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Article originally posted www.kansascity.com of the Kansas City Star:
BLOCK PARTY
Lego will join Canada’s Mega Bloks in offering toddlers oversize bricks
By JOSEPH PEREIRA and CHRISTOPHER J. CHIPELLO
The Wall Street Journal
The building-block wars are about to escalate.
For years, industry titan Lego has been accusing Canada’s Mega Bloks of stealing
market share by making colorful plastic blocks that not only look like the famed
Danish building bricks but also snap right into them — and sell for lower
prices.
Now Lego is planning to turn the tables on its upstart rival. The Danish
construction-toy maker will soon launch a new line of oversize bricks aimed
squarely at the toddler and preschool market segment that forms the foundation
of Mega Bloks’ business. Like Mega Bloks toys, the new Lego line — known as
Quatro — will be made of a softer plastic and carry a lower price than
traditional Lego playsets.
Quatro, to be unveiled this month at the American International Toy Fair in New
York, is one of a number of products Lego plans to roll out this year as it aims
to regain lost ground. The Billund, Denmark, company has seen its share of the
North American building-toy market slide to 62 percent from more than 80 percent
several years ago. Meanwhile, Mega Bloks, whose shares are traded on both the
Toronto and New York stock exchanges, estimates that its share of the market has
doubled during the same period to about 30 percent.
“We want to claim back some of our lost market share, business that we believe
is rightfully ours,” said Soren Torp Laursen, Lego’s newly appointed head of its
Americas division.
The decline was partly why the closely held Danish toy maker reported a record
loss of $166 million for 2003 on sales that plunged 25 percent to about $1.4
billion. Results were also hurt by soft sales of construction toys that let kids
build scenes and playsets based on movies such as the Harry Potter series. Lego
admits that it “mismanaged” the toy line and that interest in such toys waned,
contributing to millions of dollars of unsold licensed goods. As a result, Lego
last year cut its work force by 4 percent to about 8,000 employees worldwide.
While Lego has faltered, Mega Bloks has been growing. For the first nine months
of 2003, the Montreal company’s sales rose 18 percent to $123 million, and net
income nearly doubled from the year-earlier period to $12.7 million. Analysts
expect sales for the full year of $224 million, roughly double the level of
2000.
Mega Bloks carved its niche partly through low prices. A 140-piece Lego Bulk Tub
of blocks is priced at $19.99 on the Toys R Us-Amazon Web site. On the same
site, a 100-piece Mega Bloks Mini Bag of blocks retails for $9.99. In the
action-toy category, a 310-piece Lego’s Spider-Man vs. Green Goblin battle set
carries a $49.99 price tag, while a 355-piece Ultimate Teenage Mutant Ninja
Turtle Battle Lair is selling for $29.99.
Unlike Lego, which uses its own mix of resins, Mega Bloks uses commodity-grade
resins to make its colorful bricks. Lego believes its proprietary mix produces a
higher-quality plastic.
Mega Bloks chief executive officer Marc Bertrand and his brother, chief
operating officer Vic Bertrand, say they’re confident the company will continue
to gain market share this year. At the New York toy fair, Mega Bloks will unveil
a new line of smaller bricks that enables kids to construct elaborate models in
finer detail than existing bricks. The new product is aimed at 7- to
12-year-olds — a segment still dominated by Lego — and has “blown away” focus
group participants, according to the Bertrands.
K’Nex Industries, a closely held Pennsylvania company, and Hasbro, which
launched a new line of construction toys last fall, are also vying for sales in
a market estimated at about $600 million a year.
Now with Quatro, Lego is taking aim at Mega Bloks’ sweet spot — the preschool
market where the Canadian company commands a 50 percent market share versus
Lego’s 10 percent.
In recent years, Mega Bloks also expanded beyond the preschool niche with more
elaborate models designed for older siblings. In 1989 it launched a midsize line
of bricks and in 1991 it came out with a smaller “Micro” line, designed for kids
in elementary school, that is compatible with Lego’s bricks.
The Micro bricks became the object of a lawsuit by Lego, which claimed exclusive
rights to the “look” of the knobs on its standard brick and alleged that Mega
Bloks’ production of compatible bricks was an attempt at “passing off” its
products as a Lego product, in violation of Canadian trademark law. In July of
last year, the Federal Court of Appeal of Canada dismissed that claim,
concluding that the design of the bricks is essentially functional, and thus not
covered by trademark protection. Lego hopes to appeal the case to Canada’s
Supreme Court later this year.
Lego has tried to stymie its Canadian foe by filing lawsuits claiming that Mega
Bloks is deliberately trying to confuse customers into thinking they’re buying
Lego products. But because the last of its key patents expired in 1988, Lego’s
efforts have largely failed.
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