Monday 23 April 2018

How Lego built back its reputation brick by brick

Lego sales skyrocketed last year, with a movie release this year to provide promotion in the digital age.
Lego sales skyrocketed last year, with a movie release this year to provide promotion in the digital age.
Richard Curran

Richard Curran

Any dad who takes his child to see the 'Lego Movie', might appreciate the combination of nostalgia around the brand for him, with the modern twist for a new generation of Lego fans. What they might not fully appreciate is that they are also watching a corporate miracle. The Lego business, which has been around since the 1930s, was in a fight for survival just a decade ago.

Yet it has been completely transformed. It is the second biggest toy company in the world, second only to Mattel in turnover with sales of $1.9bn (€1.38bn) in the first half of last year. In terms of the bottom line, it is the most profitable toy maker in the world.

Massive debt, a lack of focus and a move away from core products, brought the business to the edge. It had tried to make itself more modern and attractive to the video game-playing generation. It had also attempted to broaden its appeal to the young female market. This brought it into the lifestyle brand area with its own line of clothing and watches.

Private equity companies and rivals were circling to swoop on the wounded firm a decade ago as it racked up massive losses. However, a radical reappraisal occurred. The chief executive, Jorgen Vig Knudstorp, addressed the debt issue and slashed costs by halving the workforce.

He also reduced the number of Lego pieces in the range from 7,000 to 3,000.

Simultaneously, he went back to basics with the product. He remembered that it was a toy. He gave Lego a contemporary feel while still keeping it as Lego. Deals were done with film studios to use characters like those from 'Star Wars'. It is in online gaming, thereby further deepening its relationship with the digital world. Sales have tripled since 2007.

Every seven seconds somebody in the world buys a Lego set and there are more Lego figures in the world than there are people.

The Lego story shows how enormous and successful companies can go into decline. But if they have a big enough brand that remains damage-free, they can actually revive the fortunes of the company.

In recent years we have seen the decline of several corporate titans which were frontrunners in the development of new technology.

One such business is Sony. The Japanese electronics maker pioneered new technology in consumer devices, from the Walkman to TVs. Its enormous success brought the company in too many directions. Today it makes more money from financial services than it does from electronic goods.

Many believe the turning point for Sony came in 2001 when Steve Jobs launched the iPod.

Similarly, Nokia was the leading mobile phone manufacturer in the world for 14 years. It pioneered the smart phone, but didn't respond to Apple's launch of the iPhone in 2007.

It seems that Sony became too big, having spread into the music and film business, as well as developing and manufacturing consumer products.

The Japanese group is working through a massive change programme which is trying to see it gain more focus. But its shares are trading at less than half of what they were three years ago.

Nokia was a more focused company than Sony, but a lack of innovation in responding to market trends saw its position eroded. In 2003 it had 35pc of world mobile phone sales. That has fallen to about 14pc.

It failed to respond to the Apple threat at the high end of the market, and several cheaper competitors at the bottom end.

Nokia was unable to work through its challenges and remain a standalone entity. Microsoft acquired its mobile phone business last year.

Nintendo has been around for a long time and was also an early pioneer of new consumer products technology. Its shares have been falling amid criticism that it has failed to respond rapidly enough to market trends.

Casual gamers made Nintendo the leader of a $93bn (€67.6bn) global industry, but not enough of them are signing up for its machines like the Wii U. Instead, they are being tempted by cheaper downloads they can play on the likes of Samsung or Apple devices.

Nintendo shares have been falling and at $85, are less than half where they were three years ago.

Each of these world-famous corporate successes has a different story to tell. But some interesting threads run through the arguments about all of them.

A lack of focus on the core values of their product, appears to be a common theme. Success breeding complacency is another.

However, one very important distinction should also be drawn. The Lego story, which has a happy ending, is a private family-owned firm. It hires outside expertise to run it, but it is not subject to the short-termism and scrutiny of a fickle stock market.

Lego retained enormous loyalty and sentimentality. Its private company status gave it the breathing space to go off and fix the problem. The others are all subject to quarterly earnings figures.

Lego got a bit outdated but it was never classed as being simply not good enough. It was unique.

The same cannot be said for Nokia, Sony, Nintendo or a range of other technology brands which have competitors eating their lunch. They retain the nostalgia but for many people, better alternatives are out there.

The Lego story does show what can be done. But just as Lego basks in the glory of its second coming, already commentators are saying it will come under pressure to find the next big twist in the application of the name. The market is truly relentless.

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