Mattel: Toy manufacturers need to grow up

Why Barbie and Hot Wheels need digital makeovers to keep pace with their increasingly tech savvy users.

If you learned the noise cows make from Fisher Price’s “The Farmer Says” wheel or ever had the misfortune of accidentally stepping on a Hot Wheel car, you’ve got Mattel to thank for that. For generations, Mattel’s products have been fixtures of our most formative years and have fueled imaginations while also serving an important didactic function. Such staying power, though certainly desirable, can also make a Company complacent, and slow to adapt to the latest innovative trends.

“The Business is no longer a simple process of producing an item, advertising on TV, and pushing it into stores.”                                                                                  – Dean Scarborough, Mattel Board Member (1)

By the early 2000s, Mattel was the largest toy manufacturer in the world. It achieved this through a mix of a large manufacturing scale to drive down unit costs, a healthy marketing budget and partnerships with major retailers to distribute its products (close to 40% of the company’s sales are to the Brick and Mortar retailers Walmart, Toys R’ US and Target) (2). However, within the last few years, Mattel was overtaken by its more agile and digitally adept competitors – Lego and Hasbro – which have done a better job of responding to structural changes in the children’s toys market, including:

  • Technology driven age compression: Listed as a key industry trend in Mattel’s 10-k, toy manufacturers are facing a phenomenon of “children getting older younger” and thus outgrowing toys at a younger age (3). A study by the University of Iowa found that half of toddlers can use an iPad when they are just one, with 90 per cent mastering the gadget by their second birthday (4). More time on Netflix and on an iPad means less time spent playing with a Mattel figurine.
  • Digital marketing: Until recently, nearly all of Mattel’s advertising spend was invested in television, and the company was late in using social media to create sticky audiences on popular platforms such as Facebook, Instagram, Twitter and Youtube (1). Furthermore, competitors are gaining an edge through techniques such as data targeting, which are breathing new life into traditional merchandising tricks. For example, Hasbro drives incremental sales by working with Criteo, an ad tech player, to push products towards the end of the purchase path on major retailers’ sites (5).
  • Brand building: As Hasbro has stated, “storytelling across media is becoming an increasingly important factor for driving brand awareness and successfully building brand.” (6) Along with fresh product reintroductions, brand management now entails creating digital content such as Youtube channels and online games, which can produce valuable customer insights. The latter has been a major growth engine for Hasbro in recent years.
  • Online shopping: E-commerce continuing to take a bite out of B&M retailing is trouble for suppliers that heavily rely on the channel to distribute products. Toys R’ Us’ bankruptcy in September 2017 caused Mattel’s sales to decline by 22% in its third fiscal quarter and according to the bankruptcy filing, Toys R’ Us owed $135mm to Mattel, double the amount it owed to Hasbro (7).
  • License deals: Toy manufacturers generate significant revenue through license rights to produce the toys of major franchises such as Start Wars and Marvel. In 2017, the movie theatre industry saw attendance at its lowest level in the last 25 years (8). With streaming services such as Netflix, Amazon and HBOGo competing with the traditional moviegoing experience, toy manufacturers need to think of new alternatives to replace this historical demand booster.

For failing to respond adequately to these changes, Mattel’s performance has suffered on an absolute and relative basis. In its last reported FY (2016), sales and operating income were $5.5bn and $519mm, which represent 15% and 49% declines from 2012 figures. During that same period, Lego’s and Hasbro’s sales grew by 62% and 23% respectively. The markets haven’t been kind to Mattel either. After reaching a high of $46.17 in September 2013, its stock was trading below $16 as of January 31, 2018.

In early 2017, Mattel hired a former Google Executive, Margo Georgiadis, as new CEO to usher in a digitally focused strategy. Part of the strategy calls for the introduction of interactive toys, games and live content for the company’s core brands, efforts which the Company has already launched with preliminary success. Georgiadis’ success in marrying Mattel’s analog past with a digital future will determine what role if any the company will have in the next generation’s world of play.

 

References

  1. Lev-Ram Michael, “Can a Tech Makeoever Save the Toy Industry?,” Fortune, September 22, 2017, http://fortune.com/2017/09/22/mattel-ceo-most-powerful-women/ , accessed January 30, 2018
  2. Stephanie Wissink, “Mattel, Inc.: Initiating at Hold; Getting All Dolled Up But It’s Complicated,” Jeffries, June 8, 2017
  3. Mattel, Inc. 2016 20-F (filed February 23, 2017), via EDGAR, accessed January 2018
  4. The University of Iowa, “How Toddlers Use Tablets,” https://now.uiowa.edu/2015/06/how-do-toddlers-use-tablets
  5. Heine Christopher, Hasbro’s Digital Transformation Into a Modern Toymaker and Advertiser” Adweek, June 4 2017, http://www.adweek.com/brand-marketing/inside-hasbros-digital-transformation-into-a-modern-toymaker-and-advertiser/, accessed January 30, 2018
  6. Hasbro, Inc. 2016 20-F (filed February 22, 2017), via EDGAR, accessed January 2018
  7. CBS News, “Bankrupt Toys R’ Us Spreads Gloom in Toyland,” https://www.cbsnews.com/news/bankrupt-toys-r-us-spreads-gloom-in-toyland/, accessed January 31, 2018
  8. The Verge, “Domestic Movie Theatre Attendance Hit a 25-year Low in 2017,” https://www.theverge.com/2018/1/3/16844662/movie-theater-attendance-2017-low-netflix-streaming, accessed January 31, 2018

 

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2 thoughts on “Mattel: Toy manufacturers need to grow up

  1. Really interesting example of a company failing to adapt to digital disruption that most of us can relate to! I think your first point on “children getting older younger” is particularly interesting, and a problem many industries will face. I’d be curious to hear your thoughts though on how you think Mattel should counter this trend, as I see them having a few options. Should they make their products more interactive to compete against the iPads and iPhones for a child’s time; make their products more educational (i.e., teaching kids the building blocks to learn to code) to attract to parents, who still own the buying decisions; or focus instead on partnering with the technology that is stealing more and more time by making phone apps, computer games, or partner with popular childrens shows for regular brand appearances to build their brand?

    You allude to many of these options throughout your post, but curious where you think the most viable option is!

  2. Interesting post on Mattel. I wonder if a solution for them might be to focus on developing their own brands and content. It sounds like they are relying heavily on licensing franchise IP, but one of their most successful and proprietary brands has been Barbie. Especially given the increased need for storytelling and better branding across platforms, that you pointed out, perhaps the best way for them to survive is to expand their portfolio away from other companies’ IP (e.g. Disney). This could also offer new ways of approaching digital marketing, which is extremely regulated in the children’s space.

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