Racing Champions Corporation Business Information, Profile, and History

Company Perspectives:

The company's mission is to create high quality branded replicas and unique products sold through multiple channels of distribution.

History of Racing Champions Corporation

Racing Champions Corporation is one of the largest die-cast collectible companies in North America, a position it reached in 1999 when it acquired The Ertl Company, which had over 50 year's experience in making farm toys, model kits, and die-cast collectibles. Through its various subsidiaries, the Racing Champions holding company produces such popular brands in die-cast collecting as Ertl Preschool, American Muscle, Agriculture and Construction, AMT Model Kits, Racing Champions, Press Pass, and Wm. Britains. The key to Racing Champions' success has been quality, attention to detail, and licensing agreements, most notably from the National Association for Stock Car Auto Racing (NASCAR).

Seeing Opportunity in a Growing Sport

Robert Dods, met Boyd Meyer in the 1980s when Dods was a sales representative for several toy manufacturers, and Meyer was a buyer for a chain of five-and-dime stores. The two men eventually formed a partnership, Dods-Meyer, Ltd., to serve as an agency representing manufacturers in the sale of product lines to mass merchandisers.

Soon Dods and Meyer were looking beyond the partnership to create a product of their own. As racing fans, both men were aware of the surging popularity of the sport, especially in the NASCAR racing circuit. They also knew that race fans were loyal, buying and collecting merchandise endorsed by their favorite drivers. Looking for an untapped market, the men decided to go into the die-cast collectible area. First they had to decide where and how to make the cars, and then they had to secure licensing agreements with NASCAR and with individual drivers.

Overseeing the manufacturing side of the business, Dods traveled to Hong Kong and set up agreements with local entrepreneurs to have the cars made in China. By 1994, Racing Champions had an office in Hong Kong with 40 employees in engineering, graphic design, shipping, and quality control. The cars were made at 11 manufacturing sites in China.

Arranging licensing deals was a little tougher. Sanctioning bodies, such as NASCAR, had to be convinced to sign with Dods and Meyer first. Then the fledgling company had to approach car owners and drivers, automobile manufacturers (such as Ford and General Motors), and corporate sponsors. Ultimately Dods and Meyer were successful, making their case and signing exclusive deals with NASCAR, Indycar, World of Outlaws sprint cars, and IROC (International Race of Champions). The deals not only enabled the company to approach the drivers but also added credibility to their pitch.

Auto makers were next up, as Racing Champions needed permission to duplicate the cars driven by the race teams. Corporate sponsors were then pitched, enabling Racing Champions to duplicate the corporate decals on the cars, which made them authentic and collectible.

Once Racing Champions had the manufacturing and licensing deals in place, Dods and Meyer turned their attention to distribution. Both men had years of contacts in the industry built up, and distribution to retail outlets, such as departments stores, toy stores, hobby shops, and discount stores, were quickly set.

Vintage Replicas and Special Cars in the 1990s

Not long after Racing Champions began business, Richard Petty, the so-called King of NASCAR, drove in what was to be his final season. In 1992, the Richard Petty farewell tour was a boon to Racing Champions, which made 30 different die-cast cars to commemorate each of the 30 races during the 1992 NASCAR season. Racing Champions sold over one million Richard Petty cars that season. Seeing how fans reacted so positively to the Richard Petty cars, Racing Champions began offering a line of vintage die-cast cars, to capitalize on the popularity of some of NASCAR's past stars. The company made replicas of 1970 Plymouth Superbird driven by Richard Petty as well as Cale Yarborogh's 1969 Ford Talledega.

Racing Champions signed a deal with Ford Motor Company in early 1999 to build a collection of 1:18 scale cars. Called the Ford Precision Collection, the cars would reflect Ford's history in the automobile market, beginning with the 1964 Mustang in the third quarter of 2000. The die-cast models were to be sold through some Ford dealerships, hobby stores, and specialty retailers, with a new car released every quarter through Ford's 100th anniversary in 2003. Racing Champions hoped to go beyond the anniversary year, continuing to release a new model every quarter until the company produced 100 different models.

Collectibles for the Masses

As many people associated collectibles with high prices and specialty stores, Racing Champions believed in the niche market for mass-produced, mass-merchandised collectibles. Thus, in addition to producing die-cast cars for use mainly as children's toys, the company produced limited-edition, yet inexpensive, collectible models every year. In racing, drivers changed teams and teams changed sponsors frequently, so Racing Champions offered an inexpensive means by which fans could keep pace with their favorites. Moreover, Racing Champions did not limit itself to the production of racing-sanctioned die-cast models; its die-casts also sported the images of popular cartoon and television characters and theme-based cars, appealing to collectors from a broad range of interests.

Research indicated that the market for Racing Champions products ranged from three years to 90 years, the prime collecting age range being 35--64. As the demand for inexpensive collectibles grew, so too did available floor and shelf space in mass-market retail stores. In 1996 the die-cast car and replica model market rose 28.7 percent, accounting for $513.5 million of the $9.1 billion adult collecting market.

According to Racing Champions, the key to retaining the adult market was to constantly offer new merchandise. Toward that end, the company seized opportunities to offer new products based on well-publicized anniversaries, farewell tours, and changes in drivers/sponsors. The company also created a demand among collectors by limiting the number of die-casts it issued for each model, particular with its series of models commemorating NASCAR's 50th anniversary.

Increasing Competition in the Late 1990s

In 1996, Racing Champions was still a private Illinois company, while foreign operations were overseen by Racing Champions Ltd. in Hong Kong. In April of that year, a group of investors joined with the Chicago-based venture capital firm Willis Stein & Partners LP in arranging a $96 million recapitalization of the company. This resulted in the Delaware incorporation of Racing Champions as a holding company for the concern's foreign and domestic operations. Under the new arrangement, the investor group retained a 54.4 percent stake in the company, while management, including founders Dods and Meyer, held a combined 45.6 percent share. The following year, Racing Champions was ready to make an initial public offering (IPO) on the New York Stock Exchange.

Just as management was taking Racing Champions public, two large toy makers decided to enter the racing replica market. Industry giants Hasbro, Inc. and Mattel, Inc., for example, noted the enormous increase in demand for both die-cast toys and the scale models favored by collectors. Hasbro entered into an agreement with Action Performance Companies, Inc., one of Racing Champions competitors, to create a line of Hasbro die-cast cars for mass-market retailers.

Competition in the market was not just over shelf space at retail chains. Perhaps more importantly, die-cast car makers competed for licensing agreements, and during this time, Racing Champions met with further challenge by Action Performance over exclusive contracts with drivers. Racing Champions had a licensing deal with popular driver and Winston Cup champion Jeff Gordon, but this deal expired in September 1995, and he eventually signed with Action Performance. Moreover, the equally-popular driver Dale Earnhardt went with Action Performance as well; Racing Champions' rival had long-term agreements with NASCAR's most popular drivers. Unquestionably, not being able to produce replicas of NASCAR's two most popular drivers hurt Racing Champions.

Nevertheless, Racing Champions enjoyed strong sales, particularly in 1988. With NASCAR celebrating it's 50th year, Racing Champions had a host of commemorative cars and other memorabilia ready for the collectors market. Once following year, however, the market dipped, as Racing Champions found the demand for its products weakening. Analysts suggested that collectors had gorged themselves during NASCAR's anniversary year. Moreover, the anticipated release of the new 'Star Wars' movie as well as the mania for the Pokeman animated characters had collectors' money diverted towards other products.

To bolster its sales and reputation, in April 1999, Racing Champions made an acquisition, purchasing The Ertl Company of Dyersville, Iowa, from U.S. Industries, Inc. Ertl, a 50-year-old company specializing in farm-related toys, die-casts, and model kits, was larger than its purchaser, with about $25 million more in sales than Racing Champions in 1998. While Racing Champions thus added the popular Ertl brand name to its holdings, it also gained in the deal that company's manufacturing facilities in Mexico, which incurred relatively high production costs. Racing Champions soon planned to shut down the Mexican plant and move production of Ertl products to Racing Champions manufacturing plants in China and Hong Kong.

Revenues at Racing Champions for 1999 had increased some 47.9 percent over the previous year. However, net income had plunged dramatically, as the company took a $6.4 million restructuring charge against earnings to help defray the cost of the Ertl acquisition. Wall Street took notice of the earnings reversal, and Racing Champions stock dropped from $17.88 per share in the second quarter of 1999 to just $3.56 per share in the fourth quarter. With shareholders wondering just what had happened to the lucrative company, a lawsuit was filed against the company by a New York law firm, alleging misrepresentation and breach of fiduciary duty. By the third quarter of 1999, Racing Champions found itself the target of takeover bids. Tower Hill Holdings reportedly made an offer, but then withdrew it when it wasn't welcomed; then the Enna Corporation made an offer that was also rejected by Racing Champions' board of directors.

In an effort to reverse the downward trend, Racing Champions management planned to reduce the company's dependency on mass retailers, by selling only 45 percent of its merchandise through the retailers. The rest of Racing Champions merchandise was slated for sale through specialty stores and directly to the customer via a revamped web site. The company signed an agreement with the Bradford Exchange in mid-1990, allowing Racing Champions to sell new collectibles via direct-response advertising.

In 2000, Racing Champions entered the market for a hot new product on the collectors market: memorabilia cards. Offering more than just a picture of a sports hero and a list of his stats, the most coveted among these trading cards were actually embedded with a memento, for example, a piece of a player's uniform or a small piece of a game ball; the valuable cards were then randomly inserted in packs of regular trading cards. Collectors bought entire packs, hoping to be lucky enough to find a memorabilia card. Naturally, the memorabilia cards were difficult to make, requiring precision cutting and application by hand of the actual memento, which was typically less than one-inch square. Racing Champions made the trading cards, including memorabilia cards, under its Press Pass brand name.

As Racing Champions entered a new century, the market for collectibles in general, and die-casts as well, remained soft. However, with part of its reputation staked on the enduring appeal of NASCAR and its loyal fan base, and part on the expanded product lines brought to the company by the Ertl acquisition, the company remained optimistic. Responding to industry trends, as well as successfully integrating the operations of the newly acquired Ertl, offered Racing Champions some challenges in the early 2000s.

Principal Subsidiaries: Racing Champions Inc.; Racing Champions Ertl, Inc.; Racing Champions Ltd. (Hong Kong); Racing Champions International Ltd.; Racing Champions South, Inc.

Principal Competitors: Action Performance, Inc.; Hasbro, Inc.; Mattel, Inc.

Chronology

• Key Dates:

• 1989: Racing Champions is founded.
• 1996: Company introduces a line of custom and classic vehicle collectible die-cast models.
• 1998: Company produces a new line of die-cast replicas to be sold exclusively through hobby shops; Wheels Sports Group, Inc., is acquired and renamed Racing Champions South, Inc.
• 1999: The Ertl Company is acquired and renamed Racing Champions Ertl, Inc.