1987 The Times Mirror Company
Los Angeles Times
May 24, 1987, Sunday, Home Edition
SECTION: Business; Part 4; Page 1; Column 1; Financial Desk
HEADLINE: EMBATTLED MATTEL SEARCHES FOR PROFITS AND SUPERHEROES
BYLINE: By DENISE GELLENE, Times Staff Writer
At the headquarters of Mattel, the troubled toy maker, a curious question is going around: Could mild-mannered John W. Amerman be the firm's new He-Man?
He-Man -- as most any 8-year-old will tell you -- is the centerpiece of Mattel's Masters of the Universe army of action toys and simply "the most powerful man in the universe." And for most of the mid-1980s, He-Man and the rest of his pals helped guard Mattel's position on top of the toy world.
But those days are over, and Mattel finds itself in need of a new He-Man. Not just another line of toys to match the success of Masters of the Universe, but also a chief executive who can cut costs, expand its booming overseas business and, perhaps most importantly, inspire Mattel's toy designers.
Amerman, who built Mattel's international business into a powerhouse, was named chairman and chief executive in February. It was his success overseas that apparently led Mattel's directors to place him in charge of the beleaguered company, which has recently experienced flat sales, lackluster profits and layoffs -- as well as impatient investors.
Can Count on Help
But Amerman is far from discouraged. "I think we've got great people and innovative products," he says. "I see nothing but opportunity."
Amerman knows he can count on help from Barbie, the doll created by Mattel 28 years ago. The ageless teen-ager, who has her own swimming pool, car, rock band and steady boyfriend, Ken, now brings in a whopping one-third of Mattel's yearly $1 billion sales.
"Never underestimate the power of Barbie," says Ron Qualles, head toy buyer for Merchants West, which operates 27 Karl's Toy and Hobby stores in California. Barbie had her best year last year, despite competition from Jem, Hasbro's new punk-rock doll. Some retailers predict that this year will be even better, as little girls like the new "jewel secrets" version, which comes with glittery jewelry and dresses that can be folded into purses.
And then there's Captain Power, one of Mattel's newest toys and one of the few that toy experts consider promising. The controversial "interactive toy" comes with a spaceship that can shoot infrared beams at cartoon characters to be featured in a Captain Power television series starting this fall. Children's advocacy groups have criticized this new kind of toy, but some retailers say the criticism may help sales.
Sales Generally Flat
Amerman's challenge comes when U.S. toy sales are generally flat and the industry is becoming more competitive. Once the nation's biggest toy company, Mattel in 1985 fell to No. 2, behind Hasbro. Mattel lost $1 million last year.
Mattel is taking a beating in the important U.S. market. Mattel's operating profits in the United States and Canada skidded to $6.2 million from $96.7 million in 1985. This came as sales of two key toys -- Masters of the Universe and Rainbow Brite dolls -- plummeted by a staggering $250 million last year, as children apparently lost interest in the once-popular items.
Mattel's weak sales upset the investment group that controls more than one-third of Mattel's shares. The group isn't happy with the way things are going and is willing to sell out at the right price. "Mattel hasn't performed as well as we would have liked," says John M. Vogelstein, vice chairman of E. M. Warburg, Pincus & Co. and a Mattel director.
Working with management consultants, Amerman hopes to reduce overhead by $20 million, or 8%, this year, partly by laying off as many as 200 management employees -- or about 10% of the firm's U.S. work force. He is looking to relocate operations overseas, where they can be performed more cheaply. Amerman is also looking for ways to sharpen Mattel's reflexes, so that the company can move fast when children's tastes change.
"When we're through, Mattel will be a very different company," he says.
Amerman came to Mattel after 15 years as a cosmetics and chewing gum company executive at Warner-Lambert, the New Jersey drug company. Before that, he was a college recruiter for Colgate-Palmolive. "It was a great experience. I learned how to deal with people," he says.
Former colleagues say he is a relaxed and confident executive who listens to employees. "He was very friendly and open to suggestions," says John F. Walsh, who worked for Amerman at Warner-Lambert's American Chicle unit. "He was also very responsive," recalls Walsh, now president of American Chicle. "You knew you could always go to John for a quick answer."
Amerman was named chairman and chief executive Feb. 19 when Mattel abruptly shuffled its top management. At that time, Amerman was part of a triumvirate running the company after the retirement of chairman Arthur S. Spear. The other two were Mattel President Thomas J. Kalinske and Ray Ferris, executive vice president and chief financial officer.
Since then, Ferris and Kalinske have reported to Amerman. On Friday, Mattel announced that Kalinske has resigned to become president and chief operating officer of Universal Matchbox Group, the nation's eighth-largest toy maker.
Mattel said Amerman will take the additional title of president.
Mattel employees found out what Amerman was like in February, when he summoned all 2,000 headquarters employees to the cafeteria -- the first such meeting in recent years. His first goal was profits, but his second was "to shake the cobwebs" from Mattel. "Let's open the windows and let some fresh air in," he told employees.
At a subsequent meeting, he paraded the company's 22 foreign sales managers before Mattel's headquarters employees. Said a surprised executive: "There they were -- in living color -- and we could ask questions."
"We are trying to create a more open company," says Amerman, who has held four mass meetings with employees. "If everybody knows where we're headed and there are no surprises, I think we'll get there."
Those who follow the toy industry give Amerman high marks for developing Mattel's overseas business. When he took charge of the company's international division, it sold toys in just seven countries. Now it sells toys in 22 countries, including most of western Europe and Japan, Korea and India. More significantly, Mattel's international business is profitable and contributes nearly half of the company's sales. "They are way ahead of the rest of the industry. . . . It was a smart move for them," says Rick Anguilla, editor of Toy & Hobby World, a trade publication.
But that edge may not last. More companies -- including archrival Hasbro -- are looking abroad. At a meeting with toy industry analysts in Boston two weeks ago, "just about every toy industry executive said a major objective was to become more international," Amerman concedes. He doesn't have to look far for proof: Tonka recently wooed away Mattel's marketing executive for the United Kingdom to head its overseas sales force.
Many in the toy industry expect competition overseas to intensify when Toys R Us -- the largest U.S. toy retailer -- opens stores in Europe during the next year as part of an international expansion. That move will give the big U.S. toy makers a natural outlet for their products abroad.
Before he won the top job at Mattel, Amerman was part of a three-man office of the chief executive, along with Thomas J. Kalinske, Mattel president, and Raymond W. Ferris, chief financial officer. The three were appointed to that office when Arthur S. Spear retired as Mattel's chairman last October.
Robin Young, director of research for John G. Kinnard, a Minneapolis brokerage, says it made sense for Mattel to streamline its top management. "There was too much inertia in the company. They are beginning to recognize a need to be flexible to respond to a changing market," he says.
Indeed, Mattel has often been slow to react to changes in the market. Qualles and other retailers say Mattel failed to realize that a glut of discounted Masters of Universe dolls last Christmas would hurt sales of its new action figure, the Marshal Bravestarr cowboy.
Richard Brady, vice president of the company that operates the Playco stores in San Diego, says he didn't even order Marshal Bravestarr last winter because his stores were stuffed with discounted super-hero toys.
"At last count -- and I stopped counting -- there were 47 different action-figure concepts for boys," says toy buyer Qualles. "Only one or two can make it. The rest are markdowns."
Many of Mattel's difficulties have their roots in the company's disastrous foray into video games in 1982. Mattel, which started in the 1940s as a maker of miniature furniture, bet heavily on the success of its electronic games. When the video-game market collapsed in 1983, Mattel lost a record $394 million and was forced to sell not only its Intellivision electronics business, but its other companies. It sold Western Publishing Co. -- the maker of Magic Slates -- and its Circus World theme park in Florida to raise much-needed cash.
Trimmed back to just a toy company, a nearly broke Mattel received a financial lifeline from an investment group led by the Wall Street firm E. M. Warburg, Pincus & Co. The investors got 35% of Mattel in exchange for $231 million cash and a $225- million revolving credit line. Mattel paid a high price for the badly needed cash infusion; dividends to the investment group last year came to $6.4 million.
Amerman has other plans for Mattel besides reducing costs. He says that the company -- often mentioned as a takeover candidate -- might buy a smaller company to beef up its weak preschool and games lines. He hinted that an acquisition might involve a foreign company.
He is also relying increasingly on outside toy designers for new ideas. Many of Mattel's new toys were designed or developed outside the company. For example, the company's most promising toy for this year -- the Captain Power spaceship set -- was developed by Landmark Entertainment Group. Its best-selling new toy so far this year, the Lady Lovely Locks doll, was developed by American Greetings -- the same company that developed another leading Mattel toy, Popples.
It is Popples -- more than any toy developed in-house -- that "signifies what we're trying to do at Mattel," says Amerman. The colorful plush animals that roll up into balls were Mattel's best-selling new toy last year, with sales around $65 million, according to analysts. Not only was it developed under license, but it was introduced worldwide at the same time.
The new emphasis on licensing represents a shift at Mattel, which prides itself on innovation. Its best-known and most enduring toys -- Barbie, Hot Wheels cars and See 'N Say preschool toys -- were developed in-house. Together, those three toy lines account for about 45% of Mattel's sales. "We're changing the culture," Amerman acknowledges.
But Amerman says he doesn't intend to reduce Mattel's design and development unit. "Investment in design and development is the key to the future," he says. There is "no intent to cut back on what I would call our lifeblood."
Young, the Kinnard analyst, says Mattel's decision to tap outside toy inventors is a modest step in the right direction. Licensing is cheaper than in-house toy development, he says, noting that most other toy companies rely on licensing to reduce development costs. "Look at Tonka with Pound Puppies," he says, refering to the popular stuffed dog. "It came from an auto worker in Ohio."
Toy industry executives say Mattel could use the outside help. The company's in-house design staff hasn't had a major success since Masters of the Universe, in which good guy He-Man fights the Evil Horde. Sales of the toy declined significantly last year, but it entranced children long enough to rack up around $1 billion in sales over four years.
"They need to become leaders in toy design and development again. If you look, the only place where they are leaders is with fashion dolls," says Brady, vice president of R&T Sales, which operates 10 Playco stores.
Some toys created by Mattel's designers have been big disappointments. One is Princess of Power, a collection of six-inch superwomen with long hair, gilded capes and weapons introduced in 1985. Sales slid to $40 million last year, and the toy is being discontinued in the United States. Looking back, Amerman says, "I'm not so sure (superwomen) was a viable concept. . . . Girls like to hug dolls, and dress them and comb their hair."
Another disappointment last year was Doozles, a plastic preschool toy that can be converted from people into cars. The toy, a version of Hasbro's highly successful Transformers, "didn't go over at all. . . . It wasn't exciting," says Qualles, the Karl's toy buyer.
Some changes are under way to revive Mattel's own design unit. Many toy designers got new assignments last fall after Jill E. Barad took over as executive vice president for product design. Barad, 35, shook up the department by shifting some longtime Barbie designers to newer lines, such as Masters of the Universe -- a move unheard of at Mattel.
Barad also set up a special new product task force in which toy designers meet to thrash out ideas for new toys. Amerman says the shifts are intended to bring "a fresh look to some of our products. . . . We were getting stale."
GRAPHIC: Chart, WHAT WILL BE YOUR TOP-SELLING DOLL IN '87?, Los Angeles Times ; Photo, Cheryl Mitchell, 3, with Barbie doll accessory at Toys 'R' Us store in Burbank. JOSE GALVEZ / Los Angeles Times