Lego Looks to Build in China; Danish Toy Maker Looks to Replicate Success Enjoyed in West

Lego Looks to Build in China

Danish Toy Maker Looks to Replicate Success Enjoyed in West

NICLAS ROLANDER

Feb. 27, 2014 5:34 a.m. ET

Lego A/S, pressured by stagnant toy demand in mature markets, is sharpening its focus on emerging economies, where hundreds of millions of potential customers have yet to buy the company’s interlocking bricks.

Around half of the 40 billion Lego bricks made each year are still produced in Billund, Denmark, where the first brick was made in 1949. Johannes Ledel takes a look at the production process.

The Danish toy maker has recorded breakneck growth in recent years, becoming the world’s No. 2 toy maker by revenue, behind U.S.-based Mattel Inc.MAT +0.60% but ahead of Hasbro Inc.HAS -0.02% Lego’s relatively narrow product lineup has remained popular even as children have gravitated toward digital games and mobile apps.

But the closely held company’s rapid growth in recent years, which helped it leapfrog Hasbro, moderated last year. Net profit grew 9% in 2013, compared with 35% in 2012. Revenue rose 10%, down from 25% a year earlier.

On Thursday, Chief Executive Jørgen Vig Knudstorp signaled a tough road ahead, saying that “the traditional toy market will remain quite challenging.” Demand is likely to increase by low single-digit percentages in the years ahead, and Lego said it expects to grow “moderately” ahead of the market.

“When the company is getting bigger and the market isn’t growing, it’s a pure mathematical consequence that growth rates will have to reach a more sustainable level,” Mr. Vig Knudstrop said in a phone interview.

He is now looking East, trying to replicate in Asia the success Lego has long enjoyed in the West. In 2013, Lego invested 2.6 billion Danish kroner ($489 million) in new capacity and added more than 1,300 employees in a range of disciplines. The company has opened new factories in lower-cost countries and is expanding its white-collar staff in the U.K, the U.S., Shanghai and Singapore.

Mr. Vig Knudstorp already has steered the 82-year-old company through challenging times. About a decade ago, with operations in disarray and facing financial uncertainty, he slimmed down Lego’s product line and focused on profitable ventures.

Lego quickly became known for tying its boxed sets of bricks to popular movie franchises, such as Star Wars and Harry Potter. Now, it is banking on a hit feature-length film, “The Lego Movie,” to make the most of its Hollywood connection. The film’s popularity is likely to boost 2014 sales.

Mr. Vig Knudstorp is turning attention to new markets where Lego is largely unknown. Last year, he visited Chinese families in Jinan, and said the urbanization that has boosted that city’s population to six million will continue, underscoring the need to broaden the company’s focus. “The product is universally applicable,” he said.

Mr. Vig Knudstorp said the next decade could bring 600 million Chinese into Lego’s target group. In 2013, its China sales grew more than 50%, albeit from a small base. “It is moving from an opportunity to a reality,” he said. Lego is “very much focused around the wealthiest countries in the world,” but “we see a huge opportunity, given that the product is applicable, to bring Lego even further out in the world over the next 20 years,” he added.

“The challenge for the company is to adjust its culture, organization and marketing tactics to be able to succeed in these emerging markets and to feel as much at home in China as in the U.S. or German markets,” Mr. Vig Knudstorp said. Asia represents only a sliver of Lego’s overall revenue, but Chief Financial Officer John Goodwin said that China “has got to a size now where if it doesn’t have a good year, it will impact our global results.”

In 2013, Lego announced a $300 million investment in a Lego factory in China, which is set to open in 2016. Mr. Goodwin said that to meet Lego’s goal of making its Asian business comparable in size to its U.S. and Europe operations, the company needs to continue to expand its presence. “We started in 2013, but we’ll continue in 2014 and really take on more and more employees, building our capabilities there.”

On Thursday Lego reported 2013 net profit of 6.12 billion Danish kroner ($1.12 billion), up from 5.61 billion kroner a year earlier, on revenue of 25.38 billion kroner.

The U.S. is Lego’s biggest single market, but growth there has come to a near-halt.

According to data from market-research firm NPD Group, Lego sales in the U.S. edged up 1% last year, but Mr. Vig Knudstorp said Lego’s own data show that it achieved “healthy single-digit growth” in the U.S. He added that “we are confident that we have gained overall market share in the U.S. market in 2013.”

 

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 (www.heroinnovator.com), 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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