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LEGO Group (Denmark)

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LEGO wants us to think of its brand not so much as a toy, more as a way of life. In the 1990s, the company set itself a target of becoming the world's favourite family brand, using its building blocks to capture the hearts and minds of children and their parents everywhere. Inevitably that led to a certain relaxation of the company's original educational learning principles. Instead, LEGO learned to play the movie licensing game, scoring successes with Star Wars and Harry Potter tie-ins. But attempts to accommodate children's demands for ever more high-tech games proved rather more challenging, and the group struggled to find a viable path forward between 2000 and 2005. A shift by consumers towards traditional values as well as LEGO's growing sophistication over licensing has resulted in strong recovery since 2007. Over the following five years, revenues virtually tripled, allowing the company to overtake Hasbro during 2013 as the #2 toymaker worldwide behind Mattel. During 2017, it became the global #1, helped significantly by changes in exchange rates.

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Analysis

LEGO has underwent a painful transformation in the late 1990s and early 2000s. The company was forced to adapt its long-held spiritual concerns of nurturing the inner child to encompass the more mundane reality of making money to stay in business. A wide-ranging restructuring resulted in a return to profitability, and this is likely to guarantee LEGO's independence for several years to come. Despite global economic challenges, LEGO's performance has soared since 2007.

LEGO takes its core values extremely seriously. The company's first motto, in 1932, was "Only the best is good enough". With the explosive success of its building bricks in the 1960s and beyond, LEGO became one of the world's leading proponents of educational toys for children, pioneering new forms of creative learning. Unlike its brash counterparts in the US, LEGO adopted a strict rule that none of its products would portray weapons from the 20th Century; and even now its "conflict" games are about rescues, not about fighting for its own sake. LEGO adventure character Jack Stone, for example, is not a super-tough combat solider, but "the hero who is always on hand to save people in danger". In the world of LEGO, even criminal characters - like a stereotyped burglar dressed in striped jersey and an eyemask - have smiles on their faces. If the execution has changed from time to time, the company's underlying principle has remained the same for more than 75 years - that of stimulating learning through creativity and imagination. With typically earnest Scandinavian idealism, LEGO's owner and former CEO Kjeld Kirk Kristiansen still defines the goal of the business as providing activities which "nurture the child in every one of us".

Yet children's tastes change with alarmingly unpredictable frequency, and LEGO has felt the ups and downs of that particular rollercoaster several times in recent years. It pledged in 1995 "to become the world's strongest brand among families with children by 2005". As a result, the company threw itself into the mass-market. That sector has for many years been defined, especially in the US, by character licensing and movie tie-ins. LEGO headed down that path towards the end of the decade, with theme parks, video games, clothing and movie tie-ins. It was not always an easy experience. Some product licenses proved successful - the company's Star Wars play sets, launched in 1999, sold exceptionally well, and were still the company's top-seller in 2012. The range of eleven toys sets tied into the first Harry Potter movie in late 2001 did even better. But in both cases, the key to the company's success was its conservatism. Book publisher Dorling Kindersley lost its independence when it over-anticipated demand for Star Wars tie-ins and was left with huge amounts of unsold stock. LEGO, on the other hand, under-manufactured. As a result, several of the key Harry Potter sets quickly became entirely unavailable as the company's factories struggled to keep up with demand.

However, the widespread diversification into theme parks, clothing, watches, software and book publishing cost LEGO dearly. The company slipped into losses in 1998, and then again in 2000, when it reported "disastrous" losses of DKK 916m. As a result, it spent much of 2001 restructuring, and rethinking its product portfolio. Operations in several unprofitable areas were shut down. Reflecting modern children's increasingly sophisticated skills, LEGO loosened its definition of creative learning to explore areas other than bricks. Among the new products launched in 2001 was the LEGO Studios MovieMaker kit, with video editing software, a PC camera and bricks for building film sets, allowing kids to make a film of their LEGO character stories.

The group's character portfolio was bolstered by the Bionicles, a line of imaginary action figures each with different personality attributes who inhabit an imaginary world. (In a bit of reverse licensing, the group subsequently spun out a series of animated Bionicles movies on DVD). More controversially perhaps, the long-established Duplo pre-school brand was sidelined in 2001 under the new name LEGO Explore, and the company even extended its concept into the business world, licensing its brand for a strategic planning system for corporations, LEGO Serious Play.

The rollercoaster took another unexpected turn in 2003. Four of the company's five best-selling toys in 2002 had all been Harry Potter products. Yet with no new Harry Potter movie to keep the engine stoked in 2003, sales collapsed, and the company experienced a disastrous shortfall in sales over Christmas 2003. At the same time it wholly failed to anticipate demand for other products: two of the best-selling Bionicle characters were out of stock for the entire pre-Christmas period; and sales to the pre-school market halved because shoppers were unaware that Duplo had rebranded to LEGO Explore. If the company had regarded its 2000 losses as disastrous, these were even worse, reaching DKK 935m.

There was another change of strategy in early 2004. Kjeld Kirk Kristiansen promised to refocus the company around its core lines and attempt to reduce its reliance on licensed brands such as Harry Potter or Star Wars. It also reintroduced the Duplo name. Yet these actions were not enough to correct problems within the group, and LEGO was forced to report a further 10% fall in sales for Christmas 2004. In response, the group announced plans to sell its theme park division. Although the main LEGOland park in Denmark was profitable, the three international sites in the UK, California and Germany were not. US buy-out group Blackstone acquired a 70% stake in LEGOland in July 2005 for €375m, and merged the business into its existing Merlin Entertainments theme park unit. A write-off of losses in Legoland resulted in a DKK 1.9bn loss for 2004. The business was later floated, but after poor performance was taken private once again in 2019 by Blackstone, pension fund CPPIB and LEGO's Kristiansen family. In addition to LEGOland, the business also owns the Madame Tussauds waxwork museum, the London Eye and Alton Towers.

Over the following two years, the group shut down production facilities in several more expensive countries, and either relocated production in cheaper Eastern Europe or contracted it out. The group workforce fell from 7,300 in 2004 to 5,300 in 2006. This more significant restructuring finally began to deliver impressive results, causing staff numbers to soar once more, to over 16,830 by 2016.

Brand & Activities

The group is now structured as four divisions. Markets & Products is responsible for product development, sales and distribution; while Community, Education & Direct is responsible for all direct customer contacts, via stores, mail order or online. The remaining two divisions are Global Supply Chain and the Corporate Centre.

LEGO group's products fall into four main ranges. LEGO Preschool houses simple learning products for infants and pre-school children, including the reinstated Duplo range and giant-size LEGO Quatro bricks. LEGO Creative Building is the core range, encompassing a range of products for making, building and creating from traditional LEGO bricks to more sophisticated powered or computerized kits such as LEGO Creator and LEGO Technic. LEGO Play Themes comprises a wide collection of character-driven range of themed playsets, such as LEGO City and Knight's Kingdom, as well as numerous licensed products. The top-seller by far is Star Wars, but there are also superhero partnerships with Disney-controlled Marvel and Warner-owned DC, and with Disney's Princesses range, the Hobbit and Lord Of The Rings licenses, Scooby-Doo and even video game Minecraft. The once-mighty Harry Potter came to an end with the end of that movie series.

More recent own-brand launches include LEGO Ninjago (launched 2011), LEGO Friends, mainly aimed at girls (2012), and LEGO Legends of Chima, introduced in 2013 with an eye on the Asian market. LEGO Mindstorms houses more sophisticated and visionary technology-based products, with motors. These allow older children to build working robotic creatures and devices that can, increasingly, be programmed or operated via software or smartphone apps. LEGO Architecture is even more sophisticated, with a range of kits that allow adults to replicate masterpieces including the Paris Louvre, New York's Flatiron Building or the Trevi Fountain in Rome.

The group has a small retail network of around 50 LEGO-branded stores, mostly in the US. LEGOland is now owned and operated by Merlin Entertainment Group, in which LEGO's parent group Kirkbi retains a 36% shareholding. LEGO Lifestyle is the group's licensing division, responsible for extending the brand into new areas in partnership with other manufacturers. Perhaps the most lucrative is a range of software games, originally produced under license by Electronic Arts, but now managed by TT Games, a division of Warner Bros. The group launched its own multi-player online game, LEGO Universe in 2010. The group also has a partnership with Warner Bros to develop movie-related projects. The first LEGO Movie was released in early 2014 and proved to be a substantial commercial success.

LEGO Educational Division makes learning systems for schools. The group also sponsors a number of research and development units which explore new ways of playing or thinking about leisure activity. LEGO Serious Play is the range of adult and business learning products, produced under license by Executive Discovery.

Financials

Performance has improved dramatically since 2007, despite the economic downturn which affected rival companies during 2008 and 2009. Revenues and profits have both risen sharply over the period, hitting another record high in 2014. That year, group revenues jumped by 13% to DKr 28.6bn (approx $5.1bn or €3.8bn), having almost quintupled in the course of a decade. That figure included DKr 437m of licensing income. Net profit was up 15% to DKr 7.0bn ($1.25bn or €935m), after more than DKr2bn of licensing expenditure to Disney and the other owners of character brands it markets.

With an added lift from beneficial exchange rates, revenues soared by over 25% in 2015 to DKr 35.8bn (€4.8bn or $5.3bn). Even at constant rates the increase was over 19%. Net profit jumped by almost a third to DKr 9.2bn (€1.2bn or $1.4bn). Revenues for 2016 were up 6% to DKr 37.93bn ($5.6bn), while net profit edged up by just 2% to DKr 9.44bn ($1.4bn).

There was a sharp slowdown in LEGO's growth curve during 2017, with revenues falling for the first time in a decade to DKr 35.0bn, as strong growth in China failed to offset declines in the group's key markets of North America and Europe. Net profit plunged by 17% to DKr 7.8bn. However, the equally sharp fall in the value of the US dollar against krone, nevertheless allowed LEGO to seize the global #1 among toymakers for the first time, with US$ equivalent revenues of $5.3bn and profits of $1.2bn.

There was an improvement in 2018, with revenues rebounding to DKr 36.4bn (€4.9bn or $5.75bn), despite currency headwinds. That was still below 2016's peak, however. Net profit was DKr 8.1bn (€1.1bn or $1.3bn). License and royalty expenditure - for example for use of the Star Wars brand - was DKr 2.7bn, but that was slightly offset by license income of DKr 509m from other companies using the LEGO brand.

Management

Kjeld Kirk Kristiansen, grandson of the company's founder, stepped down from day-to-day management of the group in 2004, appointing Jorgen Vig Knudstorp as president & CEO (at the age of just 36). Kristiansen and his children between them own 75% of the company's equity through holding company Kirkbi, which also controls a 30% stake in Merlin Entertainments, owner of LEGOland and other parks. The charitable LEGO Foundation, set up by the family in 1986 to promote learning through play, owns the remaining 25% of equity. He and his son Thomas Kirk Kristiansen sit on the board. Thomas Kirk Kristiansen succeeded his father as vice chairman of LEGO and chairman of the LEGO Foundation in 2016.

At the end of 2016, Knudstorp handed over the CEO role to Bali Padda, previously EVP & COO. Knudstorp became executive chairman. Less than a year later, though, the 61-year-old Padda was asked to step down in favour of younger executive Niels Christiansen.

Background

Master carpenter Ole Kirk Christiansen established his business in the town of Billund, Denmark in 1932. Initially his product range consisted of stepladders and ironing boards as well as wooden toys. However Christiansen quickly found that his wooden building blocks were by far the little company's most popular product. In 1934, the business adopted the name LEGO, formed from the Danish words "Leg Godt" (or "play well"). In 1947, the company was the first in Denmark to acquire plastic injection-moulding equipment for the manufacture of plastic toys. Two years later this allowed the design and manufacture of a new form of interlocking plastic blocks which the company sold in Denmark as Automatic Binding Blocks.

By 1951, plastic toys accounted for just over half of the company's sales. The Automatic Binding Blocks were renamed LEGO Bricks two years later, and in 1955 the company introduced the LEGO System of Play, a range of 28 different sets of bricks. In 1956, LEGO established its first foreign sales office, in Germany. Ole Kirk Christiansen died in 1958, and he was succeeded by his son, Godtfred Kirk Christiansen, who had grown up in the business. The same year the company introduced a far more sturdy interlocking structure for its bricks, using the stud-and-tube design still current today.

In 1960 LEGO discontinued its line of wooden toys after the warehouse was destroyed by fire. Instead it devoted itself wholeheartedly to plastic bricks, doubling its range to 57 play sets by 1966, and introducing more than 25 vehicles, including motorised trains. For an even younger market, the company introduced a simpler form of brick under the Duplo name in 1967. A year later the company opened the first LEGOland park in its home town, initially as a way of satisfying the curiosity of Danes who wanted to see how and where the bricks were made. The 1970s saw a new range of innovations including the company's first role-play figures (LEGO Families, introduced 1974), more advanced LEGO Technic cog and wheel kits (1977), and the first fully themed play sets (LEGO Space, launched in 1979). Also that year, the company came under the control of the third generation of the family, when 30-year-old Kjeld Kirk Kristiansen was appointed president and CEO. (The K instead of a C in his surname was the result of a spelling error on his birth certificate).

The company formalised its serious approach to learning in 1980 with the launch of the Educational Products Department (later renamed LEGO Dacta). However a year later, its patent on its stud and tube bricks expired, and it was suddenly besieged by a horde of imitators, including Tyco, whose bricks were actually interchangeable with LEGO. Despite the challenge, LEGO thrived, and by 1990, the company had become one of the world's 10 largest toy manufacturers, and the European #1. The first international LEGOland opened in the UK in 1996, followed LEGOland USA in Southern California in 1999.

By this time the company was truly beginning to enter new areas. The first was the introduction of a new range of technology-based products. In 1998 the company introduced LEGO Mindstorm sets, which combined building sets with sophisticated programmable microchip technology. It also unveiled a range of software products on CD-ROM. However, like other toy companies, the massive investment required in this new area, and children's changing tastes in toys pushed the company into huge losses. The company launched a major restructuring program, laying off 1,500 workers, and beginning an overhaul of its product portfolio.

At the same time, KK handed over day-to-day control of the group's operations to newly appointed COO Poul Plougmann, recruited from Bang & Olufson. The company bolstered its high-tech toys business by acquiring US smart toy developer Zowie Entertainment in 2000. However the company's increasing reliance on brand licensing was punished in 2003. Despite the lessons learned by other toymakers who had thrown themselves into the licensed character market, LEGO was unprepared for a sudden decline in popularity of its Harry Potter figures over Christmas 2003. The company also said it had been a mistake to sideline its popular pre-school Duplo series, which was rebranded as LEGO Explore.

Last full revision 26th October 2017

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