The Changing O-Gauge Market

By Patrick Sarver

Over the past five or so years, the O-gauge market has undergone major changes, with a relative explosion of products and growth. Manufacturers have responded to these changes in a number of ways, and the nature of O-gauge railroaders has also changed, affecting the way the shop owners need to sell to the market.

"I would say that the overall O-gauge market has grown about 50 percent in the past five years," says Ed Boyle, editor of O Gauge Railroading. What downturn there was in O is already over. There was overproduction, with too much product, and sales took a bit of a tumble with the recession, but things are looking good because inventories are being worked off."

"Retailers are telling us the market is on the slow side right now," says Andy Edleman, vice president of marketing at MTH Electric Trains, "but that's just a part of the overall economy. The O-gauge market is certainly still growing, although not as fast as it was."

"We've seen tremendous growth in the past five years, but it's hard to know just how much of that is due to an increase in market itself," says Jeff Cohen, director of marketing at K-Line Electric Trains. "There is a tremendous amount of product on the market, and customers at every level are becoming more selective. For O-gauge consumers, this is a windfall, and it has made dealers very competitive."

Manufacturers are responding to the gauge's changing market in a variety of ways. At MTH, Edleman says, "Our production quantities are very conservative, with limited runs on all our locos and rolling stock. In fact, everything we released in the first quarter of this year has sold out. We do offer a lot of choices, but no big quantity of any of them, 30 to 40 percent of what we were doing three years ago. Retailers can order what their customers wants, but we're not going to have anything in stock later. We literally have no new locomotives in stock until the new catalog comes out in late April. The closing date for orders from the catalog is the end of May, and we anticipate it will be sold out then.

"In fact," Edleman says, "the gauge is growing, but so much product has come out that the increase in consumers has not been enough to absorb that product. Manufacturers, for the most part, cannot sustain the quantities."

All this means that shop owners need to pay attention to what's current in the marketplace and make sure that they stock in a way that makes sense for today's O-gauge market, says Boyle. "A piece of rolling stock that's been out for a year or more can be deadly, because everyone who wanted one got one and has gone on to the next thing," he says. "Intelligent ordering, with an emphasis on pre-orders for the most expensive stuff, is important. Expensive stuff that sits on your shelf more than six months costs you money."

At K-Line, Cohen finds that retailers are more reluctant to stock product, which means more products are sold as pre-orders. "Customers who want to see that actual product have a much less chance of that now," he says. "Retailers still need to pick out some kind of higher profile product to have on hand for customers to actually look at. Our products sell when people see the real thing."

Cohen adds that a great majority of what K-Line makes is also in limited runs because of the amount of product on the market. "At the same time, the market demands new products, even if it's just a new paint scheme. Se we are trying to make more products with smaller runs, pulling business from a lot of areas, offering more diversity and a greater number of items."

At Lionel, the current approach is different. "People have requested that we keep specific products available from one catalog to the next," says John Brady, vice president of marketing. "We're doing about the same number of limited runs as three years ago, but we are being more patient, having products available for more than a year at a time. For a regular piece of rolling stock, we've probably got a fairly good inventory."

Another major trend affecting O-gauge is a shift in customers away from collecting trains to building layouts where they run their trains. "There has been a revolution in the past five years in O-gauge," says Boyle. "Today, the majority of the market are operators, not collectors. And their percentage has gone up like crazy. Guys are running their trains, and we're getting in more guys from HO as well as some younger consumers who don't care about collecting."

"The O-gauge customer is thinking differently about purchases," says Edleman. "Instead of buying new engines as frequently, he might be using some of his money to buy accessories or track while also considering using his collection for operation instead of just acquiring it. We're getting a shift to more of an operator mentality because there are too many choices for a collector."

"A dealer who has relied on collectibility to drive his O-gauge sales is facing a challenge," says Edleman. "That retailer today needs to reach out to those who focus on operating their trains. Discounting isn't enough. Retailers need to rethink how they're getting new people into their stores. The easiest way is to demonstrate what the product can do to those who are shifting over from collecting to operating. Retailers are important to the market because they can show consumers with first-hand demonstrations just how interesting the hobby can be. Collectors have become disillusioned because the product is not appreciating in value like it used to go. The use of the product is where the excitement is now."

At K-Line, Cohen says, "we have always catered much more to operators than collectors. There's a larger push toward hi-rail or scale three-rail. The detail and operational features have improved. These items are made with a focus on running, not on future investment value. The O-gauge market has changed. The sense of why people buy trains is changing. As the operator side of the hobby increases, we find that our customers are looking at our line as a good product to run. They are no longer concerned about the investment value or about passing it on to their children."

"Electronics are also becoming more important, and they are also driving the prices of the engines," says Boyle, pointing out that there are two types of command and control in O that are distinctly different.

"Lionel has licensed their system to other manufacturers, which means greater compatibility," Boyle says. "MTH's DCS is a newer system, with more capability, that is being accepted by hobbyists. Our publishing company's new DCS video, which is almost two hours long, is selling very well as a result. Both systems are, in fact, doing quite well. We're even finding that traditional O-gaugers often want their locos to be command-and-control capable because it enhances the resale value or just in case they eventually decide to go with electronics."

"Lionel has also developed a 'button box' that puts features in conventional control that you could only access in command and control before," adds Boyle. "Just press a button for each discrete function. They're trying to ease people into command and control, and they're going to start putting it in some of their upper end sets."

The largest manufacturers in the gauge are also adapting their products to the current market conditions.

"We have added more track to our sets, increased the transformer power and switched to a traditional transformer control from the infrared remote," says Edleman at MTH. "As a result, support from retailers for the sets are up. We are adding value to our line through additional detail and sound features. It's a bigger line than anyone else's, but we want retailers and consumers to view it as the best value. We have a significant number of products being re-released with the new electronics, usually with different paint schemes. We also have a new RailKing products using tooling from our Premier Line. Our aggressive development of new tooling in the 90s is also now paying off."

"The biggest thing we have done at K-Line is that, about two years ago, we introduced a die-cast steam engine line that people can run," says Cohen. "We're making the highest quality possible in both conventional and command mode for less than other manufacturers. We also have a new line called Action Accessories, which run off of transformer power and have motion, lights, smoke and sound. In O, people want a nice layout with the accessories that do things. We're focusing on hi-rail, with scale level detail. O-gaugers have no problem with tin-plate wheels and couplers, which are completely out of scale, but they want the same level of detail that scale operators are interested in. So that's where our emphasis is."

"For the past three years, we've sold out of the sets by late October and are looking for a repeat of that this year," says Brady at Lionel. "We've tried to simplify our sets so you don't have to be mechanically inclined to enjoy them. We've introduced the new FastTrack system to enhance those sets. We've also incorporated an instruction video and have added new, more powerful transformers and lots of fun features.

"We have a good selection of steam engines, concentrating on the more important ones," Brady continues. "Our scale steam locomotives remain as the premier category in our line. We've also expanded areas like scale rolling stock, operating accessories and track. People are passionate about a lot of different areas of the hobby, and we're trying to accommodate them all. Lionel has always done both scale and more whimsical and toy side. We are trying to get more clever in the products we offer. The concept of the Lionelville is a perfect example of that. We're trying to be clever in both the design and concept--a little sense of humor combined with a serious product line.

Source: May 2003, Hobby Merchandiser, The Trade Magazine for the Model-Hobby Industry. www.hobbymerchandiser.com

Comment on this article in our Forums ->