Mattel final 19_nov2010

MATTEL

Kristin BorradaileDave Errigo

John Hall

An In-depth Look At The World’s Largest Toy Company:

Past, Present, & Future

Where to Begin…The Rise To Fame

• Founded in 1945 by Harold “Matt” Matson & Elliot Handler. Their names smushed together make Mattel. They manufactured picture frames and doll houses

• Handler’s wife, Ruth, later became president and is credited with establishing the Barbie line in 1959

• 1960: Mattel went public and was quickly listed in Fortune’s list of the 500 largest U.S. Industrial companies

• By 1968: Hot Wheels was introduced • Mid 1970s: Mattel tried to get into electronic

games but failed because others entered the market at a cheaper price

The Bumpy Road (Past 10 Years)

• In May 1999, Mattel acquired “The Learning Company” for $3.5B in stock (4.5 times annual sales)▫ In 2000, Mattel sold The Learning Company for

a percentage of their future profits• Mattel closed its last American factory in

2002• On August 2, 2007 Mattel recalled almost one

million Chinese made toys because of potential hazard of lead paint

• On August 14, 2007 Mattel recalled over 18 million products because of the possibility of danger to children due to detachable magnets

Sometimes Less Is More

2008 2009

Revenue $5.92B $5.43B

Gross Profit

$2.68B(45.4%)

$2.72B(50%)

Operating Income

$542M(9.2%)

$731M(13.5%)

Net Income

$380M(6.4%)

$529M(9.7%)

• Cash flows increased from $436M in 2008 to $945M in 2009

• Improved execution across supply chain, realigned infrastructure, controlled costs and expenses (especially inventory)

• Resulted in increased profitability, stronger balance sheet, improved cash flow

• Used to lower debt, increase cash balance, and continue to reward stockholders with strong dividends

To Infinity & Beyond!

•Goals for 2010 and Moving Forward:

▫Gross Profit Margin: 50%

▫Operating Margin: 15 to 20%

Vision Today & Vision Tomorrow

• In 2000 Mattel’s senior management team created a vision for the company: “The World’s Premier Toy Brands – Today and Tomorrow”

• In 2010 they launched a new vision for the company: “Creating the Future of Play”▫What do you think of the different visions?▫Where do they take the company?

I Will Let You In On A Secret…

• “…we don’t just make toys. We create emotional connections that last a lifetime by encouraging children to stretch their imaginations, creating joy and allowing children to become lost in play. That’s the real value of our toys. That’s the value of play.” (Bob Eckert, Chairman of the Board & CEO, Annual Report 2009)

• Mattel is in the business of making kids’ leisure time fun and bringing magic back to their lives

Management’s Six Key Strategies

•Improve Execution of the existing toy business

•Globalize the brand•Extend brands into new areas•Catch new trends, create new brands,

and enter new categories•Develop people•Improve productivity, simplify

processes, and maintain customer service levels

Who Are Mattel’s Traditional Competitors?

Retailer Logo 2009 Revenue

Main Products

Mattel $5.4B Barbie, Hot Wheels, Fisher Price, UNO, American Girl,

Scene-It

Hasbro $4.1B Nerf, Pokemon, Transformers, G.I. Joe, Play-Doh, Monopoly, Risk, Scrabble, Trivial Pursuit

Lego $1.8B Lego Universe, Lego Star-Wars, Lego Kingdoms,

Bioncle, Lego Kingdoms

Leap Frog $379M Educational Products, Leap Pad, iQuest, Leapster,

Clickstart, Tag

Bandai Not Available Mighty Morphin Power Rangers, Final Fantasy, Sailor Moon, Mega Man, The Tick,

Teen Titans

Key Notes on Industry Performance

• Industry’s size is anticipated to contract over next five years▫ Forecast is predicting a 1.2% annual decline over the next

5 years to a total of about 680 producers in the US• Manufacturers were slow to respond to shifts in demand

which lead to a decline in sales• Cheaper imports have created intense competition within

the local market• Increased merger & acquisition activity within the industry

has lead to the demise of numerous smaller operators • Message is simple: toys currently on the market are no

longer meeting the demand for children▫ Toys need the “WOW” factor▫ Girls are now outgrowing Barbie by the age of eight,

rather than the target age of 10

However, You’re Not Just In The Railroad Business…

Competitive Toy Manufacturers

Internet

Video Games

Television

Sports

Mattel has to compete against any other activity that will take up

children’s time

Children Leisure Time Perceptual Map

Low Cost High Cost

HealthyUnhealt hy

VideoGames

Television

Sports

Facebook

Lego

LeapFrog

MattelHasbro

*Healthy from standpoint of either educational or active

Children Leisure Time Perception Map

What Makes Up the Industry

Stuck Between A Rock, A Hard Place,

and a Volcano About to Erupt• Manufacturers have an uphill battle. Have to satisfy

three customers:▫ The Rock: Retailers buy, stock, and advertise the

product▫ The Hard Place: Children ultimately have to find the

product enjoyable and it has to have repeatable “play value”

▫ The Volcano About to Erupt: Parents have to see the product as innovative, educational, or deem it as a “value.” In addition, parents will only buy products that reflect their family values.

• Will look at the profile of each of Mattel’s “customers”

Market Segmentation

The 100 Million Pound Gorillas

• Retailers control:▫ Purchases from

manufacturers▫ Shelf space and where

products are viewed▫ Advertisements to children

and parents that enter stores (coupons, in-store ads, etc.)

• Retailers promote their own private brands

• Mattel’s three largest retail customers account for approximately 40% of worldwide sales

$1.00

$0.70

$0.50

$3.20

Sales to Retailers for Mattel

(Listed in Billions)

Wal MartToys R UsTargetOther

It’s All About The Psycho….Graphics

•Lets take a look at the typical children that Mattel is trying to reach to and then we will profile a couple of “child customers”

•Children (0-14) make up 21% of American population and this is predicted to remain stable over the next five years

•Profile three of Mattels child segments▫Cyber Possum ▫Grease Monkey▫Fashion Queen Bee

Cyber-Possum

• Male or Female• Likes to be alone • Likes being inside • Quiet, Shy, Bashful• Use internet for social

interaction and purchases• Not very confident• 10-14 age group• Slightly overweight• Craves intellectual stimulation • Enjoys blokus products & video

games• Focus on advertising

interactive/electronic toys to this group along with internet games

Grease Monkey• Male• 8-12 Age Group• Likes simple toys• Likes being outdoors• Thinks the world wide web is

something a big spider makes• Aggressive and extroverted • Wants toys to reflect real

objects • In good physical shape• Craves adrenaline rush• Enjoys hot wheels products• Focus on advertising

cars/trucks, military action figures, and sporting figurines to this group

Fashion Queen Bee• Female• 6-10 age group• Loves fashion world and

dressing up• Enjoys outdoors and inside• Chatty and social • Views the internet as a chance

to increase social network• Craves living life of glamour• Enjoys Barbie and American

Girl Products • Focus on advertising barbie

products with various accessories, horses/ponies figurines, and polly pocket games to this group

If the Parents Dig It, They Will Buy It

• Mattel always has to keep the parents in mind as well.

• If the parents don’t see the product as educational, promoting an active lifestyle, or having a wow factor they won’t purchase it

• In addition, if the parents don’t see the company producing the product as a quality brand they may question the purchase

• So, at the end of the day the parents control the buying decision

• And again Mattel does have a social obligation to this customer segment (even if only for profit reasons). Parents tend to buy toys that reflect their familial values.

Key External Drivers • Per capita disposable income

▫ Households with higher levels of disposable income generally spend more on toys and games

• Downstream demand from hobby and toy stores▫ Regarded as specialist retailers for these goods

• Number of children (0 to 14 years)▫ Age distribution of a region affects it demand for toy, doll

and game products• Downstream demand from department stores

▫ Due to sheer size and range of products they offer, many regard these stores as main customer for toy manufacturers

• Import Competition▫ Despite often inferior quality, such toys have become

popular among consumers due to lower prices and extensive varieties

▫ See graph on next page

Put Simply, The World Is Flat When

It Comes to Producing Toys

Industry Key Success Factors

• Establishment of Brand Names▫Brand name, reputation and image are

important▫Agreements to supply major companies with

these attributes are equally important• Having a diverse range of clients• Ability to control stock on hand• Effective cost controls• Ability to quickly adopt new technology• Must comply with required product

standards

STRENGTHS

Brand Recognition

• Created by Mattel in 1959

• #1 seller, often accounting for up to 50% of revenue

• >1 billion Barbies have been sold in >150 countries

• 3 Barbies sold every second

• Barbie has taken on almost every possible profession

• Extreme brand recognition, other doll brands are referred to as “barbies”

• Introduced by Mattel in 1968

• Over 15 million boys 5-15 are avid collectors (avg 41 cars each)

• Two Hot Wheels cars are sold every second of every day

• Together, Hot Wheels and Barbie generate about 65% of Mattel’s profits

• In 1998, Mattel acquired Pleasant Company

• Well-known line of historical dolls, accessories, books, magazines, movies, clothes

• Originally sold in catalogs only

• Mattel extended base by selling accessories in Walmart & Target

• Recent opening of shops in NYC, Chicago, LA, Atlanta, Dallas, Boston, Minneapolis

• Popular with girls 7-12

• Wholesome, educational image

• Dolls live during specific times in American history and face hardships while maturing into young adults

• Controversies exist over some characters

• Created almost 5,000 different toys since the 1930s

• Almost 30 brands

• Acquired in 1993 as a wholly owned subsidiary

• Brand trusted by parents around the world

• Products are educational, safe, and useful

• Innovative learning toys

• Character-based tools through licensing agreements w/ Sesame Street, Disney, and Nickelodeon

Strong Values

US Market Share

Barriers to Entry• Most significant: time &

capital required to establish a new brand name

• Need to invest a lot of time & money in order to persuade consumers to shift away from strong brand names.

• The level of market share already controlled by existing players is a key deterrent.

• Economies of scale: large production runs typically required for toys, favors large established companies

• Development of new products often requires substantial changes to existing machinery and production processes

Licensing Agreements

Corporate Responsibility• Taken steps to strengthen commitment to business ethics

• As core products are designed for children, Mattel is sensitive to social concerns about children’s rights

• Responsibility of marketing to children & privacy on websites

• International environment: different legal systems & cultural expectations

• 1997 – Global Manufacturing Principles

• Principles related to safety, wages, adherence to local laws

• Manufacturing facilities must favor business partners with ethical standards comparable to Mattel

• Independent audits of manufacturing facilities every 3 yrs

• After 2007 recalls, hired VP of Corporate Responsibility

• Mattel’s Children’s Foundation

• Mattel’s Children’s Hospital at UCLA

• The Mattel Family Learning Program

• Team Mattel

• Encouragement of Mattel employees to give back

WEAKNESSES

Mergers & Acquisitions• Jan 1997: Jill Barad CEO

• 18 yrs at Mattel, 5 yrs as COO• Largely credited w/ Barbie growth -

$250M in mid-80s to $1.9B in 1998• Height of Mattel’s success • Stock price $27.75

• Mar 1997: Tyco Toys• Matchbox Cars• Licensing Agreement w/ Sesame

Street

• Mar 1998: Record stock price $45.63

• Jun 1998: Bluebird Toys• Polly Pocket

• Jul 1998: Pleasant Company• American Girl Dolls

• Sep 1998: Mattel announces 1999 earning growth would be 9-12% instead of the expected 18%

• Dec 1998: Mattel announces revenues will be $500M and earnings will be 30% less than expected

• May 1999: The Learning Company

• Leading entertainment & educational software company

• Mattel looking to enter the high-tech & interactive media segment

• One of the worst acquisitions in corporate history

• Poor Due Diligence• Expected too much• Paid too much ($3.5B,

4.5x annual sales)

• 3Q 1999 – expected $50M in profits; instead lost $105M

• 4Q 1999 – expected earnings to be 70-80 cents per share; instead lost $184M (primarily due to TLC)

• 1999 – 2000: steady stream of executive departures:

• COO• President of Fisher-Price

unit• Head of Mattel Media• Founders of TLC• CFO• President

• Feb 2000: Jill Barad resignes

• Mattel losing $1.5M per day with TLC

• Oct 2000: Sold TLC for just$27.5M!

Lack of Diversification• The popularity of electronic and interactive toys has contributed to

a decline in the traditional toy market (Mattel’s core business)

• Social Media

• Video Games

• Electronics

• Children are outgrowing toys at an earlier age and demanding more adult-like merchandise

• DVD players, cell phones, laptops

• Shortens the life cycle of products

• This trend is expected to increase as children become more technologically advanced at younger ages

• Mattel is seen as behind in electronic toys and educational toys

Loss of Sesame Street Licensing Agreement

• At the end of 2010, Sesame Street licensing agreement with Mattel expires, and has been granted to Hasbro

Recent Product Recalls• In 2007, Fisher-Price recall due to lead paint in toys

• A contractor in China subcontracted the painting of toys to another vendor. That vendor used paint from a non-authorized supplier (a violation of Mattel’s policies).

• Also in 2007, additional product recalls due to magnets which could come loose and be ingested

• In total, over 21 million toys recalled

• Reduced net sales by $36M

• Consumer confidence in the safety of toys purchased for young children was tarnished

Response to Manufacturing Issues

• At first, Mattel blamed Chinese subcontractors for the huge toy recalls

• The company later accepted a portion of the blame, but still said Chinese manufacturers were largely at fault.

• Mattel faced criticism by many consumers for denying responsibility and placing much of the blame on China

• While Mattel audited its contractors, it did not audit the entire supply chain, including subcontractors.

• Mattel hired VP of Corporate Responsibility

• Made changes to auditing procedures, including testing their products themselves instead of relying on subcontractors

OPPORTUNITIES

Mattel Opportunities

•Educational Products▫Perception Map identified whitespace for

Mattel▫Less reliance on retailers as the

distribution network expands▫Hospitals, Day Care Centers, Schools.

•M&A with video games companies▫Beyond Radica▫Let’s take a look at gaming “Consumer

Loyalty Matrix”

Gaming Consumer Loyalty Matrix

ANTES DRIVERS

NEUTRALS FOOL’S GOLD

DIFFERENTIATION

RE

LEV

AN

CE

TO

CO

NS

UM

ER

LOW

HIGH

ONLINE CONNECTIVITY

GAME TITLES

“COOL” FACTOR

GENDER SPECIFICITYTARGET AGE

HIGH

Mattel Opportunities

• Global markets (still not completely tapped by Mattel)▫ Approximately 50% of sales are international

The further the dollar falls, the more Mattel makes by selling its products abroad.  Global sales partially insulate the company against a U.S. recession.

▫ Where could they grow? China and India China's toy market is fragmented, although Mattel estimates it is one of the

leading players there. Following its entry into China just eight years ago, Mattel now has about

40 licensing partners. China is a double-digit growth market

• Improved production capabilities▫ Cloud computing▫ Focused factories with just in time inventory management▫ Value engineering & 80/20 Principles

• Barbie movie / American Girl▫ Follow Hasbro Blueprint▫ Sales kick back

A Game Changing Product for Mattel

• An interactive toy for boys and girls that integrates social media, community and most important physical activity

• The first in a line of physical activity companions that connect to social media through usb connection.

• Combination of a “doll” and “Digiwalker” pedometer that is then registered through company website

• Digiwalker Doll clips onto waistband and logs caloric daily output

Meet “Hoppin Henry” & “Va Amiga”

• Outer shell of doll is a Frog boy for “Hoppin Henry” or Frog girl for “Va Amiga”

• Sync with website for weekly, monthly and annual totals

• Increase in caloric output increases Doll “health”

• Connect through social media sites to establish guilds and teams

THREATS

Mattel Threats D.E.• Rising Raw Material Costs

▫ fluctuations in oil prices affect input costs for making plastic-based toys

▫ A considerable amount of Mattel's manufacturing cost comes from plastic resin, which accounts for approximately one-quarter of cost of goods sold.

▫ Resin prices have soared because of a rise in prices of its key component: petroleum. Oil prices skyrocketed in 2007-2008 before peaking in August

2008, when price began to fall drastically. These price movements caused the price of manufacturing

plastic-based toys rise considerably in 2008, hurting Mattel's profit margins (gross margin down to 45.4% in FY08 from 46.5% in FY07)[1][4], but if the price of oil remains low, Mattel's costs would be significantly lower allowing the firm to earn higher profit figures.

Conversely, a return to rising oil prices would put downward pressure on Mattel's profit margins.

Oil Volatility = Potential Rise in costs (Plastics/Distribution)

• Rising Distributions Costs▫ Fluctuations in oil prices affect distribution costs for transporting

products from factories in Asia to other parts of the world.

Mattel Threats • Imports from Asian countries (wages, fact

others can copy) – world is flat• Age compression phenomenon

▫Girls are now outgrowing Barbie by the age of eight, rather than target age of 10

• Rise in push for physical activity, could decrease toy sales ▫Because of America’s obesity epidemic

• Economic downturn (less disposable income)▫profit margins at Mattel and other traditional

toy manufacturers are being squeezed by macro-economic factors largely out of their control

Mattel Threats

• Mattel’s three largest retail customers account for approximately 40% of worldwide sales. ▫ WMT, TGT, and Toy’s R Us have considerable

leverage over Mattel when negotiating prices.▫ Retailers also produce toys

• The biggest concern is Internet and Videogames▫ Hasbro (2nd in revenue) is the obvious threat, but

……▫ Toy sales in the U.S. have been growing at a very

low rate for the last few years. In fact, in 2008 toy sales in the U.S. fell 3%. This is mainly because of the shift from traditional toys towards video games.

▫ In 2008, sales of video game software units (actual games as opposed to consoles) grew 15% in the United States and 26% in the United Kingdom.

CONCLUSION

Possible Strategies Moving Forward

•#1 – Stay The Course

•#2 – You’re Not Just In the Railroad Business Anymore

Strategy #1: Stay The Course

• Advantages▫Use their buying power

to price out competitors▫Leverage known brands ▫Cost cutting techniques

and operational efficiencies have improved profit so far

▫Continue to maintain licensing agreements to corner the market

• Disadvantages▫ Chaos Theory: Doing

what you’ve always done doesn’t necessarily net the same results

▫ You’re either innovating or getting left behind

▫ Age Compression of children is causing the industry to change

▫ Flat World allows others to copy toys easier

Strategy #2: You’re Not Just In the Railroad Business Anymore

• Advantages▫ Diversify business into

high growth areas (video games, educational interactive)

▫ Reduce impact of core business and brands shrinking

▫ Opens company up into other leisure time activities, results in new business opportunities and markets

• Disadvantages▫ Not prime on certain

technologies▫ Certain ventures

will be risky due to the unknown factor

▫ Could dilute the brand

▫ Excessive costs while trying to move certain products from R&D to market

Mattel and “The Future of Play”

•Circling back to one of the original slides•Which strategy should Mattel follow?•What does “The Future of Play” mean to

the class? •And where does that statement leave

Mattel?

THANK YOU!