Lego builds on story of its fight to survive to reach new heights

February 14, 2014 10:30 am

Lego builds on story of its fight to survive to reach new heights

By Richard Milne, Nordic Correspondent

The Lego Movie has rich pickings for those seeking metaphors.

In among the millions of brightly coloured bricks in the film that is released globally this weekend, some have seen an anti-business message; others a 100-minute long commercial to the Danish toy company; and yet more see the struggle in life (or Lego) between following instructions and staying creative that is a central part of the plot.

David Robertson, a business school professor, sees a more subtle metaphor: the parallels between the film and Lego’s own fight for survival a decade ago.

The author of Brick by Brick , a tale of how Lego became the world’s second-largest toymaker by sales today, Prof Robertson points to the similarities between the film’s hero Emmet and the Danish group’s chief executive, Jørgen Vig Knudstorp.

“It’s about an unassuming young man who has to organise a group of fractious but talented people to save the world from the evil Lord Business. He teaches them to co-operate and together they pull the world back from disaster. In other words, it’s a metaphor for theLego Group’s story over the past decade,” Prof Robertson says.

At the end of the 1990s Lego stumbled badly as it lost faith in the brick and plumped for bigger action figures amid fretting over how the toy world would be changed by video games. When Mr Knudstorp took over in 2004, it was on the brink of financial collapse. He united some disgruntled company veterans and together they returned the company to its roots with simple sets like a Lego fire engine.

The Lego Movie certainly arrives at a high-point for the company still based in the small central Danish town of Billund, where it was founded in 1932.

Its sales have tripled since 2007 and in the first half of last year the Danish group’s $1.9bn of revenues only just lagged behind the $2.2bn of market leader Mattel.

Where Lego really stands out, however, is profitability: its first-half net profit of $437m eclipsed the $112m of the maker of Barbie dolls, leaving the Danish group as the most profitable toymaker in the world.

Part of that is down to the simple maths of making plastic bricks. Prof Robertson notes the alchemy of turning ABS plastic bought for less than $1 per kilogramme into Lego sets that sell for about $75 per kg.

But it is about far more than that. Lego tries to reuse as many bricks as possible in different sets. Prof Robertson says the “magic number” for Lego is DKr1m: if a single element – a red 2×4 brick, or a blue 2×4, say – sells above that it is profitable; below it the losses can be deep. That sets a high barrier for a Lego designer seeking to use a new part in a set based on Star Wars or The Simpsons.

Financial metrics are relatively low in terms of performance criteria. The CEO’s bonus is as heavily linked to customer and consumer satisfaction as return on capital

– John Goodwin, Lego’s finance director

The flexibility to divert parts from a poor-selling set to one that is flying off the shelves is also crucial: John Goodwin, Lego’s finance director, notes that 60 per cent of sales occur in the final two months of the year.

Not that Lego is too focused on profitability. “Financial metrics are relatively low in terms of performance criteria,” Mr Goodwin notes in an interview from last year. “The CEO’s bonus is as heavily linked to customer and consumer satisfaction as return on capital.”

One big question for Lego is: what next? Mr Goodwin points to Lego’s big potential in Asia – its sales grew by more than a third there in the first half – and some possibilities still in the US where it was heavily under-represented until recently.

But he concedes that the stellar growth of the past will be difficult to keep up. “We’ve had a compound annual growth rate above 20 per cent. We don’t believe it’s sustainable in the long term,” he says.

Prof Robertson says Lego needs to think about “the next big innovation”. While it has been good at adding new themes – such as its homegrown Ninjago, Legends of Chima, or Friends – he thinks it needs to do something bolder.

Lego botched its first attempt to bring its bricks into the virtual world of computers, allowing the Swedish game Minecraft to do something similar in 2009 and become wildly popular for both PCs and mobile devices.

The Lego Movie provides a tantalising hint of how Lego might hit back. Together with Google it has developed “Build with Chrome”, a way of building Lego virtually in a web browser aided by Vitruvius, a character from the film.

It is unlikely on its own to be the next big thing. But for now – with a score of 96 per cent on the Rotten Tomatoes reviews website, higher than seven out of the nine Oscar nominees for best picture – Lego can bask in the critical praise for its film.