This is the time of year when toymakers start to make their pitches for the next must-have doll, game or plaything of the holiday season. But as Ynon Kreiz prepares to announce Mattel’s second-quarter earnings on Tuesday, he has more riding on the hits of holidays past.
Three years after the US company recruited him as chief executive, Kreiz has struck film and television deals not just for perennial favourites such as Barbie and Hot Wheels, but for retro franchises such as He-Man and Rock ‘Em Sock ‘Em robots.
Even the fortune-telling Magic 8-Ball and View-Master, a stereoscopic slide viewer launched in 1939, have movies in the works.
The Covid-19 pandemic that kept millions of children stuck at home has been good for those toy companies that could overcome the supply chain disruptions it wrought, and particularly good for those with brands remembered fondly by harried parents.
But if Kreiz is riding a wave of nostalgia, he has taken an unsentimental approach to the business legacy he inherited. A CV spanning Fox Kids television, Endemol’s reality shows and Maker Studios’ YouTube content had raised expectations that he would mine Mattel’s brands for Hollywood deals, but cleaning up Mattel’s core business has consumed most of his first three years in charge.
In 2017, the company reported an adjusted operating loss of $203m; its sales fell by more than 11 per cent and its debt stood at 25 times its earnings before interest, tax, depreciation and amortisation for the year.
Mattel had underperformed Hasbro to the point that it briefly entertained an offer from its larger rival in 2017. After just 14 months as CEO, Margo Georgiadis, a former Google executive, left in April 2018.
When Kreiz took the reins, Mattel had also lost its deal to make Disney princess dolls and shareholders were fretting about the future of toy companies in the age of the smartphone, the Toys R Us bankruptcy and the Nintendo Switch.
Now, though, Kreiz is now ready to declare that the turnround is real. “We’ve done the heavy lifting of the restructuring and we’re now moving into a growth mode,” he said. Mattel, he contends, has transitioned from a toy manufacturer to a high growth company driven by its intellectual property.
Kreiz has cut $1bn from the annual cost base he inherited, reducing the number of items Mattel makes by one-third, exiting factories from China to Canada and slashing capital expenditures from $300m to $120m.
The first-quarter figures released three months ago, while boosted by the pandemic, show how much has changed. Revenues were up 47 per cent year on year after Mattel recorded a third consecutive quarter of growing market share, while its leverage ratio had come down to just over 3 times ebitda. Mattel’s stock has outpaced Hasbro since the start of last year.
The strategy now, Kreiz says, is a two-legged one: in its core business, Mattel is pushing for profit growth by focusing on “play systems”, ranges of products designed to fit together and have “cultural relevance”. (Last year’s American Girl “doll of the year” was a surfer with a hearing aid, he notes.)
The second leg is about using its brands to capture opportunities outside the toy industry: in film, TV, digital gaming, live events, music, merchandise and “digital experiences”.
Those experiences include auctions of non-fungible tokens aimed at an adult collectors market. Last month, the Mattel Creations unit which works with artists and designers to create limited edition toys, released a series of NFTs based on its Hot Wheels cars, offering buyers the chance to pay in the cryptocurrency ethereum.
Kreiz will not disclose how big a business he expects NFTs to become, but said the collectors market is a “very interesting” growth market for the company. “Given the strength and heritage of our catalogue, you have incredible brands with a big inbuilt fan base,” he observed.
With more shopping shifting online during the pandemic and ecommerce now accounting for 28 per cent of Mattel’s sales, established brands are becoming more important for cutting through the noise in what Kreiz calls “a world of ubiquitous distribution and almost unlimited shelf space”.
But while Hasbro has been boosting its brands with Transformers and My Little Pony films since the mid-1980s, Mattel is coming late to the entertainment game.
Kreiz displays little doubt about its ability to catch up, citing the blockbuster successes of the Lego Movie and Disney’s creation of a cinematic universe from the Marvel comic books. “Lego was able to make a movie out of bricks. It has been done before,” he said.
The announcement in June that MGM would make a live action Polly Pocket film, written by Lena Dunham of Girls fame and starring Lily Collins, brings the number of Mattel movies in the works to 13.
It has dug deep in its IP archive to achieve that slate: Greta Gerwig is due to direct a Barbie movie starring Margot Robbie, based on the dolls that first appeared in 1959; Vin Diesel will appear in a Rock ‘Em Sock ‘Em film inspired by the battling robots launched in 1964; and Tom Hanks has signed on to a picture based on Major Matt Mason, an astronaut action figure children first played with in 1966.
It is also feeding the battle for kid-friendly franchises between established cable television networks and the proliferating number of subscription streaming video services. Two Barbie films for Netflix have already made the service’s top 10 list in the past two years and a deal for an animated series and live action movie on Nickelodeon will revive the Monster High fashion dolls launched in 2010.
“Next to Disney, I’m not aware of any company that owns such a strong catalogue in terms of children and family entertainment,” Kreiz argued. But, unlike Disney, Mattel is taking on little of the financial risk in trying to turn its brands into box office and digital hits.
“Our approach is capital light. We’re not funding the movies; we’re not funding the development of online games,” he said, admitting that his entertainment strategy would have been impossible if it had relied on Mattel funding such projects.
Making that strategy work will require a delicate balancing act in which Mattel boosts consumers’ interest in toy brands many of them are too young to have encountered, without coming across as nakedly commercial.
“We’re not getting into these areas just to sell more toys,” Kreiz insisted: “The mandate is to make great content that people want to watch. It’s not about ‘make content that will sell more toys’. If we can do that, we will sell more toys but in today’s world you have to be authentic.”
He is encouraged by the early evidence that some of Mattel’s older franchises are resonating: “Masters of the Universe: Revelation”, released on Netflix last Friday, was the most popular US kids series in the US this weekend, and ranked in the top 10 in 55 of the markets Netflix reaches.
Asked whether Mattel would entertain a Hasbro deal now, Kreiz demurs.
“We have a very strong strategy that is working and that’s our focus,” he said. “We’re starting to unlock the true value of the company.”