Train Wreck
Mike Wolf always dreamed of running toy-train icon Lionel. Now he's locked in a death struggle with the company he loved. A report from model railroading's trial of the century.
One moment it was business as usual for mike wolf. The next, with a ring of the phone in 1999, everything changed.
"Mike, we just got the Lionel C&O Alleghenys," the hobby shop dealer told him. "And, man, this thing looks just like yours."
Wolf rushed to the hobby shop, reached for the new $1,399.95 die-cast O-scale engine, and confronted an entrepreneur's nightmare. Gone were the small imperfections in the metal casting that Lionel buyers had learned to live with. The details on the engine that Wolf turned over in his hands were uncharacteristically sharp and crisp. And to Wolf, founder and owner of MTH Electric Trains, they were all too familiar.
"It is just like ours," he realized with a sick feeling. Lionel, he thought, had gotten too good, too fast. "No way they built this without something from us." The implications rushed at him like a roaring locomotive.
Model railroading sells a kind of gauzy, nostalgic innocence, but people in the business have always played rough. The industry's legendary founder, Joshua Lionel Cowen, pulled few punches in battling his rivals of the day, A.C. Gilbert and the Ives Co. A 5-foot-5-inch titan of American entrepreneurship, Cowen founded Lionel Manufacturing in 1900 at age 23. A master marketer and a fierce competitor, he positioned trains as the ultimate feel-good father-son bonding hobby while at the same time savaging every other train company with no-holds-barred advertising.
By 1953, annual revenue had reached $32 million and Lionel had become one of America's most beloved and recognized brands. Tougher times befell Lionel in the '60s, however, when it shrank to a holding company that leased its name to the toy division of General Mills. Cheaper trains and a disastrous relocation of production facilities to Mexico followed, moves that alienated longtime customers and opened the door for a small niche player called Williams Reproductions to manufacture tin plate reproductions of old, discontinued Lionel models.
Williams Reproductions, which operated out of the basement of the Laurel, Md., home of a part-time enthusiast named Jerry Williams, paid neighborhood kids $1.50 an hour to assemble engines and passenger and freight cars, which Williams then sold through hobby shops and train shows. Among the first wave of boys who hammered rivets and painted trim lines was Mike Wolf, who started at age 12 in 1973 and has been in the business ever since.
Wolf first saw his life's work stretch out in front of him in 1977, the day Williams enlisted his help at the York, Pa., train show, the biggest on the railroading calendar. Hobbyists flock there to talk, to see the latest models, to fill the trunks of their cars with engines and boxcars and accessories. Williams positioned Wolf behind the parts table, where the line often snaked practically out of sight. Wolf, who got to keep 10% of the take, remembers selling $150,000 worth of parts at a single weekend show.
The industry counts on two sometimes overlapping breeds of train buyers: modelers and collectors. Modelers are the guys who toil for hours on end over their basement layouts. Collectors are more likely to have a wall display of engines as well as engines and cars untouched in their original boxes. Modelers typically work in HO-scale, while collectors tend to focus on O-scale, which, at one-48th the size of an actual train, is twice the size of HO. For manufacturers, the money is in O-scale. An HO engine might cost up to $100, depending on the manufacturer; O-scale engines start around $300 and can rise to several times as much.
Wolf started his own business as a teenager. With his mentor's permission, he sold Williams's trains and parts via mail order from his bedroom, taking phone orders from the West Coast late at night, processing credit-card transactions, and maintaining a customer database on an early Apple. He called the company Mike's Train House -- later renaming it MTH Electric Trains as he moved to more spacious office and warehouse quarters in Columbia, Md. His catalog was crude. He slept each night surrounded by boxes of inventory. And he arranged an unusual pickup system with the UPS man in order to keep the shipments moving while he attended classes at a nearby community college. He parked an unlocked Ford Falcon in front of his house as his mailbox. A red rag on the antenna signaled a pickup. There were plenty. It wasn't long before Wolf became Williams' largest distributor.
When Williams decided in the mid-'80s to sell part of his business, Wolf was his buyer of choice. At age 22, a year younger than Joshua Lionel Cowen had been when he founded Lionel, Wolf was becoming a player in the industry. In fact, he was something of a second coming of Cowen. Wolf, too, topped out at 5-foot-5. And he would prove just as competitive, self-promoting, and audacious as the man he considered his role model. For a time, all MTH people wore black shirts at train shows. "So we were known as the men in black, the bad guys," Wolf says. "How else could I get Mike's Train House to outsell Lionel? People have to notice us to find out ours is a better product, so we did a lot of in-your-face advertising." In 2002, Classic Toy Trains magazine named Wolf the most influential person in the industry in the previous 15 years.
On that day in 1999 when he realized that Lionel was bearing down on him with a vastly -- and to his eyes, suspiciously -- improved product, Mike Wolf wasted no time responding. Sales at MTH were headed to a high of some $60 million in 2000, close to Lionel's industry-leading position. Wolf had closed the gap by offering innovative products and lower prices, but most important, he made better trains. If Lionel was now matching his quality, he faced trouble. He knew only too well the power of the nearly century-old brand -- especially among men going gray and bald, men for whom the name Lionel was a ticket back to childhood.
Wolf showed the suspect Lionel engine to his top managers, all childhood friends, many of whom also had worked in Jerry Williams's basement. They backed his decision to board a plane for South Korea and try to jump-start an investigation at his design and manufacturing subcontractor, a company called Samhongsa. Like a lot of companies, MTH had reached a certain size and realized that irresistible advantages lay in moving manufacturing overseas. It had some downsides, but in 15 years Wolf had never had reason to worry that the company's proprietary design drawings and tooling were half a world away, under someone else's control. Now he realized how vulnerable he'd become.
