BUSINESS SPECIAL ....How Lego Can Rebuild Its Business

How Lego Can Rebuild Its Business

Wharton's David Robertson discusses what went wrong at Lego.

Danish toymaker Lego recently surprised its industry watchers when it announced plans to trim its 18,200-strong workforce by about 8% to shed about 1,400 jobs after seeing revenue drop for the first time in 13 years. Lego said revenue fell by 5% to Danish krone 14.9 billion (US$2.4 billion) in the first half of 2017 compared to the same period last year as sales weakened in mature markets such as the U.S. and parts of Europe. The drop is a shock for the toymaker, whose annual revenue nearly quintupled between 2007 and 2016 to DKK 37.9 billion (US$6 billion). But the warning signs were clear when revenue growth slowed from 25% in 2015 to 6% in 2016.

Lego said it would take steps to simplify operations that have become increasingly complex as a result of double-digit growth. “We have added complexity into the organization which now makes it harder for us to grow further,” said Lego chairman Jorgen Vig Knudstorp. “We have now pressed the reset-button for the entire group.” Lego will build a “smaller and less complex” organization to simplify its business model and reach more children. In some markets, Lego will clean up its inventories across its entire value chain.

The revenue drop comes after a shakeup in executive ranks. In August, Lego announced that Bali Padda will step down as CEO after less than a year in office to make way for Niels Christiansen, who will take the job effective October 1. Danish-born Christiansen could bring a cultural affinity for the Lego brand at a level that Padda, an India-born British national perhaps did not, according to Wharton practice professor David Robertson who authored the book, Brick by Brick: How LEGO Rewrote the Rules of Innovation and Conquered the Global Toy Industry. He said Lego has to reinvent its product strategies to continue to appeal to kids in a digital world where they have more toy alternatives such as programmable robotic kits and the like. Pricing is another aspect the company needs to address, Robertson said, in the face of cheaper alternatives and new markets in India and China where margins would be lower.

Robertson is also formerly the LEGO Professor of Innovation and Technology Management at Switzerland’s Institute for Management Development. He discussed Lego’s struggles on the Knowledge@Wharton show, which airs on Wharton Business Radio on SiriusXM channel 111.

Below are five takeaways from his commentary:

Slower Growth May Be the New Normal

“We may just be seeing the end of a great run,” said Robertson of Lego’s revenue growth. “Part of it is there are only so many linear feet of shelf space in toy stores around the world.” However, Lego “is still a pretty good business.” He pointed out that Danish krone has appreciated some 15% against the U.S. dollar in the last year or so, “so a 5% loss in Danish krone is actually a 10% gain in U.S. dollars.” Adjusting for that currency factor, Lego has posted “healthy 10% growth,” he added.

Core Business Remains Healthy

Lego has “struggled” to find its next big product line, although it has teamed up with other brands such as Star Wars and Disney, and made movies such as Lego Batman and the upcoming Lego Ninjago to boost its business, said Robertson. “The core business of Lego is continuing to do well. [The question is,] what do you do from there?”

Lego could lift itself up in the face of those challenges if it gets its act right, said Robertson. “If they get another good play theme next year, all of a sudden we can start to see double-digit growth.” But he doesn’t expect that expansion to come from digital. “I don’t think that’s a failure in creativity; I think that’s a limitation of the brand.” He noted that parents buy Lego for their kids to distract them from online games and to “do something physical that is good for fine motor skills, 3-D spatial realization, creative construction and all those good things.”

Struggling to Conquer Digital

Finding its place in an increasingly digital world “may be the root of what we are seeing here” said Robertson of Lego’s problems. He recalled that in his book, the chapter on Lego’s failures focused on its efforts to create an online, multiplayer building game around Lego. “It took so much effort and so much time and it wasn’t that fun.”

Robertson did not see much traction in Lego’s attempts in this area, such as a smartphone app to play its Nexo Knights game or an Instagram feature in its Lego Life social network for kids. However, he found one new initiative — creatively using mall space vacated by retailers such as Macy’s or Sears to offer Lego experiences — “a wonderful experiment.”

Getting Price Competitive, Reinventing Products

Lego sets costing $100 or more face stiff competition from cheaper alternatives for today’s kids, Robertson pointed out. “Think about what you can get now for $10 – you can get a Raspberry Pi [computer], program it with a simple visual language program called Scratch, strap a couple of sensors and motors to it and for $30 you can do something pretty cool with it.” He noted that while Lego’s offering in that space called Lego Boost also teaches kids to program, the company has oversimplified that feature. Pricing is a critical issue for Lego because “$100 will buy you a pretty nice smartphone controlled drone,” he added.

Above all, Robertson wondered if the age profile of Lego’s target market is trending younger. “There are so many cool things for 8-year-olds and 9-year olds that weren’t there even five years ago,” he said. “I just wonder whether we are starting to see a shift in fundamental play preferences.”

Betting on New Leadership

Lego’s new CEO might bring “a love for the brand” that may have been missing, said Robertson. “[Bali Padda] was a manufacturing and supply chain person,” he continued. “He saw it as a flow of pieces through this amazing, intricate production system and not as a way of enabling and supporting the builders of tomorrow.”

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