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Mattel (MAT)Stock (Consumer Products Industry, Toys & Games Industry, Media & Entertainment Industry)
 In addition to the threat from video games, Mattel and other traditional toy manufacturers are seeing their margins get squeezed by macro-economic factors largely out of their control. The retail landscape for toys has shifted and specialty retailers such as Toys'R'Us and FAO Schwartz have faced bankruptcies as they were slow to adopt to the shift in kids' entertainment towards video games. Behemoth discount retailer Wal-Mart (WMT) is currently the largest retailer of children's toys in the U.S., a shift which has pressured Mattel's margins. Compounding the retail trends is the rise in petroleum prices, a commodity which is used to create plastic resins for toys (25% of the cost of goods, or COGS) and transportation (about 7% of COGS) from offshore manufacturers. On the positive side, Mattel has made significant moves to get into the electronics game industry through its acquisition of Radica Games in October 2006. At the same time, Mattel is relatively well-positioned to leverage its significant brand portfolio (e.g., Barbie, Hot Wheels) to create compelling new toys in an increasingly hit-driven industry, where new toys can become immensely popular in a short period of time. Finally, it is a leader in the infant and youth segments with its formidable Fischer Price division; these consumers have been more insulated from the rise in video games.
[edit] Company Overview[edit] HistoryMattel was founded in 1945 by Harold Matson and Elliot Handler (hence “Matt-El”) out of a garage workshop in California. The company started as a picture-frame manufacturer but Elliot soon developed a side business of making doll house accessories out of picture-frame scraps. Harold Matson sold out of the business while Handler, encouraged by the success of the doll furniture, turned the company’s focus on toys. In 1959, Mattel introduced the Barbie product line which went onto become one of the most successful brands in the toy industry and remains a popular product even today. Mattel went public in 1960 and throughout the 60’s grew through acquisitions of smaller toy manufacturer. In 1968, Mattel created the first Hot Wheels products which, over the years, became another very successful brand. During the 90’s Mattel merged with the Fischer-Price (1993) company and acquired Tyco Toys (1997), the third largest manufacturer of toys at that time. [edit] Business Divisions Mattel produces a wide-range of globally recognized toy products which it markets both through retailers and by direct sales to consumers. Mattel groups its products into three categories: [edit] MattelThis category includes most of Mattel's traditional products and also holds licensing agreements from other companies such as Disney (DIS), Disney's Pixar, Time Warner (TWX), and DC Comics.
[edit] Fischer-PriceThis category is geared towards younger children. The core brands within this category include: Fischer-Price, Little People, BabyGear and View-Master. The category includes licensed products from Nickelodeon (Dora the Explorer and Go-Diego-Go), Sesame Street product and Disney (Winnie the Pooh). [edit] American GirlAmerican Girl operates as a subsidiary of Mattel and sells most of its products directly to customers. Its products include a range of books, dolls, clothes, toys, and accessories for girls aged 3 and up. American Girl operates only in the U.S. [edit] Sales[edit] Domestic vs. InternationalMattel divides its business into two primary sectors: Domestic/North America and International. Mattel products are sold directly to retailers in most European, Latin American and Asian countries; in Australia, Canada and New Zealand, its products are sold through agents and distributors (Mattel has no direct sales presence). Except for American Girl, which is not sold internationally, Mattel offers the same products in both domestically and abroad. It does tailor product mix to regional fads and the quality is varied due to price sensitivity. Mattel's international sales account for 49% of its gross sales in 2007. Europe, which accounts for 25% of sales, is Mattel's largest market outside of North America. From 2006 to 2007, domestic sales decreased by 0.9% while International increased by 17% over the same time period. Latin America is a particularly fast growing region, with sales increasing by more than 23% in 2007. [edit] SeasonalityMattel's business is highly seasonal as a large percentage toy sales occur during the holidays (the third and fourth quarters of Mattel's fiscal year). This seasonality adds risks to Mattel's business since production lags means that the company has to anticipate consumer demand before peak seasons. The company admits that this often leads to overproduction of unwanted toys and underproduction of popular products. Moreover tighter inventory control by retailers in recent years means that Mattel has to maintain a significant inventory before peak seasons. These pressures have negatively affected Mattel's margins. [edit] ManufacturingMattel manufactures most of its toys outside of the U.S. Apart from utilizing company-owned facilities and third-party manufacturers, Mattel also purchases products from third-party entities that develop and manufacture certain products. Mattel owns facilities in China, Mexico, Indonesia, Thailand and Malaysia which account for roughly half of Mattel's production. Third-party manufacturers located in several other countries account for the remaining half of volume. Mattel's ownership of facilities offers flexibility in manufacturing and delivery of its products. [edit] Key Internal Drivers[edit] BarbieBarbie is an iconic American toy figure and perhaps Mattel’s most important brand. Barbie sales account for about 25% of Mattel’s gross sales and generate disproportionately high portion of overall margins (about 35%). Mattel owns the Barbie brand and does not have to pay any royalties and furthermore, the company derives licensing revenues from the franchise. However, the Barbie brand has been facing difficulty for some years now. Between 2002 and 2006, sales of Barbie products gave steadily declined.  In addition to an overall decrease in demand for dolls, Mattel faces stiff competition for its Barbie brand for the first time in its history. In the past, fashion dolls have tried and failed to gain traction in the market. However, MGA entertainment’s fashion doll, Bratz, was introduced 6 years ago and generates about $1.5 billion in annual sales. Industry observers believe that Bratz is partly responsible for Barbie's decline. Mattel has been trying desperately to revive Barbie and has implemented several programs, including the popular Barbie.com website (4 million unique users per month) and three of Barbie direct-to-videos(DTV), each of which were in the top 20 DTVs for 2005. [edit] Fischer-PriceSince Fischer-Price normally targets younger children, its products have been less affected by the slowing growth of the toy industry. Fischer-Price has maintained leadership in the preschool segment and, as demonstrated below, has realized steady increases in revenues. The category includes some enduring product lines such as Elmo and Winnie the Pooh, both of which have generated steady sales for Mattel over the years.  [edit] Trends and Forces[edit] Video Games vs. Traditional ToysToy sales in the U.S. have been growing at a very low rate for the last few years. This is mainly because of the shift from traditional toys towards video games. The traditional toys market grew by 0.3% while video games grew by 19% from 2005 to 2006. Mattel leads both action figures and dolls segments, both of which decreased in 2006: action figure segment shrunk by 9% while dolls fell by 1%. The larger decrease for action figures may be due to the male skew for video games. The only segment in the traditional toy industry that realized strong growth was Youth Electronics. Mattel's recent acquisition of Radica should help it tap further into this segment. The Infant and Playschool segment also grew slightly (2% in 2006) and has not been much affected by the increase in demand for video games. Mattel has a strong presence in this segment, mainly through its Fischer-Price products. [edit] Rising Petroleum PricesA considerable amount of Mattel's manufacturing cost comes from plastic resin, which accounts for approximately one-quarter of cost of goods sold. In recent years, resin prices have soared because of a rise in prices of its key component: petroleum. Most observers believe that prices of crude oil are unlikely to reduce any further. Mattel is also more directly affected by fuel energy prices since it affects transportation costs, which account for around 7% of cost of good sold. Mattel does utilize various hedging strategies to keep its raw material costs under control, but further increases in petroleum could materially hurt the company's margins. Because of rising costs of commodities like resin, Mattel's manufacturing costs increased drastically in 2007 and 2008.[1] As a result of these higher costs, Mattel's Q3 2008 net profit increased only 1% on the tails of a 6% increase in sales.[1] In November 2008, the company announced that it was cutting 1,000 jobs worldwide because of higher manufacturing costs and the declining consumer spending following the 2007 Credit Crunch.[1] These positions represent 3% of its worldwide labor force and about 8% of its management staff. [edit] The Retail LandscapeThe retail environment has changed greatly in recent years. Specialty retailers such as Toys'R'Us and FAO Schwartz are facing difficult times. The latter has already been in and out of several bankruptcies and Toys'R'Us is facing severe crisis and has been on the brink of bankruptcy. Part of this change has been driven by the slow growth of the traditional toy market and the rapid rise of video games, a category that toy stores were slow to adopt. Instead, the video game market became dominated by electronic retailers such as Best Buy (BBY) and Circuit City (CC). Mattel's sales to Toys'R'Us decreased in 2007 to $0.7 billion from $0.8 billion in 2006. Compounding the woes of toy stores is that growing dominance of large discount retailers such as Wal-Mart (WMT) and Target (TGT), both of which have captured a significant chunk of both the traditional toys market and the video game market. Wal-Mart--Mattel's largest customer as well as the largest toy retailer in the U.S.--has maintained a 20% share of the Mattel's revenues. This shift in retail environment may be bad news for Mattel in the long-run. Not only does Wal-Mart and Target offer less shelf-space to Mattel, they are also likely to be less enthusiastic than specialty retailers in their attempts to promote a certain toy. Tighter inventory control by these retailers is already affecting Mattel's margins. Finally, these large retailers have resources to develop their own less expensive private label toys and offer better shelf space. [edit] Competition Mattel is the largest manufacturer of toys in the world and maintains a 16% share of a $35 billion global market. It is followed by Hasbro (HAS)--the manufacturer of Monopoly, Mr. Potato Head and Transformers--which has a market share of 11%. Mattel and Hasbro have different core segments--Hasbro makes a large of portion of revenue from board games (Clue, Monopoly and Scrabble) while Mattel’s core business is dolls (Barbie). On the other hand, the two companies compete fiercely over certain segments, as Hasbro's Playskool goes after the same younger audience as Mattel's Fischer-Price division. Mattel’s size and portfolio allows it to enter deals that are beyond the reach of smaller players, allowing the company to gain more shelf space with retailers such as Wal-Mart and Target (TGT) and obtaining licensing rights of popular films from Warner Brothers. Both Mattel and Hasbro also enjoy higher margins within the toy industry due to its portfolio of immensely popular toy brands. Finally, their large sizes afford both companies economies of scale in production and logistics.
 Competition among toy manufacturers has intensified in recent years mainly due to shorter life-cycles of individual toy products. The phenomenon of children outgrowing toys at a younger age and increased use of technology mean that toy manufacturers are forced to develop newer products rapidly. Mattel’s size makes it better in coping with this change. Since the market for toys is hit-driven--certain toys gain immense popularity in a short-span of time-–Mattel, being the larger company, has a greater chance developing the latest hit. The recent acquisition of Radica, which had sales of $163 million in 2005, allows Mattel to enter the fast growing youth electronics segment. This category grew by 22% from 2005 to 2006 and has an estimated total market size of $1.1 billion. This acquisition positions Mattel to compete directly with Hasbro's Tiger Electronics and JAKKS Pacific (JAKK).  
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