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LEGO Braces for Big Changes - International Herald Tribune
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Fri, 1 Jul 2005 14:51:37 GMT
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http://www.iht.com/articles/2005/07/01/business/wblego.php
Lego braces for big changes
By Ivar Ekman International Herald Tribune
SATURDAY, JULY 2, 2005
BILLUND, Denmark Lego, the maker of the iconic toy building blocks, put this
little town on the map. Employees and residents alike cherished the family
owned, community-based business as a benevolent source of jobs and revenue.
Those were the good old days.
In recent years, competition from abroad and the computerization of children's
playtime have turned rich profit into a deep loss. Finally, last autumn, a new
chief executive was brought in, charged with transforming Lego - a national
treasure to Danes - into a streamlined, downsized, globalized company.
"Our aim is to restore profitability," Jorgen Vig Knudstorp, the new chief, who
was once a consultant at McKinsey, said in an interview. "We need to trim the
size of the company so that we can make a profit at a lower level of turnover."
Billund, a prototype European company town, is struggling to change with it.
Thanks to decades of spectacular sales of Lego Group's blocks - 340 billion
pieces and counting - Billund, the town of 6,500 where the company has been
based since it was founded in 1932, has an amusement park, a swimming hall, a
sculpture park and a big international airport.
But in recent years, Lego has cut almost a third of its work force here, a loss
of 1,000 jobs.
Last year, the company's net loss more than doubled from 2003, to 1.9 billion
kroner, or $309 million, as revenue fell 6 percent to 7.9 billion kroner. The
loss included the write-down of 723 million kroner in assets.
Aside from shedding workers, Knudstorp plans to renew the company's focus on its
classic plastic bricks after years of licensing deals and attempts to diversify
the business. He is also planning to sell assets - most notably the four
Legoland amusement parks around the world.
Exactly what will remain when the restructuring is over is not clear. The
privately held company is guarded with the details, especially what will happen
to the rest of its workers in Billund, and whether it will move some or all of
its production to lower-cost countries in Asia.
But considering what Lego means for the town, people are bracing for life in a
considerably less playful world.
"When the company last year seriously began to talk about moving jobs abroad,
things here changed," said Peter Fredensborg, the parish priest, sitting in a
modern meeting room in Billund's church, which was built with Lego money. "One
could clearly feel a heavy dark sky settling over the town."
Lego's problems result from a number of factors, including the expiration of its
last patents in the late 1970s and piracy of its intellectual property.
Worse, after growing rapidly for more than 50 years, the core business began to
suffer as children's taste in playthings changed.
While children have not given up on traditional toys altogether, the
introduction of computers, cellphones, MP3 players and other high-tech gadgets
to younger and younger children means that the competition for their play time
has become much fiercer.
Christopher Byrne, an independent toy analyst, said: "A traditional toy, like a
Lego block set, is still popular, it still has its adherents. But it's a niche
product rather than a mass product."
"Instead," he said, "younger and younger kids are replacing toys with
electronics."
According to NPD Funworld, which tracks U.S. toy sales, the American market for
building sets shrank from $820 million in 2001 to $630 million last year.
Lego was also wrong-footed by the rapid acceleration of globalization in the
1990s, which coincided with new competition from Mega Bloks, a Montreal-based
company that took advantage of Lego's expiring patents to enter the market.
While Lego makes more than 90 percent of its bricks at a big plant on the
outskirts of Billund, Mega Bloks last year produced at least half of its bricks
in Asia. Mega Bloks has been profitable for the past five years as it gained
market share. Last year it posted net income of $25.2 million.
All the while, the growth of discount retailers like Wal-Mart and the decline of
specialized toy sellers have meant ever more pressure on prices and lead times,
a harsh awakening for a company that has prided itself on the quality and
educational value of its toys.
"We have realized we need to work closer with our customers," said Charlotte
Simonsen, a Lego spokeswoman. "This means having the right delivery service, and
having the right margins for them."
Lego Group was founded in 1932 by Ole Kirk Kristiansen and is still controlled
by his family here. Until the surprising appointment of Knudstorp, 36, the
family had also held onto the chief executive position apart from a brief period
in the early 1970s.
Knudstorp - who was raised in Snoghoj, 60 kilometers, or 40 miles, from Billund
- joined the company in 2001 and worked mainly with the financial and strategic
side of the business before taking over. He is considered something of an
outsider, because he is not part of the Kirk Kristiansen family and does not
live in Billund.
He replaced Kjeld Kirk Kristiansen, the grandson of the founder, who had held
the position since 1979. Knudstorp said that he believed in Lego's long-term
survival.
"Lego is a very strong brand going through a deep crisis," Knudstorp said. "But
we have no doubt both the brand and its products will be around 50 years from
now."
The return to a focus on core products represents a major shift from a few years
ago. The Lego name was widely licensed, the company diversified into children's
clothing and computer games, and a new Legoland amusement park was supposed to
open every two years.
The clothing line and computer games businesses now operate under license, and
the four Legoland theme parks are on the block.
"Our asset base was built for a growth strategy," said Simonsen, the
spokeswoman. "When this growth was no longer sustainable, our asset base was
simply too big. With this action plan, we're now reducing it."
Simonsen said the company had already cut costs by 1 billion kroner. Lego is
also selling property and financial assets not directly related to its core
business.
That includes the sale of the theme parks, including the original one in
Billund, which was founded in 1968 across the road from the company headquarters
(the other three are in Windsor, England; south of Munich in Germany; and in
Carlsbad, California). Lego says it has a number of potential buyers lined up,
and it expects to close a deal this summer.
The new strategy almost certainly means that more job cuts are ahead. The
Billund work force has been reduced to 2,500 from 3,500 in the past two years,
through layoffs and early retirements, and the company is keeping its options
open for the near future.
Management has said that some - possibly all - production will be moved to
lower-cost countries, but no firm commitments have been made. Knudstorp said a
decision should be forthcoming within the next year.
"We find it unlikely that we will leave Billund entirely," he said. "But there
are no sacred cows here. If it proves possible to move without losing too much
of our culture, while we manage to cut costs, then that is what we will do."
While most Billund inhabitants are hoping that Lego maintains some ties to the
town, they are also trying to carry out a modernization and diversification plan
of their own.
Thanks to infrastructure put in place by the company - above all the airport
that it built in the 1960s, which is now independently run - the town has
handled Lego's cutbacks reasonably well.
Unemployment has risen, but is still about a percentage point below the national
average of 6 percent.
In addition, a new "vacation land," proposed for a spot on the edge of town, is
expected to generate several hundred new jobs.
Even though tax revenues have fallen dramatically as Lego has stumbled, Mayor
Preben Jensen struck an optimistic note in an interview.
"Billund doesn't live from Lego," he said. "Billund lives with Lego. By now, we
have adapted our economy - through cuts in the municipality's schools, elderly
care and child care - to the fact that Lego no longer makes a billion-kroner
profit."
In the end, the town's inhabitants seemed to accept their and Lego's fate.
Reactions to Lego's problems, and the steps the company is taking to deal with
them, range more toward resignation and sadness than toward anger.
"Without Lego, there would be no Billund," said Jonna Sorensen, 65, who worked
on the production line for 32 years before retiring five years ago. "The company
was always good to us who worked there."
Her husband, Niels Jorgen Sorensen, a 66-year-old farmer, continued for her:
"But it's a changed world. It's more global now."
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