When a kid grows up, someone has to suffer


ON MAY 31, 1994, the Walt Disney Co. released The Lion King, which would become history's top-grossing animated film and would help drive Disney's stock from $15 to $40.

The same year, propelled by a killer Flintstones promotion featuring a McRib Grand Poobah Meal and four Bedrock mugs, McDonald's Corp. booked record profits for the 30th year in a row.

And Toys 'R' Us Inc., riding the Power Rangers craze and a blockbuster Christmas, recorded its 20th year of consecutively higher profits

Every effect needs a cause, and the business chatterers of the mid-1990s gave plausible explanations for each of these companies' successes.

The Lion King, obviously, was a beautiful work with catchy music that drew young and old. Disney's Michael Eisner was a genius at giving the creative types loose rein and hawking movies and merchandise together.

McDonald's had made itself indispensable to the mobile modern family, and, as for Toys 'R' Us, what could you say? It had invented the concept of the big-box specialty chain that stripped sales from Main Street shops and department stores alike, and it seemed invincible.

But there was something else going on, a secret shot of biological amphetamine that was juicing these companies' results - and would soon disappear.

Disney did well for a while but stumbled in 1998 as earnings began to slump, first from theme parks, then from movies and plastic-junk sales.

Toys 'R' Us and McDonald's bombed even more quickly. Starting in 1995, McDonald's store-for-store sales went limp, prompting a frantic flopping from one dubious management shuffle and menu innovation after another. Remember the Arch Deluxe?

The Power Rangers lost their mojo, and Toys 'R' Us was forced to close two dozen stores in 1996. Toys 'R' Us posted a profit decline in 1995, and McDonald's earnings fell in 1998, breaking both companies' decades-long strings of increases. Now all three firms are in bigger trouble. McDonald's just recorded its first-ever quarterly loss, and a couple of weeks ago Moody's Investors Service downgraded its debt. Gregory Staley, president of Toys 'R' Us' U.S. division, resigned in January after poor 2002 sales. Disney boss Eisner's job may also be at risk after last year's Treasure Planet movie stinker and the apparent commissioning of the Disney Magic vacation ship as a biological weapon on a flu-laced cruise to the Bahamas.

Disney's stock has fallen 60 percent from its high; McDonald's, 70 percent; and Toys 'R' Us' nearly 80 percent, and experts are just as full of helpful explanations as they were eight years ago when these companies were thriving. Eisner has lost his touch and is harming the Disney brand by trying to micromanage everything. Staley was great for rehabbing the tired Toys 'R' Us store layouts, but what the chain really needs is a master merchant who can move the goods.

And McDonald's big problem - here's wisdom - is that poor sales have put it in the position of "just trying to play catch-up" with competitors, a Wall Street guy told CNBC. A sports analogy and a tautology in one sentence. That costs an extra nickel.

There is, however, another reason for these companies' problems, and it has nothing to do with the smarts of their managers, the appeal of their ads or even the quality of their products. Ray Kroc, Walt Disney or Rockefeller himself would produce the same bad results.

Disney, McDonald's and Toys 'R' Us, as you may have guessed, were stunned by a demographic time bomb that went off in 1995 and continues to inflict pain.

In 1994, the American bull market in 4-year-olds reached its peak. Never before or since has the nation made so many tiny humans available for playing with dolls, watching cartoon movies and eating McNuggets. (Kids' "Happy Meals" account for 20 percent of McDonald's business.)

When baby boomers stopped procreating with quite as much gusto as before, starting in 1991, the fix was in for companies with tyke and toddler customers. Goodbye, Discovery Zone. Help, FAO Schwartz.

The number of U.S. kids under 5 fell 3.2 percent from 1994 to 1999 - a drop of more than half a million. This doesn't sound like much, but remember that the magic of soaring profits often involves a relatively small amount of extra sales processed through a fixed cost structure. At all three companies, marginal costs were nowhere close to marginal revenue, which was great when the trend was up and painful in reverse.

Now, of course, the 4-year-olds of 1994 are patronizing different merchants and creating new business opportunities. Unfortunately, you can't buy stock in Limp Bizkit.

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