Mattel's New Toy Story

Sure, CEO Robert Eckert would love a blockbuster toy. But he won't sacrifice steady growth to get it

Selling toys can be a fickle business, in which the fortunes of the mightiest corporations can abruptly rise or fall on the whims of customers too young to use a credit card, or even cut their own food with a knife. It's a business constantly in search of the next hot thing. Find it, and not only will kids all over the world be happy but so will shareholders. Guess wrong, and you're left with a pile of unsellable knickknacks.

For Robert A. Eckert, CEO of Mattel Inc. (MAT ), that's the wrong way to do business. He believes he can take a lot of the guesswork out by selling toys that make money year in, year out. If he's right, Eckert, 48, and holder of an MBA from Northwestern, will not only steady the notoriously volatile Mattel but maybe even show the industry a better way to operate.

Eckert's mission is to bring the stability and predictability of a consumer-products company to Mattel, the world's largest toymaker, with nearly $5 billion in revenues. In his 2 1/2 years on the job, Eckert, the former head of Philip Morris Cos.' Kraft Foods Inc. (MO ), is already partway to that goal. He has stopped the hemorrhaging that began under his predecessor, Jill E. Barad, who orchestrated the disastrous $3.5 billion acquisition of a computer-game outfit, Learning Co. A raft of cost-cutting measures and the divestiture of the money-losing Learning Co. have boosted profits--for now.

Although Mattel lost $431 million in 2000, net income should hit $459 million this year, while revenues--reflecting in part the absence of Learning Co.--will fall to an estimated $4.7 billion, from $5.6 billion in 1998, says earnings estimate tracker Multex Inc. And Mattel's stock price has doubled from a March, 2000, low of $9.

With the easy work done, however, Eckert is hoping that other changes he's implementing will keep Mattel--which still sells a perfectly shaped Barbie somewhere in the world every three seconds--on an even keel. He's striving for less dependence on costly licensed properties, better inventory control, and to develop more toys in-house. He is also looking for strong expansion overseas. Taken together, those initiatives constitute a major change. And they will yield, hopes Eckert, the steady growth an investor could expect at, well, a company like Philip Morris.

The downside of this conservative approach is that Mattel could miss the blockbusters that come along from time to time and cause toy company profits to spike. "This strategy increases the risk that Mattel could underproduce popular toys," says T.K. MacKay, an analyst at research firm Morningstar Inc. It's a risk Eckert is willing to take.

To see how Eckert's approach--call it hitting singles instead of swinging for the fences--is already paying off, compare the way Mattel handled Harry Potter toys last year with the way its archrival, Hasbro Inc. (HAS ), dealt with Star Wars items. Mattel produced far fewer items than it had made for past big movie tie-ins. That conservative planning paid off when Mattel sold 30% more than it had forecast--$160 million worth of Potter toys. Warner Bros. Inc., the licensor, was so pleased that it recently signed Mattel to a five-year deal for toys keyed to new movie and TV versions of such favorites as Batman.

Hasbro, by contrast, hitched its star four years ago to a blowout introduction of toys tied to the Stars Wars sequels. But licensing fees were costly, sales failed to meet grand expectations, and the company has been struggling with the fallout ever since. Hasbro says it is no longer interested in expensive licensing deals and is now emphasizing its core brands instead.

Eckert is adopting another big tactic of the consumer-goods producers: When a market matures in the U.S., push it overseas. That is why Mattel is coordinating simultaneous product releases worldwide and inscribing packaging with multiple languages. That boosts sales and saves the cost of serial introductions. A big advertising push for Mattel's Hot Wheels brand in Spain, for example, boosted the company's toy-car market share there by 50%. Overall, overseas sales were up 17% in the third quarter. Eckert's goal? Raise international to 50% of Mattel's sales, from 31% today.

True to his consumer-products-company roots, Eckert is also pushing more brand extensions. U.S. sales of Mattel's flagship product, Barbie, fell 6% in the first three quarters--though with $1.5 billion in annual sales, she is hardly on her last legs. So new Barbies continue to sprout. Indeed, the latest version, Rapunzel Barbie, is seen as the toy likeliest to be a big hit this Christmas, says PlayDate Inc., a toy marketing outfit.

Mattel is also shipping its toys--which are all made abroad--later in the year to ensure that they're on shelves during the peak holiday sales season. Last year many Holiday Barbies arrived as early as July and eventually had to be marked down. The recent West Coast port unrest put a crimp in that just-in-time inventory regimen. But Mattel isn't expected to alter the practice long-term.

The company is still looking for the next big thing--if it can find it cheaply. Through long-term contracts, or by spotting a hot property early, the toymaker can avoid ruinous bidding wars over licenses. Mattel snapped up the rights to Yu-Gi-Oh!, a popular Japanese monster-themed TV show before it became a hit, and a long-term licensing pact with Nickelodeon, signed in 2000, means it got first crack at rights to the popular SpongeBob SquarePants. Meanwhile, an in-house development group begun by Eckert, Project Platypus, has unfurled its first creation: Ello, a whimsically shaped construction set for girls.

Mattel has managed to nearly fall apart every decade. Founder Ruth Handler was forced out after an accounting scandal in the 1970s. Then came the collapse of the video-game market in the early 1980s, which nearly bankrupted Mattel, followed by the Barad era. Eckert's more measured approach may avoid giant fiascoes, but it still leaves him with a big challenge: figuring out how to wring consistent growth out of the toy market. While he has turned around Mattel, that larger task has just begun.

By Christopher Palmeri in Los Angeles

    Before it's here, it's on the Bloomberg Terminal.