From Garage to Global: Rainbow Play Systems Weathers a Storm
Rainbow Play Systems Inc. began the way many late 20th century businesses have: as a disruptive start-up housed in a garage that, in the end, couldn't contain its full potential.
Like other garage to global companies, this Brookings, South Dakota-based maker of swing sets that revolutionized what a backyard play set could look like also grew too fast. Then it invested too much in the cookie-cutter templates of big-box stores and the overseas production that makes really low prices possible.
Today, almost 30 years after Rainbow's founder and chief executive officer Greg Foster built his first swing set in his parents' garage in Minnesota, the company is emerging from tough times.
Fixing the company has meant finding a balance between prefab and homespun, local and global, and between inexpensive swing sets and the rugged, vivid, multistory backyard flagships on which Rainbow made its name.
Chapter One: Chutes and Ladders
An avid woodworker when he was young, Foster conceived of revolutionizing the swing set -- shifting it from the A-frame metal versions, so common in 20th century American backyards, to ones made of wood and with all kinds of options to inspire a child's imagination.
He chose redwood and North American cedar for high-end play sets -- all woods which are insect and weather-resistant.
Then there were the horizontal and vertical add-ons such as slides, climbing walls, and monkey bars. Rainbow's swings also came in all shapes and sizes, including sling-swings, disc-swings, bucket swings, tire swings, and buoy swings.
The play sets sold so well that by the late 1980s, Rainbow employees were working 18 hour days in early spring to make the hundreds of play sets ordered for installation before summer vacation started.
"We could pre-build a little, but we were so desperate for employees my husband would come in and work shifts," recalls purchasing director Cindy Veness, who joined the company in its early years in Minnesota.
To keep up with demand, Foster knew he needed to move from the garage to a more industrial setting.
South Dakota's Office of Economic Development and its Brookings counterpart offered Foster a low-interest half-million-dollar loan, tax incentives, and cheap land on Brookings' western edge. And to deliver a key Rainbow's resource, they added in a dedicated rail spur for lumber shipments. Brookings, a town of 22,000, and home to South Dakota State University, also had a skilled and educated workforce. Students offered a constantly replenished pool of seasonal labor.
The move from Minnesota primed the company to catch the home building boom of the late 1990s.
Nesting Baby Boomers fell in love with Rainbow's new take on the swing sets of their youth. The colorful add-ons meant that every set had a design-your-own allure. Customers could choose from straight or curly slides, child-sized versions of climbing walls with brightly colored plastic "rocks" embedded on them, and add-ons that mimicked tree houses, such as crow's nests and sleeping bays.
By 2004, the company had more than 500 employees. To woo and keep quality workers in Brookings, it offered four-day workweeks with 10-hour shifts. It added a night shift and opened another factory in Albert Lea, Minnesota. Sales topped $100 million that year.
Chapter Two: The China Problem
With business booming, Rainbow decided to make a cheaper version of its play sets to capture more price-conscious customers. Rainbow's play sets started out at about $3,000, but by making play sets with lighter and rougher China fir they could bring the prices down.
But low prices came at a high cost.
Veness's job became more complex. In addition to marshaling vendors making the kaleidoscope of the non-wood parts that go into Brookings-made sets, she now had to audit Chinese production and component integrity.
"The initial philosophy was, we would hand them a thing and say, 'Copy this,' " she says. "And they'll copy it, and it'll look the same, but it's not."
The company issued recalls in 2000 and 2006. Then, the colored plastic components faded out in a year. Low priced or not, if complaints came back to its network of dealers, they reflected on Rainbow's reputation and the parts had to be fixed.
"We did round after round after round of trial and error till we finally got a non-fading red," Veness says. "To this day, we instruct, we contract, that they have to buy the pigment from this company. They think you're going there for 'cheap,' and you are, but Rainbow means quality and we expect quality."
The cheaper sets did mean Rainbow could go into big-box retailers instead of working only with dealers. The company began selling through Costco (COST) in 2004 and began even more cost cutting, as the retailer's auditors dug through every part of the company's manufacturing process. Rainbow eventually managed to bring in a Chinese-made set at $999.
A race to the bottom began. If Rainbow could make sets in China for that price, so could competitors, including some of Rainbow's own dealers who broke rank and started using Chinese contract manufacturers to produce play sets for themselves.
"Pacific cedar" became competitors' marketing-speak for Chinese fir. Once a brand asset, cedar became synonymous with cheap, to the point that Rainbow switched from using North American cedar to Douglas fir for its made-in-America sets.
The issue actually went to court in 2006 when Rainbow sued Backyard Adventures in U.S. District Court for "deceptive and misleading advertising claims" regarding "counterfeit cedar." Rainbow's public statement warned that if the trend toward using these deceptive claims went unchecked, customers wouldn't get the products they paid for -- the whole industry's reputation would be undermined. But the court's decision was telling: It found Rainbow's claims untenable when, at least in its lower-tier products, it was using the same fir from China as the company it was suing.
Rainbow continued to expand its less expensive lines into more big retailers, even as the mortgage crisis began to ravage the U.S. economy in 2008. In the beginning of 2009, Foster started what Mike Reitz, Rainbow's director of production, calls "the 'we're-going-to-sell-to-everyone' plan."
It signed on with Toys R Us, Home Depot (HD), Walmart (WMT) and Sam's Club. The company stocked up on inventories as sales started to rise. Rainbow even installed a top-of-the-line set on the grounds of the White House for Malia and Sasha Obama.
Foster publicly projected $120 million in revenues in 2009, but the Great Recession was about to hit Rainbow hard. Instead of a major increase in sales for the year, executives were looking into a crater. In April, Rainbow laid off 74 employees. The company's bank weighed in, telling them, "we won't lend you money until you look at your labor,'" says Cindy Kalsbeck, Rainbow's finance director.
"Until you look at everything," adds Kandy Barthel, the company's office director. "Down to how many phone lines we had."
Rainbow announced more layoffs in August and September. It began plans to shut down the Albert Lea facility. Reitz took over lumber buying with some hard criteria. "You couldn't buy anything," he says, "until you'd used up absolutely everything."
Rainbow got out of big-box retailers altogether and began shoring up its existing dealer network. It also shifted to more trustworthy suppliers closer to home for its non-wood components. Veness says Rainbow now buys 85 percent of those products from North American companies. Different slide models come from companies in Minnesota and Winnipeg, Canada; pipes, chains and "rocks" from Minnesota; colored tarps from Michigan; tires from South Dakota.
But the company has stayed with different price levels for its play sets. While its Brookings-made play sets remain Rainbow's pride and job, executives know that they know the Chinese-made units are a hard necessity.
Rainbow's rough navigation of the global economy showed the company the benefit of working with dealers who know how to sell all its play sets. So the company needs to "give them products at prices that get people in the door, and let their expertise up-sell them on the good stuff," Reitz says.
It's a balancing act, but as Kalsbeck says, Rainbow is doing what it must in China so it can keep doing what it does best in America. The balance seems to be working. By the end of 2014, Rainbow will show its first year-on-year sales growth since 2005.
Chapter Three: Investments in Americans
Reitz never planned on making a career out of manufacturing children's play sets.
He grew up on a ranch outside Fort Pierre, 200 miles west of Brookings. He joined the National Guard to pay for college -- studying sociology and criminal justice at SDSU. But he dreamed of going to Alaska. In 1998, he got a part-time job at Rainbow as a forklift operator to save up for the move.
Six months later, he became a supervisor of the night shift and as Rainbow expanded in the early 2000s Reitz kept moving up in the company. During the 16 years he's been at Rainbow, he's remained loyal through hard times. He, as well as other managers, has gone without annual pay raises because unlike other companies that give loyalty lip service, Reitz has seen it intimately at Rainbow.
On Dec. 26, 2002, the Pentagon put Reitz's National Guard unit on alert. He sent an email to Foster, explaining that he could be gone for up to a year and relayed his plan for delegation of shop-floor duties. Foster replied saying that his job would be waiting for him.
On Jan. 3, 2003, his unit was activated. By March, Reitz was in Iraq, serving as a sergeant with a transport company attached to the 1st Marine Expeditionary Force. One day in May, upon returning to base from a mission, his first sergeant said, "Call home." Via satellite phone, he found out his wife, Wendy, had given birth a week earlier to their first child.
After nine months in Iraq, Reitz came home to his newly expanded family and his job. However, his sergeant's pay had been roughly half of what he made at Rainbow, so the company paid the difference for the time he was gone.
These days, Rainbow is down to 125 employees, with Reitz supervising just the one shift. But he's always on the look out for how to keep the company competitive.
A few years after returning from Iraq, some Danish-made machines that reduced wood waste caught Reitz's eye at a trade show. After a trip to Europe to research the system, he sold Foster on buying the machines and Rainbow added the "Opti" line to its saw room in 2007.
Boards run one by one through a "Woodeye" machine that identifies every imperfection and then feeds them into the Opti-cut. The latter takes the readout data of each and, with a lightning fast ripsaw, excises every flawed segment, then sends the pieces down a conveyer.
"I can watch this all day," Reitz says as the odd-sized cutouts get kicked out as another belt takes them across the shop, then outside, to be ground into woodchips and resold.
The rest zoom on to a phalanx of Opti-stack machines, which aggregates them by standard lengths used in Rainbow designs. It was an upgrade, Reitz says, that helps keep the shop humming, even for this scaled-down workforce.
"When things are going good," he says, "it's the reinvestment in what you do that keep you going when things go bad."
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