K'Nex Industries, Inc. Business Information, Profile, and History

Company Perspectives:

Founded in 1992 and 1956, respectively, K'Nex and its parent company, The Rodon Group, operate as an extended family. Over the years they have internalized and embodied a system of principles, procedures and values that serve to enhance the success of both companies and to encourage the personal and professional growth of the people in their employ. This is what we believe: We believe that the company can be financially successful while behaving in a socially and environmentally responsible manner. We believe that our product, K'Nex, is unique and worthwhile; that it is capable of enriching the lives of those who use it, both through pure enjoyment and through its educational impact; and that these genuine qualities must be sustained with all the innovation and creativity we can muster. We believe that K'Nex is as safe as human ingenuity can make it, and we must make this intrinsic in every design we devise and publish. We believe that the company has a responsibility to provide a safe and fulfilling work environment, and an opportunity to grow and learn.

History of K'Nex Industries, Inc.

K'Nex Industries, Inc. manufactures the second-ranked children's construction toy in the world, K'Nex. K'Nex building sets comprise various sizes of rods that snap into connectors. Children can make a variety of things from them, such as cars, space ships, and ferris wheels. Some K'Nex kits are retailed as building sets for specific projects, such as the 1,280-piece Screamin' Serpent Roller Coaster. Others are starter sets or for more open-ended projects. The company manufactures K'Nex at one 223,000-square-foot plant in Hatfield, Pennsylvania. The K'Nex brand is particularly strong in Europe, where the company makes about two-thirds of its sales. Fifty percent of its K'Nex International division is owned by giant toymaker Hasbro. Hasbro also owns 10 percent of K'Nex Industries' domestic operations.

Plastics Manufacturer Gets a New Idea: 1992

K'Nex Industries was founded in 1992 by Joel I. Glickman. Glickman had a background in industrial engineering and worked for his family's business, The Rodon Group, which made specialty plastic injection molded products. Rodon had been founded in 1956, and its products ran the gamut from eyeglass cases to the table-shaped plastic devices which pizza deliverers stand on pizzas to keep the boxes from collapsing. Glickman was nearing 50 when he got the idea for a high-quality plastic building toy. Apparently a shy man, Glickman found himself at a wedding unwilling to mingle with the guests. Instead, he was fooling around with the plastic drinking straws at the buffet table. Then it occurred to him that he could design a construction set using straw-like rods and connectors. Glickman went to work using Rodon's injection molding machinery, and soon had designed a prototype for K'Nex. The toy was made out of a proprietary brand of acetyl copolymer, a strong, flexible material. This plastic was about four times the price of the polypropylene that most plastic toys were made of. But K'Nex needed the specific characteristics of the high-quality plastic. The pieces had to be rigid enough to stay together, but not so rigid that children's hands would have difficulty snapping and unsnapping them. Consequently, the early K'Nex sets had a relatively high retail price, and this was an initial barrier to marketing.

Glickman tried to sell his new construction set to the two major U.S. toy companies, Hasbro and Mattel. Neither were interested. Glickman also approached Lego A/S, the Danish company that produces the world's best-selling construction toy. Lego refused to even look at Glickman's prototype. Undeterred, Glickman started producing K'Nex building sets at Rodon's facility. He sold them directly to toy shops, with most of his business going to smaller stores which could handle the high sticker price--from $25 to $100 a set. But Glickman also caught the eye of marketers at Toys 'R' Us, the huge nationwide toy retailer. The toy chain test-marketed K'Nex in Philadelphia and Detroit in 1992, and sales were spectacular. The toy had the makings of a hit, and Toys 'R' Us Chairman Charles Lazarus singled out the new construction kit at the next industry toy fair. By the Christmas season of 1993, K'Nex was selling at several other major retailers, including Target Stores and Kmart. Glickman also did his own promotion of K'Nex, especially stressing that the set was an educational toy. He made a 2,000-square-foot portable exhibit of K'Nex, and brought it to children's and science museums in 13 cities in 1993. By 1994, sales of K'Nex reached $44 million in the United States. The company inked a deal with Pizza Hut to give away small K'Nex sets in its kids meals in 1994. That same year K'Nex won Family Fun magazine's toy of the year award. The sudden success of K'Nex attracted the attention of Mattel and Hasbro, though they had passed on K'Nex the first time around. After negotiating with both companies, Glickman sold 10 percent of the U.S. operations of Connector Set Toy Company (renamed K'Nex Industries in 1996) to Hasbro.

Sales Picking up in Europe: Mid-1990s

The toy industry was notoriously fickle, with fad toys experiencing phenomenal sales one year, only to fade to oblivion by the next Christmas. The industry was also increasingly taken up with high-tech computer toys and games. The early 1990s saw something of a backlash, and K'Nex debuted at a time when interest in construction toys was making a comeback. The French company Meccano S.A. reintroduced the classic construction toy Erector Set in the United States in 1991. Erector Sets had not been sold in this country for ten years. Sales of construction toys jumped almost 14 percent in 1992, making the whole market worth some $267 million. The dominant player in the market, Lego, seized on the trend by bringing out over 70 new products in 1993. K'Nex came out just when interest in construction toys was heating up, and in its first two years it did extremely well. But then sales started to fall, and the company struggled to market itself successfully against better-known and more lavishly funded competitors.

Despite renewed interest in construction toys, the category made up only about 3 percent of the overall U.S. toy market. K'Nex stood out from many of its competitors by being relatively high-priced. Wal-Mart stores declined to carry K'Nex, claiming that its customers would not be interested in paying so much for the construction sets. Wal-Mart and other discount merchandisers accounted for over one-third of U.S. toy sales. After its fine start, K'Nex found it difficult to keep building its domestic sales because it was not in discount stores. To keep up its presence in the United States, K'Nex Industries needed to advertise directly to children through television commercials. The firm changed its advertising agency several times in the mid-1990s. It spent an estimated $10 million in 1995 with a series of television spots designed by the California agency Ground Zero. The next year the company spent about the same amount, using the New York agency Kirshenbaum Bond & Partners. The Kirshenbaum ads featured a motorized K'Nex construction, with a monster movie theme. But domestic sales stayed flat.

In the meantime, the company began to have great success in Europe. K'Nex Industries had sold 50 percent of its international division to Hasbro in order to use the bigger company's overseas distribution network. K'Nex found that not only did construction toys have a much bigger share of the European toy market--from 8 to 12 percent, versus 3 percent in the United States--but marketing was much easier. Television advertising was far less important to European toy sales, because parents typically chose toys for their children based on displays they had seen in toy stores. Glickman had shown a huge K'Nex display called Big Ball Factory to buyers at Wal-Mart, who were unimpressed. While Wal-Mart declined to carry K'Nex, the British toy store chain Entertainer Ltd. made a hit out of K'Nex. The K'Nex Big Ball Factory display "stopped pedestrians in their tracks," Entertainer's marketing director told the Wall Street Journal (May 21, 1998). K'Nex also promoted its construction sets in England by working with Tetley Group Ltd. to give away K'Nex pieces in Tetley tea boxes. Children could collect the small sets, apparently fueling the desire for more. Within a few years, K'Nex claimed 40 percent of the British construction toy market, setting it on par with the world-dominating Lego.

K'Nex tried similar cross-promotions in other countries abroad. In Belgium, gas stations owned by Shell Petroleum Ltd. gave away K'Nex pieces, reaching at least 1.5 million consumers. The company made a similar arrangement with one of Turkey's largest newspapers, Meydan. The paper gave away some 82 million K'Nex pieces as part of a circulation drive, which resulted in a doubling of circulation for Meydan and vast market penetration for the toy company. European sales moved ahead in double digits, hitting $70 million by 1997. The brand held the number two market spot in the region, behind Lego. Sales in the United States were just over half what the company was making in Europe, standing at about $39 million.

A New Assault on the Domestic Market in the Late 1990s

For K'Nex, almost all the good news was overseas. The U.S. trend in construction toys had not lasted long. Meccano S.A. sold its U.S. division to a Canadian company in 1997, having failed to bring back the moribund Erector Set brand. Mattel, too, had its own construction line, Construx, which it took off the U.S. market in 1998. But that year K'Nex Industries hoped to revitalize its domestic marketing and add sales growth at home. Overall sales stood at an estimated $100 million by 1998. The company hoped to capture a bigger slice of the U.S. market by introducing a line of Star Wars K'Nex kits through a licensing deal with LucasFilm. But negotiations with the film company were unsuccessful, and Lego brought out the Star Wars character line instead. Though it trailed Lego, K'Nex had grown to become a prominent brand. Lego still claimed a 65 percent share of the U.S. construction toy market, and K'Nex claimed between 11 and 12 percent. In order to penetrate Wal-Mart and other discount toy marketers, K'Nex began bringing out small construction sets of only a few pieces. These retailed for as little as $1.99. In 1999 K'Nex announced it had hired another agency to handle its television advertising, with the account now going to Griffin Bacal. The spot showed boys building various things with K'Nex, and then animation brought the creations to life.

K'Nex made another bold move in 1999, beginning to market and distribute another venerable construction toy, Lincoln Logs. Lincoln Logs was created in 1916 by John Lloyd Wright, son of famed architect Frank Lloyd Wright. The wooden interlocking blocks had enchanted countless children, but the brand had not been selling well for many years by the time K'Nex became interested. The brand was owned by Playskool, which in turn was owned by K'Nex' partner Hasbro. K'Nex marketers thought they could bring back the brand, which was geared to kids aged from three to five. Hasbro initially rejected K'Nex' offer, but in 1999 the two companies signed a three-year licensing agreement giving K'Nex broad leeway to reposition the brand. K'Nex soon brought out television advertising for Lincoln Logs, which had made no attempt to advertise since 1993. The company also made changes to the product, though it continued to be made out of wood. The company brought out Lincoln Logs activity sets, which included railroad tracks, plastic figures of people and horses, and preconstructed buildings. This centered the building set within what the company called a "themed play land," hopefully extending the time children spent with the sets.

Domestic sales seemed to be picking up for K'Nex as the millennium turned. The company was named Vendor of the Year by Toys 'R' Us in 2000, for its general excellence in sales and in service. By the Christmas season of 2001, the construction toy industry looked like it was turning around. While overall toy sales were flat that season, construction toys were expected to grow by about 8 percent. When the dust settled, construction toys in general had had a great year in 2001, growing by 14 percent, and K'Nex managed to outperform the market considerably. Its Screamin' Serpent Roller Coaster was the top-selling item in the building sets category for that year, meaning many thousands of parents had shelled out roughly $90 for the set, which was supposed to take at least five hours to assemble. Buoyed by this leading item, K'Nex Industries' sales grew over 30 percent for 2001. The company entered the 2002 season with an array of products, from small sets for younger children to the more advanced motorized Cyber Swarm of robotic insect models to the huge and elaborate K'Nex Electronic Arcade, a working pinball game. That year K'Nex toys were sold at Toys 'R' Us, Wal-Mart, Target, Zany Brainy, and FAO Schwarz stores in the United States, and in 44 countries abroad.

Principal Divisions: K'Nex International.

Principal Competitors: Lego A/S; Learning Curve International, Inc.; Ritvik Holdings Inc.

Chronology

• Key Dates:
• 1992: Connector Set Toy Company introduces K'Nex toys.
• 1993: K'Nex enjoys its first nationwide Christmas season.
• 1994: Portions of domestic and international business are sold to Hasbro.
• 1996: Company is renamed K'Nex Industries, Inc.
• 1998: Sales of K'Nex toys thrive in Europe.
• 2001: K'Nex Roller Coaster set ranks as bestseller in construction toy segment.