The Toy Train Company That Thinks It Can

Enthusiasts are running Lionel again. Even a rock star is lending a hand

Chances are, if you were a kid or parent anytime between 1930 and 1960, you played with a Lionel train set. With real smoke, clanging bells, and wonderfully detailed metal cars, they were the toy of choice for generations. They appealed to children's fascination with technology and noise and to that particularly 20th century pride in mobility. Baseball legend Joe DiMaggio bragged about his trains. Pope Pius XII had a set. There's even talk among collectors that Texas Governor George W. Bush keeps one at his ranch. In 1953, Lionel sold 3 million engines and freight cars, making it the biggest toy manufacturer in the world.

Ten years later, the company was going nowhere fast. It had changed hands more than once, lost focus, and even started using plastic. The kind of kids who used to pore over the annual catalogs hardly gave the pages a second glance. They were too busy with their slot cars and space toys. The company languished for the next three decades, barely managing to stay in business.

Then a group of investors, including the late Paramount chairman Martin Davis and rock star and Lionel collector Neil Young, came to the rescue in 1995. In early 1999, they brought in Richard N. Maddox, a longtime executive at toy company Bachmann Industries and a lifelong train enthusiast. Maddox was close to retirement when they offered him the job, but he quickly shelved any plans to head to the golf course. "It's the dream of every railroader to work at Lionel," he says.

Maddox has had his work cut out for him. He faces a fierce rival, Mike's Train House (MTH), run by a former Lionel subcontractor. To reinvigorate the venerable Lionel brand, which turned 100 this year, he has introduced new models and technology. He's also spruced up the catalog and set up dozens of licensing deals. "We're trying to excel in things whimsical, clever," he says. Lionel LLC is bringing back some vintage accessories--stylized nuclear power plants, for example. And it's trying to stay current--its freight cars now transport popular autos such as the new Volkswagen Beetle. Maddox's own favorite is the just-launched $1,800 Challenger steam locomotive. The two-foot-long toy is a remake of a classic Lionel train.

Though Maddox is trying hard to persuade the Pokemon generation of the charms of the train set, he makes sure to pay attention to Lionel's most loyal customers--who can usually be found at train shows. It is this group of mostly male, mostly grown-up hobbyists who are the serious toy-train buyers these days. Maddox, whose first job was assembling toy trains for customers at a hobby store in Philadelphia, is a regular at the shows. He spends his time talking with collectors, soliciting their ideas for new models.

They're aging, sure, but they spend real money. In all, toy trains are a nearly $1 billion business. But most people buy smaller trains, which Lionel doesn't bother with. The market for the bigger, elaborate models that Lionel makes is just $250 million. This isn't the video-game business.

KIDS THESE DAYS. That's not to say that Lionel wants to be too retro. At the Chesterfield headquarters outside of Detroit, the design staff is about a decade younger than most Lionel collectors. And Maddox, whose office is full of toy trains, has put together licensing deals for everything from Hallmark ornaments to train-themed computer games. The Learning Curve International, an educational toy company in Chicago, makes a battery-powered train for toddlers. Companies offer Lionel train lunch boxes, clothing, even cookie tins. Licensing revenues have more than tripled in the past couple of years, Maddox says.

The privately held company doesn't release financial results, but Maddox says sales should increase 15% this year and another 15% in 2001. Lionel won't be more specific except to say that it's bigger than Mike's Train House, which expects to hit $60 million in sales next year. Greg Feldman, managing partner of Wellspring Capital Management, the investment firm that now owns Lionel, says the company has never had higher revenues than this year. And the important holiday shopping season is just beginning. (Yes, even collectors spend more in December, thanks in part to Lionel's annual Christmas trains.)

The company's 2000 catalog is its largest ever: two volumes, with nearly 200 pages of models. It includes everything from the classic gateman, who pops out of the station when trains pass, to the most modern of accessories, a wireless remote control. Neil Young, who declined requests for an interview, developed the device to control the sounds and speed of as many as 99 trains at one time. It's an extreme version of a remote control that he had designed years earlier so that his two sons, who have cerebral palsy, could manipulate their toy trains. For each Lionel train, Young also has created and mixed everything from the whistle sounds to simulated commands from the engineer.

But it's not just technology that is reinvigorating Lionel. The youth perspective is helping too. In the company's visitor center, dozens of trains speed along tracks while groups of kids wearing engineer hats scamper around. It's the perfect environment for people like 30-year-old Eric Schreffler, the unofficial "whimsy" engineer, to come up with new products. His first idea was a tank car with a Tabasco hot sauce theme. His favorite: an Egyptian-style car, complete with plastic mummies. The unofficial Lionel historian is 29-year-old Todd Wagner, who has tracked down long-forgotten blueprints of trains from the 1920s and 1930s that were gathering dust in old Lionel storerooms. Now the company is using those plans to build more authentic historical models. How does he like his job? "We're grown men playing with trains every day," says Wagner. What more could he want?

Founder Joshua Lionel Cowen didn't intend to start a train company. When he started out in a New York City loft in 1900, he wanted to make electrical devices. He invented his first train, a simple wood box on wheels powered by primitive batteries, as a marketing gimmick. The trains carried other toys around shop-window displays. But customers just wanted to buy the train. Cowen took the hint. He soon managed to buy his biggest rival, Ives Manufacturing. He proved to be a shrewd marketer. His catalogs, which featured fathers and sons playing together, were a study in persuasion. And he often included comparisons between his best models and competitors' cheapest to show his advantage in quality.

SIDETRACKED. But once Cowen sold out in 1959, Lionel was in for a rough ride. A series of management teams, including General Mills Inc., tried to keep the company going, but the quality of the trains slipped. In 1983, the owners moved the manufacturing to Mexico, lost track of production, and missed the holiday season. By 1985, they had returned to Michigan. For a full three decades, the company's service was no better than, say, Amtrak's. "They'd have one great product, and then the next one would have cheap plastic bells," says 52-year-old Groton (Conn.) collector Bob Coniglio.

Today, Lionel's scrappiest opponent is Mike Wolf, of MTH. He is so intent on beating Lionel that he keeps the company's name spelled out in bricks on the fireplace mantle in his Columbia (Md.) home. "It keeps me focused," he says. Wolf built detailed, expensive recreations of classic Lionel trains for five years beginning in 1988. When Lionel orders slowed, Wolf started designing his own trains. That ended the relationship with Lionel. MTH has sued Lionel, claiming that Lionel subcontractors in South Korea stole MTH designs. That case is pending. "There's no doubt I'd like to own them, but I don't have that kind of money," Wolf says, figuring Lionel would fetch more than $60 million.

Next year, Wolf plans to introduce technology that should allow owners to hook up their trains to the Internet to diagnose problems and even download new sounds and functions. But Lionel isn't so sure that bringing those two worlds together is smart. Lionel execs believe that toy trains will catch on with kids precisely because they're a change from today's high-tech toys. "We really believe that our product requires some imagination," says Maddox. "You touch it. You create your own atmosphere." At least a few younger consumers see it that way. Ten-year-old Zack Horne is building a new train set in his suburban Wisconsin home, starting with a hand-me-down from his uncle. "I like my train better than the computer," he says. Take that, PlayStation.