Hobby Industry Study

[NWCanuck]

I just read an interesting article in the July 2011 issue of Model Railroader Magazine (pg.10). Seems the Hobby Manufacturers Association (HMA) just released the numbers, showing the US Hobby industry cleared $1.47 Billion in 2010 which is up from sales in 2009 at more than $1.3 Billion at the manufacturer level. These numbers are then divided into four categories with model railroading coming in on top with $424 million of that 2010 figure above. This is not the part that really interested me, although it is good to see the industry is still growing at least if you go by profits.

The part that surprises me is the $2.5 - $3 billion dollar profit at the retail level due to a 40% to 50% markup. These numbers are based on a survey taken by only 39% of the US retailers that are members of the HMA. 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.

I’m starting to feel like I am at the Gas Pump when I am in my LHS now!

 

[Outback]

Yes, it seems that prices for plastic kits and similar items seem way over priced for what you actually get at times. You would think that plastic must be a non renewable resource that is becoming scarce. I can't believe some of the prices expected for things these days. I was away from the hobby for 17 years so I really notice the rip off factor that seems to be overlooked by current generations. Not on all products, but many that used to be more realisticaly priced. I guess that's why I am still old school and low budget scrounging and making due wherever I can. I do admit that quality of detail and in some cases workmanship has greatly increased but the prices have even out weighed that justification in many cases IMO.

 

[jeffrey-wimberly]

They know people want the stuff and will pay through the nose to get it.

 

[Dollie's Dad]

It is all relative.

When I was first in the hobby over 50 years ago, new automobiles cost about $1,500. Now, they're $30,000. That's an increase of about 1900%.

Really low quality freight car kits cost a dollar or so, and you had to put them together yourself, buy the paint (and sometimes decals), trucks, and couplers. By the time you were done, you could easily have $2-3 invested in one freight car. By today's standards, the stuff was crap. Of course, $2-3 was a lot more money then. In fact, in 1952 when I started in model railroading, a dollar was a lot harder to come by, especially for a 10-year old kid. Today, that same dollar is worth $8.27, so the $2-3 that I paid then was roughly equivalent to $16.50 - $24.75. Sound familiar?

But I gather the real discussion in this thread is whether or not the retailer is entitled to the markup he's receiving. The short answer is 'yes'. The cost of doing business is significant for retailers, particularly those who have a traditional walk-in store with a standing inventory.

If he really is marking things up 50% over his cost, that's a gross profit of 33-cents on every dollar he takes in. Even at that, there is a lot of expense coming out of it. He has rent, utilities, wages, interest on loans, credit card fees, advertising, depreciation on store fixtures and improvements, licensing fees, insurance, shrinkage (yes, people steal), some return on his investment, and on, and on. If he ends up with a net profit of a dime from that dollar he took in, he's doing pretty well. Most do not.

Then, there's the cost of inventory. We all want to shop in hobby shops with row after row of shelves filled to the brim with every item a manufacturer makes. He might have $250K worth of inventory sitting there, and that's money that's not earning anything at all until somebody actually buys something. If an item sits on that shelf for a year or two without selling, that's money that's been tied up earning absolutely nothing.

Understanding all that does not completely eliminate my desire to try get the best possible price. If I have more than one source for the same thing, I will usually buy it from the dealer with the lower price. Hey, I'm sympathetic; I'm not stupid.

I do shun the internet as much as possible. Granted, there is money to be saved by buying online, but there are some pretty unpleasant tradeoffs, not the least of which is the eventual extinction of local hobby shops. And I have the perfect excuse for buying online; I live over 100 miles from the closest decent hobby store, and 130 miles from the one where I do the bulk of my business. Even so, I manage to get over there every couple weeks, and I'm happy to spend my money there. His prices are typically about 10% below MSRP, and I'm perfectly happy with that. I can see what he has invested in his store, and I don't begrudge him a profit. He has put his own money at risk, and he has earned it.

 

[Selector]

I am not the least bit surprised. When I see brand new engines with DCC/sound being flogged for USD$140, it suggests to me that the markup is at least 100%. Scenic materials are about 200% or more.

However, I don't begrudge the importers a cent that I am prepared to spend. A penny more and I keep lookin'.

 

[AVNMechanic]

Yes, it seems that prices for plastic kits and similar items seem way over priced for what you actually get at times. You would think that plastic must be a non renewable resource that is becoming scarce. I can't believe some of the prices expected for things these days. I was away from the hobby for 17 years so I really notice the rip off factor that seems to be overlooked by current generations. Not on all products, but many that used to be more realisticaly priced. I guess that's why I am still old school and low budget scrounging and making due wherever I can. I do admit that quality of detail and in some cases workmanship has greatly increased but the prices have even out weighed that justification in many cases IMO.

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.

 

[Dollie's Dad]

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.

I doubt if it's a significant factor. The actual cost of materials is probably pennies per car. The significant costs are engineering, tooling (molds, dies, patterns, etc.), machining, painting/finishing, assembly, packaging, and shipping. The cost of petroleum will have an impact on all those things, but not a lot, and on a per-car basis, material cost least of all.

 

[tooter]

I doubt if it's a significant factor. The actual cost of materials is probably pennies per car.

It isn't, Dad...

It isn't the quality of the trains that cost so much money to buy...

...it's the lack of quality of the money used to buy the trains.

 

[Dollie's Dad]

It isn't, Dad...

It isn't the quality of the trains that cost so much money to buy...

...it's the lack of quality of the money used to buy the trains.

Amen

 

[diburning]

Costs have to do with many factors. Here's a list of what I THINK (that is, what I think, not necessarily what may be going on) drives up prices.

1. Cost of oil - Plastic is made from oil, ships need diesel, UPS needs diesel to deliver to warehouses, distributors, and to your LHS.

2. Inflation - Yes, things cost more, but that's because the buying power of the dollar is decreasing. It seems natural, and is not necessarily politically caused.

3. Cost of labor - Manufacturing work was once done in the United States. People unionized and demanded higher wages. Companies that don't make enough money will cut costs, and send jobs elsewhere if they can get it cheaper. Since China's labor market has increasing wages, companies will look elsewhere for cheap manufacturing.

4. Cost of living - When the cost of living goes up, people will have less money and everything will look more expensive. Higher cost of living also leads into the demand for higher wages, which drives up manufacturing costs. If the item being manufactured is a necessity, then the prices will go up, increasing the cost of living. The reason why manufacturing costs less in other countries is because the cost of living is less there, which is why people accept less wages. Your locomotives are not being made in a sweatshop.

5. Unions - They were a great idea back when the employees were being bullied by their employers, but in modern times, most unions have turned the tables. They bully the employer into paying them more, thus driving up costs. Not all companies are evil and greedy. Some companies can barely survive (I know of a few that went out of business due to them) while paying unionized employees. With the idea of unionization spreading globally, costs can only go up.

6. Profits - A business exists for one sole purpose. To make money. If a business cannot make money, then it cannot stay in business. Businesses cannot constantly break even or take losses. If the costs of materials and labor go up, then the prices must go up so that the company can generate a sufficient return to reinvest in new products/tooling.

 

[Railphotog]

(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!

 

[NYW&B]

A few points worth clarifying in regard to the questions posed and statements made so far in this thread.

Firstly, the current pricing of model trains has been totally out of proportion with inflation in recent years. Concerning the prices of common freight car "kits" in the distant past, I can tell you that in the mid 1950's both Athearn and MDC kits were available from major outlets like AHC and elsewhere for .98 cents per. No further upgrading of these cars was necessary; no additional painting, new trucks, wheels, nor couplers. They were complete and standards of the day at $.98 . These and many from other manufactures remained at very low cost for decades to follow. It was only in the past 10 to 15 years that the prices exploded and we are quickly seeing many examples of rollingstock approaching, even sometimes already exceeding, $40 a car.

Two major factors have served to escalate prices dramatically since the late 1990's. The first of these was the return of many aging Baby Boomers to the hobby. The majority joined our hobby in the late 1990's and thereafter, having been former Lionel/Flyer enthusiasts in their youth, but were unequipped as modelers/builders when entering the scale hobby. They needed to rely heavily on RTR to create even a rudimentary layout, locking them into the RTR market. They were also for the most part, much better situated financially than the entry-level, run-of-the-mill, hobbyists of the past.

Such facts were not lost on the manufacturers who had suffered some terrible losses in the early-mid 1990's from over production that resulted in product fire sales at far below cost. This created a shift to more of a "collectors" approach. With ever more limited product runs it allowed them to justify steadily rising prices. They also spawned the notion of, "Buy it now, or maybe lose out forever!" Likewise, many manufacturers felt this could equally justify pre-ordering, which could almost guarantee immediate product sellouts at MSRP and a maximizing of the return on their investment. Now I don't really chide the manufacturers for all this, as it is a wise business approach in a potentially shrinking market. Where the fault does lay is with the hobbyist themselves for buying into the concept!

We also saw manufacturers shift from American production to overseas. However, this cost savings move never resulted in even the slightest decrease in pricing, as might have been expected from the drastically reduced production costs initially. Indeed, there was new tooling, greater detailing in some models, and higher quality (sometimes), but overall these should not have resulted in anything like the tripling and quadrupling of prices for even basic rollingstock we've seen. With regard to locomotives, the better ones are rapidly pricing themselves totally out of the range of the average hobbyist today. Indeed, some are starting to rival pricing of quality secondhand brass models of far greater accuracy and detail.

Now some still like to claim that the hobby was always expensive. This, however, is an absolute falsehood, as these folks often attempt to cite their limited individual purchasing power as a child, or young teen, years ago rather than as an adult in that period. Having been in HO many decades myself, I can vouch to the fact that when the great majority of hobbyists were accomplished modelers (a fact that in itself kept manufacturers from rapidly escalating their prices) the hobby and its necessary commercial products remained very affordable decade after decade.

Finally, concerning that recently published HMA study, notice please that actual production tallies go unmentioned. Only the resulting profits are cited. Were the former such figures cited, I can guarantee that they would show a major overall decline in numbers, as it is the grossly inflated prices that are responsible for the seemingly healthy sales figures.

NYW&B

 

[Artieiii]

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

 

[diburning]

That I will agree with you on. Containers are all overpriced. Cheapest I've seen is 4 bucks each for walthers containers.

 

[blownoutcylinder]

There are ways around that though..building them up yourself from scratch..ie plastic and maybe some photo images of them ...

Meh...

I could take it or leave it..

 

[pappy]

profit at the retail level due to a 40% to 50% markup.

Thats low compared to other retail markup. My wife owns a store and the customary markup is 100%-150%. You think furniture stores stay in business with a yearlong running of 50% off...I think not. MSRP on allot of goods is over 200% if not more and that allows retailers to run discounts to make us feel better and they stay in business.

 

[NWCanuck]

I am not the least bit surprised. When I see brand new engines with DCC/sound being flogged for USD$140, it suggests to me that the markup is at least 100%. Scenic materials are about 200% or more.

And this is what I am talking about Crandell. I know where you are going Eric but remember the manufacturers made $424 Million in 2010 so I am not worried about their issues like Oil, Unions, Cost of Living or Labor. I am talking about the gross markup by the retailers who show a $2.5 to $3 billion dollar profit in 2010.

MSRP already has profits and markup built into it at the retail level. Therefore retailers can afford to list at $20-$30 below MSRP, which makes the average consumer think they are getting a deal. When that stock sits on thier shelf for and extended period of time they lower the price like Crandell said and still turn a profit. The numbers speak for themselves.

Unfortunately for me, or should I say unfortunately for my LHS, they try to sell at MSRP and when the dollar is on par with the US greenback they charge the exchange on top of that. This causes them to turn over fewer products which in turn keeps their prices high. Why not keep your prices under MSRP and sell more products, because they know they are still making a killing, but that is just my local issue.

The point I was trying to make was that companies like MB Klein buy large volumes at an untold discount. They list for $20-$30 less than MSRP and people buy like crazy. This to me is a good business model. The interesting part is if you wait long enough those prices come down considerably which is when I try to buy and they still make a profit.

I treat retail like EBay without the bidding part. If they have 6 locomotives in the same road number and I want one I will let that stock sit on their shelf until either they are down to 2 and then I buy, or I wait until they are forced to move the stock at a lower price because it has sat around too long.

 

[NWCanuck]

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

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!

Sounds like you chose option 2 in the poll. I don't mind paying for a finely detailed model either. Then again, I am also lucky enough to have the ability to make my own finely detailed models from undecorated versions. I also own a Rapido caboose and some of their steam generator cars. Very nice models indeed, but at the same time Rapido as a manufacturer is a bad example when comparing markups. Rapido is a very small manufacturer compared to Atlas or Athearn. Jason has to tie up allot of money in a single run and cannot move onto his next project until he makes some return on that investment.

But as I stated before I am talking about Retail markups, not Manufacturer. The fact is the manufacturers made $424 Million, while retail made $3 Billion. It’s not about forcing anyone to shell out large sums of money to purchase products. The fact is, at some point weather we like it or not the industry will hit a plateau where the consumer can no longer afford the product which in turn hurts the industry.

 

[Dollie's Dad]

Sounds like you chose option 2 in the poll. I don't mind paying for a finely detailed model either.

Nope. That was me.

I don't see many hobby shop owners getting rich. I sure can't recall ever seeing one drive a Bentley, or own a private jet. Most of these guys make a modest living, especially considering the huge investment it takes to have a store with a reasonably comprehensive inventory. Even if the gross profit is 100%, I don't begrudge them that just as long as they're competitive with others who operate similarly (i.e. other retailers)

Everyone is in the business to make money. It's sure not for the love of us that they do it. The manufacturer wants his cut. The distributor wants his, and the retailer is just as entitled to a profit as well.

I will be the first to admit that I miss the old Athearn blue box kits and others of that ilk. They were inexpensive, looked good enough from a distance when built without modification, and could be 'experimented' on and modified without fear of losing a significant investment.

Obviously that wasn't a business model that worked for the industry, and that's why we no longer have that option. Too bad, really.

The demographics of the hobby have changed, and that's also part of the problem. On average, model railroaders are older, and have more money to spend. They want to get up and running as quickly as possible, and aren't willing to spend an entire evening drilling holes and installing grab irons on a freight car. There just isn't that much interest in doing those sorts of things any more.

I can still remember a time when the term "Craftsman Kit" was actually a selling point.

 

[Outback]

They also spawned the notion of, "Buy it now, or maybe lose out forever!" Likewise, many manufacturers felt this could equally justify pre-ordering, which could almost guarantee immediate product sellouts at MSRP and a maximizing of the return on their investment. Now I don't really chide the manufacturers for all this, as it is a wise business approach in a potentially shrinking market. Where the fault does lay is with the hobbyist themselves for buying into the concept!

In the first, there is a word for that notion and it is... extortion.

In the second, yes, we (myself generally not included) are at fault for being led into the flames without a fight.

Now on the idea of super fine detailed collector pieces as per the Rapido cabeese &c; I am also guilty of purchasing same. But as Bob has mentioned, that price can justify itself and I don't mind paying a higher price for same when I can relate to the item in some way. For the longest time good accurate Canadian items were far and few between. Now that we have access to quality representative equipment, my wallet becomes a little more open minded with regard to pricing of those items. They are still within range as we speak, but another few dollars and guess what? They too may price themselves out of the general modeller's market and become an "elite" item just like the $300 plastic locos.