Much has been made about the divergence of two of the largest toy makers -- Mattel (MAT) and Hasbro (HAS). Since January 2012, Hasbro is up 132% and has significantly outperformed the market while Mattel has gained just 13%.
Bloomberg reported Thursday that the two companies are looking into a tie-up, but understanding Hasbro's rise may explain why buying Mattel may not be in its best interest.
Even though Mattel jumped after its report last week on strength from its suffering Barbie business, total sales for the year were down 5%. Meanwhile, Hasbro reported another strong quarter on Monday, led by its boys' category which grew 35%, and clocked in 2015 revenue growth of 4%.
Analysts point to scale and complementary categories as potential advantages of a merger: Hasbro is focused on action figures and games while Mattel dominates in dolls (Barbie, Monster High, American Girl) and pre-school (Fischer Price). However, Hasbro is already well-established in key growth areas. Disney (DIS) franchises account for 30% of Hasbro sales -- think product tie-ins from "Guardians of the Galaxy," "Captain America," and of course "Star Wars." In fact, last quarter Hasbro's girls business was its weakest category, off by 22%. And Hasbro just took over what was arguably Mattel's strongest girls' franchise: "Frozen."
Content is king
A big factor behind Hasbro's success is its focus on branded entertainment; the company has prioritized toys tied to blockbuster films, with "Star Wars"-based action figures being a key example. Mattel, on the other hand, has done almost the opposite, relying solely on a consumer goods business model with no outside factors spurring added demand for Barbie dolls and the like.
A "consumer-goods-only" model has proven to be the wrong model for the toy industry. It's been successful for consumer staple brands like Proctor & Gamble (PG) and Colgate (CL), companies that have the branding, marketing and manufacturing leverage that lets them "go to market" better than anyone else.
On the other hand, in order to extend the life cycles of toy franchises, toy makers need popular movies to keep consumers engaged, something Hasbro has been able to do with its enviable Disney connection. Disney has built a multibillion-dollar enterprise around this -- first comes its "story" business (i.e., movies like "The Avengers" and "Star Wars"), and then physical manifestations in toys and theme park rides.
It's also part of Hasbro's business strategy and what explains its out-sized success -- and why it doesn't need Mattel.
