Mattel 2011 Annual Report Download - page 18

Mattel’s principal manufacturing facilities are located in China, Indonesia, Thailand, Malaysia, and Mexico.
To help avoid disruption of its product supply due to political instability, civil unrest, economic instability,
changes in government policies, and other risks, Mattel produces its products in multiple facilities in multiple
countries. Mattel believes that the existing production capacity at its own and its third-party manufacturers’
facilities is sufficient to handle expected volume in the foreseeable future. See Item 1A “Risk Factors—Factors
That May Affect Future Results.”
Mattel bases its production schedules for toy products on customer orders and forecasts, taking into account
historical trends, results of market research, and current market information. Actual shipments of products
ordered and order cancellation rates are affected by consumer acceptance of product lines, strength of competing
products, marketing strategies of retailers, changes in buying patterns of both retailers and consumers, and
overall economic conditions. Unexpected changes in these factors could result in a lack of product availability or
excess inventory in a particular product line.
The majority of Mattel’s raw materials is available from numerous suppliers, but may be subject to
fluctuations in price.
Competition and Industry Background
Competition in the manufacture, marketing, and sale of toys is based primarily on quality, play value, and
price. Mattel offers a diverse range of products for children of all ages and families that include, among others,
toys for infants and preschoolers, girls’ toys, boys’ toys, youth electronics, hand-held and other games, puzzles,
educational toys, media-driven products, and fashion-related toys. The Mattel Girls & Boys Brands US and
Fisher-Price Brands US segments compete with several large toy companies, including Bandai, Hasbro, Jakks
Pacific, Leap Frog, Lego, MGA Entertainment, Spin Master, Tomy, and VTech, many smaller toy companies,
and several manufacturers of video games and consumer electronics. American Girl Brands competes with
companies that manufacture girls’ toys and with children’s book publishers and retailers. Mattel’s International
segment competes with global toy companies including Bandai, Hasbro, Lego, MGA Entertainment, Playmobile,
Tomy, and VTech, other national and regional toy companies, and manufacturers of video games and consumer
electronics. Foreign regions may include competitors that are strong in a particular toy line or geographical area,
but do not compete with Mattel or other international toy companies worldwide.
Competition among the above companies is intensifying due to recent trends towards shorter life cycles for
individual toy products and an increasing use of high technology in toys. In addition, as a result of the
phenomenon of “children getting older younger,” resulting from children outgrowing toys at younger ages,
Mattel competes with companies that sell products outside the toy aisle, such as electronic consumer products
and video games. Competition is increased further by the fact that a small number of retailers account for a large
portion of all toy sales, control the shelf space from which toys are viewed, and have direct contact with parents
and children through in-store purchases, coupons, and print advertisements. Such retailers can and do promote
their own private-label toys, facilitate the sale of competitors’ toys, and allocate shelf space to one type of toys
over another.
Seasonality
Mattel’s business is highly seasonal, with consumers making a large percentage of all toy purchases during
the traditional holiday season. A significant portion of Mattel’s customers’ purchasing occurs in the third and
fourth quarters of Mattel’s fiscal year in anticipation of such holiday buying. These seasonal purchasing patterns
and requisite production lead times create risk to Mattel’s business associated with the underproduction of
popular toys and the overproduction of less popular toys that do not match consumer demand. Retailers are also
attempting to manage their inventories more tightly in recent years, requiring Mattel to ship products closer to the
time the retailers expect to sell the products to consumers. These factors increase the risk that Mattel may not be
able to meet demand for certain products at peak demand times or that Mattel’s own inventory levels may be
adversely impacted by the need to pre-build products before orders are placed. Additionally, as retailers manage
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