Head ten minutes south of LAX on the 405, exit at El Segundo and you'll blunder upon a 200,000-square-foot concrete bunker lurking among the strip malls in this seedy bit of Los Angeles County. The low-slung structure, surrounded by a black iron fence, was once an aircraft parts factory. It now houses the design laboratories of Mattel, Inc., the world's largest toymaker, and deep inside the high-security facility a crack, roughly 12-person team of screenwriters, computer animators, comic book artists and industrial designers are busy engineering the next great American toy: Max Steel.
In physical form Steel will be a 6-inch plastic superhero action figure, with a well-developed backstory. His mission is to harness the turbo energy he possesses to morph into different cyborg forms and save the world from monsters bearing names like Elementor and Dredd. And, just like Superman, he has a mild-mannered alter ego: Maxwell McGrath, a 16-year-old high school kid with brown hair and a square jaw.
The Max Steel doll won't be appearing on U.S. retail shelves until August, but his launch is already well under way. Pull up maxsteel.com and you can play the Max Steel: Hero's Journey videogame, watch videos introducing him or download a Max Steel mask. In March a Max Steel cartoon premiered on Disney's XD digital cable and satellite channel and will soon be available in more than 100 different markets worldwide. Toys used to spring from entertainment. Now entertainment supports the toys.
"Having an action hero that's on for a steady basis–on television, on webisodes, on digital–is going to create a more consistent demand for that product," says Mattel's chairman and chief executive, Bryan Stockton.
Stockton, who is 59 and has been Mattel's top exec since January 2012, is referring to Steel, but it is no small irony that his 15th-floor office with views of the Pacific and the Hollywood Hills is decorated with a dozen or so glass-encased Barbie dolls, each mounted on its own personal pedestal. They deserve to be there. Because for many decades Barbie was Mattel, and Mattel was Barbie.
Barbie is more than a toy; for the last 54 years the 11.5-inch molded-plastic doll has been a defining feature of American girlhood. She is also a money machine. Just click over to Amazon.com. Princess Barbie, Astronaut Barbie, Paleontologist Barbie and President Barbie–some 45,532 products, all for sale.
But Barbie's improbable figure, her piercing blue eyes and her youthful blonde mane mask the fact that she's been showing her age on Mattel's financial statements for more than a decade. Last year Barbie's global sales declined 3% to an estimated $1.3 billion worldwide. In the U.S. she is doing even worse. Barbie's domestic sales have dropped a stunning 50% since 2000, according to Gerrick Johnson of BMO Capital Markets, down to $460 million in 2012. Barbie now represents 20% of Mattel's $6.4 billion in revenues versus 30% ten years ago.
Stockton hopes Max Steel will join Mattel's other promising toy franchises–Monster High and American Girl–in smoothing Mattel's way in a post-Barbie world. The task is especially important because some of Mattel's other key franchises–its Matchbox cars and old Fisher-Price line–are also under pressure. Their sales have fallen for nearly a decade. Then there are more existential threats, like a digital generation that favors 99-cent iPad apps over traditional toys, a shrinking number of toy stores and the looming concern that DIY 3-D printing will render premade plastic toys obsolete.
Today Mattel controls 16% of the $20 billion U.S. toy market, nearly double the share of its closest competitor, Hasbro. It has a portfolio of strong brands besides Barbie, including Barney, Thomas & Friends (both acquired with its $680 million purchase of HIT Entertainment last year) and Hot Wheels.
But to keep growing, Mattel needs a steady diet of fresh new hits, including, the company hopes, Max Steel. It's a big bet but not as risky as it might seem.
In fact, for the last 11 years the action figure has been selling like hotcakes outside of the U.S. A Spanish-speaking Max Steel, who is older, has been available in South America since 2001, the year Mattel removed an earlier version from U.S. stores because the company felt the toy's terrorist fighting themes were too controversial for American kids in the wake of Sept. 11. Latino Max already generates more than $100 million in retail sales per year.
Steel's target audience of younger boys, ages 6 to 11, responds well to videos and the recycled story plots available online. Max Steel's rollout compresses an 18-month traditional schedule down to less than a year, and unlike it did with Barbie of old, Mattel is paying decidedly more attention to Max's narrative arc. It wants a slow story reveal to build interest. "When we built Max Steel we tried to think about how many different ways can this character come to life," says Timothy Kilpin, Stockton's creative director for Mattel's franchises. "You've got to know where the brand is going 18 months from now in terms of a storytelling aspect."
In 2012 Stockton's first full year at the helm, Mattel's sales climbed 2% to $6.4 billion and profit increased 12% to $864 million, excluding a one-time litigation charge.
"Even if you think the sales growth is lackluster, Mattel is doing better relative to the industry, and their brands are in demand," says BMO's Johnson. Mattel stock climbed 32% in 2012 versus 12% for Hasbro and a 10% decline for Jakks Pacific. It handily beat the S&P 500, which was up 12%. The company has modest debt and an enviable cash pile of $1.3 billion. And when it comes to international diversification, Mattel is a shining example of how to execute well, with about 50% of its revenues coming from outside the U.S.
Stockton can take much of the credit for Mattel's impressive global footprint, having led the company's international business for eight years, until shortly before he was named chief executive.
Stockton came to Mattel after a 24-year career in processed foods, first at Oscar Mayer and eventually Kraft Foods. The son of an Indiana University b-school professor, Stockton earned his B.S. and M.B.A. in under five years at Indiana University. He then landed an entry-level position in management at Oscar Mayer in 1976. There he learned nearly every aspect of its business, from buying hogs and slaughterhouse operations to efficiently pricing grocery items like bologna. After Kraft was taken over by Oscar Mayer's parent, Philip Morris, in 1988, Stockton worked with Kraft's group vice president, Robert Eckert. It was Eckert who convinced Stockton to join him at Mattel soon after Eckert was named chief executive in 2000.
Compared to food, Stockton loves the toy business' high margins, its low capital investment and its short cycles. "We go from ideas to cash in about 18 months," says Stockton.
There are three ingredients to Mattel's continued success: launching new, richly developed products like Max Steel; efficiently milking mature franchises like Barbie; and, perhaps most importantly, continued overseas growth.
"The global middle class is expected to grow from 569 million households in 2011 to 766 million in 2020," says Stockton, who describes his motto in Mattel's 2012 annual report as "Happy but never satisfied."
With a smile on his face, Stockton describes how he has already overhauled Mattel's corporate structure, dismantling what was a siloed operation by centralizing product design, marketing and distribution. Along the way Mattel has shed $400 million from expenses since 2009, pushing gross margins up to 53% from 50%.
Besides the company's infants and preschool division, which includes Thomas and Fisher-Price and produced $2.2 billion in revenues in 2012, two franchises stand as potential Barbie replacements: American Girl and Monster High.
