In 1989, Thomas Murdough Jr. left Little Tikes in frustration. Today, the business he founded in 1991, Step 2 Co., has become one of the most threatening competitors to the company he helped build into a world leader.
Little Tikes, with about 3,500 employees worldwide, posts more than $500 million in annual sales. Step 2 stands at $100 million in sales and 1,000 employees.
Today there are rumblings that Rubbermaid might sell the toy company, which last year saw a double-digit drop in sales—even as Step 2 sales rose 4 percent before an anticipated 1998 increase of 15 percent. Meanwhile, Rubbermaid is being restructured to reduce jobs and expenses by as much as $200 million a year by the end of 2000.
For a man with a competitive streak like Tom Murdough, all of this must be an energizing call to action. Murdough himself is as circumspect in his public comments as you would expect a smart CEO to be. But to an outsider, it seems like an obvious moment for him to do something big—take advantage of the moment to somehow gain the upper hand, or even try to buy back Little Tikes.
It would be the ultimate competitive stroke. The thought, when placed on the table before him, elicits a mischievous smile.
But Murdough has another little project he’s been working on for most of this year. He’s in the last weeks of his effort (according to the vague schedule available at press time from the National Football League) of his effort to buy the new Cleveland Browns franchise.
Murdough recently took time out to talk with SBN about the growth of Step 2, about the nature of competition, and about whether he’s going to reclaim his first love.
Step 2, like Little Tikes, has been known for its big outdoor toys, but now you seem to be focusing on smaller products priced under $20. Why?
We came out with the under-$20 retail products two years ago and they were tremendously successful. They’re very effective in opening up a lot more shelf space for Step 2. This move [also] has been the result of recognizing a trend for consumers’ desire to spend less money….
How do you determine these market trends?
We do it by listening, by actively seeking out consumer preferences. Our questionnaires, which go on every new product, tell us a lot about what the consumer is thinking…
These are open-ended questionnaires. They’re not computer [tabulated], which means people actually say what they mean. We get 8,000 to 10,000 of these in a given year. We learn a lot from these.
We also … log 800 to 1,000 calls a day on our 800 number, and at any given time, in an eight-hour period, we can do a survey of people who call that day and get a quick response. They are bona fide consumers of our products. If we have something specific we want to look at, we can just ask everyone that day and do great research fast.
You mentioned the written surveys you get in. How many of those do you yourself actually look through?
I look though almost all of them. And besides me, usually three or four other people, people in marketing and manufacturing, also go through them.
Is that where you started getting the idea a few years ago to move toward some smaller products?
Most of our top retail customers supply us with shelf-life information. We get reports … that give data on every product we sell to them. Those tell us exactly how many they sold, sales by region, sales for that week, how many they sold that week vs. the same week last year, and at what price.
So there’s a wealth of information in reports like this. Staying close to your customers is the key.
You’ve said you get ideas from consumers, from employees, from your R&D staff, from your retailers. How much of a decision to go with a particular product is just gut instinct?
It’s a pretty significant percentage. A lot of it has to do with our approach to manufacturing. I don’t want to elaborate too much on this, but many of our competitors use a process that requires them to spend a tremendous amount of capital dollars in developing a product.
Our process, for all of its deficiencies, and there are many—our process is very labor-intensive. It’s unable to hold high tolerances— … can get into a new product considerably faster and for considerably less money than our competition. That’s because we’re buying cast aluminum molds. That allows us to get finished product into the marketplace, into our test stores (as fast as eight weeks from conceptualization) … and find out early on what the reception is to that product.
So, we’ll probably take a greater degree of risk with certain of our products than much of our competition. When we see we’ve had a winner, then we add additional molds, maybe as many as 20, if the volume so dictates.
What’s a product that was a sleeper success?
The most recent one, I don’t want to tell you. It’s going to be big, and our competitors don’t know it yet.
But a recent sleeper was our building-block table. … To be quite honest, I wasn’t even sure we should make the product because there are so many Lego play tables out there.
What’s unique about our product is the storage underneath this nice sturdy table. It retails for $20, and when we introduced it two years ago, it just flew out of here.
Do most of those products end up having a long cycle?
The ones I’m talking about, yes, and that has a lot to do with our approach to marketing. …
We spend a very low percentage of our sales dollar on advertising. A lot of people are critical, thinking we’d move things a lot faster if we spent more on advertising. … [But] you can’t have a $20 price-point if you’ve got a big advertising load. We think that $20 price- point and our customers’ margins are more important than the short-term burst you get from the advertising. It’s not that we don’t do advertising. We did close to $1 million in advertising in 1997. And that’s just print media.
We take this approach: Let the product be king. The mothers are so quick to pick up on something good.
You hesitated a second there, like you thought it was stereotypical to say mothers. Is that un-PC?
I say it all the time. Mothers buy 80 percent of our products. And you women spread the word so fast it boggles my mind.
How much attention do you pay to what your competition is doing?
A lot. We constantly worry about our competition. I want to know—it’s a natural instinct I guess. It is a very, very competitive industry. All of the industries we’re in, like with the home-and-garden products, are very competitive in this day and time.
It’s quite unlike the first go-around with Little Tikes. It was a competitive industry then, but we stood alone with rotational-molded plastic products and virtually did not have a direct competitor. Now we have Fisher Price and Little Tikes and of course all toy manufacturers are competing for the buyer’s dollar …
So I want to be aware of what my competitors are doing. We take great pride in being unique and innovative and being a leader in this industry. Our objective is none other than to be No. 1 in the industries we’re in.
How much do you look at what others are doing, either to validate your own efforts or to snicker at what they’re trying to push?
We get knocked off a lot, we get copied, and we want to know about things like that. We want to know what they’ve done, what their price is. Unfortunately, in this day and time, integrity has to a large degree gone out the window. That’s sad. We can’t protect ourselves with patents. The only way we can protect ourselves is by being the low-cost producer, by getting out in the market first, and then counting on the buyers [retailers] to respect all of those issues we’
;ve provided to them… If consumers can get a buck off a product from somebody else, they’ll overlook your brand.
When you were with Little Tikes, you didn’t deal with Wal*Mart or some of the other big discounters. What happened?
That’s all that’s left. Wal*Mart, Kmart, Target, Toys R Us. Those accounts and probably six others represent 70 percent of our business. And they have a finite amount of shelf space.
We believe our long-term success hinges on our customers’ ability to sell our product in volume and to be able to maintain a reasonable margin.
Which brings us to the sensitive topic of retail pricing. What are the issues you deal with?
When you allow a Wal*Mart or Kmart or somebody like that to irresponsibly use you as a loss leader, it destroys the market opportunity for your other customers and effectively shortens the life of the product. Because when a customer can no longer make money on a product, they drop it.
Let’s say one store sells your product at $24.95 instead of the $29.95 we ask. All of a sudden, that becomes the expected price in consumers’ minds.
If the others still sell it at $29.95, all of a sudden their business slows down like hell and they’re going to look at their shelf space, and they don’t want to give product away….
There are retailers in this extremely competitive environment who would take those products that they’d paid maybe $14 for and run them out at $14.99…. They don’t care what effect that has on the manufacturer. We fight with our retailers to make sure they don’t do that.
How?
I called one just yesterday and said, ‘You broke the price on our Wagon for Two.’ … We can legally control it …. They will forfeit their advertising rebate. We give them a rebate at the end of the year of maybe up to 3 percent of the sales dollars based on their adhering to our minimum ad pricing policy.
And yet, we see these kinds of products on sale all the time.
That’s the Rubbermaid influence. It may work in housewares, but the nature of the toy industry is very, very different and I don’t want to get on that subject.
What about stores like Marc’s that have prices way below everybody else’s for your products?
That’s the classic case of people cutting the price, and we’re actually going to stop selling to Marc’s for a while.
Retailers, it seems, are putting the squeeze on manufacturers. And we all know that times are tough at Little Tikes. There’s talk that Rubbermaid might be willing to sell Little Tikes. Are you interested in buying it?
I don’t think I’d better comment on that. There are lots of different issues surrounding that question. Let me just say that … um, I don’t know … I don’t know. I’d love to tell you more but I shouldn’t.
It seems you might have your hands full anyway with the NFL bid right now. If everything worked out and you purchased the franchise, how would that affect operations at Step 2?
Initially, getting the staff in place would take some time, and I’ve already talked to all of our people in the company about that … I’m expecting to put in long days, and there’s no question the Browns are going to take time initially… Once I’d get the right people in place, and the direction is set, then I’ll be able to continue to focus on Step 2 again. Believe me, we’re not going anyplace. Step 2 is more important than ever.
I’ve gotten into this thing with the Browns because I want to make sure It’s done right, and I mean that. This is a big chunk of my family’s net worth tied up in this. If it doesn’t happen, I’m going to be upset. I’m going to do it.
