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What went wrong at toymaker Lego?

A decade-long sales boom has come to an end for toymaker Lego – and the company warns it may not achieve growth again for up to two years.

So what went wrong?

The Danish company’s sales for the first half of the current calendar year totalled US$2.38 billion – down 5 per cent on last year, although still well ahead of rivals Hasbro ($1.82 billion) and Mattel ($1.71 billion).

The unexpected sales decline followed a slump in growth from 25 per cent in 2015 to just 6 per cent last year.

Lego, which a month ago dumped its CEO after just eight months in the role, says it will axe 8 per cent of its workforce – about 1400 people – and launch a review of its entire business.

“We have now pressed the reset-button for the entire group,” said executive chairman Jorgen Vig Knudstorp.

He says the company has become too complex and needed to be slimmed down into a more efficient, lean operation.

“We’ve been through a decade of very high growth and during those years we have invested a great deal,” he said. “We have now realised that we have built an increasingly complex organisation to a degree that makes it difficult for us to realise our growth potential.”

Slowdown “inevitable”

Matthew Hudak, senior toys and games analyst from Euromonitor International, says Lego’s first-half decline is not too surprising when taking into account the strong demand for its Star Wars merchandise following the release of The Force Awakens in 2015.

“That said, a big issue is that Lego has now is that it’s grown so quickly with only one product that it inevitably had slow down and hit a wall, which was already clear by the end of 2016 when sales in the US flattened. Households can have too many Lego products and not want more each year, and equally important is that children have fickle tastes, and simply lose interest in Lego.”

Hudak says the proliferation of smartphones within developed markets is adding a lot of competition for the attention of children.

“For Lego a lot of the focus now is figuring out where they need to grow into now that mature markets like the US and Western Europe are going to be much tougher. So developing markets could be a good option, such as China where results continue to be positive, as well as marketing sales directly to childless adults or even possibly looking into extending the Lego brand into new areas outside construction toys.”

He says Lego continues to have strength in its positioning as a child development and educational tool, so being able to leverage this will be critically important.

“Also, despite the small impact of Lego Batman on toy sales, the company would still benefit from developing entertainment ecosystems that span films, cartoons, and videogames, as well as toys, around its product lines.”

According to Euromonitor, Lego leads the US$10 billion global construction toys market, accounting for 65.5 per cent of sales.

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