Business - Hot Wheels;How a tiny toy makes Big Bucks (G.ReaD)

Keith Naughton

Hot Wheels are hot again. Parent company Mattel is now worth more than GM. Got an old Beach Bomb VW model in the attic? You're rich!

On weekends, Edwin Norman likes to hit the Richwood Flea Market in northern Kentucky with his sons, Ja'Mon, 5, and Julian, 6. But they don't come to pick up a set of hunting knives. The Cincinnati-area father and his sons are shopping for wheels. The kind that come in a plastic package and cost a buck. Today, the young boys see plenty they like as they rush the table at the Mo Collectibles booth, squealing and squirming over rows of shiny, tiny hot rods. Ja'Mon suddenly spots the car he likes—a metallic midnight-blue Suzuki—snatches it up and waves it in his brother's face. "I want to drive this car when I'm big," he says. Their father looks on wistfully. "This brings me back," says Norman, 50. "I played with Hot Wheels when I was a kid, and they look forward to getting new ones just like I did."
In the fad-driven fantasyland of toys, Hot Wheels has had an incredible ride. Those pocket rockets have been racing down their familiar orange tracks for four decades now and, unlike the real car market, show no signs of slowing down. Last year Hot Wheels set a record, as sales surged by 16 percent, and they continue to accelerate in 2008 even as the economy tanks. In fact, as Motown melts down, Hot Wheels is heating up. The tiny toy cars' parent company, Mattel, now has a market capitalization that surpasses General Motors. That's right—Wall Street thinks the maker of toy cars is worth more than the largest real carmaker in America.
And why not? Hot Wheels is still a growth engine that analysts say does $1 billion a year in global sales. In the $2.3 billion U.S. market for toy vehicles, Hot Wheels has been a leader for years, according to retail researcher NPD Group. Mattel says it has produced 4 billion Hot Wheels since 1968. And Hot Wheels suffers none of the age angst afflicting Mattel's other icon, Barbie, the Norma Desmond of dolls. Now Hot Wheels is getting the star treatment. There's a Saturday-morning cartoon, "Battle Force 5," debuting on Cartoon Network next fall. A Hot Wheels movie from "Matrix" producer Joel Silver and Warner Brothers is in the works. And Wal-Mart, America's No. 1 toy seller, is featuring two Hot Wheels sets, Trick Track and Beast Bash, in its big "Ten Under $10" holiday promotion. "Hot Wheels' basic fantasy is something that is timeless—it's cool, fast and powerful," says toy analyst Chris Byrne.
The brand is riding a hot streak because it reconnected with little boys and their fathers. "Dads would see the old blue box and say, 'I remember those'," says Larry Wood, a former Ford designer who started penning Hot Wheels in 1969 and constituted the entire design staff for much of 1970s. "Our sales took off." Earlier this decade, Hot Wheels took a wrong turn by going after older boys who were getting their car play from videogames like Grand Theft Auto. To try to get those big boys to put down their game controllers, Hot Wheels came up with ever more elaborate—and complicated—play sets. One, the Slimecano, featured a slime-spewing volcano that cars had to navigate—and parents had to try to assemble. But no matter how fancy Hot Wheels became, the vid kids weren't interested. Then about three years ago, Hot Wheels returned to its roots—simple tracks that snap together quickly and fast cars that excite 5-to 8-year-old boys just coming out of their Thomas the Tank Engine years. "We were trying too hard to push the brand older," says Tim Kilpin, the Mattel senior VP who steered Hot Wheels back to basics. "We had to make it cool for the right-age boys."
And that age turns out to be under 10 and over 40. The rust-colored roadways and loop-the-loops of Hot Wheels' latest offerings are descendants of the original tracks that first put the toy in motion. "It's the circle of life," says Hot Wheels marketing executive Geoff Walker. These days, adult collectors make up a quarter of the Hot Wheels basic car business. At a Hot Wheels convention in Los Angeles a few weeks ago, a collector paid $70,000 for a rare pink Beach Bomb model, a 1969 VW bus with a surfboard sticking out the back, which never went into production because it was too small for the track. (The pink color was an attempt to attract girls, which didn't take. Hot Wheels have always been to boys what Barbie is to girls.) A new price threshold might be jumped when collectors bid on a diamond-encrusted Hot Wheels racer, valued at $140,000, being auctioned this month to mark the car line's 40th anniversary.
Among the bidders will be Bruce Pascal, 47, a Washington, D.C., real-estate agent who has a Hot Wheels collection valued at $400,000. As the stock market melted down, he still paid $13,000 for a rare "overchromed" Ford T-bird from the original Hot Wheels catalog. "I've looked over my portfolio and I'm down in everything except Hot Wheels," he says.
Analysts see investor exuberance for two-inch toy cars as adult rationalization for engaging in child's play. "They might think of it as a poor man's commodity exchange," says modern-history professor Gary Cross of Penn State. "But what they're really doing is collecting their youth." And that drives up revenue, though Mattel didn't realize it at first. When adults first started gathering to swap cars 21 years ago, "Mattel didn't want anything to do with us," says Mike Strauss, who has organized the swap meets since the beginning. At his convention at the Hilton LAX this month, $2 million worth of toy cars changed hands, including one $168,000 collection unloaded by a man to help pay for his divorce.
With that kind of money on the table, Mattel now rolls up big, providing product and, most important, its stable of Hot Wheels designers to autograph their creations, which typically don't leave the packages (the better to hold their value). More than 100 grown men lined up in a courtyard at the Hilton to meet the designers they idolize. "A part of me feels like a geek telling people I'm going to a Hot Wheels convention," says Carlyle McCullough, 43, communications director for a Texas church. "But it's not like we're going behind a closed door and going 'vroom, vroom.' Well, not very often anyway."
It hasn't always been a smooth ride. The Hot Wheels story has many twists. It began in 1967, when custom hot rods ruled the road in Mattel's southern California neighborhood. Mattel cofounder Elliot Handler wanted to capitalize on the craze and give boys a toy on par with Barbie. Back then, boys played with toy train sets. Toy cars were crude contraptions, with wheels fused to their die-cast bodies. Handler asked a designer to rig a car from British competitor Matchbox (now owned by Mattel) with wheels that actually spun. An hour later, the designer had a prototype. The boss gave it a flick and it zipped across his desk. "Now those are some hot wheels," Handler reportedly said. And a franchise was born.
When the first flamed-out, chromed-up cars appeared in 1968, with names like Hot Heap and Heavy Chevy, they took off like dragsters. Mattel figured it had a hot product it could ride for a year or two. But the toymaker discovered that as long as it rolled out new models—revved-up reproductions of Detroit muscle along with flights of fancy like the skull-faced Bone Shaker—boys kept coming back for more. "The cars change every year, so you have perpetual contemporaneity," Cross says. "That's what makes Hot Wheels go."
What made them stall was any design change that slowed the cars down. In 1973, to cut costs, Hot Wheels cheapened the cars' piano-wire suspension, which made sales go cold. Designers fixed that and Hot Wheels took off again. In 1977, to save a penny per car, Mattel stopped painting a thin red line around the tire sidewalls. (Keeping the price under a buck a car has always been critical.) Today, collectors pay hundreds for those original "Red Line" Hot Wheels.
These days, Hot Wheels does as much business for Mattel as Barbie, toy analysts say. And there are now 35 designers, kicking out 300 new models a year. Lately, they've been toiling in a "treehouse" on the company's backlot in El Segundo, Calif., while Mattel builds them a new hangar-size studio nearby. You can climb to the second-floor studio on a rope ladder hanging from a faux tree, or you can simply take the stairs. Once aloft, you find a tree fort outfitted like a gearhead's garage, with a gleaming chrome toolbox, a checkerboard-flag floor and corrugated metal bulletin boards where designers hang their latest works with magnetic lug nuts. "This is our brainstorm area," Wood says. Detroit's real-car designers are trying to escape to this toy land. "I got a call today from guy in Detroit asking if we had any positions open," says designer Alec Tam, 37, a second-generation Hot Wheels designer whose father penned the original Beach Bomb. "The little cars are very similar to the real-car business from a design standpoint."
Just like their big-car cousins in Detroit, Hot Wheels designers went to art school and now create cars on computer. They zap their digitized designs to virtual model makers in Asia, who send back encoded files that are then used to produce 3-D renderings. The entire process takes just days, and a car created in January can be hanging on a peg at the toy store by summer. The process in Detroit can take four years. Another contrast: since you don't need a car loan for a 99-cent car, sales for an individual model can top one million units. "I've designed the bestselling production car in GM history; it's crazy," says GM designer Amaury Diaz-Serrano, referring to his Chevroletor retro racer, which became a Hot Wheels model last year in a design contest Mattel conducted with real-world carmakers.
Hot Wheels takes no pleasure in Detroit's pain. "We need Detroit to exist for us to be successful," says Walker. After all, Hot Wheels bestsellers remain replicas of classic Detroit iron. For decades, Motown has shared its top-secret blueprints of upcoming models with Mattel so that the Hot Wheels and real-wheels versions could debut simultaneously. That's happening again in November at the L.A. Auto Show, when Ford unveils a new design for its Mustang. As soon as the wraps come off the candy-red pony car, the journalists covering the introduction will be handed the 1/64th-scale Hot Wheels replica with a matching paint job. "It helps sell the real thing," explains Ford licensing executive John Nens. Barbie might get old. But boys and their toys never grow up.
With Patrick Crowley