Mattel: Knocked Down and Muzzled?
A headline from today’s newspaper read: “Mattel Earnings Hit by Product Recalls”. It sounded serious and other news stories were even more dramatic, talking about how the company had been “knocked down” and “muzzled”. It had the feel of a moral tale. Was it the high price paid for poor quality control? Reading the stories in more detail, I felt misled. The primary point was that quarterly profits at Mattel were off by 0.9% (sales were actually up). I looked at the articles which I had printed out by then, and I laughed; they seemed so silly!
“Mattel Emerges from Quality Crisis Unscathed.” Put that in bold and you’d have a better headline - and a more accurate one. But then it would be a more difficult story to write, would require some explanation of how Mattel actually got through three massive recalls - and a resulting public relations mess - without any damage whatsoever.
I discussed the news stories with someone, and he suggested Mattel had survived on “the power of the brand.” That may have had something to do with it, but I thought of an easier explanation: Consumers simply didn’t give much of a goddamn. In surveys, you know, they all said they were finished with “Made in China”, and they vowed to purchase products made anywhere else. They were flakes. They said one thing, but then they did something else.
“Wait until the fourth quarter,” was a suggestion. Since roughly two-thirds of toy sales come from fourth quarter sales, that made sense. Maybe Mattel would suffer a supply chain delay, or else it would face another product recall - not likely. My prediction is that Mattel will see a solid Christmas, and, not only that, when fourth quarter results come in, the toy giant is going to be held up as an shining example, a case study in crisis management. No one will recall that Mattel delayed its reporting of lead-tainted products to the Consumer Product Safety Commission; there will be no memory of an uninspired, impassive speech made by the company’s chief executive officer; and no one will think of Mattel’s awkward kowtow in Beijing.
For Mattel shareholders, the lack of bad news on the income statement is good news, but on the whole it’s a disappointing result. Where is the incentive to avoid product failures if no one suffers? Executives are actually being patted on the back for their handling of the crisis. Everyone in China will be all right, also, naturally. With orders now stable, anyone who lost his job as a result of a factory shut-down has since been redeployed somewhere else. The best part is that the media prepared the American public to expect price increases for (ostensibly) higher quality, so there is now the opportunity for better margins in the U.S., China, or possibly both. For toy companies and their suppliers, it’s nothing but upside.
A few class-action lawsuits have been filed, which looked promising as a motivator, but it is not likely that lead poisoning will be proven in any case related to Mattel, and without significant harm (read: death) it will be tough to achieve the kind of punitive damages that encourage industry to higher levels of corporate responsibility. The media often provides a meaningful check in the U.S., but in this case the press has done little more than make flat quarterly growth seem like some kind of punishment for operational negligence. I don’t know what to make of Mattel’s quarterly report results, but it’s most certainly not that.