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Turning to Tie-Ins, Lego Thinks Beyond the Brick
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lugnet.mediawatch
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Tue, 8 Sep 2009 00:48:34 GMT
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Turning to Tie-Ins, Lego Thinks Beyond the Brick
By NELSON D. SCHWARTZ
Published: September 5, 2009
Billund, Denmark
FROM the outside, there is nothing playful about the drab, two-story Lego Idea
House here, where designers gather in whitewashed rooms to dream up new toys.
But upstairs, behind a series of locked doors accessible only to employees with
special passes, is a chamber that might as well be toy heaven for kids - and
more than a few adults.
Multicolored Lego creations in every imaginable size and shape spill from the
shelves, from Indiana Jones’s biplane to Darth Vader’s fighter. Boxes stamped
"confidential" hold potential future blockbusters, like Buzz Lightyear, the hero
of the "Toy Story" animated films, as well as a police station bustling with
miniature cops and robbers.
"It’s our way of looking at the world," says Soren Holm, the head of Lego’s
Concept Lab. "We have happy criminals; even they are smiling. The sun is shining
every day."
While that may be true of Lego’s toys, until recently it was hardly the case for
Lego’s bottom line. But five years after a near-death experience, Lego has
emerged as an unlikely winner in an industry threatened by the likes of video
games, iPods, the Internet and other digital diversions.
Even as other toymakers struggle, this Danish maker of toy bricks is enjoying
double-digit sales gains and swelling earnings. In recent years, Lego has
increasingly focused on toys that many parents wouldn’t recognize from their own
childhood. Hollywood themes are commanding more shelf space, a far cry from the
idealistic, purely imagination-oriented play that drove Lego for years and was
as much a religion as a business strategy in Billund.
Just as the toys are changing, so is the company. Jorgen Vig Knudstorp, 40, a
father of four and a McKinsey & Company alumnus who took over as Lego’s chief
executive in 2004, made it clear that results, not simply feeling good about
making the best toys, would be essential if Lego was to succeed.
"We needed to build a mind-set where nonperformance wasn’t accepted," Mr.
Knudstorp says. Now, "there’s no place to hide if performance is poor," he says.
"You will be embarrassed, and embarrassment is stronger than fear."
But the story of Lego’s renaissance - and its current expansion into new
segments like virtual reality and video games - isn’t just a toy story. It’s
also a reminder of how even the best brands can lose their luster but bounce
back with a change in strategy and occasionally painful adaptation.
Founded in 1932 on the principle of "play well," or "leg godt" in Danish, by a
local carpenter, Ole Kirk Christiansen, this privately held company had a very
Scandinavian aversion to talking about profits, much less orienting the company
around them.
Mr. Christiansen’s family still owns Lego and its business may still be fun and
games, but working here isn’t. Before Mr. Knudstorp’s arrival, deadlines came
and went, and development time for new toys could stretch out for years; in
2004, the company racked up a $344 million loss.
Now, employee pay is tied to measuring up to management’s key performance
indicators (K.P.I.’s, in Lego-speak). And cost-saving touches are encouraged
when it comes to designing new toys.
That has helped to lower development time by 50 percent, with some new products
moving from idea to box in as little as a year. Mr. Knudstorp’s
bottom-line-oriented team, meanwhile, has shifted some manufacturing and
distribution from Billund to cheaper locales in Central Europe and Mexico.
Nevertheless, Lego hasn’t entirely shed its Scandinavian sense of social mission
when it comes to making toys. It kept quality high and never moved any
manufacturing to China, avoiding the lead paint scare and grabbing market share
when rivals stumbled amid multiple recalls.
Now, with profits swelling and the turnaround firmly in place, Lego is preparing
for a future that moves well beyond the basic brick but carries big risks as
well.
Last month, it opened its first "concept store" in Concord, N.C., where parents
can bring children for birthday parties and classes with master builders;
another concept store is set to open near Baltimore this fall. It’s all part of
a broader retail expansion that will give Lego 47 retail stores worldwide by
year-end, up from 27 in 2007.
In 2010, the first board game designed by Lego will go on sale in the United
States, while its new virtual reality system, Lego Universe, will make its debut
on the Web, with children able to act out roles from Lego games and build toys
from virtual bricks.
Video games - yes, Lego is there, too - are increasingly important to the
company, as are Lego’s legions of adult fans, who can now buy kits to build
architect-designed models of Frank Lloyd Wright’s Fallingwater and the
Guggenheim Museum. What’s more, the company is in talks with Warner Brothers
about a mixed live-action and animation Lego-themed movie that would move the
company and its Lego brand even further into the Hollywood orbit.
"Developing a movie doesn’t come cheap," says Soren Torp Laursen, a 23-year Lego
employee who heads its North American operations. "But five years ago, we were
in the midst of a crisis, and now we’re in a growth phase. We are definitely
taking bigger risks than we previously did."
WHILE that shift has disappointed purists and prompted worries from experts that
some of what has long made Lego special may be in jeopardy, it’s paying off, at
least in the short term.
Amid a 5 percent drop in total United States toy sales last year and the
industry’s worst holiday season in three decades, according to Sean McGowan, an
analyst at Needham & Company, Lego’s sales surged 18.7 percent in 2008. And
despite a worsening global recession, Lego powered through the first half of
2009, with a 23 percent sales increase over the period a year earlier. It earned
$355 million before taxes last year, and $178 million in the first half of 2009.
The numbers are all the more impressive given the sales declines this year at
the two biggest toymakers, Mattel and Hasbro.
"I was stunned when I heard how strong Lego’s performance was," says Mr.
McGowan, who has covered the toy industry for 23 years. "How could an $80 Lego
set sell better than a $10 action figure?"
The answer is as multifaceted as one of Lego’s most complicated brick creations
- and, like the best children’s stories, contains elements of luck, hard work
and the loss of innocence.
SOREN HOLM looks down at the machine gun atop Indiana Jones’s jeep and winces.
By the standards of video games like Grand Theft Auto and of other childhood
attractions, it’s mild stuff.
But here in Billund, toy weapons have always been a touchy subject. "I can tell
you there’s been a lot of debate about how far we can take it," Mr. Holm says.
Right down to Indy’s gun? "Oh, yes," he says slowly. "Oh, yes."
Since Lego overcame its initial hesitation about rolling out a "Star Wars"
series a decade ago because the word "war" would appear on the box, the company
has grown more comfortable with conflict.
"We’ve opened up slightly," Mr. Holm says. After all, he adds, "when you give
boys a bunch of bricks, they build a gun."
In fact, Lego has opened up more than slightly. Whether it’s the Star Wars
Assassin Droids Battle Pack or the Indiana Jones Ambush in Cairo set - featuring
a pistol-wielding Indy against a scimitar-swinging local - many of Lego’s most
popular toys today seem inspired by the special effects and violence of the big
screen.
In the United States, Lego’s biggest market and the biggest toy market in the
world, games with themes like "Star Wars" and "Indiana Jones" were among the
reasons Lego sales jumped 32 percent last year, well above the global pace. But
experts like Dr. Jonathan Sinowitz, a New York psychologist who also runs a
psychological services company, Diagnostics, wonders at what price these sales
come.
"What Lego loses is what makes it so special," he says. "When you have a less
structured, less themed set, kids have the ability to start from scratch. When
you have kids playing out Indiana Jones, they’re playing out Hollywood’s
imagination, not their own."
Even toy analysts who admire the company and its recent success acknowledge a
broad shift. "I would like to see more open-ended play like when we were kids,"
says Gerrick Johnson, a toy analyst at BMO Capital Markets in New York. "The
vast majority is theme-based, and when you go into Toys "R" Us, you’d really be
challenged to find a simple box of bricks."
Lutz Muller, an independent toy analyst in Williston, Vt., who has long followed
the industry, estimates that 60 percent of Lego’s American sales are linked to
licenses, double the amount five years ago.
And the coming "Toy Story" sets have retailers salivating, as Disney prepares to
release the latest movie in the hit series next June. " 'Toy Story' is a fit
made in heaven," raves Jerry Storch, the chief executive of Toys "R" Us, which
has increased the shelf space allotted to Lego in recent years.
Nevertheless, acquiring licenses to make toys linked to hot Hollywood properties
like "Toy Story" carries risks. "It’s a slippery slope," Mr. Johnson says, and
today’s hit can quickly turn into tomorrow’s dud, adding volatility that Lego
never faced in the past.
Indeed, unlike the Cabbage Patch Kids or Atari or the Beanie Babies, it was
Lego’s seeming aloofness from the market that helped it endure, rather than
ending up in the back of the closet like those toys of yesteryear.
For longtime Lego executives like Mr. Laursen, it’s a delicate issue, and his
own comments echo Lego’s ambivalence over creativity and hallowed Lego
traditions versus the appeal of more profitable, Hollywood-influenced toys.
He says that "we’re definitely more commercially oriented" and notes that
licenses play a bigger role in the American market than overseas. But he says
that "we’ve never sacrificed our values, and have never been a fundamentally
profit-oriented company."
In fact, he says that there is often a long debate about values when acquiring
new licenses, and that "we’re far from always agreeing to take on new ones." He
won’t specify which movies or themes Lego has passed on, but says that "there
are many licenses out there that represent a level of violence that is not
suited to Lego and doesn’t fit with the trust of parents."
As Lego ventures deeper into video games and virtual reality with Lego Universe,
the question of violence, not to mention commercial temptations, will become
only more charged.
One answer, Mr. Laursen says, is to make "violence not explicit, but
humoristic." For example, when a minifigure "dies" in a "Star Wars" or "Indiana
Jones" video game, he dissolves into a pile of bricks and then springs back to
life, cartoon style.
"We think kids really want to have this good-against-evil play; they want this
fighting against each other," says Charlotte Simonsen, a Lego spokeswoman. "But
we want to do it with a wink."
Analysts add that the recession has proved to be an unexpected boon for Lego, as
parents favor spending more time at home with traditional toys instead of going
out to the movies or taking trips with the children.
Even parents who won’t let video games in the house, like Alyson Richman Gordon
of Huntington Bay, N.Y., say Lego has retained its innocence, especially when it
comes to toys built around the traditional bricks. "It echoes back to a bygone
era," she said. "And I find as a parent that I’m drawn to things from my own
childhood that inspired my creativity."
Lester Munson, a father of two in Alexandria, Va., agrees, even though he sees a
difference between the Legos of his own childhood and those favored by his
8-year-old son, Jonas. "The most exotic thing I could build when I was a kid was
an ambulance," he says. "Now Jonas can build the Death Star."
"I still like Legos, and I’m 41," he says. "Instead of watching TV or playing
computer games, the kids are building something, and Jonas and I will build
stuff together. The pieces and the sets are a lot cooler than they were 30 years
ago, and if the price you have to pay is these tie-ins, that’s fine."
IT’S not only children who fight over toys. John Barbour, a former top executive
of Toys "R" Us, recalls "a series of truly frustrating meetings" with Lego
officials in Billund and New York at the beginning of the decade, which climaxed
when Mr. Barbour bluntly told them that Toys "R" Us cared more about the Lego
brand than they did.
The most popular toys would run out, he recalls, and Lego was simply unable to
ship more or manage the complex process of producing the plastic pieces for its
most complicated sets.
That began to change in 2004, after Mr. Knudstorp took over in Billund and Mr.
Laursen arrived at Lego’s regional headquarters in Enfield, Conn. Besides
reaching out to top retailers and cutting costs, they untangled a supply chain
that churns out 29 billion pieces a year.
The changes also filtered down to the ranks of Lego’s toy designers, says Paal
Smith-Meyer, head of Lego’s new-business group. The number of different bricks
or elements that go into Lego toys has shrunk to less than 7,000 from roughly
13,000, and designers are encouraged to reuse parts, so that a piece of an
X-wing fighter from the "Star Wars" series might end up in Indiana Jones’s jeep
or a pirate ship.
That’s very different from when Mr. Meyer joined Lego a decade ago. Though
creating a mold to make a new plastic element might cost 50,000 euros. on
average, he recalls that 90 percent of new elements were developed and used just
one time.
Nowadays, Mr. Meyer says, "you have to design for Lego. If you want to design
for yourself, go be an artist."
For those would-be Lego artists out there, the company has created a Lego
Certified Professional program, selecting adult Lego enthusiasts who don’t work
directly for the company but whose creations are aimed at Lego’s vast population
of adult fans as well as museum and gallery shows.
It’s part of another broad new effort at Lego - reaching out to those adult
fans, who maintain thousands of Web sites and blogs, like GodBricks, which
features Lego creations inspired by different faiths, and the Brothers Brick,
which showcases all things Lego, whether a life-size Lego house, news, or advice
on how to shine up yellowing bricks (hydrogen peroxide).
"There’s a huge community of people that treat Lego as an art form rather than
just a toy," says Andrew Becraft, a technical writer at Microsoft who created
the Brothers Brick blog. His site pulls in 125,000 unique visitors a month, and
Lego officials estimate that 915,000 people worldwide attended Lego conventions
and other events in the first seven months of 2009. Five to 10 percent of Lego
toys are snapped up by adults.
In the past, Mr. Knudstorp says, "we considered the adult fans like vintage
cars, a bit bizarre." But he called on another longtime Lego executive, Tormod
Askildsen, to work with adult fans. Now Mr. Askildsen journeys to Lego
conventions organized by adult enthusiasts, while working with 44 Lego
"ambassadors" from 27 countries, seeking advice about new toys and heading off
public anger when older lines, like Lego’s 9-volt train sets, are phased out.
Ultimately, Lego came up with a new, profitable train set, after inviting the
9-volt enthusiasts to two workshops in Billund to brainstorm and help design it.
"If you rock the boat, people will notice," Mr. Askildsen notes. "They were
fighting furiously for us not to give it up, but we were able to turn tension
into opportunity."
The same might be said for Lego as a whole, as it navigates the fiercely
competitive toy market and ventures into movies and virtual reality while
clinging as best it can to the more innocent, Scandinavian values that made it
so popular in the first place.
"In the end, you’ve got to go where your consumer is going," Mr. Barbour says.
"And the reality is that themes and movies are what kids want. There’s no point
in developing the best product in the world if you can’t put it on the shelf."
http://www.nytimes.com/2009/09/06/business/global/06lego.html?hp
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