The Topps Company, Inc
The Topps Company, Inc.
Incorporated: 1947 as Topps Chewing Gum, Inc.
Sales: $293.8 million (2006)
Stock Exchanges: NASDAQ
Ticker Symbol: TOPP
NAIC: 311340 Nonchocolate Confectionery Manufacturing; 511120 Periodical Publishers; 511199 All Other Publishers
The Topps Company, Inc., is one of the most recognized makers and marketers of trading cards and bubble gum in the world. With products sold in dozens of countries around the world, a variety of entertainment licenses including arrangements with virtually all the players in Major League Baseball, the National Football League, and the National Basketball Association, and trading card sales in the millions, the company that introduced baseball cards as premiums to sell gum has become part of Americana. Topps's popular Bazooka bubble gum is almost as familiar to consumers as its trading cards; in fact, Bazooka's aroma was one of those most frequently cited in a study of smells that elicit memories. Besides trading cards and bubble gum, Topps has marketed high-quality color comic books, collectibles such as sticker and album collections, and candies, including lollipops such as Ring Pop. Topps also owns WizKids, Inc., a designer and marketer of collectible strategy games.
EARLY YEARS: FROM CHEWING
GUM TO BASEBALL CARDS
The company was founded in 1938 by four brothers experienced in marketing tobacco, fuel, and other products. Abram, Ira, Philip, and Joseph Shorin named their organization Topps Chewing Gum after their ambition to produce the best chewing gum available, adding an extra "p" for distinction. The company's first product, single pieces of chewing gum selling for a penny apiece, promptly became popular throughout the country.
When sugar was rationed during World War II, the fledgling Topps Chewing Gum company bought smaller candy companies, closed them, and used their sugar quotas. With such ingenuity and with the popular slogan "Don't Talk, Chum. Chew Topps Gum" (reflecting the wartime campaign for reminding civilians to keep closemouthed regarding war information), the company was able to thrive while larger gum manufacturers had to cease operations.
To improve business after the war, the Shorin brothers introduced Bazooka bubble gum in 1947, the same year that the company was incorporated. (The Bazooka Joe comics found inside the wrapper were introduced later, in 1953, and the main character, Bazooka Joe, was modeled after cofounder Joseph E. Shorin.) Topps also soon introduced "Magic Photos," its first picture products. These cards featured 252 different subjects, including 19 baseball greats. The cards appeared blank when taken from the packages, but when moistened they revealed black-and-white photos "magically."
In the same year Topps Chewing Gum's major competitor, Bowman Gum Company, began to market baseball and football cards as premiums. Baseball cards had first been offered as premiums in cigarette packs during the late 1880s, but the practice had been abandoned amidst World War I's raw material shortages. Topps was intrigued by the premium idea but needed to obtain the legal rights to depict the players and teams. Sy Berger, hired in 1947 to assist with a promotional campaign for Topps salesmen, personally took up the challenge, overseeing the signing of many sport figures of the time to individual contracts. Topps was able, therefore, to enter the baseball card business in 1951.
In that year Topps began marketing two 52-card sets, later known to collectors as "Blue Backs" and "Red Backs," which were designed so that a game of card-baseball could be played by those who had collected all 52 in the set. Each card featured a hand-colored picture of a player and instructions on how to play the card-baseball game.
In 1952, Topps introduced the familiar format for its baseball cards, although their size was somewhat larger than the eventual standard. Sy Berger designed these cards to have color pictures of the players with their team emblems on the front and the players' personal history and playing statistics on the back.
During this time, Topps was working on obtaining rights to feature players and logos, while also working to standardize its cards. From 1952 through 1955, Topps competed intensely with Bowman for contracts, and by the end of that period, Topps had managed to secure most of them, purchasing remaining contracts from Bowman. In fact, in January 1956, Topps bought Bowman Gum Company itself, and from that year until 1980 Topps had virtually no competition in the sports trading card market. Standardization efforts were also complete, and in 1957 Topps introduced the standard 2.5-by 3.5-inch cards and began replacing the hand-tinted pictures with color photographs taken by Topps photographers at spring training camps as well as during the official season.
The 1950s also saw Topps enhance its trading card lines with new product lines featuring notable football, hockey, and basketball players. After two years of experimentation, Topps entered the football card market in earnest in 1951 with a 75-card set of college players. Although its football card line would not reappear until the college All-Americans series of 1955, Topps issued football cards every year thereafter. In 1956 Topps sold its first NFL set. Topps also began to compete with the Parkhurst Company for market share in the hockey card business; Topps introduced a set limited to players from the Boston Bruins, Chicago Blackhawks, Detroit Red Wings, and New York Rangers in 1954. The next Topps hockey set came out in 1957, and thereafter sets were issued each season through 1981. Finally, in 1957 Topps began to market NBA basketball cards. Because these were only mildly successful, another full set of basketball cards was not produced until 1969.
By the early 1960s Topps baseball cards were a well-established part of American culture, and production was increasing annually. Football and hockey cards also were selling, particularly after Parkhurst discontinued its hockey line following the 1963–64 season. In 1968 Topps formed a joint venture with the Canadian company O-Pee-Chee to better reach markets for hockey cards in Canada; this relationship continued until 1993.
Topps also began including premiums inside packages of trading cards to entice its young customers. From 1961 until 1971 various lines of Topps cards included collectible items such as stamps or specially embossed cards. Other premium experiments in the 1970s included Topps Story Booklets, Topps Baseball Tattoos, Topps Coins, Topps Posters, Topps Puzzles, and Wacky Packages. Moreover, the company bolstered its lines at the end of the 1974 season to include "Traded" cards for players who had changed teams. This would become standard practice for the sports card industry.
THE TOPPS CREED. We recognize that the optimum profit and growth objectives of our enterprise will be achieved only when we reconcile and serve to the highest degree possible the interests of our consumers, customers, employees, shareholders and the communities in which we function.
In 1975 the Fleer trading card company filed a $17.8 million federal antitrust suit against Topps and the Major League Baseball Players Association. Specifically, Fleer alleged that Topps's exclusive contracts with the players kept competitors from the baseball card market. Four years of litigation later, Judge Clarence C. Newcomer ruled against Topps and the Players Association in a district court in Philadelphia. Newcomer ordered Topps not to enforce the exclusivity clauses in its contracts and required the Players Association to review applications for licenses to market cards and to enter into at least one agreement by 1981. Although the industry would change considerably as a result of the ruling, the damages awarded to Fleer were minuscule.
INCREASED COMPETITION AND
A LEVERAGED BUYOUT
In 1980, with company sales at $60 million, Arthur Shorin, son of founder Joseph Shorin, became chairman and CEO of the company. The younger Shorin had begun working for Topps in 1958 and had gained experience in every department, noting in a 1995 interview in Topps Magazine, "I came up principally through the marketing and sales route, but also did my time in manufacturing."
Arthur Shorin's first years as CEO were filled with challenges. While such competitors as Fleer and Donruss (and eventually Upper Deck) were entering the baseball card market, Topps was experiencing some problems. First, the company was focusing on a new product, chocolate bubble gum, to help grow its sales, and that product was failing to provide results; Shorin would later recall, "I don't know a lot about racing, but that was the wrong horse to bet on." Moreover, the company had become unwieldy, with a huge workforce and little focus. Shorin promptly jettisoned the chocolate gum scheme and began scaling down the workforce and implementing cost-cutting measures.
His company also was involved in an appeal of the antitrust suit brought by Fleer. In August 1981 Newcomer's ruling that Topps and the Players Association had violated antitrust violations was overturned. The Third U.S. Circuit Court of Appeals in Philadelphia did not prevent the Players Association from licensing more than one company in the future, however, encouraging increased competition with Topps. Sy Berger noted at the time, "The Supreme Court confirmed the Court of Appeals decision by not hearing the case.… The one thing that the law said is that Topps does not have a monopoly, that others could enter the field and if they worked as hard as Topps, took as long as Topps, maybe they could do as well as Topps."
Basketball and hockey cards were underperforming during this time. After experimenting with its line of basketball cards, introducing an unusual 176-card set of larger cards displaying pictures of three players, the company returned the cards to their normal size and tried distributing them in a different way, tailoring various sets for different geographic regions. After these experiments failed to bring NBA card sales to an acceptable level, Topps left the basketball card market in 1982 and did not return for ten years. Topps likewise bowed out of the hockey card market during this time, while the company's Canadian partner, O-Pee-Chee, continued these efforts.
- Brothers Abram, Ira, Philip, and Joseph Shorin form Topps Chewing Gum.
- Bazooka bubble gum is introduced; company is incorporated.
- Company enters the baseball card business.
- Bazooka Joe comics are introduced within the Bazooka gum wrapper.
- Topps acquires its main trading card rival, Bowman Gum Company, and sells its first set of National Football League cards.
- Fleer Corporation files federal antitrust suit against Topps and the Major League Baseball Players Association.
- Arthur Shorin, son of cofounder Joseph Shorin, becomes chairman and CEO.
- Management takes Topps private through a $98 million leveraged buyout.
- Company goes public again as The Topps Company, Inc.
- Topps acquires U.K.-based Merlin Publishing International Limited for $46.2 million.
- Company takes $30 million charge as a result of the closing of its manufacturing plant in Duryea, Pennsylvania.
- Topps begins selling Pokémon-related products.
- Pokémon craze sends profits and revenues to record levels of $88.5 million and $442.2 million, respectively.
- WizKids, LLC, is acquired.
- Dissident shareholder proxy battle leads to the addition of three new members to the company board from two hedge funds.
Despite such difficulties, Topps was on the rebound by 1984; indeed, baseball card collecting in the 1980s was rapidly becoming an investment market in addition to a hobby. Periodicals emerged featuring price information and describing industry trends. Computer hotlines and investment advising groups helped investors pick out the best cards for their money. In fact, throughout the decade, rookie baseball cards outperformed all other comparable investments, including corporate bonds, common stocks, treasury bills, U.S. coins, and diamonds. During this time, however, Topps underwent a dramatic change. In conjunction with Forstmann Little & Co., Topps management took the company private, paying just $98 million in a leveraged buyout. Three years later, Topps became publicly held again, as The Topps Company, Inc., selling a limited amount of stock that raised $22 million. In 1988, to reward loyal shareholders who were not seeing increased stock prices during this transition, Topps borrowed $140 million to pay out a special dividend.
By the late 1980s, Topps was reporting a negative net worth, resulting from a heavy debt load and the instability of the trading card market. Indeed, analysts had begun warning investors of a potential decline in the value of their baseball memorabilia. Others, however, remained more optimistic about the future of Topps and its competitors. Topps did, in fact, have a good cash flow, and baby boomer fathers, it seemed, were getting their children interested in card collecting as an investment.
Because Topps's major competitors were concentrating their efforts on higher priced cards and their high-bidding collectors, Topps came to virtually own the market for less expensive cards. Topps even improved the paper stock of the inexpensive cards and boosted prices from 50 cents for 16 cards to 55 cents for 15. At the peak of the baseball memorabilia market, Topps's sales rose 28 percent for the fiscal year ending February 1990.
Moreover, to compete with Upper Deck, which was offering trading cards of a higher quality, Topps introduced premium Stadium Club baseball packs in 1991. The innovative cards featured "full-bleed" photographs rather than the traditional ones with cropped borders, glossier laminates, and gold foil stamping. They proved especially popular with collectors, many of whom bid as much as $12 for a pack of 15. Topps introduced Stadium Club lines of its hockey cards the following year. In the meantime, card collectors had been complaining that the bubble gum included in card packs was staining the cards or making impressions on them. Topps therefore took the gum out of its packs.
The company's Bowman subsidiary was experiencing improved sales in the early 1990s as well. Topps had brought Bowman back into the baseball card market in 1989, with disappointing results, but in 1992 Topps reduced the Bowman set and added new sets featuring retired ball players. The subsidiary's sales went up, establishing a new card brand for Topps.
By 1992, Topps was free from debt and it resumed its marketing of Topps basketball cards. In addition, the company issued an Archives set that showed NBA stars from the 1980s as they would have appeared had the company kept up the NBA line. Football card lines also were resumed and enhanced. Yet the company's most profitable line remained its baseball cards, consisting of four brands: Topps, Bowman, Stadium Club, and Stadium Club Dome; these brands were augmented in 1993, when the company premiered its Baseball's Finest line.
Baseball cards remained the biggest seller as the company approached the mid-1990s. After being deluged by all of the new cards marketed by Topps and other companies in these years, however, collectors staged a rebellion of sorts in 1992, and overall sales for the sports card business dropped 20 percent. Topps's profits decreased by 65 percent in the fiscal year ending February 1993, and the following year its stock value fell significantly as well.
The baseball strike that began August 11, 1994, did not help matters. Nevertheless, Topps's response to the strike was unique. The company simulated full season statistics for the backs of its cards by means of a software program that calculated what players might have done if not for the strike. Other new developments at Topps during this time included a move from its old Brooklyn headquarters to new corporate offices in lower Manhattan.
Topps also made efforts at diversifying in the face of the stagnant baseball card market. Indeed, by the mid-1990s, Topps had become quick to introduce trading cards that capitalized on fads unrelated to sports. For example, after learning that children were increasingly interested and apprehensive about the war in the Persian Gulf, Topps took only six weeks to introduce its Desert Storm line of trading cards. Other lines featured pop music stars and characters from such films as Jurassic Park.
The company's success was something in which its executives and visionaries took pride. In his introduction to Topps Baseball Cards: The Complete Picture Collection, A 40 Year History, Sy Berger, vice-president of sports and licensing at Topps, wrote: "I must confess that I am proud of what we have achieved. I feel we have given Young America a wholesome interest; we have satisfied the desires of those who are prone to collect; and for the nostalgia buff, we have made something that he can reflect on." Moreover, CEO Shorin remained optimistic about the company's future, asserting in a 1995 Topps Magazine article: "Anyone who doesn't think the recent unrest has caused real damage to the industry can sell his or her brain for shoe leather. But I think the hobby is resilient, as are the fans, and creativity still works."
Despite Shorin's optimism, the trading card market remained flat during the late 1990s, as did Topps's overall revenue figures. Even more alarming, the company's profits were on the decline. Topps pursued several strategies to attempt to escape from these doldrums. One was to expand its offerings in the nonsports entertainment sector. In addition to continuing a long-running line of Star Wars products, Topps found success with comic books and card sets based on the hit television show The X-Files and with a card collection based on the bestselling children's book series Goosebumps. With many collectors moving away from trading cards to such collectible toys as Beanie Babies, Topps also entered the minicollectible sector with lines of plastic animals packaged with candy called Puppy in My Pocket and Baby Wild Animals.
Another key strategy was overseas expansion. In July 1995 Topps acquired Merlin Publishing International Limited, a leading U.K. publisher and seller of sticker and album collections, for $46.2 million. Among Merlin's products was a line of soccer products connected to Premier League Football in the United Kingdom. Merlin had additional operations throughout Europe, giving Topps a solid platform on which to expand its confectionery lines on that continent. In March 1997 Topps renamed its new subsidiary Topps Europe Limited but continued to market products under the Merlin brand. Topps established additional subsidiaries in Canada and Mexico during 1996 and in Brazil and Argentina the following year. The company became more aggressive in pursuing overseas opportunities, gaining soccer licenses in Brazil, Korea, and Denmark and a basketball license in France, and expanding its distribution of confectionery products through agreements with local distributors in Japan, Russia, Australia, New Zealand, and South Africa.
Cost-cutting was also on the agenda in the late 1990s as Topps sought to reverse its profit slide. In late 1996 the company closed its manufacturing plant in Duryea, Pennsylvania, where it had produced gum and cards since 1966. Topps took a $30 million charge related to the closure, leading to a 1997 net loss of $10.9 million. The company began outsourcing nearly all of its manufacturing, contracting with the Hershey Foods Corporation for the production of Bazooka gum and with several U.S. manufacturers for the making of card products. In April 1998 Topps closed its manufacturing facility in the Republic of Ireland, where it had been producing gum. The company continued to produce Ring Pop lollipops at a factory in Scranton, Pennsylvania.
Topps returned to profitability in 1999, posting net income of $15.6 million on sales of $229.4 million. The sales figure, however, was the lowest in more than a decade. Nevertheless, prospects for the early 21st century appeared bright. The confectionery operations were improved through the beefing up of distribution and the introduction of new lollipop brands—Topps Baby Bottle Pop, Flip Pop, and Bazooka Pops—to complement the core Ring Pop and Push Pop brands. In the aftermath of baseball and basketball labor disputes, the sports segment was improving. In entertainment, Topps found success by being very selective in the properties it licensed; the company marketed just three lines during the 1999 fiscal year: Xena, The X-Files, and WCW wrestling. More good news followed in the 2000 fiscal year, including the conclusion of a multiyear license agreement with Marvel Entertainment Group, Inc. through which Topps began producing sticker/album collections and confectionery items based on Marvel Super Hero Universe characters, such as the X-Men and Spider-Man. Most important, Topps began to profit handsomely from the Pokémon craze among children with the introduction of trading cards, lollipops, and other products during 1999. Topps rang up Pokémon-related sales of more than $100 million for the 2000 fiscal year.
In 2000 the Pokémon craze reached its peak, sending Topps to record heights. The company earned record profits of $88.5 million for the fiscal year ending in February 2001 on record revenues of $439.3 million. Pokémon-related sales totaled $179.6 million, an astounding 41 percent of the total. The phenomenon crashed in 2001, however, and Topps generated only $24.1 million in revenues from Pokémon products in 2002. Overall sales plummeted to $302.9 million, a 31 percent decline. Only strong candy sales kept the decline from being a steeper one. Profits fell 67 percent, to just $28.5 million.
With the Pokémon bonanza over and an industry-wide drop in sports-card sales of 80 percent since the peak year of 1991, Topps fell into a prolonged slump. Revenues stagnated at just under $300 million for several straight years, while profits fell steadily, down to $11 million by 2005. During this period, the company failed to find a blockbuster successor to Pokémon, and its other initiatives were only modestly successful. For example, in October 2001 Topps launched etopps.com, a web site where people could buy e-cards sold exclusively over the Internet. The site also enabled users to trade cards and eventually to play various fantasy-style games. In July 2003 Topps acquired WizKids, LLC, a designer and marketer of collectible strategy games, for $28.4 million. Founded in 2000 and based in Bellevue, Washington, WizKids was the producer of such games as Mage Knight, HeroClix, MechWarrior, and Creepy Freeks. Revenues for 2002 totaled $90 million. Also in 2003, Topps signed a letter of intent to acquire certain brands of the Foreign Candy Company, Inc., a Hull, Iowa, maker of such candy brands as Mega Warheads and Rip Rolls. The deal, however, fell through. In May 2004 the European Commission levied a EUR 1.6 million ($1.94 million) fine on Topps for anticompetitive behavior in the trade of Pokémon products in 2000. The commission found that Topps had engaged in an elaborate strategy to keep prices high on Pokémon collectibles by discouraging distributors from selling across borders. In August 2004 Scott Silverstein, son-in-law of Shorin, was named president and chief operating officer, placing him in line to succeed Shorin.
By 2005 the sports trading card industry had fallen so far that Fleer was forced into bankruptcy. Upper Deck purchased the brand and continued to produce Fleer cards. For its part, Topps was under increasing pressure from shareholders frustrated by the company's poor performance and Shorin's conservative style of management. Shorin responded in early 2005 by placing the firm's confectionery business up for sale. In September, however, Topps pulled its candy unit from the auction block, unhappy with the offers it had been receiving. The company embarked on a modest restructuring through which it cut management jobs to shave annual expenses by $2.5 million. The restructuring also entailed the separation of Topps's confectionery and entertainment operations so that the two sides, by and large, would operate independently and would report their financial performance separately. In early 2006 Topps terminated its manufacturing agreement with Hershey, electing to contract with a less expensive manufacturing partner in Mexico for the supply of Bazooka bubble gum.
Results for the fiscal year ending in February 2006 were dismal. Revenues remained stagnant, at $293.8 million, while the company posted an operating loss of $2.3 million and minuscule net profits of $1.2 million. Dissident shareholders, led by Timothy E. Brog, manager of the Pembridge Capital Management LLC hedge fund, pressed for a sale of Topps to a bigger, deeper-pocketed company (or companies), one that would provide more marketing support and explore licensing out the Bazooka and Topps brands to manufacturers of other products. Brog, in alliance with another hedge fund, Crescendo Partners L.P., launched a proxy fight by nominating an alternative slate of three new board members for the company's July 2006 annual meeting, in the process seeking Shorin's ouster. At the last minute, Topps struck a deal with the activists, agreeing to hold a new election in August with a revised list of candidates, including three nominees from the hedge funds. Shareholders approved the revised slate, enabling Shorin to remain on the board, which also included seats for Brog and two of Crescendo's executives. The new members were likely to pressure the board to look into a sale of all or a part of the company, but were also interested in pursuing efforts to reduce the compensation of Topps executives and to get management to focus more keenly on improving the firm's bottom line. As this battle was playing itself out, Topps was simultaneously executing a Shorin-devised relaunch of the Bazooka brand with new flavors and new forms, such as twist-wrap and gum-filled lollipops.
Updated, David E. Salamie
Topps Enterprises, Inc.; Topps Finance, Inc.; WizKids, Inc.; Topps Argentina SRL; Topps Canada, Inc.; Topps Europe Limited (U.K.); Topps International Limited (Ireland); Topps Italia SRL (Italy); Topps UK Limited.
The Upper Deck Company, LLC; Marvel Entertainment, Inc.; Wm. Wrigley Jr. Company; Tootsie Roll Industries, Inc; Donruss Playoff, L.P.
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