Mattel SWOT

2. 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

3. 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

4. Sometimes Less Is More 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

5. To Infinity & Beyond! Goals for 2010 and Moving Forward: Gross Profit Margin: 50% Operating Margin: 15 to 20%

6. 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?

7. 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

8. 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

9. Who Are Mattel’s Traditional Competitors?

10. 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

11. However, You’re 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 children’s time

12. Children Leisure Time Perception Map *Healthy from standpoint of either educational or active

13. What Makes Up the Industry

14. 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”

15. Market Segmentation

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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.

22. 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

23. Put Simply, The World Is Flat When It Comes to Producing Toys

24. 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

25. STRENGTHS

26. Brand Recognition

28. #1 seller, often accounting for up to 50% of revenue

29. >1 billion Barbies have been sold in >150 countries

30. 3 Barbies sold every second

31. Barbie has taken on almost every possible profession

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

34. Two Hot Wheels cars are sold every second of every day

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

37. Originally sold in catalogs only

38. Mattel extended base by selling accessories in Walmart & Target

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

40. Popular with girls 7-12

41. Wholesome, educational image

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

44. Almost 30 brands

45. Acquired in 1993 as a wholly owned subsidiary

46. Brand trusted by parents around the world

47. Products are educational, safe, and useful

48. Innovative learning toys

50. US Market Share

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

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

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

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

58. Responsibility of marketing to children & privacy on websites

59. International environment: different legal systems & cultural expectations

60. 1997 – Global Manufacturing Principles

61. Principles related to safety, wages, adherence to local laws

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

63. Independent audits of manufacturing facilities every 3 yrs

65. Mattel’s Children’s Hospital at UCLA

66. The Mattel Family Learning Program

67. Team Mattel

68. Encouragement of Mattel employees to give back

69. WEAKNESSES

71. 18 yrs at Mattel, 5 yrs as COO

72. Largely credited w/ Barbie growth - $250M in mid-80s to $1.9B in 1998

73. Height of Mattel’s success

74. Stock price $27.75

75. Mar 1997:Tyco Toys

76. Matchbox Cars

77. Licensing Agreement w/ Sesame Street

78. Mar 1998: Record stock price $45.63

79. Jun 1998: Bluebird Toys

80. Polly Pocket

81. Jul 1998: Pleasant Company

82. American Girl Dolls

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

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

85. May 1999: The Learning Company

86. Leading entertainment & educational software company

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

89. COO

90. President of Fisher-Price unit

91. Head of Mattel Media

92. Founders of TLC

93. CFO

94. President

95. Feb 2000: Jill Baradresignes

96. Mattel losing $1.5M per day with TLC

97. Oct 2000: Sold TLC for just$27.5M!

98. One of the worst acquisitions in corporate history

99. Poor Due Diligence

100. Expected too much

101. Paid too much ($3.5B, 4.5x annual sales)

102. 3Q 1999 – expected $50M in profits; instead lost $105M

104. Social Media

105. Video Games

106. Electronics

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

108. DVD players, cell phones, laptops

109. Shortens the life cycle of products

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

112. 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).

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

114. In total, over 21 million toys recalled

115. Reduced net sales by $36M

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

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

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

120. Mattel hired VP of Corporate Responsibility

122. 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”

123. Gaming Consumer Loyalty Matrix HIGH RELEVANCE TO CONSUMER ONLINE CONNECTIVITY “COOL” FACTOR GENDER SPECIFICITY TARGET AGE GAME TITLES DIFFERENTIATION HIGH LOW

124. 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

125. 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

126. 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

127. THREATS

128. 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.

129. 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.

130. 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

131. 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.

132. CONCLUSION

133. Possible Strategies Moving Forward #1 – Stay The Course #2 – You’re Not Just In the Railroad Business Anymore

134. 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

135. 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

136. 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?