Inside the tornado

Written by Rick Spence

It’s the first week of November, and Christmas is coming fast. Santa’s elves are working overtime, and why not? His toys have guaranteed distribution.

Things aren’t so simple at Toronto-based Spin Master Ltd., Canada’s largest toy company. This afternoon, in the high-ceilinged Marshmallow Room on the third floor of its hectic downtown headquarters, the three founding partners are leading a 10-member marketing team through a tension-packed media meeting. The goal is to fine-tune their TV ad schedules based on the latest sales data. Lacking Santa’s magic sleigh, Spin Master relies on television to propel its toys onto kids’ wish lists and into their homes. The three 30-something partners are rarely found on the same continent, much less in the same room, but the stakes are as high as Barbie’s cheekbones. Over the next eight weeks Spin Master will spend almost $20 million on TV ads, so it’s vital to know which products need support—and where to pull the plug.

The latest results are sobering. Aquadoodle, the no-mess drawing mat that won Activity Toy of the Year last year, is responding strongly to the new ads. “Retailers are delighted with our sales,” says president and co-CEO Anton Rabie. But other products, such as the Bella Dancerella dance-studio kits, are falling short of expectations. (The new Cinderella and Popstar editions seem to be cannibalizing the ballet version that leapt off store shelves last year.) “We’re 40% behind on Ballerina and Popstar,” complains co-CEO Ronnen Harary. There’s even a frown on the face of product development chief Ben Varadi, who is normally the most lighthearted of the partners. And when Rabie reports that some products never made it onto store shelves in the cities where their commercials were shown, Varadi explodes.

“How much did we spend on that?” he demands. “How much money did we waste?” Larry, the media planner, adds it up over the speakerphone from New York: $90,000 in all. Varadi wants to know how this happened. Rabie, terse at the best of times, doesn’t want to discuss it. “I’m on it,” he says. Harary, the thoughtful, long-haired partner who oversees manufacturing, sits silently. But Rabie’s assurance isn’t enough for Varadi; he digs for more details. Finally, senior VP of sales Chris Beardall—an anomaly in the company at the age of 45—outlines the problems: a late shipment here, wrong-sized packaging there. Anticipating one of his bosses might bring up this issue, the bearded veteran, a former toy buyer for Wal-Mart Canada, had sweated the details.

Still seething, Varadi drops the subject; there are seven more pages of media/sales data to review, and not enough time. With annual sales of more than $300 million, 300 employees and more than 600 stockkeeping units (SKUs) to track, Spin Master is getting too big for one group to handle. Wading through the lists, the team basically decides it’s too early to second-guess their ad schedules.

But Rabie makes an exception when they note slow sales for a pirate-themed game, one of Spin Master’s attempts to move into Monopoly’s enduring niche. “It’s a disaster,” says Rabie. Is it time to cut their losses and pull the ads? Varadi again enters the fray. This is a strategic initiative, he reminds the group. To persuade choosy U.S. retailers to stock its games, Spin Master promised to support them with lots of advertising. If they cut the TV schedule, the company may have to offer retailers a rebate to help clear out the game by Christmas. Rabie opposes spending more money on a product that doesn’t look like a winner. But Varadi says they’ll have to pay either way, so they should show good faith to their retail partners. Reluctantly, Rabie concedes.

In meetings, the partners’ favourite phrase is “Let’s move on.”

As the SKUs drone on, Varadi lightens the mood. While the others talk, he playfully scratches a pen across the tabletop microphone that transmits their discussion to New York. “You hear that, Larry?” he teases.

Welcome to Spin Master, proud home of the McFlurry Maker, trucks that climb walls, dancing princesses and Spider-Man kids’ beds. With its reputation for innovation and youthful energy, Spin Master is Canada’s most celebrated and largest-ever toymaker—winner of numerous Toy of the Year honours, as well as a two-time ranking as one of Canada’s 50 Best Managed Companies. But beneath that glossy exterior is a company struggling to develop the long-term brands and discipline that will assure it a permanent place at the global toy table alongside giants such as Hasbro and Mattel.

And, as Varadi’s pranks suggest, behind that hard-driving veneer is yet another reality: the desire of three young entrepreneurs to prove not just that they can grow a global corporation in a cutthroat industry but that they can stay human while doing so.

It’s no easy task. The North American toy market is US$20 billion—and contracting by 3% a year. Spin Master’s customers are fickle and easily bored, making the lifespan of a typical toy today just 18 months. As a result, Spin Master has to reinvent 70% of its product line every year.

Simply surpassing the $100-million mark is a huge achievement for most Canadian growth companies—one rarely accomplished without management trauma and painful falling-outs among partners. Yet Spin Master has achieved its success with its original three in place. And instead of shrinking from their challenges, Spin Master’s partners are charging ahead. They’ve had the discussion about remaining a niche toymaker, limiting sales to perhaps $100 million a year. But instead they’ve set their sights on becoming the world’s largest consumer products company focused on kids. They want to own the best brands in children’s toys, furniture and entertainment, just as Procter & Gamble owns Tide, Pampers and Crest.

From the front lines of one of Canada’s most entrepreneurial firms, here’s how Spin Master’s partners expect to reach their goal while keeping their partnership intact.

Under attack

Despite Spin Master’s many successes, Anton Rabie sees its evolution as a daily battle to exist. “Every day I wake up, I am being attacked,” he says, eyes flashing with characteristic intensity. “I’ve come to realize that this is my life.”

We’re in his tidy, spacious office in late October, trying to conduct an interview while the phone rings and colleagues rush in looking for urgent decisions. “The LC is four weeks late!” complains one. Whenever there’s a lull, Rabie rolls his highback chair to his computer table to check his inbox. “Wow,” he says. “I just got an ugly e-mail.”

At its size, you’d think Spin Master had earned the right to give other people ulcers. But here are just a few of the challenges Rabie is dealing with this day:

  • The rising cost of plastic foam following the hurricanes in the Gulf of Mexico has forced Rabie to request an emergency price increase for its kids’ beds. But one buyer has just turned Rabie down flat. In a terse e-mail, the buyer adds archly, “Let us know if you don’t want to ship. We have alternative product lined up.”
  • Meanwhile, Spin Master has been trying for weeks to license an exciting new toy technology. The deal is all but done, but the inventor just found another problem with Spin Master’s proposed terms. (This haggling will continue for weeks, threatening the company’s spring schedule for rolling out the new product.)
  • A movie producer is about to award product licences for its next animated feature. Spin Master has a new product that would fit this property perfectly—but isn’t ready to announce it. Rabie gets on the phone, lobbying hard for the producer to await Spin Master’s bid.
  • Meanwhile, the acquisition of a niche toy company in the U.S. seems stalled, and Rabie has to get things moving again. “Let’s schedule a meeting, anywhere in the world you want to meet,” he tells the prospect over the phone. His goal is to get his CFO, Mark Segal, and his outside legal counsel in the same room as the U.S. toymaker until a deal is done. “How about you send the markup by Tuesday, we meet in New York Thursday at 4 p.m., and we either leave happy or sad?” In the end, the meeting is cancelled.

“Either it’s a retailer cancelling an order, competitors coming into our category or an acquisition where the terms are falling apart,” says Rabie grimly. “Our business is under attack every single day.” Then, flashing a grim smile, he adds, “It’s great entertainment.”

Part of the problem stems from Spin Master’s success. As the creative force behind the collectible Mighty Beanz and the high-flying Air Hogs (at one point the No. 3 best-selling toy in North America), Spin Master is now seen as a trend-setter, a company that invents entire niches. A company worth copying. “Now we are on the industry radar,” says Rabie. “Our scraps are worth $3 million to $5 million a year, so we’re in everyone’s sights.”

It wasn’t always this way. Spin Master began almost as a whim in April 1994 when Ronnen Harary, about to graduate in political science from the University of Western Ontario, spotted a present his grandmother had brought from Israel. It was a head-shaped nylon bundle filled with sawdust and grass seed. Water the bag and it grew a healthy head of green “hair.” Most people might have grinned and moved on, but Harary saw a perfect novelty item. He turned to Rabie, a childhood friend and UWO business student who had been his partner in a summer marketing business for three years. Within two weeks, Rabie had brought in business-school pal Ben Varadi (who likes to claim Rabie became friends with him only “because of my legendary study notes”).

With $10,000 in startup funds, the trio developed a pattern of hard work, fast turnaround and low-cost innovation that would soon become Spin Master’s trademark. Working 16-hour days, they tested prototypes on Harary’s mother’s kitchen table. They used provincial job-creation funds to hire an eight-student office staff, and recruited assembly staff from a homeless shelter. They launched the pantyhose-wrapped Earth Buddy on Mother’s Day, selling mainly through Toronto-area florists. Monday morning, the phones began ringing for more. Within weeks, Wal-Mart, Toys R Us and KMart were carrying Earth Buddy, which went on to sell more than three million units.

Lightning struck again the following year, when Spin Master sold 250,000 units of Devil Sticks, a three-rod juggling set. The secret: a grassroots marketing campaign that saw students cross North America demonstrating the toy. Other products, such as Chatter Rings and Growth Things, were less successful and are barely recalled today. But toy companies are like venture-capital firms: they count on big wins. They invest in 10 deals to find the one hit that pays for all.

Picking winners

How do you pick a winning toy? “It’s the hardest thing in the world,” says Varadi. “You have to look at the product line’s history, trends, competition. Is it a basic improvement on something else or does it take it in a new direction? In the end, it’s a gut feel.”

With his bubbly personality and childlike enthusiasm, Varadi is Spin Master’s head toy tester. Twice a week or more, he leads the product development team in a top-secret evaluation of the best submissions from North America’s top toymakers. Developing an inventor’s idea into a commercial toy can cost half a million dollars, so the bar is pretty high-and the chance of acceptance low.

On this November afternoon, Varadi and three product-development staff are sitting around the big table, evaluating ideas submitted to them personally at last week’s Toy Fair in New York. The first item is an electronic accessory designed to help parents monitor their kids’ GameBoy usage. (The examples cited here are all composites: because of the top-secret nature of new toy development and the non-disclosure agreements Spin Master makes with inventors, PROFIT agreed to change some details of the toys reviewed at this meeting.) Although not exactly a toy, it reflects Spin Master’s need to expand into kid-related accessories with longer shelf lives than toys. “This is cute, and it’s very well made,” says Varadi. But he worries that kids could crack it. As Benjamin Dermer, director of inventor relations, nods, Varadi goes into a silent comedy routine, pretending to attack the product with a hammer and then blow it up with a flame-thrower. “It’s cute,’ he concludes, “but I don’t think it’s for us.”

Then comes a parade of toys, including a game of stacking blocks so complicated that neither of the Bens can understand it, even after reading the manual, and a motion-activated coin bank that claims to track all the money deposited within-but fails to register Canadian dimes. They all go back to their separate bins to be returned to the senders. Left out for a second look is a voice-activated inflatable chair that plays kids’ songs upon request.

When Harary, who shares responsibility for product development and oversees production, drops by, he gets excited by a gadget that lets kids modify their favourite MP3 files. In the age of the iPod, this could be a ticket to the big time—or a costly foray into foreign territory. The reviewers’ gee-whizzing can’t mask their tension, knowing their decisions here will affect the company’s future.

Then Varadi brings out the musical chair. Harary’s eyes light up as he envisions a whole family of products. “This is awesome,” he says. “Let’s get an option on it.”

At the end of the day, Dermer will move forward to research only three items: “It’s been a pretty good day.”

Making partnership Work

The inventors’ meeting is a rare light moment for Spin Master’s hard-driving partners. The alpha male is Rabie, who looks after sales and vendor relations. A consummate marketer, he is Spin Master’s front man, a restless 34-year-old always in a hurry to confront the next problem.

Despite his brusque manner, Rabie takes pains to tap ideas from all over the company: “The most important thing for me to say is ‘I don’t know.'” That opportunity comes up in a meeting to discuss what to do about a plastic foam shortage that has curtailed Spin Master’s production of kids’ furniture (another legacy of Hurricane Katrina). “Options, options,” Rabie tells his managers. “Do we pay more, do we ask for extra time? The only way I can function is options. Otherwise, I can’t add any value.”

Harary is quieter and more methodical. “He keeps Anton and me grounded,” explains Varadi. But even many of the 180-plus staff at head office have only faint impressions of Harary. He spends weeks at a time overseeing operations in China, where Spin Master employs 100 people and contracts out production to 15 factories.

Both partners describe Varadi as an eccentric, creative genius. “Ben’s mind works faster than ours,” says Rabie. “He functions at the highest level, both the left and right sides of the brain.” “He’s so bright he could do anything,” adds Harary. “He can drive the P&L, plus he can write the commercials—and the music.”

One conversation can show how Varadi uses that left-right combo. When sales VP Beardall inquires how long it would take to produce a TV commercial, Varadi commits to two weeks. But then he suggests the company put the new product on retail shelves before committing to costly ads. “Let’s just test it in some stores,” he says. Beardall pushes back, saying, “It’s not that easy.” Varadi argues that it’s better to test than to make uninformed pricing decisions. “Okay,” Beardall concedes. Most people might have assumed consensus, but Varadi needs to crush any ambiguity: “Is that okay, as in ‘I’ll think about it?'” Beardall responds, “That’s okay, as in, ‘I agree and we’ll do the best we can’.”

“The chaos doesn’t break anything”

Everyone who knows Spin Master says it’s the unique chemistry of Harary, Rabie and Varadi that makes their company succeed. “They’re like the Beatles—they’re better together than they are apart,” says Dave McDonald, Spin Master’s director of design. While the three are very different, most people believe it’s their ability to bridge those differences that makes magic. “They have complete trust in each other,” says vice-president of global promotional marketing Harold Chizick. “They’ll have heated debates, but in the end everyone has his own domain where he has the final say—and the accountability.” As another staffer says, “The chaos here doesn’t really break anything.”

Running a company that takes long shots for a living, Rabie says, the partners avoid finger pointing. “If it was a mistake, you say, ‘That was a mistake,’ and you move on. You don’t look back, and you don’t blame anybody.” “There are still times it gets personal,” adds Varadi. “But you learn to say you’re sorry. We all know we need each other at the end of the day.”

To understand the depth of the partners’ trust, consider this. According to Varadi, “We only finished our partnership deal two years ago. We went eight years on a handshake.”

As the media meeting shows, the three partners aren’t afraid to argue—even in front of staff. But they live up to their forgiving reps: After debating for a minute or two, they shrug and move on. “I think we’ve all accepted that our egos were beaten down years ago,” says Harary.

The closest thing to petulance I observed came at 5:30 on Halloween night in “the apartment,” a comfy third-floor hideaway for the partners and senior executives equipped with washroom, red velour couch, treadmill, floor-to-ceiling window overlooking Toronto’s Front Street, and a risqué painting of Barbie. Harary was disputing the terms of yet another pending acquisition with Rabie, who, as the only partner married with children, was eager to get home for trick-or-treating. But Rabie stayed to defend the terms, saying he didn’t want to reopen the contract. “Then leave it the way you negotiated it,” said Harary. “But for the record, I think a year from now we’ll be sitting here and thinking we made a mistake.”

It’s not just the partners who challenge each other. Spin Master staff are encouraged to dissent and propose alternatives. While the pace of work means few debates last long, they believe in multiple viewpoints. Says Rabie: “Debate and diversity create the best decision-making.”

But governance is still evolving at Spin Master. At the end of the media meeting, once Harary, Varadi and Rabie leave, their lieutenants discuss how to make such meetings more efficient. The veteran Beardall suggests the marketing and financial staff who produce the statistics also provide detailed summaries and recommendations, instead of expecting the principals to spot all the key issues themselves. “Then they’ll just say, ‘Okay, looks good’.”

The good news is, things are changing at Spin Master. For almost a year, the partners have been looking for a chief operating officer, an experienced toy executive who would take over day-to-day operations. The three partners would be free to do more of the creative, strategic tasks they love best: identifying new products and markets.

Rabie describes his perfect COO as “an unbelievable problem-solver, with sensational discipline, phenomenal leadership skills, experience in consumer products-and some experience in Asia.” Rabie, Varadi and Harary have actually found two candidates who fit the bill, but neither could be lured from the U.S. to Toronto. (One candidate was ready to jump, says Rabie, until his teenaged children had a “meltdown” when he suggested the family move to Canada.)

When Spin Master finally lands its COO, Rabie insists, the partners will happily evolve out of their administrative functions to become developers of new products, brands and spinoffs. “We’re ready now,” he says. “There’s never been a company like this one, where the three partners will focus 100% on finding opportunities and building the business.”

Big-game hunters

Don’t call Spin Master a one-product company; for a while, that was too close to the truth. The company was still looking for a big hit when two British inventors presented their concept of a toy airplane that could fly using compressed air from the pressurized fuselage. Dazzled, the partners acquired the technology and spent two years-and $1 million-developing a prototype. They were alarmed when a rival confided that the product had been turned down by every major toymaker. But Varadi’s faith was revived when he tested an early model in a park near his home. As he watched the plane soar more than 100 feet, a little boy asked where he got it. “Toys R Us,” Varadi fibbed. “You didn’t get that at Toys R Us,” the boy replied. “That’s a toy of the future.”

Launched in 1998, Air Hogs assured Spin Master’s future. Lauded by Popular Science as one of the year’s best technology innovations and marketed through creative store promotions, the $40 plane became North America’s third best-selling toy and sealed Spin Master’s reputation as a risk-taking innovator. Fuelled by Air Hogs’ brand extensions (air-powered cars, remote-control helicopters), Spin Master’s sales hit $46 million in 1999 and doubled in 2000.

The toy industry may be brutal-but the rewards are still there. “At the end of the day, you’re trying to find a hot product,” says CFO Mark Segal. “If you do, the margins are great and you make a lot of money.”

Plus, one big win leads to more. After Air Hogs, toy inventors and giant retailers alike were vying to work with Spin Master. Products such as Flix Trix (finger-sized die-cast bicycles) and Mighty Beanz (a series of collectible, capsule-shaped cartoon characters) became hits. Spin Master moved into the top tier of licensing, snapping up merchandise rights to Teenage Mutant Ninja Turtles and The Wiggles, a powerhouse kids’ TV show from Australia.

Not everything they touch turns to gold (see “Learning from the losers”, page 45). But from the start, Spin Master’s partners have focused on finding hits two ways: through continuous monitoring of toy-retailing trends, and by treating toy inventors right. With outside inventors supplying 85% of Spin Master’s new products, Varadi has long positioned himself as the inventor’s best friend. Sometimes that’s as simple as being open and accessible, and returning phone calls: “It’s amazing how many [toy companies] don’t do the basics.” But he also goes further. Spin Master hosts annual “inventor retreats” that feature jaunts to Las Vegas and Whistler, or fishing trips to Northern Ontario. The ROI is mind-boggling, says Rabie: “We go that extra mile because we want them to show their products to Spin Master before Mattel.”

Of course, soliciting inventors wasn’t brain surgery. “We didn’t have big brands to rely on,” notes Varadi, “so we had to take chances on new products and hope they would develop into brands.” The payoff: products such as Aquadoodle, the Japanese drawing toy for which Spin Master has North American rights. Spin Master’s best-selling product last year, Aquadoodle this year exploded into spinoffs such as drawing mats, stampers, travel toys and teddy bears. “Brands last longer,” says Harary. “A product may have a 12-month life cycle. But if you’re building a brand, you can launch products around it for years.”

Late this summer, Varadi’s product developers faced their biggest challenge yet. Two inventors demo’d their latest innovation: soap bubbles coloured with disappearing dyes. Varadi envisioned a range of spinoffs. Trouble was, Hasbro and Mattel had seen the product, too. Varadi marched into Rabie’s office and told him to drop everything:

“This could be the biggest opportunity this company has ever had.”

Over the Labour Day weekend, Varadi’s team worked up a presentation to show how Spin Master would nurture and build the ColorTrix brand. On Tuesday, they flew the inventors to Toronto and spun for their lives. They talked about Spin Master’s proven loyalty to the inventor community. They cited Spin Master’s size-big enough to negotiate the distribution they needed, small enough to treat the new product as Priority 1. “The inventors cancelled their meeting with Hasbro,” says Rabie. They signed with Spin Master.

The clincher? One of the inventors had met Varadi seven years ago, and remembered how well he had treated his inventors.

Where the ideas are

Strategic intelligence-gathering also gives Spin Master an innovation edge. Rabie himself spends a few days every two months prowling retail stores, eyeing merchandise trends and chatting up retailers. One frequent source is Jon Levy, co-founder of Mastermind Toys, a 10-store specialty retailer in Toronto. “They are fantastically connected to all areas of their business,” says Levy. “They care about my market and really want to know what makes my market tick. That’s very unusual.” He says every conversation with Rabie starts with genuine personal warmth before moving quickly to rapid-fire questions such as “What’s your best-selling item? What do you think is going to be hot this fall?”

Four years ago, Rabie’s insatiable curiosity created one of Spin Master’s biggest breakthroughs. An Australian distributor revealed he was seeing a lot of action in kids’ flip-out foam sofas. Any toymaker that could slap popular character logos on these items, he said, would have a runaway hit. Leaping on that idea like SpongeBob on a crabby patty, Spin Master racked up $20 million in sales. That led to the creation last year of a new division, Marshmallow, to produce kids’ furniture and décor accessories, from pop-up Winnie the Pooh storage hampers to Disney Princess canopy beds.

Toys aren’t us

Toymakers have long decried “the shrinking toy aisle”; furniture products get Spin Master beyond the toy department and into new retailers, too. Besides, these products enjoy longer shelf lives than most games and toys. To enhance Spin Master’s move into new directions, two years ago it quietly removed the word “Toys” from its name. As the founders focus more on future expansion, Rabie expects toys will fall from 80% to about half of Spin Master’s total revenue, with about 25% coming from furniture and another 25% from new ventures that could include music, entertainment, video games or other kid-related niches. “Like any investment portfolio, we believe diversity will protect us in the long term,” says Rabie, “and give us a stronger business.”

Consistently profitable, Spin Master funds its own growth—and can always call on support from its bankers at HSBC, which has backed the company from the beginning. But if it needs more funds, says Rabie, Spin Master can turn to New York investors who have already expressed admiration for the company and want a piece of the action. “We’re starting to have more fun now, because this is the first time we’ve been able to look at acquisitions. Every day, we’re being approached with deals.”

To achieve its goal, Spin Master is boosting its investment in experienced staff and in technology that will unite all its information systems in an integrated whole. In January, the company will inaugurate a $6-million enterprise-resource planning (ERP) system, its biggest investment ever. Says Beardall: “We have people holding this company together with their minds, and we’ve gotten to a point where we can’t do it anymore.” The ERP system, which will track everything from production to sales by store, SKUs and price, will lead to greater control and faster decision-making, says Rabie: “We have to be smarter. We can’t work harder. There aren’t enough hours in the day.”

As Spin Master grows, will it still hold the interest of its inspirational founders? “We’re not going anywhere,” says Harary. “We got into this business when we were super- young, and we still have a long runway ahead of us.” $

© 2005 Rick Spence

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