The Mattel-ToysRus Alliance and Benefits in the Current Economic Context - Case Study Example

? Sales and Merchandising: Case Study Executive Summary In today’s business environment, market competition is drastically increasing and this situation tends to end up in the bankruptcy of firms. Companies operating in the global context tend to form business alliances with potential partners so as to trim down their operating expenses. The Mattel-ToysRus alliance also proposes to minimize the competition pressures in order to cut down expenses like plant, building, machinery, furniture and thereby improve profitability. ToysRus is a well established and reputed organization in Hong Kong, and this market stature would benefit Mattel to easily market its products across the country’s market. Since ToysRus has a strong global presence, it would be an easy task for the company to raise funds whenever necessary. Hence, the retailership with a financially stable firm would assist Mattel to grow its business in Hong Kong despite the global economic downturns. The buying and sourcing strategy is likely to give competitive operational advantages to both Mattel and ToysRus. Finally, the merchandising strategy practiced by ToysRus seems to be effective and it would fit the goals of Mattel as well. Introduction Mattel, Inc is the largest toy manufacturing company in the world in terms of revenue. The company’s major product s include Fisher Price, Matchbox toys, Barbie dolls, American girl dolls, board games, and video game consoles. The company was founded by Harold Matson and Elliot Handler in 1945 and is headquartered at El Segundo in the United States. Currently, Mattel operates in over 150 countries around the globe. In addition to selling toy products worldwide, the organization grants funds for making a difference in the lives of children globally. As of the 2011 annual reports, ToysRus achieved total revenue of US$ 6.2 billion where as its operating income and net income were US$ 1.0 billion and US$768 million respectively. Mattel is planning to sign a contract for an exclusive retailership with ToysRus in Hong Kong so that Mattel toys will be available through ToysRus only. This paper will analyze the planned retailership contract and suggest whether or not this strategic alliance would benefit Mattel, Inc. The paper will give specific focus to the operating context of ToysRus’ retail management and evaluate the effectiveness of the buying and sourcing strategy and the merchandising strategy in the light of the specific context of the retail management. Operating context of the ToysRus retail management ToysRus (Toys “R” Us) operates in the retail industry and mainly deals with toy and juvenile products. The company was founded by Charles Lazarus in 1948 and now it is headquartered at Wayne in the United States. As described in the ToysRus’ corporate Profile, today, the firm operates over 875 Toys R Us and Babies R Us stores in US, over 625 global stores and 140 licensed stores across 35 countries worldwide. In addition, the ToysRus operates the FAO Schwarz brand and flagship location in the New York City. Interestingly, the company also operates online sites such as Toysrus.com, Babiesrus.com, eToys.com, and FAO.com (ToysRus: Corporate Profile). Currently, the company has presence in 35 countries, mainly including Canada, United Kingdom, France, Australia, Germany, Spain and Portugal. The operating context of the retail management of ToysRus is broad because the company operates many well known brands like FAO Schwarz, Toys “R” Us International, Toys “R” Us Express, and Babies “R” Us. Recently, he ToysRus framed a rebranding strategy for FAO Schwarz with intent to add value to its brand recognition. The organization sells the FAO branded products through Toys “R” Us and Babies “R” Us stores while offering the high-end specialty toy brands through the FAO.com website. The company continues to grow internationally regardless of adverse economic pressures associated with the recent global recession. The Toys “R” Us International has recently opened its first licensed location in Poland. The company’s newly developed branding concept “Holiday Express” attracts more and more customers. The Holiday Express stores are smaller relative to the Toys “R” Us locations and they are mainly located in malls and offer more selective category of merchandise. ToysRus has strong business roots in Hong Kong. Currently, the firm operates 13 stores in Hong Kong including 9 main stores and 4 Express stores. In the country, ToysRus offers toys specifically for children under different age categories such as 0-6 months, 7-11 months, 12-24 months, 2-3 years, 3 years+, age 3-5, age 6-9, and age 10+ (ToysRus: About us). Hong Kong’s ToysRus store offers sports equipments and outdoor play items at reasonable rates. While analyzing the retail management elements of Hong Kong ToysRus, including merchandising, promotional activities, supervision, and customer service; it seems that the operating context of the company is very potential. Other than following traditional promotional tactics, today ToysRus increasingly depends on internet based product promotion techniques. For instance, the company extensively uses social networking sites like Facebook and video sharing websites like YouTube to promote its product offerings and price listings. This strategy assists the company to reach more customers at relatively lower operating expense. In addition, the company delivers effective customer services as part of giving a royal shopping experience to customers and thereby building strong brand loyalty. The company is very vigilant in maintaining product quality as the management believes that the supreme product quality is a major factor determining the level of brand recognition. Buying and sourcing strategy While evaluating the effectiveness of the buying and sourcing strategy in the light of the specific context of the retail management (ToysRus in Hong Kong), it is identified that this business strategy would benefit Mattel in the long run. The buying and sourcing strategy is a business approach where an agent operates on behalf of the buyer/manufacturer and negotiates in favor of them so as to have the best deal. As Sople describes in his book, this business policy has undergone tremendous changes over the last few decades; and such changes have resulted in the development of innovative management practices which are highly potential in terms of ‘inputs, processing, and delivery to the customers (2). The author continues that “the products today are sourced from different parts of the world, assembled at different locations and shipped to various destinations to ensure greater customer satisfaction and squeezing out unproductive time and cost from supply chain cycle” (Sople 2). Here, Mattel toy products are sourced by ToysRus and they are distributed in Hong Kong through Toys “R” Us stores and other Express stores. The ToysRus has been operating in the retail industry since 1948 and hence the company can market the toy products more effectively and profitably than Mattel currently does. It is clear that that ToysRus is a well established retail firm in Hong Kong and therefore the company maintains a well developed supply chain system in the country. As a result, Mattel products can be sold and delivered to the end consumers through ToysRus’ existing supply chain system in the country. Hence, Mattel-ToysRus alliance would assist both the firms (especially Mattel) to reduce operating costs and unproductive time and thereby improve the profitability. Once this strategic alliance is formed, Mattel toys will be available through ToysRus stores only. This condition of the contract is beneficial to avoid adverse competition pressures between Mattel products in Hong Kong. To illustrate, when same brand products are offered through different retail outlets owned and operated by different firms, those firms are likely to practice various competition approaches so as to gain potential competitive advantages over the rivals. Under such circumstances, retailers would prioritize their personal financial gains rather than paying attention to long term objectives of the brand. Obviously, elimination of unhealthy market competition would assist the Mattel to improve its sales volume and thereby net income. As discussed already, brand quality and product innovation are the two key factors that place the company ahead of its international competitors. Hence, the organization would go out of the business unless it maintains superior product quality and great innovativeness. In this context, the proposed business contract is advisable because it would aid Mattel to minimize the challenges associated with promotion, selling, and distribution. Furthermore, Hong Kong is one of the world’s fast developing free economies, and therefore the country possesses a strong and competitive retail sector. Hence, it would be a difficult task for Mattel to achieve strong presence in Hong Kong within a short period of time. In other words, the organization has to make huge initial investments to dominate the Hong Kong’s toys and games market through its own efforts. In short, the buying and sourcing strategy seems to be the most potential approach for Mattel to spread its business throughout Hong Kong within a short time. Merchandising strategy Merchandising strategy plays a crucial role in retail sales and business growth. According to Pradhan, “a merchandising strategy is defined as a company’s position with respect to a given product mix- aimed at ensuring optimization of resources, achieving target sales and margins, and reducing stockouts and/or markdowns” (26). The author continues that while designing a merchandising strategy, specific focus must be given to the products to be sourced, pricing strategy, and method of packaging and presentation to the ultimate consumer (Pradhan 26). The merchandising strategy of ToysRus is potential enough to distribute Mattel toy products across Hong Kong region. According to a report by the William & Henry Associates, ToysRus has an effective merchandising strategy which assisted the company to perform well even in the midst of the recent global recession. The report adds that the company has been successful during the key holiday period. By the fourth quarter of the 2010-11 fiscal period, the ToysRus’ net sales increased by 2% and reached US$ 6 billion. In addition, the company could achieve notable improvements (4.6% increase) in domestic sales mainly due to new store openings. However, the organization failed to maintain this growth in its international sales. During the 2010-11 period, the firm’s international sales declined by 2% due to fall in sales of video games and hardware (William & Henry Associates). The ToysRus’ thoughtful new store openings make the company’s merchandising strategy more effective. The company management is very competitive in identifying the need of new stores in particular locations and products to be outsourced. This competency has greatly assisted the organization to enhance its market growth despite the severe recessionary pressures over the last few years. ToysRus uses the scope of pop-up stores and internet to deliver quality products and services to end consumers. Pop-up stores represent temporarily opened smaller stores during the holiday season to meet the increasing product demand. Such stores offer limited categories products at selected locations in order to take advantages of temporary demand increases experienced during the holiday season. In addition, ToysRus utilizes various possibilities of internet to provide its end consumers with greater convenience and better shopping experience. Since ToysRus’ Hong Kong subsidiary maintains a number of websites containing detailed product information such as prices and age category, consumers can easily find out products that would suit their interests. The firm considers internet as a convenient channel to present its product offerings to consumers more attractively. While analyzing the pricing strategy of ToysRus, it is clear that the organization has been practicing penetration pricing strategy. Under this pricing strategy, the company charges lower prices for its products at launching stages and gradually increases the price over the years. The ToysRus’ management holds the view that the company cannot meet customer interests effectively if it sets higher profit margins because the bargaining power of buyer is very high in the toys and games industry. The exclusive retailership with ToysRus As mentioned already, Hong Kong is a free market economy and therefore foreign marketers can easily enter the country’s market. In addition, the Hong Kong government has further lowered foreign entry restrictions recently with intent to promote cross border trade and foreign direct investment. Therefore, it is easy for global marketers to enter the country and market their products without any legal barrier. There are a number of toys and games manufactures operating in Hong Kong and hence it would be a cumbersome task for ToysRus to confront with domestic as well as international competitors in Hong Kong market. Since ToysRus is a reputed firm in the Hong Kong market, this exclusive retailership would assist Mattel to spread the country’s market easily. Another potential of this strategic alliance is that ToysRus has competitive capabilities in internet based sales as the company operates in collaboration with the Amazon.com. Therefore, the Mattel products can attain a strong position in the online market, which is developing to be a potential channel for promotion and sales. In addition, ToysRus maintains a huge distribution network powered by advanced logistic systems. This feature would aid Mattel to cut down its distribution costs to a great extent. Furthermore, ToysRus possesses advanced store facilities in Hong Kong and hence Mattel can present its product offerings very attractively to consumers. On the strength of its well market stature, it is easy for ToysRus to raise working capital or additional funds in times of unforeseen contingencies. As a result, this alliance would benefit Mattel to minimize day to day operating challenges and thereby focus more on productivity and innovation. In addition, the strong financial background of ToysRus is helpful for Mattel to secure its shareholder interests and to keep its business unaffected of the domestic market fluctuations. It is identified that ToysRus has been meeting its corporate social responsibilities effectively and hence the company has a good image among the public. By selling its products through ToysRus outlets, Mattel can share ToysRus’ increased customer loyalty. ToysRus has a strong global presence and this strength would contribute to the feasibility of the proposed strategic alliance in a number of ways. Disturbingly, ToysRus has been losing its Hong Kong market share to the retail giant Walmart over the last few years and this situation may raise some level of challenges to the proposed business venture. Likewise, Hong Kong’s domestic toy manufacturers would also threaten the viability of this project. Another potential challenge is that ToysRus deals with diverse products and services and hence it is not necessary for them to give specific focus on Mattel products. More specifically, ToysRus’ sales personnel may sell toys or games products which have higher profit margins. This situation may adversely affect the rapid market expansion of Mattel, Inc. However, it is the best current available option for Mattel to spread its business across Hong Kong market. Conclusion From the above discussion, it is clear that the proposed business alliance is likely to benefit Mattel, Inc to reach Hong Kong toys market in an effective manner. Currently, ToysRus operates retail stores across 35 countries. The company has strong business roots in the country and it uses modern promotional channels like Facebook and YouTube to enhance its sales and distribution. In addition, the firm has been following the penetration pricing strategy successfully over the years. Undoubtedly, this alliance would assist Mattel to eliminate a sequence of challenges associated with market development in Hong Kong. Since this project makes ToysRus the only authorized dealer of Mattel toys in the country, this business proposal has the potential to avoid unnecessary competition among Mattel products. As ToysRus maintains a huge distribution network in Hong Kong, the planned venture is beneficial for Mattel to ensure timely delivery of goods to the end consumers. Furthermore, the proposal would assist Mattel to get rid of the responsibilities like sales and distribution. In short, the Mattel-ToysRus alliance can create several benefits in the current economic context. Works Cited Pradhan, Swapna. Retail Merchandising. New Delhi: Tata McGraw-Hill Education, 2010. Google Books. Sople, Vinod V. Business Process Outsourcing: The Supply Chain Of Expertises. New Delhi: PHI Learning Pvt. Ltd, 2009. Google Books. ToysRus: Corporate Profile. Web Nov 10 2012 ToysRus: About us. Web 10 Nov 2012 William & Henry Associates. “Toys R Us: New Management Brings Results and Hope for IPO Story”. April 21, 2011. Web 10 Nov 2012 Read More