With record sales and a hit movie expected to propel it further, the Lego Group could be expected to bask in its remarkable turnaround, but the Danish maker of colorful toy blocks is pressing ahead to face the challenges of globalization.
Last month, the world’s second-largest toymaker reported a 9 percent rise in annual net profit to 6.12 billion kroner (US$1.12 billion). It also saw sales rise 10 percent to 25.38 billion kroner last year, marking a quadrupling in just 10 years.
By contrast, the traditional toy market is expected to grow either marginally or not at all, as it loses sales to video games.
Lego’s performance is even more remarkable since a decade ago, it was posting massive losses and laying off thousands.
When chief executive Joergen Vig Knudstorp took the helm in 2004, vulture capitalists were circling the ailing company, into which Lego heir Kjeld Kirk Kristiansen had just injected 800 million kroner of his own money.
“There was an emphasis on stretching the brand and moving into adjacent businesses. Apparel, theme parks, a lot of consumer electronics and so on,” Knudstorp told reporters in an interview.
The ideas were not necessarily bad, as sales did rise, but the businesses were not a good match with Lego, which failed to make them profitable. It also lost focus on the original toy operation, where revenue plunged.
In addition to spreading itself too thin, Lego failed to adapt to consumers’ shift away from local “mom-and-pop” stores to big-box retailers like Wal-Mart Stores Inc and Toys”R”Us Inc.
The first CEO from outside the founding Kirk Christiansen family overhauled the supply chain and withdrew from high-cost manufacturing locations such as Switzerland in favor of “mid-cost” countries like Hungary and the Czech Republic.
The Legoland theme parks were spun off and merged with Merlin Entertainments PLC.
“We decided to only do the core business and leave these adjacent businesses to other operators and earn a licensing income,” Knudstorp said.
The Lego Movie, a smash-hit animated film, is a case in point of how the group is profiting from letting other companies use its brand.
A Warner Brothers Entertainment Co team spent five years immersing itself in Lego’s culture before the movie hit the screens.
Many Lego fans still build “freestyle” and post clips of their creations on YouTube, where the group boasts 7.5 billion views, 99 percent of which are user-generated and which it says put Lego in the top three brands on the site.
Lego has gone from being a purveyor of plastic bricks, to selling toys that come with pre-written storylines, such as the Harry Potter-themed range released in 2001 and last year’s megahit Legends of Chima. The new product ranges now account for 60 percent of the company’s sales.
“If you look at who is successful in this not-so-successful traditional toy industry, it is those [with] big stories,” Knudstorp said.
Lego recognizes the significant cultural differences between how children react to theme collections.
This makes attracting the right marketing talent crucial, but Lego has trouble recruiting given the remoteness of its hometown of Billund, three hours from Copenhagen with a population of 6,200.
While the company is not abandoning its hometown, it plans to set up new management hubs in London, Singapore and Shanghai, as well as at a Connecticut facility.
Lego hopes this will help it tap greater talent pools and bring it closer to emerging markets where future growth will come from.
While many in the industry say the future of toys is digital, Lego is confident it can continue to see off the challenge. The firm has let partners develop video games for various consoles for its toys.
Traditional Lego toys and digital applications “can coexist, that’s my strong belief,” Knudstorp said.