Will Christmas be derailed?

[FJ and G]

Will Christmas Be Derailed for Lionel Trains?
Troubled Train Maker Lionel Clings to Box-Office Hopes For 'Polar Express' Replica

By JOSEPH PEREIRA and ETHAN SMITH Staff Reporters, The Wall Street Journal

(Nov. 17) - Christmas is turning into something of a train wreck for Lionel LLC, the 104-year-old maker of model trains.
Lionel has the license to produce a replica of the locomotive in "The Polar Express," Warner Bros.' big-budget holiday movie that made its debut last week.
Lionel's $249 replica of the locomotive in 'The Polar Express' has sold very well.
The movie was supposed to rekindle interest in trains among youngsters more fixed these days on videogames. And in spite of the film's showing at the box office, Lionel's $249 Polar Express train sets have been a hit, selling out in many stores. But hopes for taking advantage of that interest seem dashed by Lionel's filing for protection from creditors late Monday in federal bankruptcy court in New York's Southern District.
Lionel says it filed because it couldn't pay a $40.8 million judgment against it after a federal court in Michigan found it misused blueprints from a rival's trains. The judgment "has forced us to take this action," says Jerry Calabrese, Lionel's chief executive. The bankruptcy filing will give the company time to appeal the court decision and "will enable us to create, manufacture and ship our products in our normal and usual way," he adds.
Lionel, founded in 1900 by Joshua Lionel Cowen, the son of Eastern European immigrants, has experienced wildly fluctuating fortunes over the years. The company based outside Detroit grew to become the world's largest toy maker in the early 1950s. "Every middle class boy wanted to play with Lionel trains back then," says George E. Hoffer, an economics professor at Virginia Commonwealth University who is a model-train collector and a longtime follower of Lionel.
But the suburbanization of America in the post World War II era distanced many children from train stations, Mr. Hoffer says. Interest in train play dwindled further in the 1960s and 1970s, but picked up again when many baby boomers began collecting train sets again as deep-pocketed adults during the 1980s.
Catering to their expensive tastes, Lionel and other train manufacturers boosted sticker prices for basic kits to levels that became unaffordable for younger children. "A starter kit basically cost $800 to $1,000," says Mr. Hoffer. "No parent was going to spend that kind of money on a kid," he adds.
In 1991 Lionel Inc., a toy retailer with ties to Lionel LLC, went out of business after filing for Chapter 11, leading many consumers to erroneously think that the toy-train maker had also become a thing of the past.
Over the years, Lionel LLC has operated under a rotating cast of owners that has included attorney Roy Cohn, a founder of the nephew. He tried unsuccessfully to turn the train outfit into a defense contractor, according to Mr. Hoffer. At one point, Martin S. Davis, the former chairman of the old Gulf + Western, later known as Paramount Communications, owned 75% of the company, a stake his heirs now own. Rock legend Neil Young has held an estimated 20% stake since 1995. In September, two of Lionel's top executives were replaced as part of a broad management shake-up in which 18 midlevel managers also lost their jobs. Driving the changes was Wellspring Capital Management LLC, a New York investment firm that represents Mr. Davis's heirs.
Mr. Calabrese declined to comment specifically on reasons for the executive overhaul; a spokeswoman for Wellspring also declined to comment. People familiar with the situation say the owners are upset with the company's inability to reach younger train enthusiasts. The average customer is a 52-year old male.
The Polar Express set -- an O-gauge that includes a modified version of one of the company's steam locomotives three passenger cars, 11 track pieces, a transformer several movie character dolls and an instructional video -- could have rekindled interest among young hobbyists. But Lionel and retailers underestimated demand, leaving many store shelves empty six weeks before Christmas. Says Mr. Hoffer: "This is a big opportunity for Lionel to reach children ages five, six, seven and eight, many of whom have put away their Brio and wooden train sets for good and are probably not going to get back into trains again." Mr. Hoffer testified on behalf of Lionel's rival and adversary in the design-piracy case, MTH Electric Trains Inc., also known as Mike's Train House. MTH, based in Columbia, Md., has been responsible for much of the innovation in model trains over the past 20 years: It added microchips that improved sound effects, it synchronized smoke-spouting, and introduced special features, such as electronically operated depots where water could be loaded onto stopped trains.
In its lawsuit, MTH alleged that the blueprints to a number of its engines and other model pieces -- including its NYC Hudson, Union Pacific Big Boy and C&O Allegheny lines -- were stolen and made their way to Korean Brass, a Korean manufacturer. Lionel, its contractor, started selling these models later, the suit alleged. A jury found in favor of MTH and awarded MTH $40.8 million award.
Mike Wolf, owner of MTH, says revenue at his company has declined from $60 million to $30 million since the piracy and that the judgment "is a matter of survival for us." He also says the lawsuit has created a rift among many collectors. "There are a lot of Lionel train collectors who tell me that I should have never have filed the lawsuit and that I'm the bad guy," Mr. Wolf says.
Mr. Calabrese says the "Polar Express" train has been the best-selling item in Lionel's history. "Every single bloody set we were supposed to bring into the country is in the country," he says. When retailers ask for more, he says, "the answer is, 'Yeah, in several months, when we make some more.'"
Some critics say Lionel should have produced a less-expensive version of the Polar Express -- something in the $100 range -- to reach children and their parents through mass-market retailers. But Mr. Calabrese says Lionel's absence from outlets such as Toys "R" Us and Wal-Mart Stores Inc. isn't a problem. "When you have a brand like Lionel, it's a real temptation to downscale the brand and go for that mass business," he says. "The problem is you eviscerate the power of the brand."
Despite the bankruptcy, Mr. Calabrese says Lionel will continue to make all the items in its catalog -- more than 300 lines of trains, steam locomotives, and accessories.

[brianel027]

Quotes:
"Catering to their expensive tastes, Lionel and other train manufacturers boosted sticker prices for basic kits to levels that became unaffordable for younger children. "

"Mr. Calabrese declined to comment specifically on reasons for the executive overhaul; a spokeswoman for Wellspring also declined to comment. People familiar with the situation say the owners are upset with the company's inability to reach younger train enthusiasts. The average customer is a 52-year old male."

"The Polar Express set -- an O-gauge that includes a modified version of one of the company's steam locomotives three passenger cars, 11 track pieces, a transformer several movie character dolls and an instructional video -- could have rekindled interest among young hobbyists. But Lionel and retailers underestimated demand, leaving many store shelves empty six weeks before Christmas."

Hmmm. I know train loads of you folks disagree with me. Chances are you've never travelled with a kid friendly layout demonstrating it to kids... but these quotes sound very similar to things I have been saying for over 14 years.

There will come a time when I can say "I told you so" but I promise not to rub it in. I'm not right on many things, but this is one area and topic I absolutely know with every fiber of my being that I dead on, spot on right. I've been to too many train shows, showed the trains to too many kids and talked with too many parents to believe anything other than I am 100% right on this issue!

The train market will never again be as it once was (as also said in so many words in the above article) but there is interest. There are kids out there who would get into trains and there are parents who would be willing to get those trains. They need to be available and affordable, and not to appear to be in the minority of product that makes the hobby appear to be utterly lopsided in favor of the well-to-do and adult modelers.