Phonics hooked on new market

THE BALTIMORE SUN

On Wal-Mart's aisle of educational toys and children's learning materials, dozens of brightly packaged products and cartoon-infused titles vie for parents' attention and a slice of their pocketbooks.

There's the LeapFrog electronic writing pad, Dora the Explorer learning kits, SpongeBob SquarePants education games - and an old brand fighting to be new again. More than a decade past the peak of the backlash against "whole language" reading instruction that propelled Hooked on Phonics into infomercial ubiquity, Baltimore-based Educate Inc. is aggressively reintroducing the brand as an educational products line at mass retailers and discount clubs.

The move to revitalize Hooked on Phonics, which Educate bought last year for $13 million, is part of the company's broader plans to shift more of its business toward consumer products as its core tutoring business, Sylvan Learning Centers, is stumbling.

But Hooked on Phonics faces scores of competitors in a nearly saturated market. Spending on DVDs, CD-ROMs and other educational materials is declining, and some analysts worry about the pressures on retailers to cut shelf space devoted to educational products. Some analysts also are concerned about whether a company known for its tutoring business has the skills to manage inventory and maintain relationships with retailers.

Others question whether the Hooked brand is still relevant.

"One of the questions I have is 'Will the market favor the line of thinking: What is old is new again?'" said Jim McVety, a senior analyst with MarketingWorks, which specializes in education sales. "In the retail market, they're up against companies like LeapFrog, which touts the model of toys that teach whereas Hooked on Phonics is a tool that teaches."

Educate believes its strategy can work. The company wants to attract parents who might balk at spending an average of $3,325 on tutoring, hoping they will be lured by the nostalgia of the Hooked brand. It also is trying to reach children earlier in the learning process. Educate has found that two-thirds of parents bought educational materials before enrolling their children in its tutoring sessions, which begin in kindergarten.

The move into consumer products involves more than just Hooked on Phonics. Under a deal to co-produce the PBS children's series Reading Rainbow, Educate will license and sell Reading Rainbow-related DVDs and other materials in stores starting this summer. Moreover, the company is using its Sylvan brand to sell "School Success" kits to help elementary-age children with organizational skills and test-taking strategies. And next year, Hooked on Phonics electronic learning aids will be sold at major retailers under a partnership with a toy company.

"It allows us to not only deliver service but deliver products earlier in the life cycle and educational experience," said Kevin Shaffer, Educate's chief financial officer. "We see that as a way to better address the needs of all educational consumers, both in products and service."

Hooked on Phonics, created in 1987 by a father whose son was struggling to read, quickly gained national name recognition through heavy promotion on late-night airwaves. Its promises to help struggling readers by emphasizing the pronunciation of letters coincided with a cultural backlash, fanned by conservative talk radio, against the "whole language" method of reading instruction then gaining popularity in many public schools. "Whole language" emphasized teaching the meaning of words primarily through reading.

"The parents were terrified that their kids were not going to learn to read," said Robert E. Slavin, director of the Center for Research and Reform in Education at the Johns Hopkins University. "They thought they weren't getting the phonics. Hooked on Phonics filled something that the schools weren't filling."

The culture war eventually faded, with experts advocating a balanced approach to reading instruction that included phonics as one of several important components.

Hooked on Phonics' popularity also faded. After seeing sales peak at $100 million a year, the company filed for bankruptcy protection in 1995, a year after it settled Federal Trade Commission charges that it made unsubstantiated claims about being able to teach reading to children with learning disabilities. Sales had fallen to $50 million in the years before Educate acquired the brand, according to Hoover's Inc. and D&B; Corp.

Dorothy Strickland, a professor at Rutgers University who specializes in reading, said she can't speak to Hooked on Phonics' effectiveness but "virtually all educators in literacy subscribe to programs that not only build phonics but focus on comprehension as well."

To that end, Hooked on Phonics reading products combine teaching children to sound out letters and words with vocabulary and reading lessons, said Jinny Goldstein, vice president of education and strategy at Educate Products.

"It's very much in line with what experts say is the approach you should take to teaching your child to read," Goldstein said, adding the Hooked on Phonics also provides an opportunity for parents and children to learn together.

After acquiring the brand in January last year, Educate abandoned the infomercial-sales of Hooked on Phonics and repackaged it as a retail product line targeting specific grades and topics. It expanded to other subjects like handwriting and Spanish.

A limited number of Target and Wal-Mart storesbegan stocking Hooked on Phonics products last year. More locations will sell the brand starting in August, while new retailers such as Barnes & Noble have been added. Costco, Sam's Club and amazon.com also carry the products.

More than a dozen products have been released so far, and Hooked on Phonics is planning to introduce an additional 50 items this year.

Tom Hollerbach, president of Trahan, Burden and Charles, a Baltimore advertising and public relations firm, said Hooked on Phonics has a lot of potential in the retail market.

"Moving it into broader distribution, it's a smart move for them because it has good awareness," Hollerbach said. "People have heard of the brand, and if you make it easy to purchase it, it'll help gain appeal."

Educate says sales of Hooked on Phonics products last year exceeded its initial estimates by twofold, at $20 million. While its tutoring business hit some financial snags in the second half of last year, leading to a $4.7 million loss in the fourth quarter, Hooked on Phonics became the company's fastest-growing segment.

Educate estimates that Hooked on Phonics sales will grow by 50 percent this year.

But the market for supplemental education materials is dwindling. Spending on educational software, including DVDs and CD-ROMs, has been declining each year since 2000. Sales generated $128 million last year from nearly $496 million in 2000, according to the NPD Group, a market research firm.

Even with strong brand recognition, Hooked on Phonics is still the new kid on the retail block, analysts say.

"There's constant pressure on retailers to reduce the amount of space devoted to software," said Chris Swenson, director of software industry analysis for NPD Group.

Still, retailers like Wal-Mart say traditional educational products generate solid business.

"Hooked is a well-known brand that resonates with our customer base," said Wal-Mart spokeswoman Jolanda Stewart.

"It supports building of fundamental skill sets and we are able to provide it at a great value," Stewart said.

Hooked on Phonics executives say their education expertise separates the brand from the pack.

"Retail is always going to be competitive," said Chip Paucek, president of Educate Products. "There's a limited amount of shelf space and lots of people who want it. We're part of the mix now. I can't say enough about the quality of [our] products and brand."

A product development team - which includes people with experience in children's television and books, video games and electronic toys - works closely with teachers and education experts on curriculum and pedagogy.

Parents and children then test product samples, said Wendy Bronfin, vice president of product development and education.

Once a product is created, the printing, manufacturing and warehousing functions are contracted out.

Even though scores of companies are saturating the market, Hooked on Phonics and its competitors say business has not reached its peak.

Demand for supplemental education remains strong in part because of pressures for high academic performance and increasing competition to get into college, said Lara Starr, a senior brand manager at Riverdeep Inc., a private education software company that sells retail products under brands such as Reader Rabbit and Carmen Sandiego.

Ultimately, "competition is good because it focuses attention on the category and forces people to create better products," Starr said. "It makes us look at our products and offerings in a new way."

Still, managing inventory, distribution and retail relationships could pose challenges, said Kirsten Edwards, an education equity research analyst with investment bank ThinkEquity, which does not own shares in the company.

"It's outside their traditional expertise," Edwards said. "It's still a small portion of their revenue but they're investing in it in a big way."

Shaffer, Educate's chief financial officer, said the company has beefed up its operations team to make sure it can meet orders and properly manage the supply chain.

Careful planning and investment aside, the company believes in the strength of its brands.

"We think that brand will be particularly important on [education] products as consumers spend more and more," Shaffer said. "To have a trusted brand, whether it's Sylvan or Hooked on Phonics or Reading Rainbow, that's going to be helpful."

hanah.cho@baltsun.com

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