Renovating This Old Mouse


Ever since 1929, when its famous founder sold a picture of Mickey Mouse for $300 to a stationery company, Walt Disney Co. (DIS) has been a product-licensing gold mine. Toy and clothing companies lined up to pay top dollar for the right to sell Winnie-the-Pooh stuffed bears, Donald Duck sailor hats, and Simba slippers. By the mid-1990s, product licensing and sales had become Disney's most steadily profitable unit, with 1997 earnings of nearly $900 million, on revenues of nearly $4 billion.

Then, like Sleeping Beauty, Disney dozed off. It didn't notice that rivals such as Nickelodeon (VIA) were stealing the hearts of children with more contemporary characters like SpongeBob SquarePants. Disney got to where it was willing to slap a license on just about anything to make a buck -- or several. As the market sagged, thanks to overpriced Mickey ice-cube trays and Donald Duck door handles, Disney merchandising execs saw business shrink by about half, to 2002 earnings of $394 million, on revenues of $2.4 billion.

So far, earnings have been down for this fiscal year as well. "For a long time, they commanded the marketplace," says former Disney marketing executive Carole Francesca, now president of Broad Street Licensing Group. "But the business matured, and they extended it so far that the market got tired of it."

"CLASSIC" POOH. Today, with much of the Disney empire in distress -- theme-park attendance has been hammered by the downturn, and ABC is still a fourth-place network -- a sense is growing within the company that this part has to work. After all, licensing should be the least volatile part of the Disney money machine. That's why Andy Mooney, the 48-year-old Disney Consumer Products president recruited in 2000 from Nike (NKE), has been completely rethinking how to handle licensing and product sales.

He has slashed its 3,000-odd licensees by one-third, stepped up licensing of nonmovie properties such as its Lizzie McGuire and That's So Raven! TV shows, and hired a team of designers to work with licensees like Kellogg (K) and Gillette (G) to create fewer but better cereals, toothbrushes, and other products. "For years, we've been focusing on deals, but now we're focusing on making great products," says Mooney.

Disney is also finally acknowledging the huge reach of discount chains. By devising exclusive lines that megaretailers such as Target (TGT), Kmart (KMRT), and Wal-Mart (WMT) can manufacture through their own private-label contractors, Mooney is trying to cut out the middleman -- starting with apparel makers and moving to toy companies next. If he can make it work, the savings will support lower retail prices without taking too big a bite out of his own profit margin.

"It's a breakthrough that should give [Disney] more control and a greater opportunity for growth," says Seth M. Siegel, co-chairman of independent licensing agency Beanstalk Group in New York.

PLAYING HARDBALL. At the same time, the Mouse House is trying to get out of the retail business itself, putting its money-losing chain of 480 Disney Stores in the U.S. and Europe up for sale. Traditionally, it sold mostly toys at big retailers. But lately, it has signed deals to license a new line of "classic" Winnie-the-Pooh clothes and bedding to Target and kids' clothes to Kmart. Next up: a licensing deal with megadiscounter Wal-Mart to create lines of baby clothes and Easter candies, as well as merchandise based on Disney Channel cartoon hit Kim Possible.

To beef up sales, Disney has gotten tough on some of its longstanding manufacturers. In repackaging characters such as Sleeping Beauty and The Little Mermaid's Ariel as "Disney Princess" dolls, Mooney's group bypassed Mattel (MAT) for some of the line, whose retail sales have grown to $1.3 billion in three years. Mattel still retains rights to most Disney dolls. But a new three-year deal being negotiated would require Mattel to meet certain sales targets to win renewal for two more years. That's a stark contrast with Disney's past 5- or 10-year deals. Neither Disney nor Mattel would comment on the discussions.

Some of Mooney's other plans may be harder to pull off. Disney is rolling out its biggest marketing guns for Mickey Mouse's 75th birthday, including his first new flicks in years. But some of its efforts to make Mickey more current -- such as murals in Hollywood and New York's SoHo district -- seem strained.

Disney had little choice but to shake things up. Its royalty rates had risen to the point where many licensees couldn't make money. Mooney says: "We had become a company of check cashers." The question is whether the Mouse can get out of this trap. By Ronald Grover in Los Angeles, with Gerry Khermouch in New York


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