Lilliput's cutesy cottages may not be to everyone's taste but beauty, says Charles Darwent, is in the eye of the shareholders and they are delighted with the company policy of thinking big.
If you are in any doubt about the dictum that small can be beautiful, consider one of the objects on the windowsill of John Russell's office. Not the object itself - a guffawing plastic jester, which, while unquestionably petite, is of profoundly questionable visual allure - but what that object represents. 'That,' grimaces Russell, with undisguised distaste, 'is what the company diversified into in the late '80s. And', he points an accusing finger at a lolling group of indescribably kitsch plastic tigers 'those. It may not strike you as entirely surprising that the firm should have gone from being a vibrant outfit to one that was on the point of going under in slightly less than two years.'
It doesn't, although Russell's distaste for the objects in question is not based on primarily aesthetic grounds. Indeed, his company - Lilliput Group plc, of which Russell is chairman and CEO - still manufactures a product that might itself strike some as teetering on the edge of kitschery: teeny little gypsum Amorphite cottages with names such as 'Dovetails' and 'Burnside', the roses around their olde oake beames lovingly hand painted in a Lake District factory called - brace yourselves - Lilliput Lane.
Whatever your views on the aesthetic desirability of the Cottages of Lilliput Lane, however, they clearly have an inarguable appeal all of their own for Russell. That appeal is spelled 'profit': some £3 million worth of it on a £10 million turnover last year alone, if (Lilliput's final year-end accounts have yet to be published) the market soothsayers of the Financial Times are to be believed. Russell, the soul of propriety, refuses to confirm or deny these sums, but does modestly note that 'we've had to close our order books in October for the past couple of years - we just couldn't take any more orders for Christmas after that. So last year we took on 110 extra employees: production went up by nearly 30% but we still had to close our order books, this time by the end of September.' Beauty, as they say, is in the eye of the shareholder.
What makes all of this worthy of note is that only four years ago, the shareholders of Lilliput Lane were the not-very-proud possessors of what, to the owners of life-size versions of their cutesy cottages, would be known as 'negative equity'. Five million pounds of it, to be precise - a figure that the company's bankers, deeply undersecured, understandably found less than endearing.
'My own feeling is that what had gone wrong wasn't peculiar to this company,' says Russell. 'It was peculiar to the late '80s. Coloroll went through it, the Sock Shop went through it. In those halcyon days of Mrs Thatcher (sic), turnover doubled every year. Half a million to a million is fine; one million to two million is just about OK; but two million to four million takes you into big business, and that's a problem.' The one-time Lilliputians had, in other words, found themselves transformed willy-nilly into a race of Gullivers, but ones who had outgrown their strength in the process of getting bigger. Set up in 1982 by David Tait - an ex-professional soldier with a nifty line in silicone elastomer moulding - the company began life with 12 people and some outbuildings: a cottage industry in more senses than one. For the first couple of years, things chugged along nicely on the back of the gifte shoppe trade. No one banked on a tenfold increase in turnover in rather fewer than half as many years (a chance visit to a trade fair led to Lilliput's discovery by the wider world) and no one was prepared for it when it came.
As a result, says Russell, a startled Tait turned to his local accountant for advice. This, in the words of Lilliput's new chief executive, was 'to get hold of some new capital as a kick in the backside up to the next rung. David became more, um' - Russell winces at the jester - 'creative, but the company stopped thinking about what its business was about, what market it was in. That destroyed its base. It had to open new factories, had to employ people but if you employ people without training them, you get lax procedures and costs go out of the window. Then, of course, they had to diversify. Things like that' - the unfortunate jester again - 'are made in Stoke, so you ended up with a management that spent half its time travelling. Also, it's a different process - it's resin, not Amorphite. It comes out of a mould, but so does chocolate.' Not surprisingly, Lilliput's alarmed bankers refused to fund any further expansion and Lilliput turned instead to Lazards and Schroders for venture capital. 'But the new money came with strings attached,' observes Russell, tersely, 'and I was one of those strings.' That Russell should have been able to restore Lilliput's fortunes in roughly the same time as it had taken to reverse them is clearly itself worthy of note. His own explanation for this is that he had had the unexpected good fortune to have weathered two major recessions in his previous incarnation as brands manager for the Burton Group and for Courtaulds. 'Not long after I arrived, the budget increased VAT from 15% to 17.5 %, and our order books went right down,' Russell recalls. 'Stocks were rising and, remember, we had massive borrowings. No one here had experienced anything but boom times before, and people panicked. So I said, "We've got to take out capacity, go on to short-time working," and we did.' It was also, happy to relate, the end of the road for the resin jesters and tigers, the Stoke division being hived off as a separate firm and exchanged for the shares of the same accountant whose idea they had been in the first place.
But there is another symbol of the sea change in Lilliput's corporate culture on Russell's bucolic windowsill: a pointedly un-cutesy Toshiba portable computer. 'I don't regard the £2,000 which that cost as a capital investment,' asserts Lilliput's chief executive. 'I see it simply as spend on necessities, like pencils and paper used to be. The investment is minute compared with the benefits we derive from it, but most small companies are terrified of the idea of spending on IT. If being in big business has taught me one thing, it is that the biggest problem affecting small businesses is that they think small.' Nor is it simply that Russell's £500,000 investment in IT has whittled production time and inventories at Penrith down to an anorexic leanness (although it has). The firm's integrated computer system has also allowed the company unparalleled access to what Russell describes as Lilliput's 'single greatest asset': the legion of folk - 68,000-strong at last count and growing - who are card-carrying members of the Lilliput Lane Collectors' Club.
'For £15,000,' chortles Russell, 'we managed to get software that can map postcode profiles of every one of our members, here and in the States. We can target our sales literature right down to a street, to an individual house in that street.' While the old dictum that 'everyone knows that half their advertising budget is wasted, they just don't know which half 'may apply in the life-sized world, in Russell's miniature arcady every ad penny is accounted for. What is more, every ad penny is also provided by the very beneficiaries of Russell's computing wizardry. 'The club costs us roughly £1 million a year, which is about 10% of our UK turnover,' beams Lilliput's chief executive. 'But it doesn't actually cost us anything because it's entirely self-funding. Members pay £30 for two years' membership, which covers our publicity costs. If the club were a separate business, it would break even.' What is more, the highly responsive market research allowed by Lilliput's computers suggests that some 65% of the products disgorged from Lilliput Lane are bought by members of the club, which makes targeting them accurately inarguably desirable. 'The average member's collection size is 21 pieces,' notes a sanguine Russell. 'We know that he or she will buy three-point-something a year and get two-point-something more as gifts. It's useful stuff.'
If this were not enough, Russell's application of big-business mores to small-business practice carries another advantage. Part of the incomprehensible magic of Lilliput's cottages is that they are, relatively speaking, difficult to get hold of. Promotional literature is peppered with words such as 'limited edition' and 'broken moulds'. 'We limit things by number, and we limit things by year,' notes Russell. As a result of some bizarre evolutionary atavism, competition for rare pieces is consequently hot. At a recent auction, a vintage piece of Lilliputia, £10 new, went for £1,600. 'Limiting concentrates the mind wonderfully,' Russell observes, 'and also lets us keep our stocks down. Other manufacturers of similar objects say, "We have to keep a 5% excess stock." We like to have a 5% shortfall.'
If there is any single potential cloud on Lilliput's otherwise roseate little horizon, it might be assumed to be the prospect of other manufacturers of bijouterie noticing the proliferation of noughts and commas on Russell's bottom line and deciding to join in. But is Russell dismayed at the thought? Reader, he is not. 'Barriers to entry aren't very great on the face of it,' agrees Lilliput's chairman, blithely. 'You get a mould, pour stuff in and paint it. But what we have here is a strong brand and market awareness. Our research suggests that people think our business is 10 times as big as it is. It costs a lot to establish a brand like that, and it takes a lot of time.'
Secure in this knowledge, the fairie folke of Lilliput Lane continue to paint and mould with computerised abandon. Not surprisingly given the firm's recent history - diversification of Lilliput's core product is not on Russell's agenda, although he does expect to add complementary lines through acquisition: an ambition made easier by the firm's flotation last November. Such developments are in the middle distance, however, a field that Russell spends a deal of time contemplating. 'When we floated, people said it was sheer opportunism,' Russell notes. 'It was something people in the City didn't understand. We employ 600 people now and still make the kind of profits other people dream about. This business is real business, a real gem of a business.'.