The Walt Disney Co. recently made headlines and sparked a barrage of media speculation when it ended an 11-year exclusive contract with Mattel, announcing two new multiyear agreements-one with Mattel, the other with the toyco’s rival Hasbro. This month, KidScreen goes behind the headlines to scrutinize the two agreements and calls on toy analysts to predict the comparative success of each.
Two separate announcements, issued September 20, outlined the terms of the deals. Hasbro was given the licensing rights to toys and games based on Disney-branded television properties and upcoming film properties such as Monsters Inc., scheduled for a fall 2001 release. Hasbro will also become the official toy and game company for Walt Disney World Resort, Disneyland Resort and Disneyland Paris Resort. Under the terms of its new agreement with Disney, Mattel was given the rights to produce preschool and plush toys, dolls, games and puzzles based on Disney’s classic characters. Mattel was also given the toy rights to any new infant or preschool film and television properties created by Disney.
Some in the industry speculate that the new structure is related to Mattel’s multiyear deal with Warner Bros. to license tie-ins for its upcoming Harry Potter film series, and others question whether Disney was unhappy with Mattel’s work on film merchandise. Disney’s official position is that when the Mattel contract came to an end, the two companies looked at how they could restructure their relationship and go forward. Disney spokeswoman Christine Castro balks at the media commentary pointing to a ‘division’ of licensing interests. As Castro articulates, Disney simply decided on two separate deals playing to the respective strengths of each toyco.
Toy analyst Melissa Williams agrees with that synopsis. ‘In my opinion, both Hasbro and Mattel received the key Disney categories that play to their strengths; Mattel in infant and preschool with Disney classics, and Hasbro with Disney’s entertainment properties,’ says Williams, senior VP with Gerard Klauer Mattison. ‘I don’t think the Disney or Harry Potter licenses were the beginning of a trend to split up licenses,’ adds Williams. ‘For years, licenses have been divided rather thinly between companies, sometimes too thinly. I do think recent licensing agreements may begin to suggest a trend toward a more rational approach to licensing, with perhaps more modest minimum guarantees allowing toy companies to pursue product lines that make more sense for licenses.’
Upon joining Mattel in May 2000 as chairman and CEO, Robert A. Eckert announced his intention to reposition the company for profitable growth by focusing on Mattel core brands, lowering operating costs and interest. Nine days after the new Disney agreement was announced, Mattel unveiled a comprehensive financial realignment plan consistent with the previously articulated plan to focus on core brands. According to a Reuters file dated September 29, Mattel announced it would sell its Learning Company division to an affiliate of Gores Technology Group at a steep loss, cut 350 jobs, slash its dividend and take $250 million in charges ‘in a realignment aimed at cutting costs and boosting profits.’
In light of such developments, Mattel’s restructured agreement with Disney begins to make a lot of sense. As Williams confides, ‘Mattel’s decision to pass on the toy rights to Disney’s theatrical properties has to do with Mattel’s efforts to focus on the profitability of its product lines and to focus on bottom-, not top-line growth.’ And there is obvious safety in the lucrative world of Disney classics. ‘Let’s observe that the Disney classics are icons unto themselves,’ says toy analyst David Leibowitz, managing director at New York-based Burnham Securities. ‘These are perennials and from one year to the next, they are a proven commodity and have shown themselves to be winners as witnessed by how well the Mattel and Fisher-Price preschool lines are doing.’
On October 12, Hasbro announced initiatives to improve profitability by focusing on Hasbro’s own brands and new product development. Hasbro plans to close its toy facilities in Cincinnati, Ohio; in Napa and San Francisco, California; and consolidate the U.S. toy group into Rhode Island. Along with other efforts to reduce overhead and costs, this move is expected to eliminate 500 to 550 positions worldwide. According to a Business Wire file, these initiatives to enhance future earnings will result in charges against earnings primarily in Q4 2000. Prior to these charges, and due to low U.S demand for Pokémon toys and low worldwide demand for Star Wars-among other factors-second-half results will be below expectations, Hasbro also announced. According to the announcement, Hasbro president and COO Alfred J. Verrecchia believes that the company must reduce its reliance on licensed properties to generate sustainable revenue and earnings growth, stressing that Hasbro values its relationships with key entertainment partners and recognizes their continued importance.
One thing is clear: All three companies are working towards more rational business plans. What remains cloudy is which toyco got the better deal. Although Williams will not speculate whether Mattel’s deal is a better one than Hasbro’s-or vice versa-she does compare the new agreement to its predecessor. ‘From my understanding, Mattel’s agreement with Disney for the classic properties is a better deal that allows the company to make more money on its Disney-related infant and preschool than it did under its previous contract.’ Williams also believes that Hasbro struck a better deal than the one Mattel was previously carrying. ‘Hasbro has traditionally done well with licensed properties and action figure lines, which should allow it good success with the Disney properties it will license.’
Hasbro will begin its licensing of Disney film properties with Monsters, Inc., a Disney/Pixar animated feature film slated for a fall 2001 release. Film licensing, when weighed against the classics, is a riskier proposition since the average movie stays in theaters for two to three months at best. Once the final credits have rolled, the curtains fall on the media exposure that toy licensees pay huge sums in licensing fees for and count on to drive their toys at retail. ‘There is no question that the manufacturers of licensed product have been burnt on such a regular basis that there is great hesitation to take a product sight unseen or to overpay for products that might be considered of questionable appeal,’ says Leibowitz. While Leibowitz claims The Lion King ‘was golden’ in terms of licensed merchandise, Pocahantas and Hercules proved to be less successful, and Disney ‘seemed to be the manifestation of the old Russian economic forecast `this year was not as good as last year, but it’s going to be a heck of a lot better than next year.”
Retailers also tread lightly when it comes to stocking merchandise based on theatrical properties. ‘Movie properties offer great risk and reward for a drug retailer,’ says Mike Deimling, director of category managers for U.S. drug store chain Long’s Drugs. ‘Great movies do not always turn into great licensed product sales at the retail level, and even the best movies tend to have very short shelf lives.’ Long’s selected licensed product in categories they already participate in, such as toys, stationery, party goods and toothbrushes.
Long’s will be selling a selection of merchandise based on this month’s theatrical release of Universal’s Dr. Seuss’ How The Grinch Stole Christmas. The company’s philosophy is to have the product prior to the movie’s release and only reorder if the product appears to have greater appeal than the usual three-month movie product cycle. ‘We approach movies and movie products cautiously,’ says Deimling. ‘Studios closely protect the characters and story line, and at best, retail buyers get to see the trailer and some hype about the names appearing in the movie as characters or voices. This is not enough to determine if the movie will sell product.’
Leibowitz says that new theatrical properties must first be measured against the success of the property they are based on. ‘We cannot say in advance how good the license will prove until we see how good the theme or the brand that it is based on does in its theatrical release.’ He adds, ‘when the Disney properties did not have the box office appeal, that clearly hurt the value of the license.’
Under terms of Hasbro’s deal with Disney, the toyco becomes an alliance company at Disney theme parks and resorts in Orlando, Anaheim and Paris. Planned initiatives include a 16,000-square-foot toy store, co-developed by Hasbro and Disney, in Walt Disney World’s Downtown Disney Marketplace. And Hasbro-branded toys and games will be featured in Walt Disney World Resort hotels, as well as on Disney Magic and Disney Wonder cruise ships. Disney is set to add a second theme park to its Anaheim roster with the February 2001 opening of California Adventure. Although Disney doesn’t forecast attendance or profits for its theme parks, research recently released by Merrill Lynch & Co. analyst Jessica Reif Cohen estimates that the new park will increase overall Disneyland park attendance by 50%. According to the research, projected operating income for the park’s first full year of operation will be US$150 million.
While only time and retail performance will prove which deal is more lucrative, Disney’s move to restructure its toy licensing was a smart one, at least in the analyst eyes of Williams. ‘The advantage for licensors in splitting up rights really comes down to money, and more opportunities to make it. Disney’s efforts to rework its consumer products division should lead to more focused product lines, perhaps fewer offerings, but in the end, greater opportunity with products that make more sense for the license.’