It is a brand name familiar to children around the world, but a decade ago Lego was in crisis. Sales were collapsing at a rate of 26 percent a year, it lost 1.4 billion Danish kroner (US$257 million) in 2003 and private equity firms were circling the 82-year-old family-owned Danish company.
Now, after a series of job cuts and the ending of the family’s management of the company, the plastic-brick business has rebuilt itself into the world’s most profitable toymaker, taking the spot from Barbie’s Mattel.
Lego Group, which has been headquartered in the small Danish town of Billund (population 6,155) since 1932, on Thursday reported “another record-breaking year” of sales and profits growth — for the ninth consecutive year. Its high profitability comes from its ability to turn each kilogram of raw material plastic — which costs less than US$1 — into sets that sell for more than US$75 per kilogram.
Annual profits increased by almost 10 percent to 8.2 billion kroner — about the same as the profit Facebook Inc turned in last year. Sales jumped 10 percent to 25.3 billion kroner.
“That is an incredible quadrupling of our revenues in less than 10 years,” Lego chief executive Joergen Vig Knudstorp said. “We think we are changing children’s lives forever when they play with Lego. We think this was another year where we got great affirmation of that.”
Knudstorp is credited with driving Lego’s resurgence since he took over as CEO from Kjeld Kirk Kristiansen, grandson of the company’s carpenter founder, during the crisis from 2003 to 2004.
He said Lego’s success was due to constant innovation and the creation of 60 to 70 new products every year, including Harry Potter, Star Wars and SpongeBob SquarePants ranges. He admitted it is still a “major innovation challenge” to “stay on the top of children’s wish lists” against competition from iPads and computer games.
“We need to constantly become better, or otherwise there will be someone out there who will catch up to us,” he said.
Jane Westgarth, a toy analyst at market research firm Mintel, said Lego’s recovery had been fueled by its investment in quality and design.
“They are doing things that are taking Lego into a slightly different position, from the boxes of bricks where you had to use your imagination to sets you use in specific ways with characters you already know,” she said.
“If it’s good quality, people are prepared to pay that little bit extra,” she added.
Westgarth said Lego was also benefiting considerably from parents’ nostalgia for their own childhood — parents including David Beckham, who said last month that he builds Lego with his children to stay calm and had just completed the 4,287-piece Tower Bridge kit.
The company, which sold its Legoland theme parks to Madame Tussauds owner Merlin Entertainments in 2005, is building on its “red core business” by boosting its digital presence, but Knudstorp said his customers have done most of the work for him.
More than 99 percent of Lego videos on YouTube — featuring Lego recreations of everything from the London 2012 Olympics to the New Testament — are made by users.
“We’re not leaving the brick, but we will leverage digital technology to stay relevant over the next 20 years,” he said.
Lego, which is derived from the Danish leg godt meaning “play well,” also benefits from “a considerable amount of excitement” prompted by the Lego Movie.