Competitive Intelligence

Trouble in LEGO-Land: Playing Well, but Not Putting It Together

The name LEGO comes from the Danish words "Leg Godt", which means "Play well". In Latin it means "I put together" or "I assemble". The Danish toy maker, founded in 1932 and whose colored plastic building blocks have been favorite children's toys for decades (including my own), said last week it was expecting a $240 million pretax loss, the worst in the privately held company's 72-year history.

The company fired EVP and COO Poul Plougmann over failed marketing strategies and also dismissed Francesco Ciccolella, who was responsible for product development. The company said it might also lay off some of its 8,000 workers worldwide.

Kjeld Kirk Kristiansen, chief executive and grandson of the company's founder, said Lego's push to develop new products did not generate the results it wanted. Last year was "very, very bad," he said.

Since it reported its first loss of $47.8 million in 1998, Lego has been hit hard by increasing competition from the makers of electronic toys. Under Plougmann, the company reacted by expanding its electronic offerings, including making high-profile deals to use characters from Disney, the Star Wars films and Harry Potter books in its toys. It also developed popular CD-ROM games and its cool Mindstorms series of high-tech robots made of building blocks but programmed with a PC, in effect turning children in programmers plugging in reusable OOP code to control robot activity.

As a result, sales rose but profits stagnated because of the higher cost of producing the new products. The company now plans to stop making the electronics and movie tie-in products and return to its core mission of producing plastic building blocks primarily for pre-school children. "We would rather be in control of our own products, the things that we can decide," Kristiansen said. "We want to go back to our core products, and that is a key part of our future strategy."

Figures for 2003 were not released, but in 2002, Lego posted a 7% increase in sales, to $1.9 billion and a 1% gain in its net profit to $72.5 million. Until 1997, Lego did not release its financial results. The global toy market came to a near standstill in 2003 and caused a deleterious 25 percent sales drop for the company.

It's a real question whether a company like Lego can compete in the high-tech game world kids have become accustomed to. An excerpt from one story explains Lego’s dilemma:

[Kristiansen] said the company would now go back to its roots, focusing on building blocks and abandoning its forays into multimedia and film products. "We are returning to Lego's former concept. We're going to focus on building bricks as our main product, concentrating on little kids' eagerness to assemble," he said. "That's why we're pursuing much more aggressive marketing for building bricks, leaving products linked to films such as Star Wars on the back burner," he said.

One key factor for the weak result this year was the poor sales of games based on the Star Wars and Harry Potter films in 2002. Kristiansen acknowledged that Lego's recent attempts to diversify had been a catastrophe. "We tried to follow trends, to have toys that were in fashion, that are 'in' one year and 'out' the next. But it didn't work," he said. "In our efforts to follow the trend, we forgot about our traditional, basic products - the plastic building bricks - and we spent all our efforts on new toys that we launched together with films like Star Wars and Harry Potter".

Other forays included Lego theme parks in England, the United States and Germany, collaboration with the Formula 1 Williams car racing team to get children interested in the sport, and a clothing line bearing the Lego brand.

Facing tough competition from electronic games, Lego also jumped into the fray and began producing in 2002 videos and animated films based on its hugely successful Bionicle series, signing contracts with U.S. companies Creative Capers Entertainment and Miramax Films. Its film "Bionicle Mask and Light", produced in DVD and VHS formats, got off to a strong start when it was launched in the United States and Canada on September 16. Lego is still hoping for similar success in Europe and in the rest of the world.

Children's toy researcher Joern Martin Steenhold said there were several reasons for Lego's poor health. "Lego was not able to follow up on the success it had on its new products. There was a void after the Bionicle, Harry Potter and Star War series," he said. "In addition, Lego was not skillful enough to exploit its 'smart building brick' with an electronic chip, a super product with enormous potential," he added.

Making matters worse, Lego has been hit hard by the weak U.S. dollar. Some 40 percent of its sales are in the United States.

Danish PR guru Martin Lindstroem agreed with Lego chief Kristiansen, saying he believed the company's future lay not in multimedia products, but in the bricks. But he stressed that it "still has a lot of potential, it has one of the best brandnames, recognized in 90 percent of the western world."

Toy researcher Steenhold also said Lego was making the right move by targetting pre-school children. "All research, including my own, shows that computer games and other electronic games take up only 20 to 30 percent of children's play time. Boys play with traditional toys up until the age of eight or 10, and it is in the zero to seven age range that Lego has its niche," he said.

Personally, I think it takes a lot of guts for a company to take risks on product innovations as Lego has, fail miserably, then be able to admit it, dust itself off and take steps to move forward. One bright spot is its new $90 Mars "Spirit" rover 858-piece play set of building blocks – thanks to the successful touchdown of the NASA exploratory space mission, another risky proposition if the mission had failed. "It's on the high end of challenging to put together," said Jeff James, of Lego's community development office in Connecticut.

- Arik