Lego tops toy sector by building on its strong foundations

With sales of the colourful plastic bricks rising exponentially around the world and its first movie grossing more than $400 million (€289 million) at the box office, Lego has successfully rebuilt its global empire.

In 2003, the toy brand was losing more than half a million euro a day. Not only has it saved itself from financial ruin, but last year it became the most profitable toy company in the world, with an 11 per cent jump in sales to 25.38 billion kroner (€3.4 billion), enough to see it overtake Barbie manufacturer Mattel.

The 82-year-old manufacturer, headquartered in the tiny Danish town of Billund, has bucked the downward trend in the global toy market, with revenues quadrupling in the past decade. Sales and profits have risen for nine consecutive years, on the back of lines ranging from chunky Duplo building blocks for toddlers to computer-programmable and app-controllable Mindstorms robots.

Founded by impoverished carpenter Ole Kirk Christiansen in 1932, the company’s first product was a wooden duck, which adopted the name Lego, derived from the Danish “leg godt”, meaning “play well”.

The first version of the plastic interlocking blocks rolled off the production line in 1949, with the modern version of the Lego brick, made using ABS plastic in the same eight-stud configuration as today, patented in 1958.

Few toys have as consistently captured the imaginations of generations of children all over the world decade after decade, but such universality has not always translated into financial success.

Ten years ago, the company was on the verge of collapse.

Fall and rise
In an effort to boost sales after a decade of stagnation in the 1990s, under the direction of former Bang & Olufsen executive Poul Plougmanm the company strove to innovate.

It expanded its product range exponentially and diversified into areas ranging from theme parks to clothing, while simplifying some of its lines and creating a “juniorised” series around the figure of Jack Stone.

Despite some successful licensed lines linked to the Star Wars and Harry Potter film franchises, sales remained flat while costs soared, leading to a pretax loss of 1.4 billion kroner in 2003.

The company's recovery from that nadir is credited to Jorgen Vig Knudstorp, a former McKinsey management consultant who took over from the original founder's grandson as chief executive of the Lego Group in 2004.

His plan, as Lego history chronicler David Robertson recounts in his recent book, Brick by Brick: How Lego Rewrote the Rules of Innovation and Conquered the Global Toy Industry , was to take the company "back to the brick", by refocusing on construction toys.

The old Lego City line was reintroduced, along with the bigger Duplo bricks for preschoolers. The colour palette and the number of plastic elements in stock were reduced, bringing down costs and ensuring collectors could reuse sets to make other things.

The Legoland theme parks were sold to Madame Tussauds owner Merlin Entertainments in 2005, and the “lifestyle” products were dropped.

Sales and profits have soared since, with revenues jumping 23 per cent in 2012 alone.

Duplo, Lego City and Star Wars are still among the company’s biggest sellers.

The Friends range aimed at young girls caused some controversy after its introduction in 2012 for its taller and slimmer minifigures and pink palette, but has proved a commercial success for the company, with a jungle Friends theme to be introduced this year, alongside a Disney Princess set.

Knudstorp attributes the company’s success to achieving a balance between the timelessness of the plastic building blocks and innovation.

In an era where iPads and computer games increasingly compete for children’s attention, constant reinvention of the product is needed to keep Lego’s share of the market, and its business model has adapted well so far to the digital age.

With lines such as Ninjago and Legends of Chima in recent years, the company has built an evolving online narrative around the physical Lego sets, with animated series, computer games and apps to keep the “iPad generation” of kids engaged.

A new collaboration with Google this year, Build with Chrome, allows users to construct buildings from virtual Lego blocks into Google Maps. The company is even considering the potential opportunities of 3D printing.

Collaboration
The internet has also facilitated the emergence of user groups for adult fans of Lego, known as Afols, whose legions include celebrity enthusiasts such as David Beckham, Brad Pitt and Mark Wahlberg, and who have become central to the brand's success in recent years.

Recognising the importance of this fan base to the company, Lego has established a dedicated support team to interact directly with the 200 user groups around the world.

It is this support for fans that makes the company unique, according to David Fennell, a 40-something chartered accountant who is one of three men behind the Brick.ie forum for Irish adult fans. His models of Heuston station and the Arnotts department store have been exhibited at Lego World in Denmark.

“Community support teams help fan clubs organise larger events and exhibitions to display the incredible models that fans are capable of,” says Fennell. “This word-of-mouth support can be far more effective than paid advertising, especially when delivered by peers.”

Some adult enthusiasts have managed to turn their passion for building into a career, with Lego supporting 12 "certified professionals". Almost 10,000 Irish Lego fans poured through the doors of the Ambassador theatre in Dublin last weekend to see The Art of the Brick exhibition by one such Lego artist, Nathan Sawaya from the US, featuring more than 70 Lego sculptures created from more than a million bricks.

His works include interpretations of some of the world's most famous art works, including the Mona Lisa and the Venus de Milo , as well as a six-metre T-rex skeleton.

"With very healthy advance sales, it looks like being the most successful exhibition we have brought to Dublin in the past few years," says Noel McHale of event promoter MCD. "We were lucky with the timing in that The Lego Movie has sparked a great wave of interest and nostalgia for the humble brick."

Another independent professional Lego builder from Britain, Warren Elsmore, will bring his Brick City exhibit of global landmarks to Titanic Belfast next month.

The collaboration between the company and consumers works both ways, with Lego increasingly looking to its fanbase for ideas and feedback since it first approached user-hackers for advice while developing its Mindstorms robots in the late 1990s.

Enthusiasts are often invited to attend product-development workshops in Billund, while six Lego sets have been brought to market as a result of the Lego Cuusoo crowdsourcing website, which allows fans to propose designs that are then voted on by their peers.

Support for fans is not limited to adults, however, with more than five million children aged four to 11 signed up to the Lego Club worldwide, and 230,000 nine- to 16-year-olds involved in the First Lego League science competition every year.

Future
The phenomenal success of the first official Lego Movie has only added to the hype. The film is still in the Irish box-office top 10 eight weeks after its release, grossing more than €3.25 million so far in Ireland alone, and $424 million internationally. It is second only to Captain America in the biggest grossing films of 2014 so far.

Despite the commercial success of the film, in both ticket sales and merchandise, the company’s marketing department insists increasing sales was a secondary priority in the decision to make the movie, behind “giving a new dimension” to the brand.

Although the pace of growth has begun to slow, the company has forecast continuing expansion that will exceed the “low single-digit” growth expected for the global toy market generally.

Central to this plan is expansion into new markets outside Europe and North America, with growth in recent years driven by rapidly rising sales in Asia.

The company injected €354 million into capital investment projects last year alone in an effort to scale up production close to these new markets and in low-cost regions.

Factories were expanded in Mexico and the Czech Republic, while construction of a manufacturing plant in Hungary is almost complete.

A new factory in Jiaxing in China will be ready to begin production in 2016 to supply the Asian market.

In the meantime, the company will continue to build on its enduring appeal for adults and kids alike for whom, as the old Lego advertisement goes, the old pile of bricks “becomes a new toy every day”.