The Year of the Lego

November 11, 2013

The Year of the Lego

Posted by Ted Trautman

Earlier this year, Lego overtook Hasbro to become the world’s second-largest toymaker, after Mattel. It was more than just one company outperforming another—it was Lego’s one brand generating more revenue than Hasbro’s sixty-eight brands, which include G.I. Joe, Transformers, and Mr. Potato Head. While Hasbro and Mattel have grown by creating and acquiring a diverse array of toys, Lego has adopted the opposite strategy: focus on the one, iconic product, but get more kids to play with it. There is little room left for Lego to grow in the United States, where it already controls eighty-five per cent of the construction-toy sector, besting imitators like Mattel’s Mega Bloks and has-beens such as Lincoln Logs and Erector sets. Lego’s revenue of nearly two billion dollars in the first half of 2013—compared with $1.43 billion for Hasbro—was boosted in large part by its growth of seventy per cent in China. That country, where parents are increasingly seeking out educational toys, has become the world’s second-largest toy market. The Asia-Pacific region will likely overtake North America as the largest regional toy market sometime next year.Lego’s success in Asia wasn’t inevitable. In the nineteen-nineties, the company tried to follow the lead of its rivals by rampantly diversifying: the products that came out of that included apparel, video games, and theme parks—all since spun off. The strategy failed, and in 2004 the company nearly went bankrupt. Afterward, though, Lego made significant changes to its design staff, as David Robertson and Bill Breen recount in “Brick by Brick: How Lego Rewrote the Rules of Innovation and Conquered the Global Toy Industry.” Lego put a manager named Per Hjuler in charge of the Concept Lab, where workers think up Lego’s new products; Hjuler found that the Lab’s staff “consisted solely of designers, most of them Danish men, who were deft at conjuring clever concepts. But … they didn’t understand the competitive environments that shaped the many markets LEGO targeted,” Robertson and Breen write. Hjuler created a marketing team within the Concept Lab, and deliberately hired a number of non-Danish designers, including several from India and Japan. Since then, the company has painstakingly climbed back to the top by expanding not its product line but its geographic reach.

Like most toys, Legos facilitate what David Whitebread, a Cambridge University psychologist, calls “pretense play”—the invention of original narratives such as sending Barbie to rescue Batman from under a soccer ball. But Lego also promotes “construction play” not found in dolls or board games, which calls upon the child to be creative in a very literal sense: she must create the toy with which she wants to play. Whereas a Transformer changes only from humanoid to vehicle and back again, a pile of Lego bricks can transform into anything a child imagines. The combination of construction play and pretense play represent, in Whitebread’s view, a “powerful context supporting the development of thinking skills, problem-solving and creativity” all the way into young adulthood; Cambridge’s engineering department, for example, makes “extensive use” of Lego as a teaching tool.

Lego acknowledges the educational value of its marquee products, but is careful not to let it overshadow Lego’s appeal as a source of diversion. “Of course we believe in the educational values that are inherent in any Lego product,” said Roar Rude Trangbæk, a Lego spokesman. But “if it’s educational, that’s a side effect for the child. … It’s just as important that a child has fun.”

James Button, a senior manager at the Shanghai-based consultancy SmithStreet, told me that many Chinese parents have been attracted to Lego’s capacity to develop children’s creativity and independence. “These areas of development are increasingly important in China’s economy, but are not well addressed through China’s education system,” he said. Parents have “lost faith in the ability of the Chinese education system to develop these critical skills in their children.”

Trends in the Asian toy market seem to support this. Sales of educational toys in China have more than doubled in the past five years, compared with a thirty-eight-per-cent drop in the United States over the same period, according to Euromonitor International. In South Korea, the demand for educational and construction toys is so strong that Lego has accrued a greater market share there than anywhere else, including its native Denmark.

Parents’ drive to see their children succeed is strong enough that, in Button’s eyes, Lego is competing not so much with other toymakers as with after-school extracurricular activities. Fortunately for Lego, it long ago made itself an extracurricular activity in the form of a division called Lego Education. The program, more than thirty years old, adapts Lego products to the classroom—encouraging children to use gears to learn about ratios, for example, or to program Lego robots, or to physically build the worlds they have written stories about—and it caters to students from preschool all the way through university. The program is in seventy countries so far. “It’s attempting to teach parents the value of playtime, and at the same time it’s building awareness of Lego,” Button said. Separately, the nonprofit Lego Foundation has, in the past three years, donated Lego sets to schools in China that serve more than a hundred thousand children—a small number for China, but one that makes for a revealing initiative nonetheless.

Here’s the thing: both Lego Education and the Lego Foundation promote learning, but these efforts probably also help Lego win over new customers. Spokespeople for both Lego Group and Lego Education downplayed Education’s impact on retail sales, and the Lego Foundation didn’t respond to requests for comment, but Jennifer Stein, the C.E.O. of the media-and-education consulting firm Always In Entertainment, told me, “With all of these young children playing with Lego in school, there has to be sales. The teachers are basically putting their stamp of approval on it.” Implicit recommendations from schools, along with explicit recommendations from experienced parents, are invaluable for toy marketers in China, since the one-child policy means that many parents may be shopping for toys for the first time.

In theory, Lego’s greatest weakness worldwide should be that the last of its core patents expired in 1988, which has left it vulnerable for the past several years to competitors selling nearly identical bricks at lower prices. Mattel has its Mega Bloks, Hasbro has Kre-O, and China is home to at least a dozen imitators, including the brazenly named Ligao. But SmithStreet’s Button believes that the price and quality of Lego’s products and those of its imitators are so far apart that they are not competing for the same customers. If anything, Button said, the more affordable knockoffs serve as an “entry point” to playing with Lego-style bricks, from which a family might later upgrade to the real thing.

Indeed, authentic Legos are an upgrade: manufactured with an extremely high degree of precision, they can flex just a thousandth of a millimeter. The result is that they hold together so a child can actually play with the things he builds without them crumbling in his hands. Many Lego imitators make their bricks more cheaply, on the logic that lower prices will make up for looser bricks; I recently tested a rival set of blocks, and the difference was immediately noticeable.

Lego has a second weakness in Asia: its high prices. Sets cost up to twice as much in China as they do in the U.S., because of import and distribution costs. The company recently said it will build a factory in Jiaxing, an industrial town near Shanghai, which should be up and running by 2017. Button guessed that local manufacturing could cut Lego’s prices by as much as twenty per cent. In the meantime, entrepreneurs in New York have been known to ship Lego sets in bulk from the U.S. to China, illegally not paying duties, so that they can sell them in China and undercut Lego’s own prices.

Despite its recent arrival in much of Asia, Lego has managed to pick up more than eighty thousand registered Adult Fans of Lego in the region, and the company has made some gestures to acknowledge them. Japanese Lego fans had access to Cuusoo, an online tool that allows users to design their own Lego sets, a full three years ahead of the service’s worldwide launch in 2011. And Lego’s new Architecture series, the first Lego product line designed specifically for adults, is sold on a limited basis in Asia and so far includes two Asian landmarks: Seoul’s Sungnyemun gate and Tokyo’s Imperial Hotel. As for its younger customers, Lego designs products that it hopes will be attractive to children everywhere, but this year it made a small exception when it adapted an existing dinosaur set and repackaged it as a commemorative Year of the Snake special edition. Tellingly, it was sold only in China.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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