Rebuilding LEGO

When speaking with Jorgen Vig Knudstorp, it's worth bearing in mind how, only recently, LEGO was in crisis. In 2003, the company was falling apart, brick by brick. Sales had dropped by 30% and the company suffered its third loss in five years, despite its fiercely loyal fan base. Fast-forward three years and LEGO has turned its fortunes round. Jorgen became CEO in 2004 and the company hasn't looked back. His is a back-to-basics strategy focussed on the company's core product — the humble, ubiquitous, small and colourful plastic building block. So ubiquitous, in fact, that on average every person on earth has 52 of them.

Carefully managed product extension has been an important part of the company's re-growth too, increasing ten-fold between 2001 and 2006, and now worth $400m.

While it faces challenges ahead, particularly from the modern-toy industry, the building blocks of the company are clicking back into place and Jorgen is convinced that LEGO can innovate whilst remaining true to its core values. He tells us how to keep a globally-known brand in front of the minds of consumers in a toy business dominated by technology and the internet, and talks about the role of licensing in LEGO's new future.

How had LEGO found itself in the position it was in When you took over as CEO?

Taking a philosophical approach, with the benefit of hindsight, LEGO had lost its identity. The company strayed too far from having the building system at its core. Mind you, the company was 70 years old at the time.

What has been your strategy since becoming CEO?

We asked ourselves: What is it that makes LEGO a completely unique toy? The answer is that it is this huge system of bricks that fit together. It's a mutually complementary system and there just isn't anything like it. There are other construction toys, but they don't have 7000 elements that all fit together, like LEGO does. So, I've tried to make it very clear what LEGO is actually all about and then build our core business around that.

Does the LEGO brand need to be marketed, or is the whole world inherently aware of it already?

I've recently got back from Tokyo. Japan is one of the toughest markets, and the world's second biggest toy market. I found retailers out there claiming LEGO is the best known toy brand. We are in the traditional toy market there and are really the only western brand to be succesful, which speaks volumes about our popularity.

Globally, we're 2 to 3% of the global toy market, which is worth E 50bn. Some people say we are the strongest brand. We are at least among the strongest. To be so strong and not be more than 2 to 3% proves we are a brand that everyone knows but also one with a very loyal fan base, that will buy heavily into the brand. Even though LEGO is a mass market brand that everyone knows, it's also a niche player.

Can you describe a LEGO consumer?

The very core LEGO consumer is a boy aged 4-9, although 20% are actually girls. They mostly come from households that are 'mass-affluent'. When we talk about real core consumers, they tend to belong to families that really emphasise learning, activity and creativity. We've asked core consumers what they would like to be when they grow up. They want to become scientists, architects, designers or musicians. All very creative trades. Of course, their biggest desire is to become a LEGO model builder!

Does that career exist?

Actually, it does! But really, the dream is to come and work at LEGO, which is great.

It seems like LEGO has a committed fan base. How aware is the company of it?

We have an entire part of our organisation dedicated to working with our fan community to involve them in things like product development. The phenomenon of being able to connect the brand to consumers so closely is hugely important for the future.

We are heading towards having two and a half million LEGO club members, a number that's growing because of the internet. LEGO.com is in the top five website for boys aged 4-9 in the US. I think it's these dedicated fans that are the buying a lot of licensed LEGO product.

To what extent are traditional toys vying with TV and computers to get children's attention?

When we survey families that buy a lot of LEGO, one of the striking things we find is that the child's other favourite toy is a computer game. So children really like both types of play. Typically, the families of LEGO fans will have some kind of rules about how the child spends its time. They won't be allowed to sit on the couch watching five hours of TV each day, for example.

LEGO isn't competing directly with modern technology then?

We have a two-pronged approach. In the same way that kids will always play soccer and run after a ball, they'll always play with LEGO. Books, I believe, will never go away despite modern technology, and neither will LEGO. That's a core belief in our strategy.

But we are aware that kids use mobile phones like never before and that ten years from now children's bedrooms will be massively penetrated by wireless broadband. So we are making plans to improve our presence in the virtual space. One way is through community building on the net. We are following sites like YouTube very carefully and we have our own online community as well.

You don't think the internet hinders a traditional toy brand?

LEGO fans want to connect online. So we are experimenting with ways to bring the LEGO experience to the virtual space through sites like legofactory.com where you can design your own LEGO constructions online, order the bricks you need to build the model and get them delivered to your door. You can post your designs on a gallery, or send them to friends too. And we allow fans to build their own club pages through our website for example. It's early days but we have no doubt that LEGO has a role to play in that virtual space, which is why we continue to work on video games as well.

To what extent is LEGO more than just a toy brand?

That's an important question! We have a strong retail turnover on licensed products in a variety of segments like apparel, watches and books. We've sold more than a million LEGO Bionicle books with Scholastic. The LEGO videogames have been bestsellers globally. There are some strong opportunities to utilise the LEGO brand.

What are you looking for from your licensing partners?

It's important that the licensing partners we work with provide an experience that is on par with LEGO's values. We are quite particular about who we choose to work with and we manage the brand carefully. The reason LEGO is so well known and such a strong brand is because people have come to expect a particular level of product performance from it.

Is there a risk of extending the LEGO brand too far?

If a person buys a LEGO-branded product and they think 'this isn't really a LEGO experience', then we start to dilute the brand. LEGO product has to have that creative spark and LEGO quality that people associate with the brand. We have to be careful which categories we extend into.

What are LEGO's brand values?

LEGO is all about the joy of building and the pride of creation. I like to say our core values are creativity, quality and fun.

What do you mean by 'joy of building'?

LEGO is essentially a building construction toy. It provides an experience of creative building within a coherent system. It's a high quality experience and, of course, it's fun. That's what we call 'the joy of building'.

We've noticed that the primary thing our users get out of playing with LEGO is pride in what they build. It's not like they want to brag about what they've done but it's the satisfaction of coming up with something that is new and creative by combining well known pieces in previously unknown ways. LEGO taps into that inner creativity inbuilt in all of us. Just like if you write a great piece for the magazine and look at it with pride and say 'I created that'. That's what LEGO is all about.

Is there a market for LEGO as a retro brand?

Definitely. We are benefiting from almost 75 years of LEGO. LEGO lets adults re-live their childhood. 20% of our sales originate with adults, which is a large number for a toy company! I'm quite sure a number of our licensed products attract adult buyers too.

How has discounting on the high street affected LEGO?

We are positioning ourselves as a premium niche player. As I've said, we are such a small piece of the overall to market share that we believe our strategic aim should be to deliver a high quality experience for people who really appreciate LEGO. So we are not responding with overall price decreases. Generally, we are holding on to our premium.

Can you sum up LEGO's retail presence?

We are not about selective or exclusive distribution and there aren't many toy stores in this world that don't stock LEGO. In fact, we have more than ten thousand distribution outlets. But 10% of our sales come from our stores, website and catalogue.

What do stand-alone stores add to the brand?

They present the full assortment of products and the LEGO playing experience. In that sense they are brand windows, but they are still run on a profit basis in line with what we expect from the company overall. We have LEGO stores in Germany and the UK. In the rest of Europe, we have LEGO shop-in-shops or partnership stores which are run like franchises.

How tough is the retail market at the moment?

The retail environment in the UK is moving more towards the US. There's a high degree of consolidation and strong penetration of private-label toys. That's why we felt a need to establish our own presence there by opening LEGO stores. I speak to a number of retailers and they all say the UK is the toughest market from a brand perspective.

What about the toy industry?

Globally, it's been declining by about 2 to 3% every year for the past five years in the major markets — America, Japan, Germany and the UK. The Scandinavian and Benelux markets join them in this decline. We are starting to see a slight upturn in the US though, driven by price increases by the major players on the back of rising oil and plastics prices. Both Mattel and Hasbro have come out with strong third quarter results, beating market expectations.

How far can you innovate a traditional toy like LEGO?

We can take innovation quite far. I've no doubt some of the possibilities are based on leveraging the technology.

When will we see real innovation from LEGO?

Expanding LEGO's ranges is something that will always happen but I think any major change is probably about 2-3 years away, simply because the company has recently turned to profitability, and it will only turn to growth over the next couple of years.

The Star Wars range of LEGO products has been hugely successful. What does a partnership like this add to the LEGO brand?

It allows us to build a larger fascination for what you can do with LEGO. It's as if Star Wars LEGO is becoming a brand in its own right. I think a lot of people are fascinated by the types of Star Wars representations you can get out of LEGO.

It comes back to LEGO being about creative building and creative role-play. Intellectual property, whether it's Bob the Builder or Star Wars, just provides a much richer universe for children. That's the beauty of linking LEGO to other properties.

Are you looking for new characters?

There's no doubt about that. We'll constantly seek new properties to partner with. But we have to pick properties that are really in keeping with LEGO's values. We also tend to go for properties with longevity. Harry Potter is a good example.

Can you summarise LEGO's future strategy?

We are now in a place where we are re-energising our core business. After 2008, we will look to revitalise the LEGO brand by bringing things out where you, as the consumer, will say, 'Wow, that's obviously a LEGO experience but it's something I've never seen before.' So really bringing the 'wow' feeling back into it. We won't leave the core business, we'll add layers to it. Some of those layers are bound to come from the virtual space, and also from working with partners because by doing that we'll seek out new dimensions for the business.

And finally, what is your favourite LEGO product?

I'm a die-hard Star Wars fan!

LEGO:

Facts & figures

  • More than 400,000,000 children and adults will play with LEGO bricks this year.
  • LEGO products are on sale in more than 130 countries.
  • If you built a column of about 40,000,000,000 LEGO bricks, it would reach the moon.
  • Approx. four LEGO sets are sold each second.
  • The world's children spend 5 billion hours a year playing with LEGO bricks.
  • There are 915,103,765 different ways of combining six eight-stud bricks of the same colour.
  • With a production of about 306 million tyres a year, the LEGO Group is the world's largest tyre manufacturer.
  • If all the LEGO sets sold over the past 10 years were placed end to end, they would reach from London, England, to Perth, Australia.

LEGO Time Line

1932 Ole Kirk Christiansen, master carpenter and joiner, establishes his business in the village of Billund, Denmark. His firm manufactures stepladders, ironing boards, stools and wooden toys.

1934 The company name LEGO is coined by Christiansen from the Danish phrase leg godt, meaning 'play well'.

1949 The company produces around 200 different plastic and wooden toys, including Automatic Binding Bricks, a forerunner of the LEGO bricks

1958 The current LEGO stud-and-tube coupling system is patented.

1968 LEGOland Park in Billund opens, attracting 30000 people on the day it opens.

1980 According to a survey, 70% of all Western European families with kids under 14 now have LEGO bricks in their home.

1990 The LEGO Group is now one of the world's 10 largest toy manufacturers-the only one in Europe (the others are American and Japanese).

1996 LEGO.com is launched.

1999 LEGO produces a Star Wars theme with Lucasfilm.

Winnie the Pooh and Friends (LEGO DUPLO) launches.

The LEGO brick is named as one of the "Products of the Century" by Fortune Magazine.

2000 LEGO & Steven Spielberg MovieMaker Set launches.

2000 Bob the Builder and Harry Potter ranges launched.

LEGO Spider-Man introduced.

2006 SpongeBob SquarePants, Avatar: The Last Airbender and Batman building sets are introduced.

LEGO licensing case studies:Paul Frank

Paul Frank Industries (PFI) is a design house in Orange County, California. The company owns and operates Paul Frank, Julius & Friends and Small Paul as well as the Paul Frank retail division. As some of the characteristics pervading the Paul Frank workplace are bright colours, creating and designing, LEGO was a perfect collaboration for Paul Frank, promoting creativity though design.

The LEGO range is the first collaboration to feature all three of PFI's brands. The clothing range includes t-shirts, fleeces, pyjamas and knitwear incorporating LEGO's minifigures, bricks and logo, all with a PFItwist. In addition there is a fun and kitschy line of accessories including bags, belts and stools.

Ryan Heuser, president and co-founder of PFI says: 'We are inspired by design and architecture so what a perfect and logical collaboration to work with a company that promotes creative adventure through building and structure.' The range will launch in spring/ summer 2007.

Clic Time

Clic Time, based in the North East of England became the first LEGO licensee for watches and clocks in 1999. Over the years the company has had some great successes with LEGO despite an industry made difficult by retail prices being driven down and retailers becoming less interested in listing children's watches. The watches are currently sold in 34 countries and new distributors for an additional 11 territories are expected to begin trading by 2007. The watches, which stick to LEGO's core values, have always had a buildable element to them. One of the most popular aspects of LEGO watches are plastic, interlocking links, which click together to allow children to create their own, unique style.

Ross Company

Ross Company Sagl., the official licensee for shoes, accessories, sunglasses and apparel for LEGO in Europe, Middle East, Far East and Oceania is introducing the first LEGO branded shoes collection. The collection has been based on four key themes from LEGO: the LEGO classic brick and minifigure, LEGO DUPLO, CLIKITS and BIONICLE, between them targeting consumers from 4 –12 years. A strong emphasis has been put on the packaging (a shoe box inspired by the original LEGO brick and customised with a specific graphic for each theme) and POS materials that have been developed to drive consumer awareness and interest in the products instore. The footwear line will be distributed in more than 35 countries from spring/summer 2007.

LEGO Bionicle

In 2001, LEGO created the Bionicle universe by developed a background story as the basis for a new product range. Through a combination of products and an online universe, consumers are invited to tell how they see the story developing. It is a classic example of how developing a toy into a story can help to create emotional attachments with consumers. It has become so successful that it has spawned its own series of unofficial websites and forums. Bionicle has not only extended the LEGO brand into a sub section of toys (described as constraction toys, a combination of 'construction toys' and 'action figures'), it has created a new home grown IP that has sold over $200m at retail. It has been supported by DVD releases and led to the development of a new computer game. TT games, along with Eidos, have just released the multi-format Bionicle Heroes, which will be supported through cross-promotional activity with the existing toy range.

Star Wars

Star Wars' assocation with LEGO began in 1999 when a range of Star Wars inspired traditional LEGO products was launched. It sold exceptionally well, is still going strong and has spawned a number of other partnerships with brands like Dora the Explorer and Batman. For Lucas Films, the partnership has enabled Star Wars to extend further into the toy category, opening it up to a younger audience who perhaps are used to the non-role play patterns inherent in traditional LEGO prouducts. For LEGO and Star Wars, the relationship ha resulted in a LEGO Star Wars sub-brand being licensed back out. Last year TT Games developed a LEGO Star Wars computer game. It has gone on to sell well over 3.5m copies worldwide. Building on that success, LEGO Star Wars 2 was released in September. It sold 1.1m copies globally in its first week and is expected to sell 5m copies by the end of 2006.

Jill Wilfert, head of global licensing says: 'We are thrilled with the strong success of these titles and with the fact that the essence of LEGO has been captured within the game play, as delivering a highly positive consumer experience regardless of the category is our top priority. It's also very exciting that we are consequentially seeing a strong up tick in our overall LEGO Star Wars business, which we can't help but feel has been influenced by consumer's awareness and interaction with the video game.'

Jorgen Vig Knudstrop

Jorgen Vig Knudstorp was born in Fredericia, Denmark. He completed a Ph.D. in business economics, focussing on superior value creation based on the particular configuration of a company's key assets. He joined the LEGO Group in 2001 as director, strategic development. and has been CEO and president since October 2004.

Jorgen has lived in London, Paris, Boston, Aarhus and Copenhagen, before moving back to Aarhus where he currently resides.

He is married and has three young children.

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