A Brick too far

Lego has lost a huge amount of money in two of the past three years. Why has the world’s most popular toy fallen from grace, and can it come up with a convincing rescue strategy? David Benady looks for answers

Lego’s admission last week that it had turned a £45m profit in 1999 into a £90m loss in 2000 cast a shadow over the company’s recent strategy. “Like a splash of cold water in the face, this has opened our eyes to what we are not good at and what we do wellí” says chief operating officer Poul Ploughmann.

Sales figures for 2000 have not yet been fully compiled, but Lego’s biggest annual loss to date – in fact, only the second in its 60-year history – is the result of a devastating collapse in turnover from 1999’s £860m.

In the press release published last week, Ploughmann assured Lego lovers around the world: “We know what went wrong and we know what to do about it.”

But the company would appear to have spent too long in Legoland, and lost its grip on reality.

Losing focus

Lego owns probably the most popular and successful children’s toy ever invented, but has panicked in the face of a changing market. Critics of the company’s strategy say executives have lost sight of why kids and parents love the multi-coloured plastic building bricks.

Instead of revelling in the brand values of Lego – it is a creative way to teach children physical manipulation and hand-to-eye skills and is also fun – management is diluting the brand with a thousand extensions, marketing partnerships and licensing deals. This confuses children and their parents, many of whom grew up with the Lego brand.

Ploughmann admits the company has “lost focus” and needs to “refocus on the core business”.

He says the brand is about “stimulating imagination, creativity and learning” but then proceeds to lay out a strategy for recovery which contradicts this.

The refocusing will involve pulling out of manufacturing wristwatches and publishing books, and instead licensing these activities to third parties. Lego will also be looking hard at its existing licensing deals, such as that with Danish firm Kabooki (which produces the Lego Wear clothing line). In addition, investment in new Legoland parks will be slimmed down. But while the leisure parks are seen as contributing to Lego’s brand image, clothes and wristwatches appear to have little to do with stimulating imagination, creativity or learning.

Lego plans to reassemble the business by placing more emphasis on its leading-edge technologies, by extending the “intelligent brick” concept of Lego Mindstorms – which features bricks with an embedded microchip that can be built into a robot – and extending Lego Studios, which puts “the power of movie making in the hands of children.”

Chief executive Kjeld Kirk Kristiansen claims the Lego brand is “as strong as ever”.

But Ian Madeley, managing director of children’s marketing company Logistix Kids says: “It needs to be reminded what its core values are all about. Lego is about imagination and construction, teaching hand-to-eye co-ordination in a fun way. On the press release Lego says it has got to focus on the core business, and in the next breath talks about tie-ins with Disney and Harry Potter. What has that got to do with the core product?”

Bewildering product range

A glance at the Lego website shows that extensions and tie-ins have proliferated. Once the world’s most straightforward toy, Lego now requires a bewilderingly large set of product catalogues. Lego Scala aims to widen the brand’s appeal to girls, Lego Technic Nautilus is sold with a CD-Rom giving instructions on how to build the model, Duplo is for toddlers… the list goes on.

The shelves of toy shops are buckling under the weight of all these new takes on the Lego brand. There are branded clothes and bags and Lego even plans to produce television programmes for families and children. Its aim of becoming the world’s top family brand is just the sort of bold mission statement that senior executives love – the sort that is so broad as to indicate a lack of clear direction.

“Lego has confused the consumer as to what it is about,” says Madeley. “Children are no longer sure what they are buying, or whether they will ever have the complete set. Lego is missing the point – there is a huge market for traditional values. It should be the Lego brand, not Harry Potter or Disney.”

Lego has spent the past 20 years battling against a changing world. After launching the “stud and tube” snap-together bricks in 1958, it enjoyed growth for 20 years, and managed to penetrate the US market after some hiccups. The patent on the bricks expired in 1981, opening the way for an array of competitors. In the Nineties, the growth of video and computer games outstripped that of construction toys, and in 1998 Lego recorded its first loss. This prompted the company to drop its long aversion to commercial tie-ins and it linked up with Star Wars and Winnie the Pooh.

But partnerships are always a tricky area for powerful brands such as Lego, offering a tempting, but short-term, fix. The brand risks becoming devalued and ending up as little more than a medium for the latest craze around at the time. One of the dangers is that, if there are no big children’s Hollywood blockbusters in a given year, the brand will suffer.

Spoilt for choice

The problem for Lego is that while many children will have a set in the toy box, they are taking it out and using it less frequently. There has been an explosion of choice in toys and, in many countries, increasing wealth and diffused family relationships has meant a host of stepmothers and fathers, uncles and aunts all buying presents for children. They are spoilt for choice.

Some argue that brand extensions can be an important part of Lego’s business, but that it should forget about targeting children over ten years old altogether. Martin Phelps, business director at Ogilvy & Mather, which works on Mattel’s Barbie business, says: “There’s a fundamental problem for Lego. The older end of the market is where much of the growth was coming from, but now that children are getting older at a younger age, it should not be aiming at the older group. Its core business is the fourto eight-year-olds. It needs to bring the brand more alive for them.”

Mattel performed reasonably well last year – with overall revenue edging up two per cent and Barbie sales increasing by five per cent.

A Lego spokeswoman says sales of its new ranges aimed at older children were one of the bright spots last year, with sales rising 20 per cent. But she admits the huge growth in sales of mobile phones for children took the company by surprise.

Phelps says older children will increasingly see Lego as being too childish. Barbie has managed to weather the storm of new technology, he says, by forsaking the older age group and embedding the brand more in the lives of little girls. It is an aid for social development, so can be extended in many ways without diluting the brand. “Lego does not have the same social context as Barbie, and it would be well advised to look at ways to expand its impact on children’s lives,” he says.

Central European strength

The spokeswoman admits Lego has suffered poor sales in the US, Japan and the UK. “If we had the same market share in those markets as we do in central Europe, we would be well off,” she says. This trend supports the view that Lego is a devalued currency with older children – as it is the weaker-performing markets where the cult of adulthood has seriously hit the over-tens.

But Lego’s push into technology markets puts it into contention with the iconoclasm of PlayStation or the older teenage pop image of mobile phones – a battle that will be hard to win.

Still, many parents would prefer their children to play with Lego rather than sit in front of the television or a computer game – it is a constructive toy rather than a destructive one like many PlayStation games. Some are surprised that Lego is launching a television station. “Leave it to the professionals,” says one observer. The brand risks losing its position as the creative, constructive alternative to watching the television and the more decadent end of the video games market.

While Lego searches for the true meaning of its brand (it sounds rather like the plot of a Disney movie), the rationalisation of its production capacity continues, with thousands of workers being made redundant and factories closed. Last week it announced the closure of its Neuhof and Lattich factories in Baar, Switzerland, the sale of its tool factory in Germany and an engine factory in Budapest, all with the loss of 500 jobs. The company admits it had over-capacity and planned for too much production.

Simplifying the structure

This may be a result of Lego’s push into licensed goods and brand extensions. Global supply chain director Tommy Gundeland Jespersen says: “To maintain the competitiveness of our production in Europe, we needed to establish a simpler structure that can more efficiently respond to changing demand for Lego products within our main markets.”

A double whammy of bad news hit the toy industry last week following Lego’s announcement of a poor 2000. Online toy retailer eToys is pulling the plug on its operations. Toys ‘R’ Us also issued a warning of lower earnings in the next three quarters and reported sales slipping in the fourth quarter to $4.8bn from $5bn (£3.4bn) the previous year.

But toymakers such as Mattel and Hasbro have, after some setbacks, done much to ward off the worst effects of the trend of children moving away from dolls and toys to more grown-up technology.

Lego says it knows how to put its problems right. Licensing out the manufacture of wristwatches will do little to stop the slide, but all is not lost. Older children the world over appear to be moving away from Lego’s building blocks, but demand for its underlying brand values remain as strong as ever.

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