Letter from Mike Wolf

I find it odd that there is

I find it odd that there is hardly any concrete exit strategy for such a large model railroad company.  Mike either made this decision very quickly or simply doesn't have a good option at hand.

I've voiced my viewpoint here a couple times that the O scale segment is rapidly aging and possibly heading downhill.  This may both affirm that opinion and move things one step closer to a much less prevalent position for the scale.

I've always been a vocal critic of the proprietary DCC systems in 3-rail and the departure of one of the two major players in that realm shows the blessing of having a industry-wide standard.

My stepfather was just starting to sell and update his collection of 3-rail, almost exclusively MTH products.  I feel he's going to have a tough time getting rid of stuff and may not ever purchase any new 3-rail O products.

I hope MTH

can find someone willing to continue with the S scale products. The S line was purchased from SHS a few years ago but never really promoted. There is some nice S stuff in their collection so it would be a loss to the hobby if they can't get someone to continue the line.....DaveB

S scale products

I too hope they can find someone for their S scale line.

I spoke with their train show guy at the WGH show earlier this year about a run of the 2-8-0.  He said they ere considering it, but of course now that's over.

Paul

Hm...

In view of the S side of MTH, you might want to brace yourself for what may happen: Nothing. Adios SHS line.

Lionel will be fine and dandy with the former SHS line fading away. Lionel's market is Hi-rail and traditional S. They are also very aware of the demographics in motion within the very small niche of S, which is similar to what is happening in the O 3-rail world, but the numbers are smaller in S. To wit: Boomers are aging out and passing. This is already putting a lot of product on the secondary market (with much more to come), but NOT new customers with money burning a hole in their pocket for S scale products.

The only other option, American Models, will not have the deep pockets required to purchase the SHS line. The SHS line was a very expensive experiment for MTH, and now its a liability. Piece meal sales may happen, but again, who's got the venture capital in the small model railroad industry at this precarious moment in US history?

"This moment in US history": To wit: Co-19 with its dramatic downturn of the economy, countless small business shuttered forever, wide-scale violent insurrection in the streets, losing infrastructure because of same, etc, etc? It will be a HUGE job to rebuild this Nation after the panic-induced economic damage, along with the property damage (once the violent tantrums are over).

Terrible timing for MTH.

Having said all of the above, I do wish Mike and his family the best and I don't blame him one iota for wanting to cut his business losses so as to minimize damage to his personal finances and move on.

Andre

I wouldn’t be surprised if

I wouldn’t be surprised if Kader (Bachman) snatches up some of the pieces of MTH.  That would be pretty consistent with their business model.

More to come

I believe MTH closing is just the beginning of many closings we will see in the next few years. I wish Mike Wolf a grand retirement. In the last couple of years we have seen Northwest Shortline, Chooch and several other model railroading manufacturers close shop. Some of these have been purchased and continue to operate with new ownership. There are many model manufacturers who are approaching retirement and I’m sure we will see a few more move on within the next few years, to them I say Thank You, enjoy your retirement. There are also many new companies that have begun operating in the last few years, good luck in this new world. As for the Chinese, things are going to change in the near future. We are already seeing the cost of some new freight cars in the $60 range and I don’t see that going anywhere but up. Locomotives will be over $400 (with DCC and Sound) in the very near future, with some steam over $600 already. The cost of doing business in China is going to get a lot more expensive in the very near future. Shipping is also going to increase. Model railroading will survive. We will build smaller layouts with less equipment. We may even get back to painting and detailing (modeling) our own equipment. I think we will see more of the models were we have to install our own grab irons and other parts like on the new Walthers GP9’s and other manufacturers offerings. The hobby will do fine, we may just have to do more modeling to keep the cost down.

I believe MTH closing is just

So you believe MTH closing is related to the economic impacts of COVID19?  I didn't see any indication in the formal announcement.  Just time to retire and get out of the business.

As noted, even before COVID, we have seen quite a number of closings over the past several years - but sure, there may be some the COVID will push over the edge.

Modus operandi basically.  Heck, it's been standard to have to install grab irons on Walthers models for a long time.  We've been in the golden age of the hobby for the past 10 years and up to the present.  There have been bumps along the road but so far no paradigm shifts.  But anything is possible.

Unfortunate

It’s always sad to see a model railroad company go away.  MTH made some 3 rail stuff that, after swapping trucks and couplers, could do reasonable duty on a 2 rail layout.

It does seem like a good example of why buying into a proprietary control system may not be a good idea though - unless someone buys MTH’s DCS system and keeps it going the folks who built their 3 rail empires on it may run into difficulty if they need more stuff.  Same potential problem with Lionel’s TMCC.  For some reason the 3-rail market seems to be very brand loyal, whereas pretty much everything else is more mix and match.

The reality is that most

The reality is that most small businesses are not in a position to continue once the founding family wants out.

If you think about it the business may earn.enough to keep Tthe founder alive with a reasonable income.  But in order for it to be sold to someone else it needs to earn enough to pay for the cost of business (tools meterials, taxes, rent, utilities employees and what have you) as well as pay the new owner a living wage AND still have enough left over to pay the original owner off (or to pay the bank if the new owner took out a lone).

So before you can sell a.business it has to be making a decent profit over and above the cost to run it.

So say I open a model railroad business selling C&O related models.  I work full time at it and I earn a good living at it say 75k a year.  Now in order to sell this to someone else I also need to earn enough to pay the asking price.  Above said 75k a year.  So a business that I start and keep running for 20 years could very well go under because it does not make enough to pay to buy it.

The truth is that most small buisnesses  in the US probably fall into that problem they do well enough to pay the owner/operator but not enough to Pay off the original owner.

It is simple math.  And has nothing much to do with the economy or the world or China or model railroads.  
Think about it how many small business do you know that have survived past the lifetime of the founder unless they “sold”  (usually means gave) the business  to their kids.

-Doug M

Continuing the S scale line?

  Seems like the molds, tooling, etc. would have a market value based on what someone new could do with them. Often however these assets never get back into service for whatever reason. ....DaveB

Molds?

Since the molds are probably in China, the chances of getting them is rather slim. AristoCraft had problems "finding" their molds. Who's AristoCraft? Exactly.

I have dealt with several manufacturers that attempted to move production to other Chinese injection molders / manufacturers only to discover that their molds were "lost" or "unserviceable". When the manufacturers agreed to stay with the same molders the molds just seemed to appear and work.

DCC, COVID, scales

So what is actually going on in model railroading? Everything I've been seeing/hearing is that people are spending more on model railroading, since they're stuck at home in their basements building stuff, or is it that they're actually spending less?

I don't think DCS killed MTH. I'm no fan of proprietary systems, but 3-rail O is a dying scale. It's been dying since the last big economic downturn in 2008. The future is scale models, not toys like 3-rail. People who collect today are collecting HO scale models that are highly realistic to live in their yard, not 3-rail O scale toys to put on the wall.

In order to sell a business, wouldn't the purchaser only need to pay slightly above the liquidation value of the company assuming not enough value to create a bidding war? Or is even that too high?

On the other hand, companies come and go. As soon as some go, a few more will pop up with something else. New technologies like 3D printing and Arduino are starting to transform the hobby and offer new options as well.

So say I open a model

If you're running a business you should be making $75K as an employee of the business AND get a return on the money you invested in the business.  That $75k doesn't mean much if you had to invest $1 million to get the business going.

I work with a lot of business owners who are asset rich and cash poor.  A lot of them would be better off selling off their assets, investing it, and then working for someone else.

DCS

I wasn’t suggesting that it did.  I was just pointing out that people who have built their 3 rail layouts on DCS are probably not happy campers right about now.  I think MTH read the 3 rail market well, and DCS was another tool in their toolbox to lock people into the MTH brand.

I work with a lot of business

Bingo! You keep hearing how rich Jeff Bezos is.  People do not understand it is in assets.  He is not sitting on billions and billions of dollars in the banks.  Then you get he should sell his stock,  People have no clue what happens when a company just floods the market with it's stock let alone the primary owner CEO etc. doing a massive sell off.  

The truth is that most small

Yep, I know the gloom and doom crowd declared Coronavirus the latest threat that's "gonna kill off the hobby!!!" but the reality is most small businesses in any industry are lucky if they even make it 5 years. I mean this one pizza shop down the street from me is on it's 2nd owner in the span of about 10 years. The restaurant beside it is on their third in that span of time and that happened last year. None of the owners of any of those businesses are related to each other. 

...

This will be a big blow to the model railroad press community, MTH likely had a $10k per month advertising budget provided how widespread (basically everything with a model or toy train on it) and how large their advertisement spreads are (often full page).

You don't just replace that kind of market capital once it goes away, unless it is indeed replaced - but the next company will be trying to both pay off the previous owner while operating the business, which means less operating capital for advertising.

My uncle was one of them, but the flipside is these people are so finiky they never could work with anyone (again) in the first place - and not as anything less than a controlling business interest, even if they aren't very good at running a business.  The biggest pain is that my uncle's assets were all of such a piqued or obsolete order that the heir pretty much donated or recycled everything, even the things that could be turned into value, because they don't want to deal with any of it. 

It would have taken my uncle ten or twenty years to divest everything...he died scheming up a way to get his brother to help fund his new dream, a 30'x60' building on the East side of his property, it would feature a garage on the bottom level to house his growing fleet of derelict vehicles that all kind of worked, and 1800 square feet of storage on the second level, only he hadn't figured out just how he would get to the second level, if it would be an elevator or just a landing for the forklift, and stairs...If you want to know where the madness had already gone, this would be in addition to the 50x60 in the front yard and the 32x32 tied onto his house...all full...the house was a 5 bedroom 3 bath?  Yeah...the madness has ended.  I have my own madness, of course, but it's not to that point quite yet!!

Buyers for the HO line?

Things certainly point to a piecemeal divesture.  That means that the buyer of the O line may be different than the HO line.  While there were a few duds in the HO line, there were a few good pieces too.  Can anyone guess where the HO line would be a good fit?

Molds will probably be ok.

If chances are so slim, I guess most of the manufacturers with AFFA beat the odds then because they are pretty much all back in action and producing models from those "lost" or "unservicable" molds.  Intermountain, ExactRail, Trainworx, Atlas and others.  Spring Mill Depot did discuss having a difficult time getting their tooling but AFAIK, the did finally get it.  But one report I heard is a reason some tooling was held was because the owners owed the factory money and they had to settle finance issues before assets were released.

As far as lost molds, that has happened but it doesn't seem to be the norm as you would imply.  One example I am aware of is the lumber load molds, Athearn used to sell and include with flat cars and bulkhead flat cars, were lost according to an Athearn rep I spoke to. That happened during the last factory crisis in China around 9 or 10 years ago. 

I expect there are other instances of missing/lost molds to be sure, but (back to the topic) the MTH assets and tooling aren't necessarily going to become lost, at least I wouldn't assume that.  For one thing MTH is still open and in business for about another year, and will be providing warranty service for another year beyond that.  In the mean time MTH may negotiate a deal for a new owner to take over some or most of the models and perhaps resume work at the same factory.  Time will tell.

Does that mean the settlement his wife got was mostly assets?  What was it, 38 billion or 4% of the company?  It was reported she was donating half of it to charity.  How is the charity going to spend assets?  I"m sure some/much of it is, but a lot is not which is how he can afford a very expensive house, $65 million private jet and so on.

S scale molds

I suspect the problem here won't be the cost of the molds.  There is a very small market for these and if MTH wants anything for them,  they probably have to sell them cheap.

I think the real problem is who wants (and has the capital) to start the line up again.  One of the things that happened about 10 years ago with the problems in China, is that SHS stopped supplying dealers.  The result was that many dealers that were carrying S, stopped carrying the scale altogether. 

American Flyer has expanded their line somewhat and they along with American Models can probably cover the market.

I expect that the old SHS line will just be gone.

Paul

Bezos

Assets can be his stock and in regards to his wife she let him off easy. He turned over stock worth the agreed settlement and she has to convert that to cash. Same for Jeff. A few weeks ago he cashed out 600 million and turns around and buys a 34 million dollar home. As with most of the 1% and a lot of the 10% many of their expenses are run through the businesses or trusts and anything else to reduce taxes. You may have gotten $1200 in stimulus cash but the 10% and 1% got a huge tax break worth about 1.4 million yearly. Look it up, it is in the package! When it comes to the really wealthy, you have to remember they are different from us. 
 

As to MTH, if he had really cared for his employees he could have made the announcement that he is retiring in 2021 but sold to the loyal employee group. That would have allowed the employees a chance to keep the company going with no real adjustments. I predict the product lines get broken up for the most money for Mike. And there is nothing wrong with that either.

Tom

Wealth

The extremely wealthy are just the most obvious. As you go up and down the spectrum, the whole system is tilted towards those with more. Homeowners get deductions on interest paid on mortgages, people who own stocks get to pay capital gains taxes, not income tax, which is a giant loophole written into the law. At the other end, the poorer you go, it goes the other way. Car loans are massive drains on finances for the middle class. Credit cards for the middle and lower-middle class. Predatory payday lenders for the truly lower classes.

So the extremely wealthy are just on a continuum of systems created to benefit those who already have more.

  "American Flyer has

The problem with that is the SHS stuff is the best of the lot.  

If the molds are in China perhaps some Chinese entrepreneur could decide to run some product and sell it online? They seem to be into selling lots of other train stuff direct.......DaveB