Market Report: Hopes Are High

by Rich Richter, Independent

Lionel's stock has dropped recently, mostly due to weak, unfocused leadership and poor quality control. But the Lionel name still evokes strong emotions and there are signs of a dramatic turnaround. And it couldn't come at a better time. The train market is more competitive than ever, we are entering a new millennium and there are thousands of Lionel enthusiasts hoping for the best.

Here are five signs that indicate better things ahead for Lionel.

1) New President
Lionel's new president, Dick Maddox, has experience (30 years in toy trains) and knows marketing and quality. He amassed a fine record at Bachmann and produced a nationwide advertising campaign that exposed the Bachmann name to millions. He was responsible for two award-winning engines and Bachmann's sales jumped under Dick's watch. Dick loves to sell toy trains and his enthusiasm and marketing know-how will be a refreshing change.

2) Vastly Improved Catalog
Lionel's Summer 1999 catalog looks like a toy train catalog. This alone is a big improvement as the last three Classic catalogs looked like department store catalogs and the last Heritage catalog looked like a AAA travel brochure. The presentation was improved (they kept it simple) and there was a nice product mix.

3) Recognizing the Competition
Lionel has been in denial. They refused to acknowledge any competition, a result of mis-guided arrogance and ignorance because you must first know the enemy before you may defeat the enemy. But recently, Lionel has shown signs of becoming both competitive and aggressive.

They have launched an assault on MTH's dominance of the premium engine market by announcing a scale, articulated Allegheny at a competitive price along with a Shay, RS11 and SD-60s and SD-70s.

Lionel has also reinforced their entry-level set line-up with a New York Central set that comes with a much improved transformer, die-cast engine and tender, premium rolling stock featuring die-cast trucks and operating couplers. The track also has been upgraded with the heavier O gauge replacing the lighter weight O-27. This set compares favorably with MTH's entry level New York Central sets.

4) New Partnership in Korea
Lionel has struck up an alliance with a new Korean company consisting of some young Turks who left Samhongsa to start their own company. If they can produce quality engines at competitive prices, Lionel will be in a position to strongly challenge MTH's dominance of the premium engine market.

The key is quality. If the Allegheny is a highly detailed, quality engine, Lionel will be on its way. Indications are good that it will be. The first engines produced by the ex-Samhongsa staffers were the recently released mid-sized Hudsons, which have been warmly received by both collectors and operators.

Quality and scarcity are the buzzwords for an item to become desired and collectible. With the new Korean partnership, Lionel can no longer excuse higher prices by saying that MTH is made off-shore and Lionel is made in America. If the Korean-made Allegheny and future premium engines are equal to MTH in price and quality, it bodes well for Lionel because if everything else is equal, you might as well get the Lionel name.

MTH has built their company on beating Lionel in price, quality, variety, features and in the high-end scale market. Lionel must turn that around if they are to survive and it appears they have taken the steps to do just that.

5) More Competitive
After being beat to the punch by MTH repeatedly, Lionel finally turned the tables by producing a better and cheaper Hellgate Bridge. Lionel's version was priced $100 under MTH's, was illuminated and could accommodate two O gauge trains while the MTH version, an exact copy of the Lionel original, could only accommodate one train.

Not Out of the Woods Yet

While the above bodes well, there are still sensitive areas that Lionel must address:

1) Variety of Product
With the Korean partnership, the existing Chinese connection, the Mount Clemens factory, and a new president who loves to sell toy trains, Lionel is poised to produce a record-breaking number of new products. A hint of what's to come may be found in the February Toy Fair catalog. The new mid-sized Hudsons and Pacifics are available in 16 versions.

In the last 18 months, Lionel has announced five premium F-3s, three of which (the CP, the WP and the clear shell) are re-issues of the most collectible F-3s in Lionel's history. And, if a collector wants to keep current, he must not only buy the F-3s, but the matching passenger cars as well.

And the beat goes on. Look for lots of diesels next year. The down side is that Lionel may become like an HO catalog, which has 6 to 10 roadnames for each type of diesel or steam engine. This may result in collector burn-out. Too much to buy so he gives up. Nothing means anything because there's just too much.

Dick Maddox must find a way to keep the collector market alive and still increase sales. One way is to make limited editions of premium engines while mass producing the rest. Right now, the trend is towards operating and away from collecting. Only Lionel can revive the collector market (if they even want to).

Collectors tend to go after only items that are produced in lower-then-normal numbers like the clear shell F-3, the Allegheny and the Spirit of the Century set. All are perceived as being scarce. When this "produced in very low numbers" buzz gets out, the old-time collector frenzy returns.

2) Volume of Product
Lionel must keep production number low if they expect collectors to bite. And indications are they will. For example, for the first time in their history, Lionel printed in the catalog how many items they were going to produce (1000 Spirit of the Century F-3s and matching passenger cars). The catalog also stated the clear shell F-3s will be a "limited run." Then Lionel told dealers the Allegheny was going to be severely allocated which has set off a firestorm of collector interest.

The latest version of the Commodore Vanderbilt also addresses the quantity produced issue by assigning a serial number for each engine which establishes a production run of 600. Even some regular line items have turned out to be under produced - like the Hellgate. Lionel has to learn to keep supplies a little behind demand so all their items are sell-outs and nothing is closed-out.

3) Close-Outs
Anymore close-outs like the log loader (originally $200, closed-out for $79), the Jersey Central motorized unit (offered on the Internet by Lionel for $29.95 - $40 under the suggested list price, or the Victorian House ($49.95 list, closed-out for $19.95) will severely hamper Lionel's ability to restore integrity in their pricing. Close-outs have left buyers dazed and irritated. Should they buy now or wait until the price drops. The key is to keep production numbers low so there is nothing to be closed-out.

4) Internet Sales
Tricky situation. The company line is that new customers are created by selling direct on the Internet and on TV. This is true. It's also true that some of these new customers will want to expand their sets and end up at the Lionel dealer to buy more trains, track and accessories. Then why are dealers upset? Because they don't want Lionel selling direct to the consumer. Who needs the added competition? Also, what dealer is going to fix a train sold direct by Lionel?

The biggest fear however has to do with selling at a discount, particularly starter sets, the lifeblood of most dealers. Dealers also don't want to see items they still have on their shelves being sold direct at a discount. To keep the dealers happy, Lionel will have to sell everything direct at the full list price. But that's not going to happen. Selling direct is too tempting and no manufacturer, including Lionel, can resist it.

Black & Decker, GE and other companies are selling direct on the Internet, much to the dismay of their dealers, but it continues. Where will all this end? Who knows? But I wouldn't invest my life savings in a chain of small retail shops.

5) Specialty Cars
Specialty cars are another source of irritation for collectors. Lionel is producing so many limited edition cars for clubs, magazines, museums and train stores that collectors are overwhelmed and many have just given up. Many times, a collector won't hear about a car until it's in the secondary market, then he has to pay a premium. This leads to frustration which leads to losing interest in collecting.

6) Product Delivery
While we look forward to this plethora of new product, it would be nice if Lionel would deliver on some items announced or anticipated long ago. For example, where's the dummy A unit for the Northern Pacific F-3s, the add-on cars for the aluminum Santa Fe passenger set that came out two years ago, and the Santa Fe and New York Central FTs? Items such as the ZW and Veranda are eagerly awaited but there seems to be no delivery date in sight. What gives?

There is also great interest in this new Odyssey motor. Where is it? Wouldn't it have been nice for the new clear shell to have the Odyssey? Isn't that why clear shells were conceived in the first place? There's no Odyssey motors in the latest catalog. What's the problem? When can we expect delivery? Ill-will is created when Lionel announces all kinds of new product, but fails to deliver on products already announced (some more than two years ago).

Here's a goal all train manufacturers should aim for: deliver all product in current catalog before the next catalog comes out.

7) Price Integrity
Lionel has to restore their price credibility. Right now, customers are hesitating to buy regular line items for fear they will be offered at a much lower price in six months. The Heritage pricing has led to confusion and loss of confidence with Lionel. First it was a fixed price. Then Lionel permitted 10% discount. Now there is no Heritage price policy. Both consumers and dealers are confused. Lionel must adopt an effective price policy and stick to it.

8) Starter Sets
Good news in this area. Things are improving. The New York Central set in the latest catalog is the best starter set yet. Both the engine and tender are diecast, the transformer is greatly improved, the premium rolling stock comes with die-cast trucks and operating couplers. The track is heavy-duty O gauge. Definitely a home run, even with a list of $400. Unfortunately, the New York Central set won't be released until April, too late for Christmas, 99 but early for Christmas, 2000.

But $200 is still the ideal price point for starter sets. Lionel should make a quality passenger set, freight set and maybe a specialty set (like the Crayola) and make these sets the best they can be at that price. Then change these sets each year by changing the name, roadname of the engine or by replacing a car.

This would be definitely a step in the right direction because consumers will recognize the quality and might become a future steady customer which is the idea of starter sets. In the recent past, Lionel produced too many starter sets that turned out to be "ender sets." Buyers would take one look and never buy another train set again.

9) Quality
First, it was wise for Lionel to acknowledge quality problems existed, because they did. The problems peaked when Lionel hit the trifecta with the Backshop, Mohawk and Culvert Loader. Positive signs of improvement in this area are the recently released Commodore Vanderbilt and the Hellgate Bridge.

The Commodore Vanderbilt is a huge improvement over the first issue. First, the paint is very close to being right on, the casting imperfections have been eliminated and the paint job is gorgeous (three coats of paint). Another home run.

The Texas Special F-3 has opened to rave reviews and will probably sell out, although the price is high when compared to MTH's F-3 and very high when compared to K-Line's F-3 with six motors. However, it's gorgeous and will probably sell out because of the Lionel name, Command Control and Railsounds.

What is Lionel's Direction in the New Millennium?

It appears Lionel is planning to firm up areas where they are weak and exploit fully the areas where they are strong - in other words, they are planning to launch a full-bore offensive. That means a steady stream of scale, premium engines, improving their line of entry-level sets and continuing to offer the best assortment of rolling stock and accessories.

Lionel already has the best sound (RailSounds) and control system (Trainmaster). Both have been great successes and they continue to grow and distance Lionel from the rest of the hobby. But, even with all these strengths, the biggest asset Lionel has, by far, is their name. It still has meaning and evokes happy memories for a significant segment of the marketplace.

What's New?
The toy train market has evolved into a merry-go-round of new releases. Everyone is waiting for the next new catalog. Buzz. Buzz. Buzz. What's new? What's new? That's where all the excitement is.

And everyone will be expecting even more in 2000. They figure the companies will have to do something extra special to celebrate. It didn't happen to any great degree with the car manufacturers. Maybe the train companies won't do much either. But the anticipation is sure there.

This feeding frenzy for new items hurts items that don't sell-out immediately (or that are over-produced) and it is also harmful to the average items in the secondary market. If the item doesn't sell in six weeks, chances are the dealer will have the item for the rest of his life. Why? Because buyers spend all their money on new items and have nothing left to go back and pick-over remaining inventories.

Big Questions for Lionel
If Lionel does use this new Korean partnership to compete in the scale market, will the Lionel customer accept Far East manufacturing? Big engines produced off-shore have been accepted in the past, with some reluctance, because the quality was there and there were no alternatives. Now MTH and others provide many alternatives, and Lionel must prove they belong in this league.

Can Lionel increase their market lead in entry level sets and fend off MTH's strong challenge? Better Lionel should protect this area because if they leave the door ajar, MTH will drive a RailKing Big Boy right through it.

A Challenge
Will Lionel produce so much product that they will turn the collector market into an operator market? Only Lionel can keep the collector market alive and they must balance this with showing dramatic increases in sales to keep their bottom-line owners happy. Not an easy task but one that must be done for this new regime to be successful.

The Wall of No Return
With so many trains being purchased by train enthusiasts over the past three years, there may come a point when even the most enthusiastic train buff hits the wall and says, "Enough. I can't buy anymore trains no matter how nice they are!" It's the old "be careful what you wish for" thing. We all wanted lots of great new engines. Now we have them and we don't get that excited because there are so many (and who has the money to buy them all anyway?).

No Let-Up in Sight
MTH recently released two catalogs which total 128 pages and I'm sure Lionel's new president is going to want to make a big splash. And you also have Atlas, K-Line, Weaver, Williams, 3rd Rail and others. So hang on to your seat, we ain't seen nothin' yet.