The Lego headquarters in Billund, Denmark. The toymaker’s growth has slowed since 2015. PHOTO:FABIAN BIMMER/REUTERS
The maker of Legos, long immune to the struggles weighing on other toy companies, reported its first sales drop in 13 years on Tuesday, betraying cracks in its strategy to compete against a rising array of digital distractions for children.
Lego AS, the Danish company built on a foundation of tiny plastic blocks, said it would lay off 8% of its workers and thin the ranks of decision makers to speed up product rollouts.
“The car has gone off the road and landed in a ditch and now we have to pull it out and get it back up to speed again,” said Jørgen Vig Knudstorp, chairman of Lego Brand Group, in an interview.
In some ways, the sales drop is a result of Lego’s own success.
Its current structure was created to cope with double-digit sales growth, but the company says it now has too many layers and overlapping business functions, making it tougher to implement marketing strategies, slower to react to trends and disconnected from retailers.
“We have built an increasingly complex organization, an organization that is complex to a degree that makes it difficult for us to realize the growth potential we have,” said Mr. Knudstorp, who served as Lego’s CEO until the end of last year.
To turn sales around, Lego last month named Niels B. Christiansen, the 51-year-old former boss of Danish industrial group Danfoss AS, as its new CEO, succeeding Bali Padda, a Lego executive for 15 years who had been its chief operating officer before taking the CEO job.
Like Mattel Inc. MAT -1.64% and other toy makers, Lego is being buffeted by a host of new rivals for children’s attention, including playing videogames and watching YouTube videos. In response, the industry has tried to modernize toys for the digital age: Lego has rolled out its own videogames based on its plastic bricks as well as a set of programmable robots.
The shift, however, hasn’t come fast enough to counter eroding sales of more traditional toy lines. Lego said Tuesday its overall sales for the six months to June 30 fell 5% from a year earlier. In July, Mattel said its half-year sales fell 6.4%.
One bright spot for Lego: Tuesday’s half-year sales of 14.9 billion Danish kroner ($2.38 billion) pushed it above rival Mattel, which in July reported half-year sales of $1.71 billion. Sales were above the $1.82 billion Hasbro reported for its first half. But Lego’s net profit has slipped to 3.4 billion kroner from 3.5 billion kroner a year earlier.
Meanwhile, Mattel has cut its dividend to free up cash and revitalize its approach to toy development. Newly installed Chief Executive Margo Georgiadis, a former Google executive, said the U.S. company needed “to adapt” to the modern world. She said she wanted all of Mattel’s key brands, like Barbie and Hot Wheels, to include not just physical toys, but also video content and gaming components.
Lego has in some ways been ahead of the curve in efforts to experiment digitally, even as it has promised to remain committed to its physical brick sets. Following the launch of its Chima toy line in 2013, for instance, it introduced related online games, videos and a TV series. It has created Lego Boost, a robot-building kit that combines computer coding with elements of physical construction. And in February, the company launched an app-based social network—promising strict moderation and privacy controls—that lets children share their Lego creations.
Digital offerings aren’t threatening to wipe out physical toys anytime soon. Kids “are still reading books, still using Legos, people are making a place for physical toys,” said Judy Ishayik, owner of Mary Arnold Toys, an independent toy shop in Manhattan. But, she said, “there’s more dual play,” where physical toys are paired with a digital component.
She pointed to Crayola, owned by Hallmark Cards Inc., which rolled out an app that turns coloring-book creations into animated online representations. Hasbro Inc.’s Love2Learn Elmo app provides children with a way of interacting verbally with their Elmo dolls.
Play on touch-screen devices outranks all other kinds of play in frequency—including with blocks, board games and puzzles—according to a 2014 survey by New York research firm Michael Cohen Group of 350 parents with children age 12 and under.
The shift underscores the challenge for Mr. Christiansen, who takes the reins next month. In his nine years heading Danfoss, Mr. Christiansen is credited with making operations more efficient and agile, and investing in research and development as well as digital capabilities. At Lego, he takes over from Mr. Padda, who will have been in the job just nine months.
On Tuesday, Lego said it would cut roughly 1,400 jobs, with between 500 to 600 of these coming from its Billund, Denmark, headquarters alone. It is also working to reduce layers of management and administration to speed product rollout, which Mr. Knudstorp said can involve 20 teams on average before a product is ready for global launch.
“We are simply not executing well enough on our activities across the business, on product development, marketing, sales,” said Mr. Knudstorp, who as chairman of Lego Brand Group oversees the Kirk Kristiansen family’s 75% stake in Lego, as well as its interests in Legoland theme parks and an education business.
It could be a couple of years before the changes yield results, warned Mr. Knudstorp while declining to specify whether he expects Lego to return to sales growth this year or even next. Lego previously said a big marketing push in the U.S. had failed to pay off, and on Tuesday said its U.S. sales had declined in the first half.
Lego’s results sent tremors through the toy industry. Shares of Mattel were down 1.5% and Hasbro stock was off nearly 3% in New York.
Some of Lego’s recent woes are because toys tied to movies have underperformed retailers’ and manufacturers’ expectations. Lego products tied to last year’s “Star Wars” movie, “Rogue One,” didn’t generate the same excitement as had the prior installment, “The Force Awakens,” which was the first “Star Wars” movie in a decade.
SOURCE: THE COMPANY
Another big bet that didn’t fully deliver: the company’s second movie based on its toys, called “Lego Batman.”
Toys “R” Us Inc. said toys tied to the movie missed sales goals, even though Lego spent heavily to try to boost interest. “It didn’t manifest itself into the kind of sales momentum that we expected or they expected,” Toys “R” Us CEO David Brandon said in June.
Mr. Knudstorp, who served as CEO from 2004 until the end of 2016, acknowledged his share of the blame for the recent troubles.
A former kindergarten teacher and McKinsey consultant, Mr. Knudstorp was the first person outside Lego’s controlling family to lead the company. He took over after Lego sales had slowed sharply and heavy debt threatened bankruptcy.
He refocused the company on its iconic brick sets, and scaled back on the array of watches, clothing, dolls and other merchandise the company had rolled out. Initially, he also cut jobs, outsourced manufacturing and simplified the management structure. All that buoyed sales, giving Lego double-digit growth for more than a decade.
More recently, though, he boosted staff to keep up with resurgent demand—and the expectation that it would continue to boom. Between 2012 and 2016, Lego added 7,000 new employees.
“This investment has not materialized into a good harvest,” he said. “We have clearly built too large an organization and we need to make it smaller.”
Source : WSJ
