What Went Wrong at Mattel

(page 2 of 2)

Whereas Mattel used to randomly test finished toys, Eckert say it will now test every single batch of toys produced. Safety checks will also get beefed up at the supplier and subcontractor level prior to the finishing of the product. The recalls today involved 436,000 toy cars contaminated with lead paint and 18.2 million magnetic toys manufactured between 2002 and January of this year.

Not all recalls are due to suppliers cutting corners. In the case of the recalled magnetic toys, technology advanced faster than toymakers' perceived risk. Mattel's quality guru Walter noted in an interview with BusinessWeek in late July that the company puts products through rigorous stress tests. The industry didn't anticipate, however, that if two or more of the high-powered magnets were ingested at once they could close off the intestines of small children. In newer versions of the toys the magnets will be locked into the products in such a way that a child cannot break them free.

Will Holiday Toy Sales Suffer?

On Aug. 2 Mattel announced that it had taken a charge of $29 million to cover the cost of product recalls this year. That amount is unlikely to have a major impact on the company. Mattel earned $592 million on sales of $5.6 billion last year. But BMO Capital Markets analyst Gerrick Johnson said Aug. 13 in a report that he expected the recalls to have an ongoing impact on the company's sales. He adjusted his estimates for the company's revenues down by $25 million this year and by $40 million in 2008.

It's still unclear to what extent parents will shun toys this holiday season as repeated recalls of products undermine consumer confidence. "They have to prove they can manufacture these products safely or parents will stay away," says Dr. Stevanne Auerbach, author of The Toy Chest, a guide to toys.

Other toymakers and retailers have already begun promoting the fact that their toys are made in the U.S. Kidbeam.com, of Asheville, N.C., says its plush dolls are not only made locally, but manufactured from organic cotton. Green Toys says its line of gardening kits and pretend cookware are made from bioplastics derived from corn (see BusinessWeek.com, 7/31/07, "Not Made in China").

Eckert told reporters he was not pushing for any kind of federal safety standards. "I don't rely on anyone else to ensure the safety of our products," he said. "This is our concern." He also said he's hoping his ads and Web site will ease parental concerns. "I think it's important to establish a dialog with parents," he said. "I want to make sure they hear from me."

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau.