Why did K-Line fail and what lessons can be learned from this?

[FJ and G]

And, how come we didn't see it coming?

K-Line's latest catalogs looked beefy with really innovative stuff such as the cars moving down the highway. You'd a thought they were poised to take over the industry with their low prices and wide offerings.

Or, could the low prices and wide offerings, coupled with Lionel's lawsuit, finally caused the boat to swamp?

More importantly, what lessons can be learned from all of this?

On the following, I'm generalizing and may be off on a couple of points since I don't follow the whole thing as closely as some of you.

Would Williams, perhaps, be a good business model?

1. Good prices
2. Good guarantees
3. Limited (but manageable) offerings

Or MTH?

1. Reasonably prices at the low end but high prices at the premier end
2. No lifetime guarantees but good service
3. Fairly wide offerings
4. Many investments tied up in DCS but limited takers
5. Pending UP lawsuit
6. Delving into other scales so eggs not all in 1 basket

Or Lionel

1. similar to MTH but slightly higher prices
2. Recent UP AND MTH lawsuits
3. Takeover of K-Line, with all its baggage
4. Delving into other scales so eggs not all in 1 basket

Or Atlas

1. high prices
2. limited offerings (such as no steam)
3. great quality and detailing
4. very good line of track
5. well settled into other scales

Or 3rd Rail

1. high prices
2. quality
3. limited offerings

or possibly Weaver, which I'm not familar with except for their low-priced but well-detailed reefers, which I snapped up.

I would have to think that Atlas, Williams, and 3rd Rail have a lower risk business plan, while at the other end, MTH and K-line have been much less risk-aversive.

Your thoughts?

[cnw1995]

I think you hit the nail on the proverbial head here: low prices - not enough revenue - and wide offerings - higher expenses? - coupled with Lionel's lawsuit - cash for lawyers - finally caused the boat to swamp?
O gauge is really a niche within a niche hobby. I think you have to find a product you can ride for a while (RMT's Beep) or be extremely selective (like some of the brass offerings) or less effectively, enjoy a reputation (Lionel)

[FJ and G]

Doug,

EXCELLENT point!

I failed to mention RMT's Beep.

The guy that did that, Walter, or something, did his homework.

1. A similar shorty model (critter?) is a big seller in G. And, not even prototypical. If they can do it in G, why not in O, where there also is a whimsical following.

2. Limited offerings

3. Walter promoted his product on the other forum and got a lot of feedback as far as roadnames go (he also picked up a bunch of sycophants along the way). (What other toy train leader sticks his head out on a forum, with exception of that TCA company or something that makes electronics components for trains)

4. He offered low prices and mass produced the product

5. He indicated ship times, etc to keep lines of communications open

6. He listened to feedback early on as to problems navigating turnouts and retooled the product

etc etc (need I go one!?)


-----------

(now, if I had the business acument to make an open auto rack, prototypical, that holds 18 cars on 3 levels (cars that scale 1:48). Then, offer different model cars....

hmmmmmmmm

[laz 57]

DAVE,
About a year and a half ago K-line fired most of there reps so one would have to guess something was a miss?
My thoughts are why in most catalogs we see every company copy the other guys merchandise? Case in point with the Berkshires all the companies ran there versions,and they were trying to outdo the rest. How do they know what the other companies are putting out?
Spies, dumb luck what gives?
laz57

[Bob Keller]

Bad decision making had as much (or more) to do with the mess as did the market, over production, or trying to create a market for high-end K-Line products out of thin air and on a timetable.

[EIS2]

K-Line failed because they entered the murky world of industrial espionage. The company engaged in illegal patent infringement activity and were rightfully caught.

K-Line's demise is a loss for our hobby and an even greater loss for the many K-Line employees that had no part in the illegal activity of a few.

The K-Line employees and Lionel employee involved in the conspiracy deserve to be in jail. To the remainder of the K-Line and Lionel employees, our sympathies are with you.

Regards...
Earl Staley

[Jumijo]

K-Line was doing fine offering less expensive trains because the tooling was already there. They didn't have to pay for new tooling. They might have tweaked it a little, but it was the old Marx tooling. When they started making new tools for the higher priced stuff, they spent too much too quickly and didn't see a sufficient return on investment. All the large O gauge train manufacturers (K-Line, MTH, Lionel) are guilty of this to some extent, but it spelled the end for K-Line. I honestly wouldn't be surprised to see one of the big 2 end up like K-Line, and sooner rather than later. You might be surprised by which one I think it will be.

RMT uses old tooling as well to produce their Beeps and Buddy cars. They can sell for such a low price because of the volume they are doing. The difference is, so far you don't see RMT getting in over their head with new tooling costs. They are building a positive cash flow using old but tweaked tooling to produce their products. Whether or not that money will ever be put into new tools for new products is anyone's guess.

Of all the O gauge train companies, I like Williams. They make nice simple products and make them well. From what I've heard, they stand behind their product. That's very important to me. They have a business model that works - make a small number of items at a time and wait for the stock to deplete before making more. It's less expensive to pay for smaller runs and there is no large access, unsold inventory sitting in a warehouse. They make enough to turn a profit, then make some more. Less speculation and risk to deal with that way.

K-Line and Krispy Kreme Donuts. Two N.C. companies that tried to grow too big too fast. Too bad. Both had a lot to offer their customers.

Jim

[cnw1995]

OK, Jim, I'll bite - who do you think is next to fall?

Frankly, I don't understand the copy-cat products.

[Jumijo]

The copy-cat products happens because brand x makes a certain locomotive, so brand y makes one like it just to keep up. Market studies for each company say the market will support 2000 loco sales, but with each company making 2000, there becomes a glut. Blowouts ensue, and revenue is lost. That's why we are seeing more and more stuff being offered on a pre-order basis.

Jim

[FJ and G]

1. What about the higher-end gambles? For instance, do you think Lionel recouped its money from TMCC and do you think MTH did likewise? K line didn't make a single high-end gamble, just lots of smaller gambles with their plethora of fancy accessories and many varieties of trains. And, they seemed to have wisely piggybacked on TMCC, but by that time, they may have already hemoragged too much blood.

2. Also, why does a company keep offering products that don't sell? I don't know the figures, but my guess is that, for example, ScaleTrax isn't turning a profit. In K-Line's case, there must have been many products that weren't moving as well as they'd planned on. Perhaps there were no market studies conducted?

Also, I imagine that hobby shop - manufacturer relations must be a factor in establishing good business (along with of course, customer relationships such as good service, keeping promises of offerings, etc etc). I'm not sure what K-Line's track record is here.

[Warburton]

I saw this coming but didn't know when it would happen. I was doubfounded at the size of K-Line's recent catalogs. They came on top of Lionel's and MTH's. Too much supply, too little demand. Simple as that. The weakest, (probably) most leveraged of the 3 was most vulnerable, and that was K-Line. As to who will survive, don't bet against Lionel. At least the Lionel NAME will keep appearing on trains for a long, long time!

[Anonymous]

K-Line had reached a settlement with Lionel that would have allowed the company to keep going (for how long is another story). Their own half *'d press release PO'd the judge and that is what tripped them over the edge.

They failed because the person at the top made a bunch of bad decisions, the press release being his last. The company went in too many directions at once and lacked the long term capital backing to deal with the economic slump following 9-11. They didn't have the name recognition/track records of Lionel or MTH (as far as financial support was concerned) or the HO/N business backing that Atlas had. If you want to play with the big boys, you need the big bucks to back it up.

Re the comments about copycat/overproduction. In general, ALL companies assume that whatever they are going to make will sell. They don't deliberately try to make turkeys. They also honestly don't know what will sell. The public is rather fickle. There was a string of commentaries in O Scale Trains called Crapolla from the Cupola by John Smith, aka Pecos River Brass. These commentaries give a behind the scenes look of the model railroad business. One of my favorite lines praphrased is the way to make a small fortune in the scale brass import business to to start out with a large fortune.

Re the comments about "industrial spying". This happens, a lot. It's not right and it shouldn't but it does and NO ONE is IMMUNE. Just because you didn't get caught doesn't mean you didn't do something you weren't supposed to. And even when you do get caught it doesn't always mean you did what you were accused of. There are a lot of loopholes and fine lines that are being walked and often crossed and the bottom line is that you should treat people the way you would want to be treated and that folks who live in glass houses should always make sure they are at least wearing underwear.

[cnw1995]

It's funny, I found K-Line products in more retail stores than anything other manufacturer - chains like HobbyTowne USA and Hobby Lobby.

[FJ and G]

Getting back to the Beep as a good business model, there's a caveat perhaps, of someone else coming out with something similar.

I can't think of a good example, but at one time, Gargraves had the most Hi-rail looking track around. They specialized in that, while parasitic companies like Ross and Curtis improved on their turnouts.

Then, along came Atlas track.

While many still use GG, the Atlas must have cut into their sales at least somewhat, and, GG wasn't diversified in their offerings. Not that they'll go under, just that there's perhaps a caution in going with too limited offerings.

K-Line, OTOH, went off on the deep end with too much stuff and sort of overwhelmed the buyers.

[Bob Keller]

I believe that K-Line may have been RMT's path to Sanda Kan, so it will be interesting to see how the relationship may change and if Walter will be able to offer additional products.

[brianel027]

Dave, I'm surprised with all the discussion on this that you were asking about this?

Jaabat summed things up pretty well.

It helps to know (if the truth be told) that there were no real train guys at K-Line. No one with a good gut feeling for the market or the hobby. Maury was a businessman, not a train guy and same goes for Jeff. Nick Ladd is a train collector, not an operator. I won't even touch the "wonder boy" of engineering (and hopefully no other 3-rail companies will now either!). Much of what determined K-Line's market moves was based on what others were telling them (particularly at shows like YORK) and based on what other companies had never done before.

I was at K-Line when Mr. Ladd proceeded to comment on how a product they were making was going to be "real hot." And right as he said that, my first response was "no it's not." I didn't want to say anything, but my gut feeling told me I was right. And unfortunately for K-Line, I was actually right.

This theory of doing what others hadn't done before worked in the beginning. Most guys who claim to be K-Line fans today, wouldn’t have ever considered the products K-Line was making that got them started. K-Line's more early offerings filled a void in the market that was being overlooked, and still is to a lesser degree. K-Line's slower more calculated method of more scale detailed offerings was a better way to go.

K-Line also shot themselves in the foot by failing to cooperate with the price guide publishers, and constantly reissuing previously issued products. NO company can guarantee making collectibles. But you don't help the matter by reissuing the very products you made a couple years ago. What incentive is there to entice your previous customer into buying more products? They saved a few bucks on paint masks and probably lost far more sales because of it.

And I know from my many years of doing shows and seeing how much attention my custom painted K-Line products got, that another huge mistake K-Line made was not offering basic train sets and basic train items in current, contemporary road names. Even young children recognize the Conrail logo and the Norfolk Southern logo... I saw this far too many times to believe otherwise. I can't help buy wonder how much revenue K-Line's exclusive Conrail employee offerings brought them versus having the same products issued to the general public?

Most guys who offer up extensive wish-lists of trains they'd like to see made don't give any consideration to development and tooling costs. While on one hand they want unusual, prototypical sized and detailed offerings, they also don't want to pay the prices necessary to make these products truly profitable. If some new engine costs around $200,000 just to get to the point of production, you gotta sell a lot of locos to recoup that investment... and you don't recoup costs by having to blowout products.

K-Line, outside of some throw-away goof-ball ideas, basically forgot about their original core group of customers. Maybe those customers were not enough, but it wasn't advisable to just forget about them either. And it's quite easy to see from the success that RMT has had with the Beep and the Buddy that there REALLY is a market for basic quality well made and lower priced trains, even if many guys on the train forums will scream "those are toys."

In addition to their other well known problems, K-Line over-estimated the numbers of high-end buyers they'd be able to woo away from other product lines. K-Line unquestionably made some very nice scale products in recent years. But there are not enough buyers out there to justify so many companies offering so many similar types of products - especially when there is so much risky investment into making these products in the first place.

While obviously Williams and RMT are on to something, there are a number of buyers who simply will not consider those kinds of products. While using the same exact truck sides on multiple engine releases works for me, there are other more demanding modelers who this doesn't work for.

So the question for any train company is, who do you want to have for a market and to what point can you afford to please that audience? I think Jerry Calabrese has more than hinted that Lionel cannot continue to issue the kind K-Line products that cannot possibly recoup their initial investments. Which will mean higher prices, but on what? I'm all in favor of newly tooled products being priced at a much higher price point so that they can see a return. But will buyers pay so much more when they've been spoiled by the rash of price reductions and blowouts. I know I cannot nor will not continue to pay more for items where the tooling has long been paid for decades ago. The rash of new prices on many Lionel products has priced them out of my league. $26 for a manual 027 switch from $10? Forget it... I'll buy used beaters.

For the future, as I have said before, I think the truly successful products will be the ones that can straddle the fine line between toy train and scale model. The Lionel Docksider is a fine example of this. Even the RMT Beep, however unprototypical, seems to have pleased enough higher end buyers to warrant other companies making specific electronic control upgrades for this product.

And it wouldn’t be such a far-fetched idea for the 3-rail guys to start getting subscriptions to the Model Railroader magazine. That magazine has been chuck full of do-it-yourself detail projects for decades. How is it that the HO guys don't mind ripping apart, cutting up and repainting a loco to make it into the more prototypically correct model they want and yet the 3-rail guys won't. Collectible values? Ha ha ha ha... those days are done for the most part. But maybe they'll return when folks start having fun with the trains again. It was the fun folks had with the trains several decades ago that made the prices go up so much years later.

[Buckeye Riveter]

Many of the problems that have been mentioned can be summarized very easily. K-Line had bad management, which ultimately led to bad decisions in marketing, finance and operations.

Many a company has overcome bad management practises by making strategic changes to that management and then going forward. K-Line was found by the judicial system to have also violated the copy right laws which put the last nail in their coffin and the hammer in the hands of a competitor.

[1688torpedo]

It seems that K-Line underestimated the marketplace which is somewhat smaller & also more fickle than ever before.Plus, I believe that Maury Counted his Chickens before they Hatched. So to speak. Supposedly, He had a Five Year plan in which K-Line was to be the #1 Toy Train maker after a five year period and it seems that he did not take into consideration the post 9-11 economy in which hundreds of thousands of people have been layed off from their Jobs & the last thing on their mind is to go out & buy a Toy Train Set for themselves or their family. This was not a good business plan as no one knows what is going to happen in five years much less one and this is how K-Line pretty much went Belly up along with the other reasons listed above. Lesson Here: Do not count your Chickens before they hatch.[2c] Take Care.

[Anonymous]

Atlas O does not intentionally copy what everyone is doing.

Lionel and Atlas O have rarely made any exact or near duplicate products.

K-Line did some copies that might have been too soon for the marketplace to absorb.

Andrew F.

[tgovebaker]

This is an interesting thread. When I'm not struggling with layout building, I spend my days as a management consultant. My sense of this, albeit one not informed by good market research or analysis, is that overall market conditions were problemmatic: slow overall growth, excess supply (and capacity), most importantly, unfavorable economics. As someone pointed out, the investment required to develop a new product, particularly new tooling, often ensures very thin margins.

At the same time, as the market has matured, some of K-Line's more nimble competitors have successfully developed more narrowly focused business models. As noted, Atlas has been very successful with a limited product line and a focus on high-end detail. Their decision to stay away from steam is interesting as well: few companies ever make decisions NOT to do something. Knowing what not to do is as important as knowing what to do.

K-Line also appears to have made a series of bad decisions about its product line. While their products were often on shelves, their overall selling proposition was pretty cloudy. Were they, for example, trying to appeal to O-27 enthusiasts, or were their scale aluminum cars designed for another segment of the market. My sense is that their internal incoherence -- a marked contrast to Williams or Atlas -- contributed to their problems.

Compounding everything, of course, appears to have been a series of bad business decisions, including too much investment in too divergent a product line.

Both Lionel and MTH face similar challenges, though the latter has done a much better job distinguishing between its product lines. Purple for Premier, yellow for Rail-King, etc. Lionel is closer to K-Line in that the buyer has to know what he or she is doing if they want to avoid buying rolling stock that doesn't match the rest of their equipment. In this area, Lionel's history -- the orange box -- may be a significant burden to overcome.

Lionel and MTH both make too many products, and seek to please too many people. Lionel's acquisition of K-Line may actually signal that Lionel wishes to cede the higher end of the market to MTH and Atlas, and to compete instead with Williams in the nostalgia and toy markets

What this market really needs is some good research.

[Poppa_Zit]

QUOTE: Originally posted by tgovebaker

Compounding everything, of course, appears to have been a series of bad business decisions, including too much investment in too divergent a product line.

Your post is very well-organized, to-the-point and articulate. And let me state right up front that I'm not a huge K-Line fan, after it said three years ago it would probably make an articulated steamer in S-gauge -- and never did. And tried to pass off as S-gauge freight cars made from old O-gauge Marx tooling. And all the S-gauge locomotives (Pacific, Porter, Plymouth) and starter sets it took orders for and didn't deliver.

That said, here's my take: K-Line's problem wasn't too much investment -- it was too little. Running up $4 million in debt to Sanda Kan tells me K-Line was spending OTHER people's money, and at a pretty good clip, too. At about that same time, K-Line agreed to a $2 million settlement with Lionel -- committing even more money it didn't have.

On top of all that, it also was a terrible business decision to employ dishonest tactics -- stealing another company's technology. Shameful.

I wonder why Sanda Kan let K-Line rack up such a high receivable.

And I often wonder how long Maury and the gang thought they could keep up this charade.

[klahm]

I didn't see how they could possibly survive with the breadth of product offered in recent years. As others have noted, the market is, at best, flat.

They didn't capitalize on repeat sales by offering add-ons to unique product lines, like the scale aluminum cars, despite consumer & dealer demand. Some products were poor me-toos.

One major K-Line dealer told me that they were a real pain for a retailer to deal with. Not a good way to ensure that product gets sold.

The bottom line is that they over-reached in too many ways. The technology theft merely hastened an end that seemed inevitable anyway.

Perhaps some interesting product will live on under Lionel's deal.

[mickey4479]

I am not informed enough to weigh in on this thread, but I thought I would toss out a few thoughts to stir the pot. Having read this entire thread, and considering the comments on poor management, limited market and competition, etc... I am puzzled by Lionel wanting to buy the K-Line assets. I would like to have been a fly on the wall during the Lionel management meetings when they developed that strategy. Defensive move to keep MTH or Williams from buying? If Sanda Kan owns the tooling, I just wonder what Lionel bought or rather intends to buy? Enough to garner perceived market share that K-Line once had?

[Anonymous]

What can be learned from this?

Stay the heck away from the business of manufacturing or selling (as a dealer) toy trains unless you're well established and/or have VERY good business sense and a sound--and honest--business plan to support that knowledge.

[Anonymous]

K-Line products will be around for years. They are in warehouses, train stores and in large containers somewhere in the world. 20 years from now, there will still be lots of K-Line products floating around EBay.

[jimhaleyscomet]

"If Sanda Kan owns the tooling, I just wonder what Lionel bought or rather intends to buy? "

Does anyone know if Lionel paid very much (if anything) for K-line? Perhaps they just offered to liquidate the product (at non blow out prices) while giving some service in exchange for taking K-line off the market.

Jim H

[Bob Keller]

Why would Lionel want access to the tooling? So they can have a product ready to catalog without going into development costs. That saves a chunk of change. But I'm thinking of K-Line's A4 0-4-0 or B6 0-6-0, not the Marx FAs or the Alco switcher. Lionel has enough tooling of its own if it wants to do "cheapie" stuff.

[mickey4479]

Lionel is perhaps in a tricky situation on the service matter. If they decide to service all of K-Line's products when K-Line was in operation, that is potentially an expensive deal. As I understand this, and I am often wrong, Lionel bought some assets, probably including the name. In theory, they would not be legally obligated to follow through on service for things previously sold. But if Lionel intends to market current or left over K-Line inventory and new items in the future, not following up on service on the older items may hurt future sales. I don't know. It is interesting to speculate. But your comment about loads of K-Line inventory socked away is interesting. Do you think this might become collectors new focus?

[Bob Keller]

Keep in mind that Lionel isn't buying anything. They are licensing the name with an option to buy at a point in the future.

Part of me says it would be more of a $$$$ liability for Lionel to honor the warranties on everything K-Line made because, after all, someone else made it.

I'd expect them to honor warranties on any K-Line items Lionel offered. But we'll just have to wait and see.

[cnw1995]

Licensing the name - let's see, does that give L the right to produce something and call it 'by K-Line' or produce something from K-Line's tooling or both?