Copyright Rogers Publishing Limited Sep 4, 2000

[Graph Not Transcribed]

Javier Espinal is strolling through the expansive storage area of his 25,000-square-foot Toronto factory, casually inspecting Polar Magnetics Inc.'s inventory of "trinkets and trash." The carefully stacked merchandise ranges from key chains, wall plaques, coasters, place mats and reusable stickers to the company's biggest seller: fridge magnets. And sure enough, it's not long before Espinal is walking among aisles of steel racks, their shelves groaning under the weight of thousands of magnets displaying the likenesses of a veritable Who's Who of pop culture.

There's the trendy (Britney Spears and the Backstreet Boys), the classic (Marilyn Monroe and the Three Stooges) and the forever cool (Elvis Presley and Woody Woodpecker), plus a host of others from fruit to fish. Judging by the amount of inventory awaiting shipment, the company is in superb shape to supply its growing number of retail accounts-which include not just ma-and-pa gift shops, but big chains like the Bay and Canadian Tire-for the upcoming Christmas crunch. But then Espinal, the company's cofounder and vice-president of product development and licensing, comes upon a rack piled haphazardly with a bunch of magnets, all of them unceremoniously coated in dust. "Oh, that's garbage, man, pure garbage-by the time we finally got the licence to do them, they were dead," Espinal says. "They" are the Spice Girls, the all-gal pop quintet-cum-quartet that-for a relative nanosecond-was the hottest thing in the known universe, just about when Polar got the licence for them in 1998. One nanosecond later, the company was left with boxes of unsellable magnets bearing the images of Sporty, Scary, Baby, Posh and Ginger. Now, Espinal can't even give the stuff away.

Such turns in trendiness are part of the cycle of pop culture. Luckily for Espinal and his partners-Mike Boland, president, and Lucian Pateopol, vice-president of production-Polar Magnetics has notched far more hits than misses. But luck alone may not explain the success these 30-something execs have had determining what's going to catch fire with teens and tweens. In their six years in the business, they've discovered that mastering the magnets game has as much to do with licensing as with trend spotting. That lesson has transformed Polar from a $25,000 company that got its start in Boland's basement to one with an estimated $6 million in sales this year. And like most stories involving movie stars and rock idols, it began with a chance encounter and a twist of fate.

In the early 1990s, Javier Espinal made $14.50 an hour working as a landscaper. It paid the bills and allowed him the free time to do more creative things with his hands. One day, on a whim, he made a fridge magnet of former Toronto Maple Leaf winger Wendel Clark by cutting out his photograph and laminating it onto a half-inch-thick piece of wood. He then meticulously carved the wooden slab to match the photo's dimensions, stuck on a magnetic backing and, presto, the "Funky Chunky" fridge magnet was born. Espinal created more magnets and gave them away as gifts to family members and close friends. They were an immediate hit, and many recipients urged him to think about actually selling them. So to test the idea, he started lugging an old freezer door covered in sports-themed magnets to Sky-Dome on a few weekends the Blue Jays were in town. Talk about hitting a bases-loaded homer: Espinal's magnets were an irresistible impulse buy, and he was soon selling his magnets by the fridge-load.

Things began to accelerate on Dec. 31, 1992, when at a New Year's Eve party, Espinal was showing guests a few of his magnets. Among the revelers was Michael Boland, who ran a reforestation company at the time. "How'd you like to make a million bucks?" Boland enthused, sensing a major business opportunity. But before the new partners could make a million, before they could even consider the logistics of mass-producing thick wooden fridge magnets, they faced one hitch that Espinal had evaded when he was selling his magnets outside SkyDome: they had to acquire licences from the rights holders of the characters they wanted to use. Along the way, they discovered that character licensing in the pop culture industry isn't just kids' stuff-it's big business.

First stop on their path to greatness was a jaunt to the New York Licensing Show in June 1993. The show is a smorgasbord of some of the biggest intellectual property holders in the world-Marvel Comics, Warner Bros., Universal Studios. Almost all the producers of pop culture garner extra revenue and publicity by licensing character images to other companies. These images, in turn, end up on everything from T-shirts and beach towels to stickers and stationery. But breaking into licensing can be almost as tough as making it big in movies. For starters, you have to impress the Hollywood types. And the bigwigs just weren't taken with Boland and Espinal's sales pitch. "None of the licence holders had ever heard of us," recalls Espinal. "We had to tell them we don't have any contracts right now. And they'd say, 'OK, guys, come back and see us when you've got some sort of a track record.' " Well, a track record is hard to come by if you can't get a licence.

Faced with that catch-22, the pair tried a Hail Mary pitch to the King himself: Elvis Presley. Well, Elvis Presley Enterprises (EPE), anyway, the licensor for the King's estate. They struck out yet again-but not before learning that manufacturers selling Elvis-related merchandise to the Elvis gift shop in Graceland didn't need a formal licensing agreement from EPE. Boland phoned Graceland's head of merchandising to sell Elvis magnets directly to the gift shop. Again, the answer was "Thanks, but no thanks." But this time, Boland refused to take no for an answer.

With the tenacity of a boiler-room telemarketer, Boland phoned the Graceland official once a week for six months. His pestering paid off. By the spring of 1995, the exasperated Graceland official agreed to place an order-partly to get Boland off his back. "That's why we call Mike the 'redheaded ball-buster,' " says Espinal. Polar supplied the Graceland gift shop with 1,500 magnets, all of them adorned with Elvis images-Young Elvises, Gold Lame Elvis-five Kings in all. The gift shop priced the magnets at about US$10 apiece, and in less than three weeks they sold out. The Graceland official put in another order - this time for 2,500.

Elvis opened the door. Licensing deals with EPE soon followed, and then licensors representing the estates of James Dean, Marilyn Monroe, the Beatles and the Three Stooges came calling. (Terms and conditions of licensing agreements are confidential, but Espinal says a low five-figure sum plus a royalty fee is typical, although certain licences can cost more than $100,000.) In September 1995, the company moved into a 5,000-square-foot factory as sales soared from $25,000 in 1994 to $1.2 million in 1996. The influx of new business meant that Polar was now in a position to buy its own laser cutter, a machine that is capable of cutting up to 2,000 magnets in an eight-hour shift. Which is where Lucian Pateopol, Polar's third partner, comes in. Pateopol was working for one of the companies from which Polar was outsourcing its laser cutting work. By late 1995, it was clear to Boland and Espinal that it would be more efficient to do the laser cutting in-house, so they offered Pateopol an equal partnership.

Polar began to diversify, moving beyond magnets and into spin-off lines such as wall plaques and key chains. More importantly, the company had established enough of a reputation in the business that it could cherry-pick properties it wanted to license. In just two years, the partners had gone from begging to choosing.

Licensing is a risky game that parallels the stock market in some ways. The trick is to know early on which properties to back. (The more popular the property, the more expensive the licence.) A good or bad decision often means the difference between a profitable or moneylosing year. That became apparent by October 1997. Boland received a phone call from a licensing company representing an edgy new animated TV series. Boland passed on the offer, but after talking to other makers of licensed products, the prevailing industry buzz suggested that the cartoon was going to be big. "We changed our minds," says Boland, "and became South Park's third-ever licensee."

It was an adroit decision. South Fark was a monster hit for the company. Between Nov. 1, 1997 and March 31, 1998, Polar sold more than $3 million worth of South Park merchandise. "We couldn't cut magnets fast enough - we had to go to Buffalo to outsource some of the work," says Espinal. The deal was especially sweet because Polar got it for a relative pittance.

But perhaps they learned too much from those bratty South Park boys. "It made us so much money so fast that we became fat, dumb and happy," Boland says. "It gave us a false sense of security." And it didn't last. By June 1998, the gravy train derailed. "By this point, all the other manufacturers of South Park-licensed merchandise had their stuff in the stores," says Boland. "People stopped buying our stuff to buy the new South Park stuff."

In the interim, being "fat, dumb and happy" led the Polar principals to make some regrettable business decisions. Like the Spice Girls. By the time Polar acquired that licence, the band's popularity was plummeting. Worse, Polar grossly overpaid for the rights. "We needed to sell 200,000 Spice Girls magnets just to break even, but we sold only 60,000 units," says Espinal. "We didn't do our due diligence on that one." And there were other bombs. Pateopol points to the 1998 film Small Soldiers. "A lot of people we talked to said this movie was going to be the next Toy Story," recalls Pateopol. "But the movie was crap. We ended up selling maybe 10 magnets."

In March 1999, Polar happened upon an annoying little critter that, along with its zillions of equally annoying friends, had the potential to make millions. That spring, the company secured a licence to produce Pokemon merchandise. Thanks to Polar's rapid turnaround time (all aspects of production are handled in-house), Polar's Pokemon products were on store shelves by July. Being quick to market is vital. In mid-1999, Polar was one of only 50 Pokemon licensees in North America; by December, there were more than twice as many. As with South Park, Polar racked up some $4 million in sales in five months. The difference this time, says Boland, "was that we weren't running the company as if we had a Brinks truck parked out back. Pokemon took us to the next stage. We bought our third laser cutter and moved into our new building." In turn, Pokemon led to the full list of red-hot teenybopper properties. "We've sold tens of thousands of Backstreet Boys, "NSYNC and Britney Spears magnets," says Pateopol.

Being trendy can be exhausting - it essentially amounts to running after children all day long. So to protect itself against the downtimes, Polar has developed a new line. Talk-A-Matics are magnets that allow the user to record a 10-second message that will play (thanks to a built-in motion sensor) whenever somebody walks by. "It's like a talking greeting card," says Pateopol. (Indeed, there is a Talk-A-Matic attached to Polar's front door, which offers a hearty welcome to visitors.) Significantly, the Talk-a-Matics feature few licensed characters, but primarily use images created inhouse by a team of full-time designers.

The trio predict that the Talk-A-Matic line of magnets could emerge as Polar's next big thing this Christmas. But should the line sputter, another product now hitting shelves seems destined for novelty greatness. It's dubbed the Muscle Car Magnet - a magnetic image of a man's arm rippling with Schwarzenegger-like biceps. The idea is for a motorist to place the arm on the driver's side door. It's an idea that just might be goofy enough to attract a following. In early August, while stuck in traffic, a motorist in the next lane glanced over at Espinal - then did a double take when he saw the muscular arm hanging out the window. The motorist scoffed at the muscle-bound show-off, then broke into hysterical laughter when he realized he was staring at a fake. He leaned over to ask Espinal where he could buy one. "Without question, the Muscle Car Magnet will be the next Garfield," enthuses Boland, referring to the once ubiquitous stuffed orange tail that dangled from car trunks for a short while in the 1980s.

Well, maybe. But in the long run, Polar plans to achieve a 50-50 split between licensed and non-licensed merchandise - which should help the company through the vicissitudes of pop culture trends. Then again, there's always the chance that everything old will become new again. In fact, there's even been some recent buzz about a Spice Girls comeback album and world-wide tour. It's anyone's guess whether Girl Power can be resurrected to its 1998 glory days. But if it is, that warehouse rack of "garbage" may yet turn to gold.

"South Park made us so much money so fast that we became fat, dumb and happy," says Polar president Michael Boland. "It gave us a false sense of security." And it didn't last