How Spin Master got its mojo back

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Melanie Teed-Murch, vice-president and general merchandising manager for Toys "R" Us Canada, is standing in Spin Master's Star Wars showroom in L.A. The object of her scrutiny is a two-foot-high, voice-activated Yoda whose development has been shrouded in so much secrecy that she and her colleagues at Toys "R" Us have a code name for it, which they refuse to divulge. (Just to set foot in the showroom, I had to sign a non-disclosure agreement.) By the time Yoda lands at Toys "R" Us in fall 2015, Teed-Murch will have seen him several times, at toy fairs in Hong Kong and New York, and at retailer "walk-throughs" like this one hosted by Spin Master in mid-October and attended by buyers from around the world. Thanks to tens of thousands of lines of code embedded in his processing chips and his itty-bitty light sabre, Yoda will be able to teach young Padawans how to fight Jedi-style and dispense Yoda-isms like Patience, you must have. In hands-free mode, Jedis-in-training can harness the power of the Force to propel Yoda backward.

But there's that scowl.

"We're still working on the face," admits Johnny O'Neal, director of marketing for Spin Master's global boys-and-wheels unit. If he seems a bit defensive, perhaps it's because Spin has spent months working on Yoda, and the Toronto-based company has invested hundreds of thousands of dollars in developing it. Spin Master expects to ride a frenzy of fandom following the release of Star Wars: The Force Awakens, the seventh instalment in the film franchise, due out in December, 2015. And the toy maker is convinced that Yoda will be a must-have for both newer fans and sci-fi nerds who grew up with George Lucas's original masterwork.

Spin Master's suggested retail price for Yoda is $179.99. It's an unspoken rule in the toy business, however, that only the most fantastical items warrant a price tag over $100.

"Is your cost final for that?" she asks.

"Yes," replies O'Neal with the slightest hesitation.

"We'll see—the guests will vote."

The guests she's referring to are, broadly speaking, cost-conscious moms whose toy budgets vary little from year to year. In fact, the North American toy industry has been stuck at roughly $22 billion in sales since Spin Master launched in 1994. A good year sees that number rise by 1% to 3%; a bad year sees it decline by about the same. For toy companies, the trick is to make better products using cheaper materials and more efficient manufacturing processes so they can hold the line on prices, or even reduce them. And, of course, they need to keep finding the next big thing.

Spin Master's founders—co-CEOs Anton Rabie and Ronnen Harary, and chief creative officer Ben Varadi—have a knack for doing just that. With estimated revenue of somewhere between $750 million and $1 billion a year, according to BMO Capital Markets analyst Gerrick Johnson, the privately held company is still a baby compared to the Big Three—Mattel, Lego and Hasbro. Yet, Spin has launched some of the most popular toys of the past two decades. "They always have their eye on the next latest and greatest before we even know it's coming," says Teed-Murch, who has known "the boys" since joining Toys "R" Us as an assistant buyer 18 years ago. Back then, she says, "they were creative, wide-eyed, a bit throw-caution-to-the-wind." And Teed-Murch is encouraged by what she saw on her most recent visit to L.A. "They're pushing creativity again. Trust me, they've had their share of dogs. But it always seems to be the creative ones that are a hit for them."

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It's difficult to imagine two more disparate characters than Ronnen Harary and Anton Rabie, who met at sleep-away camp at age 10 and have been best friends ever since.

When Rabie speaks to you, he leans in, stares unblinkingly into your eyes, probes your face for reaction. He's a hugger. He also throws off the kind of intense energy that is more commonly associated with cocaine enthusiasts or fitness freaks. Rabie is most definitely the latter—a hyper-competitive tennis player who neither smokes nor drinks, and who is constantly fuelling his lean frame with salad, nuts and green tea.

Then there's his habit of hijacking conversations with wild non-sequiturs, which clearly grates on his more circumspect co-CEO, judging from Harary's tense shoulders and frequent eye rolls.

As Harary launches into the story of how they got their start, Rabie jumps in with his own account. "Ronnen doesn't tell you the good stuff," he says. (Eye roll, loud sigh.) Rabie had just finished writing his final exam at Western's Ivey Business School when Harary, who studied political science at York, showed up in London with a goofy-looking, seed-filled sprouting head that his grandmother had picked up in Israel. The pair—who both emigrated from South Africa as kids—had always dreamed of going into business, and decided to create a Canadian version. A week later, they set up an unlicensed table on Yonge Street selling products they'd made in Harary's mom's kitchen with panty hose purchased in bulk at Kmart. They called them Earth Buddies, and they sold out immediately. Rabie and Harary decided to make another 5,000 in time for Mother's Day. They brought in Varadi, a classmate of Rabie's from Ivey, and set up a rudimentary factory, hiring workers from local homeless shelters. (Harary admits this wasn't the best recruitment strategy, since many of them would show up for a day and then disappear. But one shelter recruit ended up running the company's shipping department for six years.)

Two weeks after Mother's Day, Kmart Canada put in an order for 26,000 Earth Buddies. Within three months, it had asked for half a million more, worth $1.7 million wholesale. The trio switched factories four times that first year, running flat-out 24/7.

But the toy that truly launched Spin Master was the Air Hogs Sky Shark, a motorized foam plane powered by compressed air that the partners spent half-a-million dollars to perfect. "With Air Hogs, we went up the learning curve on design and development," says Harary. By the end of 1998, Spin Master had sold hundreds of thousands of Sky Sharks and had revenue of close to $8 million. Two years on, it was up to $103 million.

The company now has 900 employees (around 230 of them based at its headquarters next door to The Globe and Mail), offices in Los Angeles, Tokyo, Arkansas, Hong Kong, Mexico and across Europe, and a direct line to top execs at Disney, Pixar and DreamWorks. The company's family games division is ranked No. 2 in the U.S., according to the market research firm NPD Group, and its 10-person entertainment unit has produced 500 episodes of children's programming, including the reigning No. 1 show for preschoolers, Paw Patrol. All of which has Spin Master bouncing between fourth and fifth among global toy makers, along with LeapFrog.

Along the way, Spin has gained a reputation for launching innovative toys that big players like Mattel wouldn't touch. In the early days—and even now—the partners flew to toy fairs around the world, met with inventors and manufacturers, hunted for cool products that had no distribution in North America. "The joke was, no matter where you went around the world, they were there," says Jim Silver, CEO and editor-in-chief of the toy-review juggernaut TTPM, who's known the Spin guys from the start. "They were more aggressive than any other company, and they've done a very good job in terms of picking toys and taking chances. A lot of companies won't do that."

Ultimately, though, toys are a fashion business, ruled by small children with brutally short attention spans. Toy makers generally have to update or replace up to three-quarters of their lines each year just to keep up. But what happens when your biggest money-maker dries up and you've got nothing in the pipeline to replace it? Spin Master found out the hard way.

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Benoît Gadbois sits in a sparkling white boardroom in L.A. It's the third day of the retailer walk-through, and he's gathered here with Rabie to talk about the future of the toy business, and why he left the Fortune 500 CEO track to join this quirky shop three years ago.

At age 43, Gadbois is compact and muscular, a byproduct of his days as an elite hockey player whose career ended as a teenager, when he broke his shoulder four times in four months. He still speaks with an unmistakable Quebec accent, even though he left the South Shore at 17 for Boston, where he learned English. He went on to earn both his CPA and CMA designations, and spent two years as a senior auditor with Arthur Andersen before joining the manufacturing conglomerate Newell in 1999, the same year as its $5.8-billion merger with Rubbermaid. Gadbois was sent to Paris and Brussels to turn around Newell's European unit, which was bleeding cash. When he returned to the States, it was as global president of the Rubbermaid unit—the fifth in four years. "Let's just say it was known as a suicide mission," says Gadbois, laughing (something he does easily and often). He lasted 2 1/2 years. Next up was the company's writing instruments division, which included Sharpie. It wasn't a turnaround gig, but Gadbois says income doubled in the four years he was in charge.

When he got his first call from Rabie in 2012, Gadbois was on a business trip in Mexico. He'd never heard of Spin Master, and he had no interest in taking on another president role, especially not at some tiny Canadian company. But Rabie was so persistent. He called Gadbois five times over two days. When he got back to Chicago, Gadbois told his wife he felt compelled to meet with the guy, if only to prevent him from knocking at the door in the dead of night.

He flew to Toronto for dinner. Rabie showed up 15 minutes late, then immediately asked if they could switch seats. His host's first question: What was the most recent business book Gadbois had read and what were his top five takeaways? "And I thought, wow, this is gonna be a loooong dinner," says Gadbois.

But Gadbois's kids had grown up with Spin brands like Bakugan Battle Brawlers—which, as it turns out, was the toy that had precipitated Rabie's call to him. Bakugan had been Spin Master's biggest hit. But now the company was in trouble.

Bakugan came to Spin in 2005, when a 26-year-old American illustrator handed over a sketch to an inventions broker based out of Los Angeles. It landed on the desk of Ben Dermer, Spin's director of inventor relations, along with dozens of other pitches. The idea was marbles that popped open into action figures, a perfect fusion of Dermer's two childhood obsessions: marbles and Transformers. "If I'd been into Pogs as a kid," says Dermer, now Spin's vice-president of new ideas and innovation, "I could easily have passed on it."

Instead, Dermer took the idea to Harary. The co-CEO had no clue how Spin would actually make the marbles open. But he knew in his gut that Bakugan hit just about every metric for blockbusterdom: collectability, trendiness, unique characters, and what Harary calls the "fiddle factor." He was so excited that he flew to Japan and persuaded the CEO of Sega to co-produce a Bakugan TV show, in conjunction with Toronto-based animation house Nelvana. It drew a huge audience on the Cartoon Network, further fuelling toy sales. "Everything just came together," Rabie says. "I mean, Bakugan popped. It was hot in 58 countries. São Paulo, Dubai, the Philippines—you could be fricking anywhere and people were playing with it." That first year, Bakugan won three Toy of the Year awards, including Property of the Year. Spin Master's employee ranks swelled and revenue doubled. Bakugan's total global sales eventually hit $1 billion.

But the life cycle of a toy can be short and brutal. Kids grow up. Price points deflate. New trends emerge. As Teed-Murch puts it, "If you get a three-year property with kids these days, you've won the lottery." That's how long the Bakugan craze lasted. And then, suddenly, it was over—and Spin Master had nothing in the pipeline to replace it. It's a familiar tale in the toy business. Coleco, the manufacturer of Cabbage Patch Kids, which caused riots during the 1983 holiday season, went bankrupt in 1988. The maker of Teddy Ruxpin sold 800,000 of the animatronic dolls in 1985; within three years, the company was gone.

"I think we got a little seduced by success," says Rabie. Revenue took a dive, and the massive and disorganized global infrastructure Spin had built began to crack.

Spin Master had been muddling through "the tough times" (as they're known around the place) for several months before Rabie and Harary realized they needed to hire a president with the operational cred to reorganize the company. Enter Gadbois, who was suggested by a corporate headhunter (not that she thought Spin had any hope in hell of hiring him). "His resumé was beautiful," recalls Rabie. Though Gadbois had never worked in toys, he had a long history in consumer products, dealing with the same retailers, metrics and supply chain as Spin. "Basically, I was looking at Wayne Gretzky."

Gadbois had been about to quit Newell Rubbermaid to take on a CEO role at a U.S. private equity firm. But he was drawn to the creativity of Spin Master. He took the job, commuting between Toronto and Chicago, and says he laughed more in his first week at Spin than he'd laughed in the previous 15 years.

But the place was a hot mess. Gadbois could scarcely believe that these geniuses could be so disastrous on the operation-al side. "There was no process, no clear

measurement, no accountability," says Gadbois. He told the founders he needed 45 days to figure out how to fix the place without derailing its innovation process. He did a deep dive on the books, talked to suppliers, manufacturers and retailers, and sat through hundreds of one-on-ones with employees. In the end, it took him three months to persuade the founders to follow the plan he put together—which, he admits, was harsh. "Not many owner-entrepreneurs would have been able to do what they did."

With the partners' support, Gadbois reorganized the company into global business units, expanded toy lines around specific price points, and killed underperforming or redundant products. He laid off scores of employees, many of whom had been with the company from the get-go, and reassigned dozens more. He hired two colleagues from Newell Rubbermaid, Bill Hess and Krista DiBerardino, to head up operations and marketing, respectively. He also introduced stricter financial controls, while shielding the creative types from worrying about profit margins. "It lets all the great people in the company live in the chaos they love, with no restriction," Gadbois says. "But once something goes past ideation, it gets put into a very tight product development, go-to-market and supply-chain process. It's making sure the chaos is surrounded by the right guard rail."

Meetings to develop new ideas—what Gadbois calls the Spinnovation process—always start with how a product will connect with kids, not with how much money Spin will make off it, says Gadbois. "Because if the magic is not there, what's the point of making it?"

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That's a word you hear a lot around Spin Master—magic—from the co-CEOs down to the brand managers pitching their product lines to an endless stream of buyers. Of course, what Spin Master calls magic is really just clever technology. The trick is to make the components disappear inside the toy, so that the kid who's playing with it never knows they're there. By the time an item lands in the company's showroom, it has gone through 18 to 24 months—sometimes more—of development, prototyping, play labs and focus groups, bouncing between designers, engineers, marketers and brand managers in Toronto, L.A. and China, where Spin has 260 employees. "It's a very iterative process," says Harary. "It's not one idea, not one person. It's small increments that allow you to create something fresh."

Spin Master vets up to 3,000 ideas a year, the majority of them from external inventors (there are about 150 "serious" ones worldwide, according to Dermer, whose job is to meet with them), though 70% of the toys that get made come from internal product developers. Still, inventors have been responsible for some of Spin's biggest hits (Air Hogs had been turned down by virtually every other toy company by the time its British creators knocked on Spin's door). Many of them have become multimillionaires. Dermer says those behind Bakugan—the original illustrator, plus the broker and an engineer they worked with briefly—have each made $10 million. "We have a philosophy here," Harary told me the first time we met. "We are happy to pay millions of dollars in royalties, because if we're paying out a lot of royalties, it means we're generating a lot of sales."

When inventors Peter Greenley and Nick Grisolia first pitched Dermer on a toy called Zoomer in September, 2011, it was a remote-controlled truck. They'd started working on it for a competitor who kept chipping away at the guts of the thing in an effort to lower the price point. Eventually, Greenley and Grisolia—whose Wisconsin-based shop is called G2 Inventions—moved on and decided, "Let's just give it more magic," as Greenley puts it (there's that word again). By the time they met with Ben Dermer, the truck—well, just a chassis, really—had four motors and moved in wacky and unpredictable ways. Dermer's gut instinct was that G2 had invented a puppy, not a truck. He gave the two partners a bit of cash to tweak the design. They worked seven days a week, Greenley on mechanics, Grisolia on programming and electronics.

The following February, the inventors drove 10 hours to Toronto—they were too broke to fly—and presented Zoomer to a dozen Spin Master executives, including Varadi and Dermer, who bombarded them with questions and criticisms. After a brief confab while the G2 guys waited outside, Spin agreed to license Zoomer (at the high end of what the inventors had been hoping to get money-wise) and invited Greenley and Grisolia to work on every facet of the dog's design and development. "Most toy companies will take something and say, 'Get lost,' " says Greenley. "You give them a mouse, and all of a sudden it hits production and it's a monkey." But Greenley and Grisolia even made several trips to Spin's Hong Kong facility, and spent two marathon 10-day sessions helping the engineering team there figure out how to mass-produce Zoomer without losing any of the functionality (and still make a profit).

Zoomer debuted in fall 2013—a voice-activated, Dalmatian-esque pooch on four wheels (remnants of its original truck design) that sits, wags its tail, snuggles, rolls over, barks and even pees on command. He has sold 500,000 units so far, at $100 apiece, and spawned an entire line of interactive pets, all designed by G2. Zoomer Dino, which launched this past fall, is a fierce little two-wheeled T. Rex that roars and sniffs and snaps its jaws, depending on its mood. It was one of the most hyped toys in the lead-up to Christmas, with Spin Master producing 500,000 units. There are more dino iterations on deck, including a top-secret model tied to the upcoming movie Jurassic World (executive producer Steven Spielberg had to sign off on it personally). Zoomer Zuppies are a smaller version of the original that retail for just 40 bucks, and Spin will be launching a pack of new breeds later this fall that will be heavy on the pink and sparkly, and aimed squarely at girls. Teed-Murch is particularly excited about an upcoming pug. (Could Spin add a tutu as a Toys "R" Us exclusive? she wants to know.) Zoomer Kitty will hit stores in 2016, capitalizing on the cat craze. (Grumpy Cat—a two-year-old curmudgeon with a wicked underbite—has 7.2 million likes on Facebook, a dedicated YouTube channel and has commercial deals worth millions.)

Greenley and Grisolia say they're spending 95% of their time working on Spin projects. Even as they perfect the guts of Zoomer Kitty and Dino 2.0, they're building a new, top-secret Zoomer spin-off for 2016 that they promise will be awesome.

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Zoomer could not have existed five years ago. But lighter batteries, more efficient engines and exponentially more powerful computer chips have allowed toy makers to create and mass-produce products that in the past they could only dream about. Zoomer has the same specialized voice-processing chip as a new Samsung smartphone—and sells for one- seventh the price.

Technology is changing the toy business in other ways. North American kids now spend an average of seven hours a day in front of screens. They've never lived in a world without app stores and YouTube and social media, which means that toy makers face an unprecedented amount of competition for their attention. But even as they spend increasing chunks of time immersed in online worlds, kids still crave toys they can snuggle or carry around in their pocket. That fact has given rise to a new kind of toy that fuses the physical with the digital realm—phygital, they're calling it. It's a trend that another Canadian toy maker, Ganz, started when it launched Webkinz in 2005.

Spin is making its first big push into phygital in February, with a product called Sick Bricks. The idea was pitched to Spin two years ago as a line of collectibles—tiny Lego-like characters that kids could trade in the schoolyard. Harary loved it. "It was very irreverent in terms of the characters and stylings," he says. "It had the fiddle factor, a low price point, and it was mix-and-match. It had great core play patterns."

Around the same time, Spin was launching its mobile gaming unit.Harary had been talking to a company called Magic Pockets, based near Paris, which has produced 50-plus bestselling apps and console games. He'd also come across a company in Tel Aviv that had invented a 3-D scanning technology for military application. Within a few months, the team realized they could meld all three ideas into one slick package. There are several dozen Sick Bricks characters—like Katie Kantmiss, Tiberius Warpspeed, and their leader, Jack Justice—that kids can mix and match to create hundreds of combinations. Hold any one up to the camera on your tablet or smartphone and the Israeli technology instantly scans it into the game. The objective of the free app—which cost Spin hundreds of thousands of dollars to develop—is to save Sick City from the evil Overlord Omega. One way is to collect bricks from bad guys to rebuild neighbourhoods swarming with pirates, zombies and ninjas. And the more Sick Bricks collectibles you buy (they retail for $2.49 apiece) and scan in, the more you can accomplish in the game.

Sick Bricks was supposed to launch in December, in time for the holiday rush. But the app wasn't ready. Now, the goal is to have Spin street teams hand out samples in February, showing kids how to scan them into the game. There will be a traditional TV marketing campaign, plus short, rudely hilarious webisodes on Spin Master's new Spindo YouTube channel, which it created in conjunction with Mondo, a channel with 2.5 million subscribers.

It's not really fair to call Spin Master a toy maker any more. It's more like a children's entertainment company. "We want to be pioneers of play," says Gadbois. "Anywhere the kids are, we want to be there to entertain them," whether it's TV, YouTube, social media, mobile gaming or the toy aisle. The company's most recent TV show, Little Charmers, debuted on Nick Jr. in January, with spin-off merchandise set to hit stores in the fall. The sole mission of Spin's new advanced concepts unit is to suss out cutting-edge technology that could one day have a kids' entertainment application. Spin has at least one acquisition in the works—bigger than any of the 10 deals it has done in the past decade. And though they have no plans for an IPO, they won't definitively rule it out either. "The company is at a crossroads right now, where the financial means we have are incredible," Gadbois says. "Benny, Anton, Ronnen and I spend a lot of time talking about this—do we seriously want to grow this company? Because now's the time."

They'll go nowhere fast if kids lose interest in their products. "Ultimately," says Gadbois, "if you have the magic, that's what takes the business forward."