Hobby Industry Study

[Dollie's Dad]

Another reason I don't resent profits at the retail level was demonstrated by an episode I saw at a shop yesterday.

A man brought in two DC power packs, and said they had both gone bad at the same time. The shop employee took the time to connect each one to the store layout and test it. They were both perfect. The customer was adamant that there was a problem. The salesperson explained that it was probably a short circuit somewhere on his layout, and it was tripping the built-in circuit breaker. He then patiently went through several possible scenarios on how that might happen. The customer seemed to be getting a little steamed because he was being told that the problem might be his own fault, that it wasn't the power packs. This went on for over a half hour before he finally left the store with the two power packs under his arm, and even after all the time he had consumed, he wasn't happy. That time he took up was worth something, but did not generate a dime's worth of business to the store. That's just another cost of doing business that they're expected to absorb.

 

[vato loco]

Plastic is made from oil. A non-renewable resource. Price per barrel was recently at a high of $114. So I'm curious if that has anything to do with the prices of plastic trains.

Plastic is a by-product of making Fuel! Read up on Bunker C http://en.wikipedia.org/wiki/Gas_turbine-electric_locomotive which Gas turbine locomotives were running on! The discovery of plastic killed the turbine locomotive! "Union Pacific ran a large fleet of turbine-powered freight locomotives starting in the 1950s.[1] These were widely used on long-haul routes, and were cost-effective despite their poor fuel economy due to their use of "leftover" fuels from the petroleum industry. At their height the railroad estimated that they powered about 10% of Union Pacific's freight trains, a much wider use than any other example of this class. As other uses were found for these heavier petroleum byproducts, notably for plastics, the cost of the Bunker C fuel increased until the units became too expensive to operate and they were retired from service by 1969." As lone as fuel is being processed or vise versa the two go hand in hand! LOL's Cost of plastic I feel is not the factor of the high prices at the counter! I feel IMPORT FEE's ARE!

 

[vato loco]

REMEMBER, Plastic is a By-Product of Fuel refining process! high Oil prices, taxes on the refining of the oil, along with Import fee's are the reason we pay so much for our beloved trains! Also Taxes on the the Items doesn't hurt either! How much Does the government make for $$ per Gallon of gas and pound of plastic and import fee's???? Just a though.......

 

[Cjcrescent]

I'm still not sure, after reading the comments, who is mad at whom for making a profit? Is it the retailer, or the manufacturer.

I am choosing neither in this poll, as it is totally biased.

Yeah my LHS makes a profit. I'm glad he does. Since the LHS has gotten the current owners, who are well experienced people in the LHS business, my LHS has gone from a FEW model railroad items to almost 1/2 the store being MR stock.

If he didn't make a profit, he couldn't buy this additional stock. So I do almost ALL of my business thru him, and I do get a discount. But as was said in an earlier comment, I don't see him driving a Bentley. I've also spent many days there sitting and talking to him in the shop, and its just him and me for hours! I would have to say that with utilities and such, my little $3 purchase during one of those days did little to add to his profit margin.

 

[NWCanuck]

Tom and Carey,

I won't bother quoting you guys because I agree with everything you said in your posts. I want to make clear that I also want to see my LHS do well and we are all on this planet to make money because that is the system we have created in our society. I guess where I am going with all of this is that I am worried at some point in time we are going to reach a plateau where it can no longer be sustained. Whether that means LHS closing up or the industry itself collapsing one manufacturer at a time. Maybe not in my life time, but I am only 36, and I sure don't think there will be much left when my son (19 months old) reaches the age of some of the more experienced gentlemen on this forum.

I really do enjoy spending time in my LHS shooting the ... But at the same time I find it hard to spend money there when I can find it elsewhere for 30% cheaper in most cases. I love what Rapido has done for the Canadian market and the detail of the models they offer. But for an example the new "Canadian" passenger train requires a 25% deposit to order and will be a made to order run. The price in CDN dollars is $1499.99 and comes as a complete set. This thing looks awesome but at $1499 you can count me out unless I win the lottery. Things are just starting to get out of range for middle class, blue collar workers. Manufacturers need to place large orders and turn stock over quickly to make a profit. At some point things are going to hit the wall.

 

[vato loco]

Tom and Carey,

I won't bother quoting you guys because I agree with everything you said in your posts. I want to make clear that I also want to see my LHS do well and we are all on this planet to make money because that is the system we have created in our society. I guess where I am going with all of this is that I am worried at some point in time we are going to reach a plateau where it can no longer be sustained. Whether that means LHS closing up or the industry itself collapsing one manufacturer at a time. Maybe not in my life time, but I am only 36, and I sure don't think there will be much left when my son (19 months old) reaches the age of some of the more experienced gentlemen on this forum.

I really do enjoy spending time in my LHS shooting the ... But at the same time I find it hard to spend money there when I can find it elsewhere for 30% cheaper in most cases. I love what Rapido has done for the Canadian market and the detail of the models they offer. But for an example the new "Canadian" passenger train requires a 25% deposit to order and will be a made to order run. The price in CDN dollars is $1499.99 and comes as a complete set. This thing looks awesome but at $1499 you can count me out unless I win the lottery. Things are just starting to get out of range for middle class, blue collar workers. Manufacturers need to place large orders and turn stock over quickly to make a profit. At some point things are going to hit the wall.

People today don't have the disposable incomes they once did! Unemployment is at an all time high, people who you wouldn't dream of loosing their homes are becoming homeless and We are still getting TAXED to death! You still seeing people buy stuff and going places, but not with out heavy thought of "do I really need this to survive!". It's sign of the times...

Now that I'm single and being financially raked over the coals by everyone, I spend $0.00 on any of my hobbies. I work 2 jobs 60-72hrs a week and still CAN'T get ahead. Just 10 minutes ago my TV just quit working! No Money to replace it....So I'll have to Do with OUT! My vacuum cleaner broke yesterday...So I do with OUT! My A/C broke 3 weeks ago....So I do with OUT! You get the idea.....I'm not alone here. that is the future of all hobbies...Some can and will......Most will have to do with out! Basic economics at work here Do what ya can!

 

[pappy]

Tooling cost.

A good example of massive profit margins.....just try to price containers for your container yard. My LHS sells packs of 3 of over $20. These cannot cost more than a few cents a piece to manufacture (even if oil is $144 per barrel.
-Art

Dont forget that they probaly spent $10,000 or more on tooling to make them and that is a big chunk of MFG costs. You also have to factor in the cost of the mold press which adds to the cost as well.

 

[vato loco]

Dont forget that they probaly spent $10,000 or more on tooling to make them and that is a big chunk of MFG costs. You also have to factor in the cost of the mold press which adds to the cost as well.

Yes, but divided out still MFG, tooling, and just the shear numbers of these things that will be produced and SOLD..the % that MFG would add is minimal! Getting the Product from China then through our customs/government controls, import taxes, shipping and what not to get our toys here, cost more than MFG and making of the product! I bet out of that $20 for that 3 pack of containers you pay $10.00 or more for getting it on your layout!

Every time that product changes hands it gets taxed! Taxes and shipping add up! How many times do you think that package of containers gets packed, unpacked, then repacked? Every time that product is sold, from MFG to Wholesaler, to Retailer, To you....Tax and shipping+Tax and shipping+Tax and shipping+Tax and Drive it home in your car with gas being $4.00 a gallon...

 

[Espeefan]

The take on the article is the problem here. The 1.3 billion is for the entire hobby industry. $424 million of that was us. The $2.5-3 billion is again for the entire hobby industry with a corresponding percentage of it being model railroading.

Revenue is not profit. Costs have to be subtracted from it. They did not share their profits on the referenced survey, and they would not. Business owners of small privately held companies don't usually share that information with anyone except the IRS. Masssive profit margins? Hardly, or as Carey said, our LHS owners would be driving Bentleys, and not shrinking in number. 40-50% mark up is not out of line in the retail business. As someone posted above, furniture and jewelry can see as much as 400%. That's why those guys are always having fire sales.

There was a pretty good article in Model Railroad News recently about how manufactruing in our hobby (and many other businesses) follows cheap labor. Some business are now looking at Viet Nam and Bangladesh. The Chinese weren't going to work cheap forever. They want a higher living standard too. Maybe labor costs will finally hit the wall, and some of this business will come back home.

It isn't the 1960's any more guys. You can't buy a new car for $1500.00 or a house for $25,000.00 or a weeks worth of groceries for $25.00 either. Also, the current level of detail is so far above that Blue Box kit, it's hardly fair to compare prices. If you like something and can afford it, buy it. If you have limited means, or are a younger hobbyist, there are still plenty of low cost items out there. The Walthers Train Line series is affordable, as is the Bachmann line, and let's not forget all that stuff out there at swap meets and on e-bay. Why not just enjoy the hobby? I don't care how much my LHS owner or Phil Walthers take home in their paychecks. I'm just glad they're there.

PS for Brad: Add a third choice: "I feel that the current market prices are fair for what you get." I would have voted that way

 

[Dollie's Dad]

Well said, Alan, and I totally agree with all of it.

 

[Charles Smiley]

Tom,

The scary thing is that the powerpack Bozo in illogical-denial works for some company or government department. It makes me wonder how many things he has fouled up in his life for others. The average 12 year old would understand straight away what the hobby shop guy was tellling him.


Tooling Costs:
From my experience, the biggest savings in product development has been in tooling costs that can be moved to China. Quotes from the US on some items that were $30,000 were often around $7000 to $8000 in China. This was for items that had far fewer parts than an accurate and detailed PS-1 HO scale boxcar!

The oil-based plastic material is very cheap compared to the tooling cost. Each item made has to help pay for the tooling cost. That can be thousands of produced items. Cheap tooling will wear out before you get there. So you pay more for better tooling and raise the sales bar even higher. It can be a gamble. Somebody has to pay for the engineering drawings that the tooling company uses to make the tooling too.

Someone trained in Autocad and/or SolidWorks CAD design has to make up all the detailed dimensional drawings with the knowledge of what is possible in part molding practices. These guys don't grow on trees. That's a pretty big bill too. The tooling maker creates his own set of drawings from there.

A set of quality tooling to mold plastic parts in China was always about 1/4th of quotes from local US companies. Tooling like that is NOT very portable. If you try to take tooling to a different company, the new company can't use it. They will tell you that the tooling is junk and it doesn't meet their standards and practices. So you are a captive in a sense.

So does that sound like a business you'd like to be in?

 

[Espeefan]

Every time that product changes hands it gets taxed! Taxes and shipping add up! How many times do you think that package of containers gets packed, unpacked, then repacked? Every time that product is sold, from MFG to Wholesaler, to Retailer, To you....Tax and shipping+Tax and shipping+Tax and shipping+Tax and Drive it home in your car with gas being $4.00 a gallon...

Um...nope. Not sure where you heard this Chris, but that isn't how it works. Items sold business to business for resale are not taxed. I know it feels like you pay a bunch of taxes, and if you're a single guy, you do get hit pretty hard, but over all, our taxes here are pretty low. Among the lowest in the industrialized world in fact. There are import duites, which get passed on to us, but no multiple tiers of tax. We don't have a European style value added tax, at least not yet.

 

[pappy]

Tooling Costs:
From my experience, the biggest savings in product development has been in tooling costs that can be moved to China. Quotes from the US on some items that were $30,000 were often around $7000 to $8000 in China.

We are starting to see a change in China and tooling cost. 10 years ago that was the case but in the past couple years their quality has been up to spec and their cost is nearing ours. In the past customers would recieve tooling from China and we would re-work it and it was still slightly cheaper but that isnt the case any more. We have had to think and work smarter to keep our price for tooling from rising and China tooling has been getting better and costing more (I'm refering to the PM tooling and I think the same is happening in the mold tooling also). I think we seen the same thing with Japan in the 60's and 70's.

 

[Dameon]

This issue here is not the how's and why's of production cost. It's about how much the consumer is being charged in markup.

As others have said, we saw a change in the hobby many decades ago. You originally had two main consumers: Those who were buying toy trains like Lionel (sorry guys but, Lionel were toys), and those who were buying the "scale model" stuff which mostly came in craftsman kit form (sorry guys but, craftsman kits are unfinished products). So at one end of the spectrum you were marketing to parents who were only going to open their wallet so far to buy a toy. On the other end you were selling a half-finished kits which kept manufacturing costs down and so while the markup could have been the same % as it is now, the overall price was still going to be proportionally lower.

Then the hobby changes. We see a large influx of model railroaders, the overwhelming majority were retirees with little to no craftsman skill, but what they did have was buying power. So, manufacturers adapted. We now have a bevy of RtR kits on the market but with high price tags. Because they learned the consumer would pay.

Why do you think gas at the pump costs so much? Don't give me some story about how much it costs per barrel. Why do you think it costs that much per barrel? Its becuase the people selling the oil learned the consumers would pay more for it. When gas prices spiked so badly they never went back to were they were becuase they never had too. The fuel companies learned what the consumer was willing to pay.

Meanwhile, the hobby is changing again. Many of those same older cash-cow retirees are now starting to choke up the retirement homes, or dead (sorry guys but, Model Railroad Conventions are full of snowbirds). The core demographic of the hobby is now shifting to a majority of cash strapped individuals.

The manufacturers are adapting. The limited run "buy it now or you may miss out!" strategy is part of this. Even that won't last. Model Railroading will be here and continue to adapt. It's just not going to be the same hobby it was 40 years ago. But then, the railroads aren't the same as they were 40 years ago either.

So, are we getting extorted by having to pay so much mark-up? Well, it all goes to what people are willing to spend. If the generation before us was willing to pay a 40% mark-up, but we are not (or can not), well then many people would answer the question YES. The retailers will now have to adjust their prices back down to what the market can bear.

 

[Dollie's Dad]

Some of what Dameon says is true, although I'm trying to figure out if he's expecting me to go to an old age home soon or worse.

There is an old truism in business that says, "Excess profits breed ruinous competition." If you don't believe it, think of all the fast food restaurants and computer software companies that have tubed in the last couple decades.

If these hobby companies are making boat loads of cash, it won't be long before lots of other companies will be lining up to cash in on the easy money. If, in fact, prices are artificially high, competition will eventually force them down and those of you who are still alive (I'll be dead, remember?) will benefit.

 

[Dameon]

...although I'm trying to figure out if he's expecting me to go to an old age home soon or worse.

Ageism in the hobby is one of my big buttons and so can easily (and often) seep into my discussions. My comment aren't directed at anyone in particular, just sort of venting.

 

[Dollie's Dad]

Ageism in the hobby is one of my big buttons and so can easily (and often) seep into my discussions. My comment aren't directed at anyone in particular, just sort of venting.

I''m not sure where ageism fits into all this; you're a little vague. The way I see it, older people bring a lot of history, experience, patience, and accumulated knowledge to the hobby. Young people bring curiosity, enthusiasm, and imagination. I see the relationship as mutually beneficial.

Who (in your opinion) resents who? I've never seen it myself.

 

[tooter]

PS for Brad: Add a third choice: "I feel that the current market prices are fair for what you get." I would have voted that way

Same here, Espee...

...because I also feel that the current market prices are fair for what I get for my work.

In the private sector free market there is a balance of parity between the cost of production and the cost of consumption, so as long as you can operate on both sides of the ledger as both a producer and a consumer, you'll always be just fine regardless of economic conditions.

Greg

 

[Selector]

(0) I feel like I am getting ripped off!
(0) I don't mind paying 40-50% extra.

There should be a few more choices in your one-sided poll. Either choice indicates we modelers are being taken advantage of. Sure no one likes higher prices, but blaming the manufacturers or dealers is out of line. Things go up in price, its a fact of life.

Last week I bought a Rapido Trains CPR caboose decorated for our local shortline, the NB Southern. The model has exquisite detailing inside and out, track powered LED lighting, marker lights at both ends that can be switched on and off with the supplied magnetic wand, Kadee like couplers, opening cupola windows, great painting and crisp yellow lettering, etc. I paid $50.00 (MSRP $59.95)for it, something I never thought I'd ever do. But it is a one time purchase for me, as I see the prototype cabeese locally all the time. Being able to buy such a finely detailed model of something I can relate to was not a problem for me.

Many years ago I kitbashed a similar style wide vision CP caboose, I used two Athearn kits and a real lot of work, splicing two bodies and cupolas together, filling in and cutting new windows, and about a month's worth of hobby time. While I'm happy with and proud of the model I built, it no way compares to the new Rapido model I bought, for just $50.00! No month long effort, no buying Athearn kits, Floquil paint, decals, detail parts, etc.! So I don't think I have personally been ripped off by buying this fine model.

If you feel the manufacturers and hobby shops are ripping you off in your hobby purchases there is one simple solution - don't buy anything! No one forces anyone else to shell out $300.00 for a DCC sound equipped highly detailed locomotive or whatever. Seek out an old Blue Box Athearn version with DC only and metal handrails for $50.00 or so and save money!

I haven't looked into this thread in a few days, but I can't let Bob's post go by without my own hearty agreement. Getting ripped off is being cheated. I don't see how any retail transaction, all of them de facto voluntary, can be construed as cheating unless one or more of us is selected to pay a different amount due to some irrelevant factor about our persons. But, as long as any hobby purchase is voluntary, each of us is in full control every step and every second of the way.

 

[BSVRR]

Kind of makes you wonder why you are paying $300 and up for a DCC/Sound equipped locomotive only to pass that extra cash onto the retailer who is clearly making more than the manufacturer.

It's based on a business model that used to work when cars had carburetors and royalty didn't wear toilet seats on their head and call it a hat.