I've never really appreciated the whole model train thing until I took my kids to Northlandz, a 52,000 square foot facility in Flemington, New Jersey. It's a wonderful place with more than 100 trains running on 50,000 feet of tracks through make believe (yet very realistic) towns and scenery. Don't take my word for it - if you want to get an idea of how cool it is, just check out this video. You may not immediately become a model train enthusiast, but you'll appreciate those who are.
A 2005 report in the Financial Times pegged the model train business as a $2 billion a year industry. And it's enormously popular in the United Kingdom. Unfortunately Britain's recent exit from the European Union is having a major effect on many of these companies.
According to a report this week by the BBC, train maker Hornby announced a 10% increase in prices - with more increases potentially on the way. Dapol, a Welsh manufacturer of model trains, has reported a 10-20% rise in its costs in just the past few months and will likely be increasing their prices as a result. Other makers like Busch, Kibri and Bachmann are expected to do the same, if not already.
It's all because of Brexit, and the 17% fall in the value of the pound since June.
"We were hoping that the situation would stabilize and that the pound would regain some of its fallen value," Dapol managing director Joel Bright told the BBC. "It is now clear that this is not going to be the case and perhaps a weaker pound is here for the longer term. As a consequence, we now need to recoup these increased costs from imported goods."
Are you keeping a close eye on this? It could happen to your company too.
In today's globalized world, companies like Hornby, Dapol and many others purchase needed materials or send their manufacturing to be done outside of the country. When the value of their currency falls, costs rise. When it falls a lot - as the pound has recently done - costs rise...a lot. Overhead can only be cut so much. To stay in business these companies have been forced to raise prices to cover the difference. And although some companies have been doing their best to absorb these added costs, there is only so much time they can survive without giving in to higher prices too. How reliant is your cost structure on overseas partners? If the dollar dips, how exposed are you?
There is a good side: overseas sales. As the value of the pound has dropped so therefore have the prices of these model trains to customers in the U.S., Australia, Germany, Austria and Switzerland. Those companies who have invested and established themselves with easily found and up to date ecommerce platforms will reap the benefits of more sales to non-domestic customers which will hopefully make up for profits. Have you made these investments? Do you have a growing base of overseas customers that you can rely on to diversify in the event of a fall in the dollar?
The problems of train makers in the UK are a lesson for companies in the U.S. Your business model may hinge on purchasing work and materials from overseas, which is all well and good in a stable economy with consistent exchange rates. But a fall in the dollar caused by trade wars, rising government deficits or a decline in confidence in the U.S. economy could cause these very same problems here - and expose you to higher costs because of a weaker dollar.
If you've been thinking ahead you hopefully have a base of existing and prospective overseas customers to sell to at a more attractive price if the dollar becomes weaker. But if your cost structure is reliant on overseas providers, and these problems do occur, it will impact you like its impacting the model train industry in the U.K.
Are you fully prepared for this to happen? Take a trip to Northlandz and think about it.