Mattel, Hasbro Cut Costs, Plan for Growth

Running a toy company these days is no game.

While toy sales hold up well during recessions -- no parent wants to suggest a no-gifts birthday party -- the industry hasn't been immune from slowing revenue this time around.

Which is why it's encouraging to hear good news from Mattel ( MAT) and Hasbro ( HAS), the No. 1 and 2 American toy companies, respectively. This week, each reported higher-than-expected quarterly profits, bringing much-needed optimism to the sector.

No matter what the age of your target consumer, you can learn something from these companies' survival strategies. In the short term, make the best of what you've got by paring costs and focusing on a few key products. At the same time, you've got to lay the groundwork for future growth or risk getting left behind.

This should have been a banner year for Mattel and Hasbro. Mattel's iconic Barbie doll turned 50, kicking off a wave of publicity. This spring, the company opened a six-floor flagship Barbie store in Shanghai, where shoppers can pick up doll-sized Vera Wang wedding gowns, catch a live fashion show and design their own custom doll.

Hasbro, for its part, expected its Transformers toys to get a major boost from the movie "Transformers: Revenge of the Fallen," one of the year's biggest blockbusters. But penny-pinching customers have taken a toll on overall sales for both companies.

According to Sean McGowan, a consumer leisure and lifestyle analyst at Needham & Co., last year's holiday season was the worst for toy sales in 40 years. "The companies that did well were the ones who took away their promotional budgets and used that to cut prices. If you weren't offering value, people weren't buying."

Taking the value lesson to heart, Mattel laid off 1,000 employees and drastically cut its corporate travel and advertising expenses. Hasbro instituted salary freezes and trimmed administrative expenses as well. Both companies put their limited resources into shoring up their core brands, and that focus on the bottom line paid off: Even though Mattel's net sales fell 14% in the second quarter, profits rose 82%, while Hasbro's net revenue was up 1%.

Mattel's and Hasbro's attention to their core products should also benefit them going forward. The toy industry has been shaken by Wal-Mart's ( WMT) recent announcement that it would be shrinking its toy departments. Since Wal-Mart is responsible for a quarter to a third of all toy sales in the U.S., that's a major blow. Luckily, Mattel and Hasbro have a strong lineup of well-known character toys.

Both companies have also entered entertainment partnerships that bode well for future sales. In the toy biz, snagging the licensing deal for a hot kids' movie can be the difference between a make-or-break year. Last summer, Mattel was selling toys tied in to movies such as "The Dark Knight," "Speed Racer" and "Kung Fu Panda." With no comparable deals in place this summer, Mattel's sales have slumped.

That shouldn't be a problem in 2010. "Next year is shaping up to be a blowout year for Mattel," McGowan says. "They traditionally haven't been dependent on licensing, but it's going to be an entertainment-heavy year." The sure-to-be-blockbuster "Toy Story 3," due next summer, features Barbie and Ken as characters. And Mattel's lineup of Disney Princess products should get a boost from a new animated version of "Rapunzel."

Hasbro did have a powerful summer tie-in with "Transformers," which was enough to bring overall sales into positive territory (barely). But a joint venture with Discovery Communications to create a new children's television network should broaden its market considerably.

"It's a good strategic move," McGowan says. "They have so many properties that would translate well into TV shows." By producing shows starring G.I. Joe, My Little Pony or Star Wars (all Hasbro brands), the company will make those toys relevant to a new generation.

While relentless cost-cutting can help you survive the hard times, it's a focus on the future that gave Mattel and Hasbro a stock boost this week. Whatever your business, you have to show a similar confidence about your business's long-term prospects.

As for the toy industry's most crucial sales period, the holiday season, the forecast looks relatively positive. McGowan predicts that well-known brands will be in a strong position, especially since parents are more likely to spend this year: "You're not going to stiff the kids two years in a row."

Elizabeth Blackwell is a freelance writer based in Chicago. She is the author of Frommer's Chicago guidebook, and writes for the Wall Street Journal, Chicago, and other national magazines.

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