Lego has found the right building blocks for getting the business out of the red: focus on the core product, fans and online operations. By Martin Croft
Iconic toy brand Lego has poached Levi European head of digital marketing Helene Venge as it seeks to build a reputation online – an arena it considers to be of growing importance in brand building.
Lego had a rough ride in the 1990s, with ill-advised attempts to turn the colourful building-brick range into a lifestyle brand – plunging the Danish company into record losses. But its fortunes appear to have revived over the past 18 months, under a rebuilding programme launched in early 2004.
That plan involved refocusing on core brand assets, rebuilding customer relationships and slashing costs – and keeping the company a family business. Sales in 2004 were DKr6.3bn (&£585m), but profit before tax, interest and extraordinary items was only DKr63m (&£5.8m). In 2005, sales rose to DKr7bn (&£650m), with comparable profits of DKr468m (&£43.4m). If one-off costs are included, then 2004’s pre-tax loss was DKr1.2bn (&£111m), compared with a profit for 2005 of DKr459m (&£42.6m).
The company shed 12% of its workforce, shifted production and distribution to Eastern Europe, slashed its core range of components from 15,000 to 7,000, conducted a rigorous procurement review, sped up new product development and sold off control of Legoland theme parks. Between 2003 and 2005, the company cut costs by DKr1.6bn (&£148m).
But more remains to be done, admits chief executive JÃ¸rgen Vig Knudstorp: “We are now profitable; we have very good cash-flow; we are debt free. But there is a crisis in the industry as a whole.”
That crisis is the fundamental change in how children spend their leisure time. Traditional toy companies now compete for children’s attention (and parents’ cash) with music, clothes, fashion accessories, film and television, and – perhaps most importantly – hi-tech consumer goods and computer games. In the 1990s, Lego, along with Mattel, Hasbro and other toy companies, thought the answer was to move into these areas themselves. That, however, proved a disaster. As Knudstorp says: “We thought we could be an apparel company, for instance. But with the benefit of hindsight, we know it doesn’t work. The uniqueness of Lego is that it’s a building system. You put it together and it sticks really well – and that’s it.”
Knudstorp joined Lego Group in 2001 as director of strategic development from McKinsey. He took over from Kjeld Kirk Kristiansen, grandson of Lego’s founder, in October 2004.
One key driving force behind Lego’s renewal has been reconnecting with its ultra-loyal consumer base and consulting the most dedicated fans on product development. Knudstorp estimates that 15-20% of the 2 million members of the Lego Club “are really into Lego. We get advice from the most dedicated Lego fans”.
Lego is now looking to create a symbiotic relationship with its greatest fans, which has required some tactical changes. For instance, within weeks of launching Mindstorms robotic kits in 2001, a computer hacker had written better control software and posted it on the Web. Knudstorp says Lego’s initial response was to bring in the lawyers – but it then realised the fan could help sell the products. But, Knudstorp says: “The balance between brand protection and encouraging the Lego fan community needs to be managed carefully.” He adds that it is vital the Lego community remains fan-driven and fan-controlled, with as little involvement from Lego as possible.
The experience helped firm up Lego’s decision to invest heavily in online. “We want to tie Lego to the virtual space, where we can build a Lego universe and share ideas,” says Knudstorp. It has patented the software to put bricks together online, and since posting a cut-down version, has had 1 million downloads. There is also Legofactory.com, where users can build a design, calculate and order the required bricks.
But the online store and the handful of flagship outlets in shopping centres are not intended to compete with Lego’s traditional retail partners. Instead, Knudstorp says, these stores encourage its customers to visit the major retail outlets. Lego has also invested heavily in developing existing and new concept lines, such as Bionicle, Exoforce (just launched in the UK), and Mindstorms, the new version of which, Mindstorms Nxt, launches in September complete with Mac and Bluetooth compatibility.
Another area it has reviewed is licensed ranges; it will concentrate on key properties such as Lego Star Wars, Harry Potter, Dora the Explorer and the new animated Batman series. But there is a deliberate policy not to jump on the latest licensing deal bandwagon – as Knudstorp says: “We are selective with licensing. We cannot allow ourselves to become too dominated by it.”
Lego may not be able to overcome the problems facing the modern-day toy industry: but at least it is now in a far fitter, leaner state to try.
Facts and Figures
â¢ In 1934, Danish carpenter Ole Kirk Kristiansen starts using the brand name Lego for his wooden toy range. He derives Lego from the Danish words “leg godt”, meaning “play well”, unaware that it also means “I put together” in Latin.
â¢ In 1949, Kristiansen buys Denmark’s first plastic moulding machine and a British patent for plastic building bricks, which he significantly alters to create Lego bricks.
â¢ In 2000, Lego was named Toy of the Century by both Fortune magazine and the British Association of Toy Retailers.
â¢ Today, Lego is the world’s fourth-largest toy manufacturer after Mattel, Hasbro and Bandai, with kits sold in more than 130 countries.
â¢ Lego.com is one of the world’s most popular internet sites, with 5 million visits each month.
â¢ Lego Club in the UK has more than 260,000 members. Worldwide, it has more than 2 million.
â¢ Every minute in the UK, a Bionicle can is sold and, in total, 14 Lego sets are sold.