Scale Model Railroading

Pre-ordering has become a way of life in the model railroad industry. The expense of development and tooling to create models is immense and can make or break a model manufacturer. Jason Shron of Rapido Trains penned a great response to this in their latest newsletter that explains the rationale behind the trend:

“I discussed this in issue 10 of the Telegraph, but I think it’s worth revisiting. Many people, myself included, have bemoaned the “pre-order” culture that has taken over the model railroad industry. Unfortunately, it is a necessary evil that we have to live with. Here’s why.

The capital investment involved in a model railroad business is huge. A friend of mine started up a software company about four months ago. His expenses are salary, rent, desks and computers. That’s it. In a few months he is already doing a roaring business, growing by leaps and bounds, and – most importantly – he’s bringing home the bacon. His advertising costs are nil (he relies on word of mouth for his business), and his capital investment (that means the money he spends on physical stuff) is peanuts in comparison to what he brings in.

In contrast, in order to bring a model train product to market, we must first design and build the plastic and metal molds – collectivey called the tooling. A diesel locomotive can cost up to $175,000 to tool. A passenger car with our level of detail can cost up to $100,000. Then there is the product cost itself which has to be paid, as well as rent, salaries, overhead costs, and a huge advertising budget. (Remember, my software programmer friend spends nothing on advertising whereas it is our biggest expense after product and payroll.) All of that money is spent before a single product ships and a single payment is received from our dealers.

The thing that will make or break a model train business is cash flow. I could have a great product and sell a million of them, but if I don’t have the cash to pay for the product then I will be out of business. It’s as simple as that.

So the manufacturer has already spent thousands of dollars on the tooling, and now he has to spend money to make the models. If orders are low for a given product, the manufacturer can do one of three things: delay the product, cancel the product, or make lots of inventory hoping that the products will sell eventually. We can’t just make, say, 12 Illinois Central coaches of a given number because we need to spread the cost of the painting masks and printing pads over a larger number of cars to make production economical.

The problem with making inventory is that the manufacturer has spent the money for that product, tying up vital cash that can be used for overhead, advertising, new product, etc. And in today’s economy, what almost all manufacturers are finding is that sales from inventory have come to a virtual standstill. Yes, people want the new stuff – and they order it in advance. But whatever is not sold by the time the goods arrive tends to sit on the shelf.

So if a model train manufacturer wants to stay in business he needs to take pre-orders and make the products to those pre-orders. If the pre-orders are too low, it is better to delay or cancel than to spend a lot of cash on inventory and hope it sells. Pre-ordering is a necessary evil in our industry, but without pre-orders we would have a much smaller selection of products.

The good news for those of you in the kitbashing, construction or scenery stages of your layout is that building supplies and parts (such as our “Totally Wired” Telephone Poles) are usually stock items and do not need to be pre-ordered. But for that snazzy locomotive or high end passenger car you’ve had your eye on, chances are that pre-orders are the only way.”