative but volatile market. Lines such as Gladiators and My Magic Dragon are manufactured in the Far East. But the train and Scalextric sets are still made in Margate.

The Margate factory is essentially a light engineering operation with a core staff of just over 500 augmented by seasonal workers in the second half of the year. Production is increasingly mechanised, though some tasks, such as adding the paint lines to collectors' items of locomotives, are still performed by hand.

New products are being brought in to shield the core markets from competition. Tyco, an American company, has launched a range of smaller, zippy slot car racing machines, so Scalextric has produced a similar compact range. Other new products such as Cassy, an eight- inch doll launched to tackle the mighty Barbie and Sindy, have been less successful.

While Hornby has done well to survive, it is not completely out of the woods. The diversification into leisure has clearly not been a success and the sale of Fletcher sports boats cannot be far away. In the core toys business problems loom.

'Hornby railways have virtually no export market and at home they are not the high profile, fast-selling line they used to be,' says Jon Salisbury, editor of World Toy News.

Hornby's big problem is that its core market is shrinking. More than half its sales are in trains and cars, where the audience is young boys. The sector has been ravaged by the Sega and Nintendo craze.

Marketing has not been a conspicuous success. In the years when Nigel Mansell was at his peak and now that Damon Hill is keeping alive British interest in motor sport, Hornby has failed to sign a promotional agreement with either. Mansell endorses race car products for Tyco, Scalextric's chief competitor.

A pointer to the future came in January when Hornby took a 10 per cent stake in Original San Fransisco Toy Makers, a US company, giving it exclusive UK rights to the range.

This and other licensing deals, such as the Gladiators arrangment with LWT which enables it to tap in to the success of the programme, give access to the potentially lucrative market for fashion toys.

(Photograph omitted)