As highlighted in our recent global company profile, LEGO, the world’s third biggest manufacturer of traditional toys and games, continues its dynamic expansion bolstered by the success of 2014’s The LEGO Movie. The world’s leading construction toys manufacturer was among the most dynamic toymakers in the world over 2009-2013, more than doubling its sales. LEGO’s global strength is founded on its dominance of the construction toys category, in which it held a 65% value share in 2013. Construction toys accounted for 94% of the company’s global toys and games value sales during the year, with games and puzzles responsible for most of the remainder. However, LEGO decided to phase out its LEGO Games board game product line in 2013, judging that it did represent a sustainable fit with the company’s core long-term operations. LEGO has used its dominance of construction toys as the platform for dynamic expansion in recent years. The company significantly increased its global construction toys value share every year throughout 2008-2013.
Its strong product innovation has played an important part in driving growth, with the company launching 60-70 products per year, and both revitalising the core brand and expanding its consumer base through the introduction of new lines such as LEGO Friends (2012) and LEGO Chima (2013). LEGO has also made astute use of licensing, with its relationship with brands such as Batman and Star Wars taking on an existence with a certain independence from the parent entities. This has facilitated the LEGO brand’s continuing expansion beyond construction toys into video games; 2014 saw the introduction of the video game, LEGO Batman 3: Beyond Gotham, for example. Such moves have in turn had a positive impact on the company’s core category sales. 2014 saw LEGO add a new dimension to its media presence with the release of The LEGO Movie. Movie releases have a marked impact on sales in toys and games across a number of categories, and the success of The LEGO Movie maintained the brand’s strong momentum especially in the first half of 2014.
Moreover, it paved the way for new movies, including spin-offs, such as Ninjago and LEGO Batman movies, and a sequel to The LEGO Movie, which is scheduled for 2018. The company’s established lines such as LEGO City, LEGO Creator, LEGO Technic and LEGO Star Wars also made significant contributions to its growth over 2014. In geographic terms, LEGO has established a global reach, leading construction toys sales in every region. Nonetheless, its operations remain biased towards the developed markets of Western Europe and North America, which jointly accounted for 68% of its sales in 2013. In 2014, the toymaker underlined its commitment to expansion in China with the official ground-breaking of the company’s first factory in China, located in Jiaxing, and the inauguration of a new office, one of the company’s five main offices globally, in Shanghai. While LEGO’s concentration on a single category has been a notable strength, providing a strong focus and enabling the development of a highly recognisable, coherent brand, it makes the company sensitive to a potential wane in demand for construction toys.
The company should consider ways to diversify its offer that fit with its core brand values, particularly its emphasis on free-play, and, preferably, provide cross-over play opportunities with its core products. Movie releases play an important part in boosting growth across a number of toys and games categories. LEGO should work to maintain the momentum resulting from the success of The LEGO Movie through the development of movie sequels and spin-offs, and related products in both construction toys and video games. While it has successfully extended its core brand into video games, LEGO is notably weak in digital gaming. The company needs to address this issue as digital gaming is set to be the most dynamic toys and games category over 2013-2018, and has a potentially key role to play in LEGO’s expansion in Asia Pacific. LEGO would also benefit from developing games with a greater emphasis on free-play, as embodied by its core construction toys products. LEGO is working to expand its presence in emerging markets, particularly in Asia Pacific.
This needs to be a priority, especially given that the company is set to experience intensifying competition from the likes of Spin Master and, particularly, Mattel in construction toys. While LEGO is the dominant force in the category in its core markets, it has a significantly more vulnerable position in key emerging markets such as China.Nine-year old twin brothers Robbie and Zacky Keirstead had one wish for their last day of summer break: to go to the Lego store at Rockefeller Center. Their mom granted that wish and the two brothers walked away from the store on Thursday with their fresh purchases, including a $50 Lego Super Heroes set for Robbie, who has 20 Lego City sets in his collection. “We have tons and tons,” said Zacky. “I have so many creative ideas. (With Lego) you can buy pieces and build them. There are all these different choices.” Lego’s Rockefeller Center model The Keirsteads’ passion for Lego is one reason why the Danish company’s first half sales growth of 11% outpaced its major rivals Mattel Inc. and Hasbro, and allowed it to edge past Mattel to become the world’s No. 1 toymaker for the first six months.
To be sure, Lego may hot hold the top spot through year- end – Mattel generates a far bigger percentage of its sales in the second half during the key holiday season. Mattel’s $6.5 billion in sales last year is still almost two-fifths larger than Lego’s, according to FactSet data. Still, Lego is a classic turnaround story, bouncing back from two straight years of losses in 2003 and 2004 that sapped its cash reserves. The family-controlled company brought in former McKinsey & Co. executive Jørgen Vig Knudstorp as CEO in 2004. Knudstorp sold the theme parks business in 2005, and the company moved to use partners such as Warner Bros., the studio behind this year’s blockbuster “The Lego Movie,” to develop video games. His top priority was to refocus on the company’s classic brick toys. Sixty percent of its sales are from new products created by a team of more than 180 designers. Unlike its rivals, Lego makes over 90% of its products at four company-owned factories in Europe and Mexico.
Those moves have paid off. Sales and profit have risen each year since 2005. The company’s gross margin has widened to about 70%, compared to about 50% each for Mattel and Hasbro. Lego has “a shot at being No. 1,” said Euromonitor toys and games analyst Robert Porter, who highlighted its significant edge over construction toys Mega Bloks, which Mattel is buying, and Hasbro’s Kreo line. “It’s the entire narrative behind it. They are able to give the kids the story. They are very innovative. are losing market share.” That narrative has kept loyal shoppers hooked well into their teens. At the Lego store in New York, Scottish native Mark McLean and his wife spent about $300 on Thursday on purchases including a $160 Star Wars set for their 16-year-old son back home. “We’ve spent thousands of dollars” on Lego for him since he was a toddler, McLean said. “It’s everywhere in his bedroom.” One major advantage is that Lego is private, said Porter.