I’m not sure what I expected: Hot-pink, bejeweled furniture in the lobby? Race-car tracks coiling through the hallways? Perhaps a gaggle of elfin employees, scootering in and out of meeting rooms on mint-colored mini-Vespas with blueprints for next season’s must-have toys?
I found no such frivolities—or merriment of any other sort—at Mattel’s corporate headquarters in El Segundo, Calif. Inside the banal, 14-story tower are all the hallmarks of a run-of-the-mill, old-economy compound: cubicles, mostly blank walls, and library-like silence. Even the top-floor C-suite is disappointingly un-fun. Yes, there is a display of limited-edition Barbies—complete with gem-studded dresses and miniaturized stilettos. But tethered to pedestals and imprisoned in glass cases, the dolls appear more showpiece than plaything. “You can look, but you can’t touch,” the injection-molded figurines seem to whisper from pursed and plumped lips. One wonders if anyone ever actually has any fun here.
Rewiring the Dreamhouse: Margo Georgiadis, a Google veteran, became Mattel’s CEO in February. Among her plans: Designing Mattel’s toys to collect better data from users, and using that data to build better toys.
Angie Smith for FORTUNE
Down the steely corridor, however, past private offices and even more silence, I find an unexpected corporate “play pattern.” (The term, industry jargon for how kids use a toy, will come up repeatedly over the next few days.) In a grand corner suite, Mattel’s new CEO, Margo Georgiadis (Fortune’s 2017 Most Powerful Women list, No. 49), is talking, even laughing, with her chief operating officer, Richard Dickson. The two share the office, working side-by-side at stand-up desks that look comically current in these stodgiest of business quarters.
“There was a real feeling that leaders were not accessible, and kind of ‘ivory-towerish,’ ” the chief executive, who took office eight months ago, says of Mattel’s past. “What better message to send than, ‘I don’t need this big fancy office—I can share it.’ ”
It’s a collision of cultures that Georgiadis welcomes—one, you could say, that she was hired to create. Georgiadis is a Google veteran, having spent eight years as a top sales exec for the freewheeling search giant, and she’s here to rearrange far more than the furniture. Yes, it’s ironic that the typical Google office boasts open floor plans, collaborative workspaces, and plentiful beanbag chairs—a more playful environment than her current toymaker employer’s. But more important, the tech company is data-driven, fast-moving, and relatively unhierarchical. Mattel, meanwhile, is notoriously bureaucratic. Divisions don’t really talk to one another. And technology has been an after-thought. The latter is sacrilegious to a Googler: “I almost feel like I’m in the 1990s,” Georgiadis admits.
She might as well be in the 1950s or 1960s, because the products that Mattel introduced in those decades—flagship franchises Barbie and Hot Wheels—still make up about 30% of the 72-year-old company’s global sales. These aging brands consistently rank among the top toys sold worldwide (see “How Little Things Change” below), but they haven’t exactly been springboards for innovation. And not coincidentally, Mattel’s revenue has slipped in recent years: In its last fiscal year, sales came in at $5.5 billion, 14% less than in 2012. Its stock price, meanwhile, has slid from $37 to $16 over the past five years. (Georgiadis is the company’s fourth chief exec in that same period.)
How Little Things Change
Many top-selling toy franchises have been around for decades, showing the power of big brands—and the dearth of innovation—in the industry.
Top-Selling U.S. Toy Properties in Dollar Terms, Jan.–June 2017:
The Voorhes
- Pokémon
Introduced 1996
Manufacturer: The Pokémon Co. (licensed from Nintendo) - Nerf
Introduced 1969
Manufacturer: Hasbro - Star Wars
Introduced 1978
Manufacturer: Hasbro (licensed from Lucasfilm) - Barbie
Introduced 1959
Manufacturer: Mattel - Batman
Introduced 1966
Manufacturer: Mattel (licensed from DC Comics) - Hot Wheels
Introduced 1968
Manufacturer: Mattel - Little Tikes
Introduced 1970
Manufacturer: MGA Entertainment - Shopkins
Introduced 2014
Manufacturer: Moose Toys - Paw Patrol
Introduced 2014
Manufacturer: Spin Master Entertainment - Lego Star Wars
Introduced 1999
Manufacturer: Lego (licensed from Lucasfilm)
Source: NPD Group
To be sure, Mattel isn’t the only toy giant whose innovative streak appears to be stuck in Slime (a product Mattel introduced in 1976). Rivals Hasbro and Lego also face challenges, as all three struggle to stay on top of the $49 billion global toy market. While the industry is expected to grow about 4.5% this year, these formidable players are up against fierce headwinds. Their dependence on licensing deals with movies—particularly at Hasbro, which owns “master rights” to Disney franchises like Star Wars—has become a double-edged lightsaber: When movies are down, so are toys. This past season produced Hollywood’s worst summer box office in over a decade, leading BMO Capital Markets analyst Gerrick Johnson to reduce his price target on Hasbro and Mattel. Among the factors Johnson blamed: “Fatigue in certain properties associated with multiple sequels, and competition from entertainment from other screens.”
Ah, yes, those “other screens.” In a digitally saturated era where even toddlers reflexively grab their parents’ smartphones for stimulation, technology presents a seemingly unsolvable puzzle for traditional toymakers. The more kids consume iPad apps and Netflix shows, the less time they spend playing with dolls or snapping together small, colorful bricks. (Privately held Lego has also suffered: In early September, following a 5% drop in midyear sales, the Danish company announced it would slash 8% of its workforce.) From an outsider’s perspective, the industry stands at an existential threshold: To break out of its rut, it has to go digital.
But here’s the problem: Kids may love screens, but it’s not clear that they like “tech toys.” The toys they gravitate toward—or at least the toys their parents buy for them—remain largely analog. Think Pokémon cards, Nerf guns and balls, and, yes, Barbie dolls, all among the five bestselling toy properties this year, according to research firm NPD Group. “There are pockets driven by technology,” says Juli Lennett, an NPD analyst. “But most growth still tends to be driven by some of the classic play patterns.” Another example: The fastest-growing category of toys sold so far this year was games and puzzles, a grouping that doesn’t include video games. As Stephen Pasierb, CEO of the Toy Association, a trade organization, argues, “Many parents want their kids to have some digital detox.”
Parents may not want screens and technology to replace toys. They do, however, want toys that meet the expectations that tech creates—more interactivity and customization, for starters. They also want to be able to buy toys without going shopping, which helps explain why once-dominant retailer Toys “R” Us filed for bankruptcy in mid-September, buckling under the weight of e-commerce giant Amazon (and creating another headache for big toymakers). As Mattel board member Dean Scarborough, chairman of labelmaker Avery Dennison, puts it, the business is no longer a simple process of “producing an item, advertising on TV, and pushing it into the stores.”
This is the gauntlet Georgiadis is running. The exec is already shaking things up, in a Google-y way, developing a shared technical infrastructure for toy development and investing in digital marketing. (Until recently, nearly all of Mattel’s ad spending was invested in television.) “We needed someone from the digital world,” says Scarborough. “And it’s pretty hard to get more digital than Google.” Ruth Porat, the search giant’s chief financial officer, expresses faith in her former colleague, pointing out that Georgiadis ran one of Google’s most important businesses, giving her the background she’ll need for “applying cutting-edge tech into all parts of Mattel’s business.”
Some toys, though, are better left in their analog state, and Georgiadis will have to know which levers to pull and when. There’s nothing particularly high-tech about the Chatter Telephone, for example. On the windowsill in the CEO’s shared office sits the smiling, plastic pull toy, first developed in 1961. It is a reminder that all the 0s and 1s in the world don’t diminish the appeal of a ringing rotary phone, as far as babies (and their parents) are concerned. In 2000, Mattel upgraded the old model with a push-button design that lit up. The result? Consumers protested, and the company brought back the original version.
If there’s a lesson there, perhaps it’s this: In a data-driven age, there is a science to developing products that match kids’ “play patterns.” But there is also an art.
After taking the top job last February, Georgiadis did what all new outsider CEOs are expected to do: She traveled the country, talking to as many of Mattel’s 32,000 employees as possible. Then she tore down a Barbie Dreamhouse.
Like Barbie herself, the mockup Malibu pad, first conceived of in 1962, has gotten multiple touch-ups over the years. By the ’70s, the one-story abode had grown to three floors and an elevator. In the 1990s Mattel spruced it up with a working doorbell and a fireplace that lit up. And last holiday season, Barbie moved into her first “Wi-Fi, voice-activated” Dreamhouse, which enabled kids to open doors using spoken commands. (With a price of $240, that’s about $30 per square foot.)
But according to Georgiadis, Wi-Fi wasn’t enough to bring the 58-year-old Barbie into the Internet age. That’s why she brought a screwdriver to the weekly management meeting and took apart the latest Dreamhouse, laying out each component—and each flaw—for all to see.
For starters, the voice-activated parts had a cumbersome amount of circuitry. “There were, like, seven chipboards in that thing,” Georgiadis says. Not only were the chipboards completely separate—not communicating with each other—but Mattel wasn’t using them to their full potential. The toymaker wasn’t recording or saving Dreamhouse owners’ voice commands—much less combining them into a system that could learn and evolve, otherwise known as natural language processing. “You want to know, how many times did she
Another crack in the Dreamhouse’s foundation: Mattel didn’t do over-the-air software updates, which would allow the company to add new features even after they sold the product. (Other chip-equipped Mattel toys, like a Hot Wheels track that uses computer smarts to steer cars around, suffered from the same problem.)
The most encouraging thing about the deconstruction session: Georgiadis’s colleagues got the message. “The minute we took the thing apart to explain all of the opportunities we were missing, everyone said. ‘Oh, my God, that’s so obvious,’ ” she says. Now she’s realigning the company around that kind of revelation. She has hired a chief technology officer who has taken over all engineering resources. More developers are being hired, and a common technology platform for things like voice recognition is in the works. Georgiadis envisions that, someday, language processing tech developed with the Dreamhouse in mind will also be used in, say, a Fisher-Price baby swing, to track how a child’s cry is impacted by different speeds. “Skip the focus group,” she says, because with tech, “You have an everyday focus group.”
The new CEO is utilizing data elsewhere too. She wants to move Mattel entirely to shared systems—enterprise resource planning software, for example, and collaboration tools like Yammer. “Forecasting, demand planning, all these kinds of things are more data-driven,” says Georgiadis; the tools she favors could make that kind of information available to more people, more quickly.
Getting Mattel’s divisions to collaborate poses geographical challenges too. While flagship brands like Barbie and Hot Wheels operate out of headquarters in Southern California, other divisions are cleaved from the core. Many are acquisitions that are still parked in their hometowns. American Girl, maker of dolls from different points in history, is based in Wisconsin. Mega, a block-toys arm, is in Canada, and Fisher-Price, the brand for smaller tots, is based in New York, to name a few. “This company that had a huge potential was really almost like a house of brands,” says Georgiadis. “There wasn’t a shared mission.” To get everyone on the same page, Georgiadis has written a new code of shared values (the initials of the six precepts spell out “WONDER”) and instituted monthly Google-style “town halls.”
Of course, however sweeping her reforms, there is no real-life Magic 8 Ball (the Mattel-owned toy launched in the 1950s) that can help Georgiadis see which products will sell and which will flop. Will parents want their kids’ voices recorded, even if anonymized and used to improve products?
Still, observers think she’s on the right track internally. Mattel’s bureaucracy has likely stifled innovation. How could smart ideas bubble to the top when it was hard for designers to even reach the management on the top floor? “Literally, there were guards and codes and badges,” says Dickson, the COO and Georgiadis’ office mate, who has spent 13 years at Mattel. No one, until Georgiadis, had ever asked him to share an office. No one had broken down the silos between brands. In fact, no one had even managed to bridge the gap between the company’s corporate tower and the flatter, cooler building right across the street.
The day after I visit the tower, I tour the “Design Center,” a warehouse-style building with high ceilings and, well, a lot of toys—a space that’s as fun as the HQ is drab. This is where about 700 of the company’s creatives sit—toy developers, graphic designers, and even Barbie hair specialists. There are no elves or mopeds, but there is a sprawling, orange Hot Wheels track, where I stand on top of a ladder and send a silvery, die-cast toy car whizzing through the lobby. In a nearby chemistry lab, a machine slowly mixes sparkly goo. I pick up a plastic pony and dip it into water—it changes from pink to yellow. So this is where the magic happens.
This warehouse isn’t actually a factory; the majority of Mattel toys are manufactured abroad. The Design Center is for conceptualizing, developing, and testing new versions of the flagship brands that have been around almost since the company began. That’s one reason that, even in its colorful cacophony, the center feels stuck in time. One of the first things I notice is the separation between girls’ and boys’ toys. Exactly half of the 200,000-square-foot floor is devoted to Barbie and other “girl brands” like spooky-doll line Monster High. There are rows and rows of Barbies on shelves and in employees’ cubicles, many of which are partitioned with frilly white curtains. One disconcerting display showcases dozens of Barbie heads—just the heads—stuck on top of perfectly arranged spokes like so many Barbie-headed lollipops, showing off the variations of their hairstyles. The other side of the building is devoted to “boys’ toys,” mainly Hot Wheels but also brawny WWE figurines. The juxtaposition—muscle cars and muscled-up action figures on one side and hyper-feminine dolls on the other—seems outdated, if not downright out of touch.
In both its gender dichotomy and its old-school, siloed feel, the Design Center shows how much Mattel needs to play catch-up. “I really applaud the efforts Mattel has made to update Barbie,” says Debbie Sterling, founder and CEO of STEM toy startup Goldieblox. “But there’s a real challenge around the legacy of Barbie and what she stands for.”
The Oakland-based Goldieblox sells games that teach building and early engineering skills, with a focus on attracting girls. It’s one of many toy upstarts that are steadfastly steering clear of gender stereotypes. Another Bay Area toy newbie, Wonder Workshop, builds turquoise-and-orange robots used by kids who are learning to program. To date, the company has shipped more than 300,000 of its bulbous “Dash” robots—marketed to boys and girls alike—that scoot around according to simple instructions programmed by kids. And New York–based LittleBits is also being gender–neutral in selling its inventor kits that enable kids to build and control robots. The company got a licensing deal with Lucasfilm after participating in an accelerator run by its parent company, Walt Disney. Its latest product? A build-it-yourself version of iconic droid R2-D2.
Regardless of what they make, toy startups have an advantage that Mattel, Hasbro, and Lego lack: They can start supply chains and distribution models from scratch. That means they can “fail fast,” testing products with the rapidity of a tech company, and tap e-commerce and digital advertising instead of breaking into bricks and mortar and shelling out millions for TV ads. In all these ways, the startups are much farther down a road that Big Toy is still scouting out.
The toy giants know they need to take a tech-centric approach to product development and shed their more cumbersome production processes. “We have added complexity into the organization which now in turn makes it harder for us to grow further,” Lego’s executive chairman Jørgen Vig Knudstorp acknowledged in a news release announcing the company’s recent layoffs. “We have now pressed the reset button.” In August, the company ousted its CEO and appointed a new leader, Niels Christiansen, the former head of engineering company Danfoss—hiring a techie outsider in an unprecedented move for the family-owned company.
Like Mattel and Lego, Hasbro is hitting a wall; analysts expect revenue growth to slow from 13% in 2016 to just 3% in 2018, and its stock is down almost 20% from its highs this summer. As investors lose faith in its movie tie-ins, Hasbro is stretching in unfamiliar, screen-based directions. The company recently announced that its first Netflix series, Stretch Armstrong and the Flex Fighters, will launch in late 2017. That’s a move that’s simultaneously new (a show on a streaming service!) and old-fashioned (the original Stretch Armstrong doll was a hit upon its debut—in 1976).
Toy Titans Retool
Here’s how the three biggest companies in the traditional toy industry are adapting to a digital age.
Mattel
HQ: El Segundo, Calif.
2016 revenue: $5.5 Billion (–4% from 2015)
The Hot Wheels maker is developing tech “platforms” like natural language processing to use across multiple toy lines. Leading the charge are Google-trained CEO Margo Georgiadis and chief technology officer Sven Gerjets, a former CIO of Time Warner Cable. The tech-centric approach is new at Mattel, which still makes about $1 billion a year from a very analog product: Barbie dolls.
Lego
HQ: Billund, Denmark
2016 revenue: $5.4 billion (+6% from 2015)
Lego’s new CEO, Niels Christiansen, wants to simplify and speed up the company’s business processes, while bridging the gap between physical building blocks and digital 0s and 1s. After a strong decade, Lego’s growth has significantly tapered off, leading the company to eliminate 1,400 jobs and hire Christiansen, who comes from an engineering and manufacturing background.
Hasbro
HQ: Pawtucket, R.I.
2016 revenue: $5 billion (+13% from 2015)
Even Play-Doh got a tech makeover at Hasbro, owner of brands like Monopoly and Easy-Bake Oven. Last year it launched an app that digitizes Play-Doh creations, allowing kids to interact with their sculpted dinosaurs and kittens on a screen. Still, much of Hasbro’s growth comes from traditional toys that build on license agreements with the likes of Disney’s Lucasfilm.
But no big toymaker is making a bigger tech bet than Mattel. Georgiadis wants Mattel to emulate the speed and efficiency of Silicon Valley. That’s why she’s asked the company’s head of supply chain to rely on fewer vendors, and why she’s asked all executives to follow her “Rule of Two,” which allows just two senior execs to make a decision (before Georgiadis, it usually took four or five). It’s also why utilizing customer data in toy development is such an urgent project.
Retooling Mattel could take many more years, of course—especially given the typical 18-month concept-to-market cycle in the industry. Georgiadis says she had a modest hand in this year’s holiday toy lineup, most of which was already under development when she joined the company.
In the meantime, she—and her competitors—will still be able to draw inspiration from the pre-digital past. In one corner of Mattel’s Design Center, I come face to face with some real magic: A machine that once made reels for View-Masters, the bright red 3D “stereoscopes”—invented in 1939—that many of us grew up with. This clunky apparatus, which operated for seven decades at a plant in Mexico, isn’t much to look at. But it likely helped instill awe and wonder in thousands or millions of children worldwide.
In 2015, Mattel struck a partnership with Google to bring the toy back to life with a techie twist. The “View-Master Virtual Reality Viewer” was built on the search company’s Cardboard VR platform, and was applauded for bringing VR technology to younger audiences at an affordable price. Georgiadis’s mission is to create product platforms that kindle similar magic—but with the staying power of Barbie and Hot Wheels.
Source: Fortune September 22, 2017 | By Michael Lev-Ram