Robert Eckert, chief executive of Mattel, the world’s biggest toy marketer, remained relatively sanguine as the U.S. economy weakened last year. He knew that, historically, even the most cash-strapped adults have been inclined to spring for a Barbie doll or a Hot Wheels car for their kids at the holiday season, when as many as half of all toys are sold. “People will self-sacrifice if they have to, but they don’t want their children to realize that times are tough,” Eckert notes.
Yet when the global economy went into free fall in the fourth quarter of last year, following the collapse of Lehman Brothers Holdings, Eckert finally felt his share of angst. Industry numbers show that domestic toy purchases fell 5 percent from the same period of the previous year. “I remember thinking, ‘This is the worst number I’ve ever seen. Could the whole industry really be in trouble?’” Eckert, 54, says.
He moved quickly to gird the company, based in El Segundo, California, for the slowdown. Eckert laid off almost 1,000 people late last year and cut prices on many toys before the holiday rush. Still, the recession hit hard. Sales declined by 11 percent in the fourth quarter from the same period a year earlier, to $1.94 billion, and earnings tumbled 46 percent, to $176.4 million.
Toy companies tend to do badly after the holidays, but this year’s first quarter was particularly gruesome. Mattel’s revenue dropped 15 percent, to $785 million, reflecting decreased toy sales and the translation effects of a stronger dollar. International sales, which generate roughly half of the company’s revenue, were down 23 percent, with the dollar accounting for 13 percentage points of the decline. Mattel posted a $51 million loss, compared with a year-earlier loss of $46.6 million. Its stock closed at $15.79 on June 17, down from a 52-week high of $21.95 on August 11.
The company did receive one boost this spring, when a federal judge upheld a 2008 ruling that awarded Mattel $100 million in damages and gave it control of rival MGA Entertainment’s Bratz line of dolls, which was based on drawings by a former Mattel employee.
Eckert met recently with Institutional Investor Contributing Writer Claudia Deutsch and discussed how he plans to manage his way through the economic downturn and other challenges facing the company.
Institutional Investor: Do you see any signs that the current recession is abating?
Eckert: I won’t say the industry is optimistic, but we’re hopeful that the economy can hold at the current level between now and the end of the year. We’re not seeing positive news, but we’re finally seeing the absence of constant negative news. For a couple of months, all we kept seeing was more bad news, record unemployment, record profit declines — I’m hopeful that we’ve leveled off. Long term, history has proved that recessions end.
How important was the Bratz victory?
Winning that case was important on principle — the people who design toys here should know that we will protect what is ours. If you design a toy here, we want to make sure that this company gets the benefit.
Iconic brands like Hot Wheels and Barbie have served Mattel well over the years, but they must seem old hat to today’s Internet-savvy kids.
Are you developing a Barbie equivalent for the Internet age?
In fact, the advent of digital games and the Internet has broadened Barbie’s appeal. Our sweet spot used to be five-year-olds, because as girls got older, they didn’t want to be caught playing with dolls. But now we’ll get eight-year-olds or even older girls visiting Barbie.com and Barbiegirls.com and playing with the doll online. So the Internet has let us double Barbie’s life span with girls.
Boys can now play with Hot Wheels online too. Even Fisher-Price, our line for infants to four-year-olds, has gone interactive. You can plug its newest exercise bike for three-year-olds into a TV set, and as kids pedal they can also play learning games on the video screen.
In 2007, Mattel had to recall some toys that were made in China, because they turned out to be unsafe. Yet you still do most of your manufacturing in China, Indonesia and Thailand. Why should parents believe that it won’t happen again?
We reorganized the company in 2007 for just that reason. We have teams of safety engineers who report directly to me. We created the job of senior vice president for corporate responsibility, who also reports to me. And we’ve strengthened our testing protocols and added more redundant checks. It’s a lot harder for anyone to circumvent our rules for how you make a Mattel toy, and it’s a lot harder for a defective toy to get through our system.
Mattel owns and operates many of its plants in China. Since you feel so confident of your testing protocols, wouldn’t it be easier, and even cheaper, to simply hire local manufacturers to make toys?
It’s a question of volume and a toy’s life span. We’ve made Barbies for decades — we’re way up the experience curve. And we make maybe 600 million Hot Wheels cars every year, so we know how to design and manufacture them at highest quality standards at lowest costs. But we’ll usually use outside plants to make new toys. It’s a fluid system — we constantly review each toy to see if it should be made in a Mattel plant or a vendor plant.
You were running Kraft Foods when Mattel asked you to be its chief in 2000. Why didn’t Mattel promote from within, or at least tap another toy industry executive?
Mattel had fallen on hard times. It had spent $3.5 billion to buy an educational software company called the Learning Co. It lost lots of money. The board held existing management responsible for that decision and was ready for change.
Kraft and Mattel are in incredibly similar businesses. Both capitalize on the relationship between moms and kids — in one case through nutrition, in the other through education and entertainment.
So what needed to be fixed at Mattel, and how did you fix it?
Well, we immediately sold the Learning Co., for virtually nothing. And we got rid of Mattel’s cultural silos. The company had been structured so that groups were competing instead of cooperating. There was a manufacturing organization that worried about processes, a distribution group that worried about shipping, a sourcing organization that bought toys or parts from other plants and so on. You couldn’t make a fully informed decision on whether to make or buy a toy, for example, because manufacturing and sourcing had different interests. We now have a system where a group is responsible for making and distributing specific toys, not carrying out specific functions.
And we instituted some real management training and development programs. I guarantee that when I finally leave, the board will have good internal candidates to consider.
Mattel has always emphasized the value of good corporate citizenship. Are philanthropic giving and the green movement luxuries that Mattel can afford in this economy?
As I’m talking to you, I’m drinking plain tap water from a cup that says it’s made of compostable corn. The difference is, I had to consciously change my behavior. The younger generations fully understand the interplay of the planet and profits. The point is, greener can be cheaper. We’ve gotten rid of a lot of excess packaging, and we’ve gotten more efficient at utilizing space in shipping containers so that we can ship more toys per trip. We just remodeled our design center. It’s now lit by skylights. It’s a friendlier place to work and a lot more fuel-efficient.
Have you had to cut back on philanthropy?
When I joined this company in 2000, we were losing $1 million a day and we still fulfilled a $25 million commitment we’d made to the UCLA medical school. Tough times come and go, but we don’t renege on our commitments. Our rule has traditionally been to give 2 percent of pretax profits to charity. That won’t be a huge number this year, so we’re relaxing the rule to maintain our giving levels. Charities have told us that if we can be predictable, they can build infrastructure around us, so maybe we’ll change the rule to 2 percent of profits over the past five years or so.
And what about executive pay? Has Mattel relaxed the rules on that as well?
My compensation dropped 38 percent in 2008. I don’t have a company car anymore, and Mattel didn’t pay bonuses to executives. Mattel walks the walk when it comes to pay for performance.
