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Mattel Needs A Knock-Me-Out Elmo


It's the best-kept secret in toyland. On Sept. 19, Mattel Inc. (MAT) will debut the latest version of its popular Elmo toy. In the past, the furry red Sesame Street character has giggled when tickled, danced the hokey pokey, and performed the limbo in a Hawaiian shirt. This year, however, Mattel is refusing to reveal Elmo's latest trick. To build buzz for the toy's 10-year anniversary, retailers won't receive boxes of the new $40 Elmos until the night before they go on sale. Some stores have even installed countdown calendars, tearing off the days until T.M.X. Elmo is unveiled on Good Morning America. "Innovation and marketing, it's exactly what the industry needs," says Gerald L. Storch, Chairman and CEO of Toys 'R' Us Inc. (TOY).

It will take more than an Elmo makeover to get Wall Street tickled about Mattel again. Toymakers' sales have been flat for much of this decade as kids increasingly shun toy cars and stuffed animals in favor of video games, computers, and digital music devices. The industry's largest player at $5.1 billion in sales, Mattel saw its earnings fall 27% last year, to $417 million. Beyond competition from electronic gadgets, its flagship Barbie brand has come under attack from the saucy Bratz doll line, made by rival MGA Entertainment Inc. In recognition of the company's woes, Robert A. Eckert, Mattel's CEO since 2000, shook up his senior management team last October, promoting 59-year-old Neil B. Friedman, the highly regarded president of the company's Fisher-Price (MAT) preschool unit, to supervise its major brands.

RUMBLE IN THE AISLE

Elmo is Friedman's baby. He launched the first version, Tickle Me Elmo, while head of the preschool division of Tyco Toys (MAT) in 1996. Tickle Me became an industry phenomenon. Parents stampeded stores to get them. Some were offered secondhand at prices as high as $1,500. Mattel acquired Tyco the following year, and Friedman went on to marry one of Elmo's designers. (His wife, Amanda, no longer works for the company.)

But the industry hasn't seen a breakaway hit like that since the fuzzy Furby doll craze in 1998. Toymakers and retailers love frenzy-inducing items because they bring more traffic to stores. "When there are hot toys, the consumer will shop the toy aisle more," Friedman says. "There's a halo effect across everything."

Mattel is helping to fuel the potential Elmo frenzy by manufacturing fewer of the toys than it normally would, says Jim Silver, co-publisher of Toy Wishes, an industry trade publication. He estimates that Mattel is making about one-third fewer than its usual run of about 1.5 million Elmos. That has retailers chomping at the bit. "I have never seen the item," says Robert Weinberg, senior vice-president of merchandising and product development at retailer KB Toys Inc. "We really want a lot more."

Mattel should have other hits this Christmas. A line of electronics for toddlers is generating a lot of buzz. This includes the $70 Kid-Tough Digital Camera, made of rubber so kids can drop it. It features two viewfinders because very young children can't always close one eye. "The digital camera is already red-hot," Friedman says.

Because of the 12- to 18-month lead times in toy development, however, industry analysts say Friedman's real opportunity to turn around Mattel's financials won't come until next year. Friedman concedes that the company and the industry have not always done a good job of creating what he calls the "wow factor" in toys. In the past, he says, Barbie wound up being "just a doll in a box." That's why a new bridal-themed Barbie line for next spring will include a cake that plays the wedding march, ring bearers, and dolls that turn into flower bouquets. "A toy has got to be fun," Friedman says. And it's got to make cash registers ring.

By Christopher Palmeri


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