Lego bricks rest on solid foundation

Press, 14 September 1988, Page 38

Lego bricks rest on solid foundation

You thought rich manufacturing companies must make increasingly sophisticated products? Look at Lego and think again. The Danish family company makes one product — children’s bricks. Their high-technology content is zero. Anyone, it seems, could make copies. The company has recently lost legal battles in Britain and America to protect itself from imitations. The market is notoriously fickle. And the final consumers of the product — children in Western Europe — have been declining gently in numbers over the last 25 years. Yet, though margins have narrowed over the last two years, Lego is not unduly ruffled. It has built up such a strong market position — creating the measurable market segment of “construction toys” virtually singlehanded — that it does not intend to let a bit of competition make it fall apart.

“Legal protection is not all-important,” says Mr Kirk Kristiansen, the 40-year-old grandson of the founder and now president of the group (his father, Mr Godtfred Kirk Christiansen, is chairman). “We have a market position which is such that if we do the right things in future we shall still be all right ...” If that sounds like hype, consider the record. Lego sells in almost every country that does not keep it out with import restrictions. It has manufacturing plants at its headquarters in Billund, a small town in mid-Jut-land, Denmark, in Switzerland and in America, and joint-ventures in Brazil and South Korea. It has its own machine-tool factories in West Germany and Switzerland (“Lego’s not as simple to make as you might think”) and the group is, and has been for many years, self-financing. The secret of its success, though, lies not in its production expertise, but in its dedication to a basic product, together with a clever marketing strategy to make people buy it.

That strategy is based on repeat-buying. Plenty of construction toys existed before Lego came along, but in most cases children got bored with them after playing with one or two kits. Lego makes money because the purchase of the first basic kit leads to many more — the little blighters always want more bricks, as parents quickly discover. Some years ago the company worked out that the average customer’s first kit led to the purchase of ten or 12 more. As the product has developed, they reckon the multiple is quite a bit higher today. The basic product, the studded brick (which was not an idea original to the company), is so simple that sceptics have been telling Lego ever since the 19505: “This can’t last; you must find something new.” But the temptation to find something new in the fad-conscious toy market has always been resisted. Instead, the group sticks to its last — making toys which appeal to children’s imagination. “Understanding how to develop the bricks in such a way that children can build whatever they want with them is the trick that

lies behind our success,” says Mr Kristiansen. This process began with simple bricks in the 19505; then came bricks with wheels; then motorised cars and trains. A step down the age-ladder was made in 1969 with Duplo, double-sized bricks for small fingers. Since then there has been a flow of “technical” kits of increasing complexity, some of which test the skills of an adult. Toy figures of people brought a further dimension to Lego; roleplaying. This is taken seriously by the company, not least because sales to schools and nursery schools (for which special kits are made) have become a main source of recent sales expansion. Another is geographical expansion. The company treats Europe, which accounts for 60 per cent of sales, as a single domestic market — and somewhat to its own surprise, has found it a steady growth market; sales rose 8 per cent in 1987. As more complex products come on to the market, demand for the basic kits has risen, helped by the fact that the parents of today’s children played with Lego when they were kids. In

America sales are rising even faster — by 20 per cent last year — and the company hopes for further growth because its share of the total American toy market is still smaller than its share of the European market. Perhaps the biggest export success has come in Japan, where Lego has seen off the local manufacturer in its own market, even though Lego costs 25 per cent more. When American firms complain that the Japanese market is impenetrable, the Japanese cite Lego as an example of how a foreign firm can succeed. What no one can tell from all this success, however, is how profitable the company is. Lego is a family firm and intends to remain that way. It has virtually no long-term debt and a complicated structure of four holding companies, intended to defend the family interest from Danish inheritance and wealth taxes as family control passes from generation to generation. The basic facts about the companies controlled by the Danish group are now published. Sales last year were Dkr2.3B billion (about SNZS62 million). This covers companies with about 3300 of the group’s total payroll, which runs to 5950. It seems reasonable to guess that group sales are close to double the published figure. The Danish group last year made a pre-tax profit of Dkr2lo.9M and Dkrlo6.BM net (the chart shows the largest component of this group, the Danish manufacturing arm). The return on sales was lower than in some boom years in the early 1980 s, when the strength of the dollar helped to boost profits. But over the past three or four years the Danish-controlled companies alone have invested about Dkrl billion in new equipment —

hardly evidence of a company which thinks competition is going to bring about decline. — Copyright “The Economist”