Mattel Losing Money As Manufacturing Costs Rise
Mattel is losing money as manufacturing costs in China rise, according to Bloomberg:
Sales of Barbie fell 12 percent in the U.S. as the 49-year- old doll faced competition from Hannah Montana and Ganz's Webkinz. Mattel, which recalled more than 21 million Chinese-made products in 2007, expects Chinese manufacturing costs to rise further. The yuan has climbed 10 percent against the dollar over the past 12 months, and inflation in China is near an 11-year high.
Also mentioned were the costs that Mattel incurred due to their lead and magnet recalls:
The recalls of Sesame Street vehicles with paint containing excessive amounts of lead and Polly Pocket dolls with magnets that may detach and get swallowed by children cost Mattel $110 million in 2007 for toy returns and legal, advertising and testing expenses.Ouch.
Mattel Posts Loss as Chinese Production Costs Rise (Update4) [Bloomberg]
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Good.
Another factor may be the increasing costs of moving all those Barbie dolls from China to the US. Diesel is going through the roof.
One of the silver linings to high price of oil may be that it starts making sense to move manufacturing back closer to your market.
Find a company in the US that DOESN'T face increasing manufacturing costs.
@Corydon: I think that logic is going to start applying towards a lot of things. If oil prices remain this high then just about every company is going to have to reassess how they do things. Any kind of production firm is going to be in trouble if they don't.
@Youthier: True but the point is balancing transportation costs vs. other costs. If oil gets higher then it may be cheaper for companies to produce locally (even with higher labor, raw materials, etc... costs) than to produce things elsewhere and ship them in.
dear mattel, i have an idea. move production back to the u.s. there's a manufacturing plant in murray, ky with your name on it! (really, there is - you closed it 7 years ago -> [query.nytimes.com] )
After reading the initial Mattel articles here I bought Hasbro stock.
They also make their toys in China but were less ornery about complying with federal laws. They managed to turn a tidy profit at the same time Mattel turned a loss.
So it's not the cost of shipping, or the rising cost of China's good, or weak demand; it's an inept corporate board that brought this.
I find it interesting that the claim is the yuan is climbing against the US dollar. Why not state it correctly? The US dollar is falling against the yuan. If China has inflation their currency value is decreasing. It is 10% higher because our money decreased an extra 10% in value than the yuan.
There is a considerable lack of trust in their product, brought on by their own lack of oversight.
I just finished reading a book called The Real Toy Story so this is a timely story. It really illustrates what tight margins the toy industry operates on.
Yeah, I can see how difficult it will be to make a profit when the cost of making a Barbie in China jumps from 25 cents to 50 cents.
@Corydon: Large container ships are one of the most efficient forms of transportation there is, per ton-mile. I doubt the cost of diesel fuel is actually a very large percentage of the per-doll price.
They wouldn't be losing money today if they had spent the money to do their jobs right yesterday.
Again, part of the issue is actually the value of the dollar going in the toilet.
The thing that jumps out at me is the Webkins competition. I don't know if anyone else's households have been caught up in the craze, but the sale of these stuffed animals is just the start - each one allows you to create a persona on the Webkinz website and play games, get money, buy stuff (in the online world, not the real world) etc. I'm concerned that my kids are getting addicted to this, they would play online for hours if I let them (which I don't).
The point is, though - Webkinz may be selling toys, but they're really selling online personas. Even if their toys were made of 100% lead, you could buy one, rip the online ID tag off of it, throw it away, and most kids would still have what they want - another online persona. Heck, they could sell the little ID tags and people would probably buy them.
If this is what's providing tough competition for Mattel, there's been a big shift in what kids want and they're in really big trouble, because no amount of retooling is going to fix the fact that they aren't selling what kids want.
@Orv: Still, the increase in the price of oil has been dramatic, and it's a cost that cuts into the money they save on cheap overseas labor.
Really, for all the money they save on labor, they're spending more on oversight and logistics, and their merchandise sits in a container ship for days not making money, not to mention the incaculable PR cost from the tainted toy fallout.
You know, I could've told Mattel years ago that manufacturing overseas probably wouldn't be worth the trouble, but they didn't bother to hire me as a consultant for some reason.
It isn't because Mattel has been selling lead-filled toys to toddlers, is it? Not even a teeny bit?
None of the others moms I know will buy their toys because they refused to recall stuff they weren't forced to last year.
There are so many alternatives to everything Mattel makes, including Barbie, that you'd think they'd get wise and not try to antagonize their customer base with comments about how they don't actually have to follow the law when it comes to child safety recalls.
To quote: "Mattel Chairman and Chief Executive Robert Eckert said in an interview that the company discloses problems on its own timetable because it believes both the law and the commission's enforcement practices are unreasonable. Mattel said it should be able to evaluate hazards internally before alerting any outsiders, regardless of what the law says."
Anyone heard anything recently about the supposed impending crash in the Chinese labor market as they run out of people to work like dogs for a couple years before they decide to return to their villages flush with cash? Like this was supposed to increase the cost of labor as they have a hard time retaining workers...just I never saw a date attached.
@Youthier:
Any company that doesn't have generations of pensions and health care costs. And with the falling dollar, relatively speaking, you need to have some SERIOUS problems with your actual country-specific (so NOT fuel) costs growing for your costs relative to other countries to be growing as well.
Costs a lot of money to "get the lead out."
mattel is like the new ms... but in terms of kids toys.
@GiltProto, I'm not defending the toy companies, but the industry faces a surprising number of problems to stay afloat. According to this book, the biggest one is kids getting older and playing with toys less, or rather, in the case of Mattel, Barbie being abandoned for Bratz by pre-teens.
Toys have to be constantly re-invented to remain profitable, but the toy makers also have to contend with distributers like Wal-Mart which forces them to bring the cost of the toys down. R&D, lawsuits and royalty payments to inventors also take up a huge chunk. Licencing toy brands/images is where toy companies seem to make up the difference. Anyway, read the book! The last chapter goes into great detail about the toy sweatshops in China, how workers get fined for tons of infractions and the awful working conditions. The workers are forced into debt and have no way of getting out.
If Matte Hell wanted to avoid playing dumb, they'd prevent the costs by paying for legit auditing of their manufacturing.
They cut corners by either ignoring their internal auditing of manufacturing in China, or by not having reasonable auditing practices to begin with.
Either way, the CEO is being hailed by their Kool-Aide drinking plastic dolls as someone who stepped up to some challenge.
If you are in a job, you avoid preventing a problem, and the problem you avoided emerges on your watch, you created the problem.
Instead of getting canned, you get praised for claiming to address the problem you basically created. While at the same time, funding a toy lobby buying off Congress to fight off a bill that would make lead paint illegal in toys.
Yes, they do lobby against any law that would ban lead paint.
I know, I know... I have no idea about how the practical ramifications of such a ban could lead to....
what's that you saw, Matte Hell?
oh right, trace amounts are normal in kid toys? Uh-huh.
Does this make sense? Only if you work for a multi-billion dollar company with a bargain sticker icon for a logo. And you grew up eating lead paint chips.
Buy American, pay more for quality toys, and pass the word.
China also enacted all sorts of new worker's rights laws. Medical care, pensions (really more like our social security), a minimum wage are all hitting Chinese manufacturers.
My friend manages a factory there. His costs have risen greatly. Plus, China's having a skilled labor shortage. Coupled with the rise in fuel, the rise of the Yuan vs. the dollar, it's a tough fight for some of the smaller manufacturers to stay in business.
A lot factories are moving to India and Vietnam now
What Mattel isn't letting on here is that the vast majority of the toys they recalled last year were recalled because of DESIGN FLAWS not Chinese manufacturing. In fact, a representative from Mattel made a public apology on Chinese TV addressed to China atoning for Mattel's PR making it seem like all the recalls were due to Chinese manufacturing. ([www.nytimes.com])
Chinese manufacturing costs are going up across the board due to huge price increases for raw materials (oil for plastic, steel for plastic injection tools, oil for air/sea transport, paper for packaging etc), new labor laws came into effect in China on January 1st including the institution of a 5 day work week, and (most importantly) inflation in China right now is at its highest rate in >10 years.
Every company that manufactures in China is feeling the pinch, but Mattel is getting thumped in particular because of their own incompetence.
The rise in manufacturing cost is a small price to pay so our nation's children aren't exposed to chemicals and lead. This is assuming Chinese manufacturers have fixed the problem.
However, raising prices for its toys is the last thing Mattel needs in this economy.