Mega Bloks, Inc.

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Mega Bloks, Inc.

4505 Hickmore
Montreal H4T 1K4
Canada
Telephone: (514) 333-5555
Fax: (514) 333-4470
Web site: http://www.megabloks.com

Public Company
Incorporated: 1967 as Ritvik Holdings
Employees: 1,000
Sales: $188.8 million (2002)
Stock Exchanges: Toronto
Ticker Symbol: MB
NAIC: 339932 Game, Toy, and Children's Vehicle Manufacturing

Mega Bloks, Inc. is Canada's largest toy company. It is the world's second biggest manufacturer of construction toys, and one of the fastest-growing toy brands in the world. Based in Montreal, Canada, the company sells its plastic interlocking toys in more than 100 countries worldwide and has offices or manufacturing operations in 11 countries. The company's principal product is sets of plastic building blocks. It markets to two main categories: children under the age of five, and children five and older. Its toys in the preschool category are mainly large blocks that are easy for young children to hold and manipulate. The blocks designed for older children are smaller, and indeed are the same size as the blocks of Mega Bloks' key competitor, Lego. Mega Bloks successfully challenged Lego's dominance in the interlocking building blocks category, winning patent infringement cases brought against it in various courts. Although Lego is the market leader in this category, Mega Bloks showed that there was room for more. The company's sales grew precipitously in the late 1990s, and Mega Bloks, formerly Ritvik Holdings, went public in 2002. The company is run by the sons of the founders, Rita and Victor Bertrand.

Early Immersion in the Toy Industry

Victor Bertrand had his first job in the toy industry at the age of 17. He was born in 1943, and while still a teenager he worked to support his parents, going to school in the evenings. By the age of 20, Bertrand was already very knowledgeable about the toy industry, plastics, and injection molding. In 1967, he was confident enough of his ability to start his own toy distribution company. He named it Ritvik Holdings, taking the name from the combination of his first name with his wife's, Rita.

Ritvik Holdings was a distribution business, making sales in Canada for toys manufactured elsewhere. Ritvik also negotiated contracts with Canadian manufacturers to make toys for foreign brands. Ritvik Holdings grew to become a vertically integrated company. It owned plastic injection molding operations, design operations, tooling manufacturers, and marketing services. By the early 1980s, Ritvik Holdings controlled a leading share in the Canadian market for plastic injection molded toys.

At this point, Victor Bertrand set his sights on expanding the business beyond Canada. He was interested in construction block sets, and believed there was room in this market for growth. Construction sets had been toy industry staples since the early years of the 20th century. Batima Blocks came out in Belgium in 1905, and the American construction sets Tinkertoys and Lincoln Logs dated back to 1916. Erector Set, another leading brand, came on the market in 1913. These kinds of toys tended to be perennial. They appealed to a wide range of children, from early school-age kids to teenagers. The world's leading brand of construction toy was Lego. Lego was a Danish firm founded in 1932. It came out with its signature interlocking plastic bricks in the mid-1950s. By the early 1970s, Lego had sales of $50 million, and the brand was known around the world. In Canada, Lego sets were manufactured by contract with the Samsonite Corporation.

Victor Bertrand's friends apparently tried to dissuade him from making a plastic interlocking construction kit like Lego. But Bertrand thought he had two competitive advantages. One was that he aimed to make plastic bricks much like Lego, but in a jumbo size suitable for very young children. Traditional Lego bricks were too small for little children to handle, but Ritvik's Mega Bloks would be large and sturdy enough for toddlers to play with. Ritvik's second advantage was price. With Bertrand's extensive knowledge of the injection molding business, he knew he could design and manufacture plastic bricks that retailed for less than Lego. Sure of himself despite contrary opinions from his advisors, Bertrand went ahead with his plans.

New Product Line in the 1980s

Ritvik Holdings first showed its line of Mega Bloks construction sets at trade shows in the United States and Canada in 1984. Mega Bloks caught on instantly. The company made substantial sales in Canada, and also got into the leading U.S. toy chain, Toys 'R Us, with an order worth $1 million. Mega Bloks were available at retailers across the United States and Canada in 1985.

As soon as Ritvik showed its new line in 1984, bigger toy companies came calling. Bertrand told Canadian Business (November 1993) that several multinational companies asked to either buy the distribution rights to Mega Bloks or to buy Ritvik Holdings outright. Bertrand told the magazine, "We've turned down some very rich proposals in various markets because we did not believe they were long-term formulas for success." Ritvik Holdings, at that point 100 percent owned by Bertrand and his family, was financially sound and did not need quick cash. Mega Bloks was not meant as an instant sensation but was the cornerstone of a long-range plan to bring the company into wider markets.

By the late 1980s, Ritvik was distributing Mega Bloks in 30 countries. Mega Bloks became popular in the United States, Canada, and Europe. The company found that consumers were very loyal to the Lego brand. But initially Mega Bloks could compete by appealing to children who were too young for the more intricate Lego sets. The company developed 30 different play sets, all designed for children under the age of six. In 1988 Ritvik also brought out some preschool toys, such as a piano with Mega Bloks keys that could be integrated into other Mega Bloks construction sets. In 1989 Ritvik Holdings divested itself of all its other toy and plastics lines. Its business was now solely centered on Mega Bloks.

Head to Head with Lego in the 1990s

Mega Bloks sold well from the start, and Ritvik was growing. Bertrand gambled on the continued success of the line by selling off the company's other toy lines in 1989. Bertrand claimed that marketing the jumbo plastic bricks was easy because they immediately impressed mothers. He told Marketing Magazine (September 29, 2003) that Mega Bloks had been an instant hit because "Moms identified with it immediately as being a 'wow.'" After five years of selling blocks intended for very young children, the company was ready to move on to construction sets geared for older children. In 1991 Ritvik brought out its "Micro" line of Mega Bloks. These blocks were the same size and shape as Legos, and were essentially interchangeable with the older brand's sets. Mega Bloks had so far avoided trampling on Lego's toes by pitching its toys to kids too young for the Danish company's products. But now Ritvik was offering something that looked like Lego, made for kids aged 8 to 14. Lego Canada eventually brought a suit against Ritvik for unfair competition.

Lego's Canadian operations had been contracted to Samsonite between 1961 and 1988. After that time, Lego took over manufacturing operations for itself. Lego's patent on the shape of its brick had expired, and the Canadian lawsuit hinged on the claim that Ritvik had caused confusion between its Micro Mega Bloks and Legos. The case was not decided for years, during which time sales of Mega Bloks continued to grow around the world. But the Canadian court found in favor of Ritvik, saying that the company had done what it could to distinguish its brand from its venerable competitor's. European and U.S. courts came to a similar conclusion in other cases brought by Lego.

Ritvik had great success with both its toddler lines and the smaller Micro lines of Mega Bloks throughout the 1990s. Sales grew by an average of 70 percent a year through the mid-1990s. In 1996, the company got financial backing from the New York investment firm the Blackstone Group. The Blackstone Group, founded in 1985, grew to be one of the top U.S. private investment firms. It bought a 27 percent share of Ritvik. Rita Bertrand, who had been instrumental to the company since its inception, retired in 1996, along with her daughter Chantal. Two other Bertrand children, Marc and Victor, Jr., were active in the company's management.

Worldwide Competitor in the 2000s

Ritvik pushed into more international markets in the late 1990s. It established a Latin American subsidiary, Mega Bloks Latinoamerica S.A. de C.V., in 1997. The next year it opened a European subsidiary, Mega Bloks Europe N.V., to promote sales to European retailers. During the 1990s, international sales grew to about 30 percent of revenue. Canada and the United States accounted for the remainder. Ritvik depended heavily on sales to four major chains: Toys 'R Us, Wal-Mart, Target, and Kmart. These retailers accounted for almost 60 percent of Ritvik's sales. This situation was typical of the toy industry, however, which had become increasingly consolidated in North America, both among manufacturers and retailers.

Company Perspectives:

Our vision: To be the most dynamic and innovative toy company, building quality products that are expandable and universal.

Ritvik followed some other industry trends in the late 1990s. It began licensing characters for use on its toys in 1998. Many toy companies had jumped on this bandwagon, tying their products to movies or cartoon characters. Ritvik signed licensing agreements in 1998 with Teletubbies, the British television show aimed at toddlers, and with toy company Fisher Price for its Sesame Street characters. Ritvik also signed stock car race drivers Jeff Gordon, Dale Earnhardt, and Mark Martin for a new Nascar-Mega Bloks product line. Ritvik also added new features to its play sets in 2000, in line with similar moves by Lego and the budding U.S. construction kit brand K'Nex. Ritvik added building sets that could transform into vehicles, and made an electronic kit with a remote control called the Mega Bloks RO Action Builder. Also in 2000, Ritvik began advertising Mega Bloks on television for the first time. The company initiated a $2 million campaign with a Cincinnati, Ohio agency that specialized in advertising children's products. By 2002, the company was spending almost $30 million annually on advertising, marketing, and research and development.

Ritvik's sales continued on a steep upward swing through the late 1990s into the 2000s. Between 1999 and 2003, sales doubled, and the company's international sales expanded to more than 35 percent of revenue. With things going so well, Ritvik decided to sell stock to the public. It held its initial public offering on the Toronto exchange in May 2002. At that time the company changed its name to Mega Bloks, Inc. Marc Bertrand became president and chief operating officer, while his brother Victor, Jr., became chief operating officer. Founder Victor Bertrand remained chairman of the board.

Mega Bloks, Inc. advanced its sales in Asia by forming a joint venture with the Japanese toy company Bandai in 2003. Bandai held licenses for a slew of Japanese cartoon characters. It agreed to market Mega Bloks sets featuring some of these characters, for sale in Japan, Hong Kong, Taiwan, and South Korea. Mega Bloks also kept up with the trend toward fantasy, stimulated by the worldwide success of J.K. Rowling's Harry Potter books and the hit Lord of the Rings movies. In 2003 Mega Bloks came out with a Dragons series of construction sets, with bricks colored to look like castle walls and fortresses. The sets included helmets, shields, chain mail, and axes. The company also put out huge new sets called Mega Play! Mega Play! featured jumbo-sized blocks that kids could put together to make a structure they could fit inside.

By the early 2000s, Mega Bloks was one the fastest-growing toy brands in the world, and the company held down the number two spot in the construction toy market, second to Lego. Mega Bloks did well even when industry trends worked against it. The toy market was in a downturn in 2002 and 2003, with the construction toy segment dropping in the United States by some 10 to 15 percent. Nevertheless, Mega Bloks' sales were up. It did well in international markets, but it continued to expand its grip on North America even as the toy market slumped. By 2003, the company had seen 17 straight years of growth. Mega Bloks seemed poised to continue its rise as it developed new products and moved into new markets.