Mattel is falling off a cliff in brazil – mattel, inc. (nasdaq mat) seeking alpha tally erp 9 data recovery software

Brazil is huge in virtually every respect. The country has the fifth-largest landmass and the fifth-largest population in the world. It has the eighth largest GDP. Brazil makes Portuguese the sixth most widely spoken language. Brazil is also the world’s fourth-largest democracy and the second-largest Christian country. It also has the world’s largest river, the Amazon, as well as the world’s largest tropical rainforest.

Brazil is also the seventh-ranked country in terms of total natural resources. It is estimated to have $21.8 trillion in commodities. Brazil has large deposits of gold and uranium and is the world’s second-largest producer of iron. While the country also has sizable oil deposits, its most valuable natural resource is timber. About 12.3% of the world’s timber supply comes from Brazil.

The current President, Mr. Michel Temer, is implicated in corruption charges and his two predecessors, Dilma Rousseff and Luiz Inacio Lula da Silva, are in jail. In fact, Michel Tenner has already announced that he will not run again for the presidency in the elections scheduled five months from now.

The disparity in living standards is extreme. Economic inequality in Brazil has reached extreme levels, despite being one of the largest economies in the world. The last decades have seen incredible progress across Brazil. The country has been able to reduce inequality, taking millions of people out of poverty and thereby raising the base of the social pyramid. But despite this evolution, the pace has been very slow and the Latin American giant is still listed as one of the most unequal countries on the planet.

Brazil’s six richest men have the same wealth as the poorest 50 percent of the population; around 100 million people. The country’s richest 5 percent have the same income as the remaining 95 percent. Someone earning the minimum monthly wage would have to work 19 years to make the same money a Brazilian from the richest 0.1% of the population makes in one month.

If they can get a job, that is. Unemployment is a major problem. After 8 years of improvement, resulting in a rate of 6.8% in 2014, the situation has again worsened and is now, at the end of last year, estimated at 13.4%. Exacerbating this, youth unemployment is extreme – the Youth unemployment rate at the end of 2017 stood at 30.46%, the highest since 1992.

Whilst literacy is well above 90% for the population above 15 years of age, educational levels continue to be a major impediment to Brazil’s economic development. The World Development Report 2018 (WDR 2018) – LEARNING to Realize Education’s Promise— estimates that it would take Brazil more than 260 years to reach the OECD average proficiency in reading and 75 years in mathematics.

Even though the toy market is pretty solid, the leading retailers have not been spared the fallout caused by political and economic uncertainty. For one, R I Happy, the largest toy retailer, has decided to postpone its initial public offering scheduled for Spring this year, due to weak investor demand. Secondly, Walmart (NYSE: WMT), too, has struggled in this environment. The number of its stores has declined since the peak of 558 in 2013 to now 498. Despite being the third-largest retailer in the country, with sales last year of $9.4 billion, Walmart has not been able to generate an operating profit in the last seven years. The company is now looking for a buyer of its entire Brazilian venture. However, potential acquirers have estimated that the unit owes up to $3 billion in back taxes to state governments which, if accurate, will significantly impact its valuation.

There are also reports that Amazon (NASDAQ: AMZN) may soon expand into the South American country. An earlier report by Bloomberg said the tech giant is recruiting for a number of positions in Brazil, leading some to believe it has its sights set on Latin America’s largest market.

Whilst these market shares look reasonable, they have been subject to significant changes over the past six years. The most notable one occurred with Mattel (NASDAQ: MAT) which had a 30% market share in 2012, then dropped down to 15% by 2016, to 12% last year and is now trending towards 10%. Hasbro was one of the main gainers in the process which propelled them from then 4% to 7% in 2015, 9% in 2016 to 10% last year. The trend during the past five months this year continues to be positive and suggests that Hasbro will replace Mattel as the top toy company in Brazil this year.

I asked one of my friends in Brazil, a senior retail executive – what he thought were the main reasons for these changes. His response was very simple: in the case of Mattel, you have two – the loss of Disney Princess and complete lack of Brazil-specific innovation. In the case of Hasbro, the main determinant was the acquisition of Disney Princess and the success of movie IPs. Candide, in turn, benefited from the success of two very innovative products – LOL of MGAE and PJ Masks of EOne.

What this suggests is that Hasbro clearly dominates the Action Figure field with Sunny being second and Mattel third. In the Fashion Doll category, Hasbro has pulled ahead of Mattel and Disney Princess has relegated Barbie to a very distant #2.

In other words, even though Brazil is clearly a very problematic place to do business in, companies can prosper there if they have the skills and the financial resources to overcome the obstacles that face them. Also, Brazil continues to be the major economic power in Latin America and is hence a potential prime destination for any toy manufacturer bent on international expansion.

For foreign toy companies wishing to enter this market there are few options. One of them is obviously starting a Brazilian company and handling all supply chain issues from the word “go.” Whilst this is obviously possible, it is an avenue that is extremely risky and time-consuming and one that does not provide any guarantees for future success. For instance, leading retailers would not even consider taking in products from a newcomer unless he or she agreed to absolutely onerous conditions – pricing, payment terms, guaranty for obsolete inventory, etc.

I spoke to a source of mine – a national buyer at one of the major retailers – to get a sense of the options available to a newcomer wishing to enter this market. She was not overly encouraging. She said that most newcomers were considering appointing an agent or exclusive distributor and letting him get on with it. Whilst obviously a tempting route to take, it is also pretty risky. There are specific laws relating to the agency agreement and these laws tend to protect the agent rather than the principal and impose certain mandatory terms in agency agreements. Brazilian law will apply and commissions are usually payable even where sales are not introduced by the agent. These agreements can also be difficult to terminate and, on termination, require a substantial payment to the agent. The second is that agents or distributors who enter into credit arrangements with their own customers tend to do everything possible to transfer this risk to the supplier by insisting on open account terms rather than payment by Letter of Credit, which invariably leads to delays in settling accounts and often a refusal to pay at all if there is the slightest dispute between the company and the distributor. The third is that not all distributors are created equal as far as the large retailers are concerned. My source mentioned that she would only deal with distributors who met very stringent and ongoing quality criteria as far as supply chain execution, product standards, financial performance, and management quality were concerned. She also said that she would not consider new vendors if they did not already have a long and verifiable track record with other retailers.

In the opinion of my source quoted above, the only prudent course of action for a newcomer is to either find one of the few really good distributors [with credit terms to match] or alternatively enter into an arms-length and financially secure license arrangement with an already established and reputable company.