MATTEL

An In-depth Look At The Worlds Largest Toy Company:

Past, Present, & Future

Kristin Borradaile
Dave Errigo
John Hall

Where to BeginThe 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
Handlers wife, Ruth, later became president and is
credited with establishing the Barbie line in 1959
1960: Mattel went public and was quickly listed in
Fortunes 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 Mattels senior management team
created a vision for the company: The Worlds
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 dont 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.
Thats the real value of our toys. Thats 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

Managements 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 Mattels

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

Industrys 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, Youre Not Just In

The Railroad Business
Sports
Competitive Toy
Manufacturers

Television
Internet

Video
Games

Mattel has to compete against any

other activity that will take up
childrens time

Children Leisure Time

Perception Map

*Healthy from standpoint of either educational or active

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 Mattels 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
Mattels three largest retail
customers account for
approximately 40% of
worldwide sales

Sales to Retailers for Mattel

(Listed in Billions)

$1.00
$3.20

$0.70
$0.50

Wal Mart
Toys R Us
Target
Other

Its 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 dont see the product as educational,
promoting an active lifestyle, or having a wow factor
they wont purchase it
In addition, if the parents dont 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

E
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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
Mattels 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
childrens 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

 Mattels Childrens Foundation

Mattels Childrens Hospital at UCLA
The Mattel Family Learning Program
Team Mattel
Encouragement of Mattel employees
to give back

N
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EA

W
S

E
S
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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 Mattels 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 (Mattels 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
technologically advanced at younger ages

more

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 Mattels 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

S
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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
Lets take a look at gaming Consumer Loyalty
Matrix

Gaming Consumer Loyalty Matrix

RELEVANCE TO CONSUMER

HIGH

LOW

ANTES

DRIVERS

ONLINE
CONNECTIVITY

COOL FACTOR

NEUTRALS

FOOLS GOLD

GAME TITLES

GENDER SPECIFICITY
TARGET AGE

DIFFERENTIATION

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

S
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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 Americas obesity epidemic

Economic downturn (less disposable income)

profit margins at Mattel and other traditional toy
manufacturers are being squeezed by macroeconomic factors largely out of their control

Mattel Threats
Mattels three largest retail customers account for
approximately 40% of worldwide sales.
WMT, TGT, and Toys 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.

L
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N
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Possible Strategies Moving Forward

#1 Stay The
Course
#2 Youre 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 youve always done
doesnt necessarily net
the same results
Youre 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: Youre 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!