| STRENGTHS: Brand Equity Leading position Financial Performance Marketing Ecommerce growth | WEAKNESSES: Pricing High operating costs Complex Product Range Limited Target Market |
| OPPORTUNITIES:- Diversification Digital games & interactive learning Brand awareness Grow adult audience | THREATS: Counterfeits Competitive pressure Regulatory and legal issues |
What’s Lego?
Lego is the maker of interlocking plastic bricks that can be interlocked together to form bigger toys and other shapes. The company was founded in 1932. It started as a carpenter’s workshop. The founder’s name was Ole Kirk Kristiansen, a skilled craftsman who made great toys for kids. In 1935, he chose the name Lego for his company, a combination of two Danish words, ‘Leg Godt,’ meaning play well. He had also pondered on the name Legio, but while Lego was simpler, it also reflected its motto to help the kids learn through play.
The founder did not know that in Latin, Lego meant to bring together. The bricks were not introduced when the company was founded, but years later. They were first released in 1949, but the model was different from the ones we see today. In 1958, the company patented the Lego bricks’ design with a new coupling principle like the ones seen in today’s Lego bricks. In 1960, the company discontinued wooden toy production after a fire destroyed its wooden toy warehouse. The Lego bricks grew 60 years old in 2018. The company is headquartered in Billund, Denmark. The CEO is Niels B Christiansen. The Lego group’s net revenue in 2019 was approximately 5.16 billion Euros (Statista).
Here is a detailed analysis of Lego’s strengths, weaknesses, opportunities, and threats.
STRENGTHS:
Brand Equity:
A company’s brand equity depends on the customers’ perception and what the customers think of the brand. Lego is a popular toy brand that enjoys strong popularity and brand loyalty globally due to its product quality and its focus on marketing. Strong brand equity has led to higher sales and growth in customer loyalty. Lego has continued to invest in innovation and focus on customer experience to grow its customer base and strengthen brand equity. Stronger brand equity is also key to beating competitive pressure and maintaining a leadership position in the industry.
Leadership position:
Lego’s leadership position in the toy industry is also a critical strength for the brand. The company has successfully retained its leadership position despite growing competition. It is the second-largest toy brand globally after Namco Bandai. Lego has very few direct rivals, including Barbie and Hasbro. However, the competition from online entertainment and online games businesses have grown.
Despite that, Lego is a leading name in the toy industry. It has continued to strengthen its position through digitalization and innovation. The company is strategically investing in long-term growth, and that has also started paying off since the company is enjoying strong growth momentum. Its focus on technological innovation will maintain its leadership position and dominance in the toy industry in the longer term.
Financial performance:
Lego has maintained strong growth momentum. In 2020, despite stores being closed due to the pandemic during the first quarter, the company had enjoyed strong sales and revenue. Its net revenue in 2019 reached 5.16 billion Euros from 4.87 billion in 2018. It has also managed a strong free cash flow at DKK 4.1 billion in the first half of 2020 (Lego, 2020). While the pandemic has resulted in declining sales and revenue for many businesses, the company has been investing in digitalization over the past several years. The company experienced growth in revenue from its e-commerce business during the first half of 2020. In the coming years, too, Lego is expected to maintain its growth momentum, and its sales and revenue will continue to grow, driven by a higher focus on innovation and digitalization.
Marketing:
Lego’s strong focus on marketing has helped it achieve and retain the leadership position in the toy industry. It has differentiated its brand from rivals successfully. Apart from the traditional marketing channels and in-store promotions, the company is using digital channels for sales and promotion. Partnerships with other brands have also helped it strengthen brand awareness. For example, through its partnership with companies like Disney, Warner Bros, and Adidas, the company is marketing its brand to grow brand awareness.
Lego is known as a great marketer and compared with brands like Nike or Starbucks in this regard. However, Lego’s real attraction lies in its ability to engage the imagination of its young customers. Marketing is a key driver of Lego’s global success and its large market share in the toy industry. It has also helped the company beat competitive pressure successfully. The company has launched several iconic campaigns in its history successfully. The various theme sets that the company released, including Star Wars, have helped it grow its brand awareness throughout the world.
E-commerce growth :-
Despite the difficult situation in 2020 due to the pandemic, Lego has achieved impressive growth. Its e-commerce sales grew in the first half of 2020 according to the company. In the first half of 2020, the number of visitors to Lego’s e-commerce platform more than doubled compared to the first half of 2019, crossing the 100 million mark. Growth in sales from e-commerce channels will also reduce Lego’s dependence on physical channels.
WEAKNESSES:
- Pricing:
The premium pricing of Lego bricks affects the sales and growth of the company. The company targets customers mainly from the middle class and upper-class segments. However, the raw materials required for building these toys are costly and the company has to price them higher to remain profitable. While the consumers in the emerging economies are more price sensitive which leads to reduced sales of Lego products there. While the company has still been enjoying an impressive financial performance, with more affordable pricing, its sales in the Asia Pacific region could have been higher.
- High operating costs:
Lego’s operating expenses grew in 2019 compared to the previous year while its operating margin and net profit margin reduced. The company’s operating profit remained flat in 2019 compared to the previous year at DKK 10.8 billion. The company’s total operating expenses remained DKK 27.7 billion in 2019 compared to DKK 25.6 billion in 2018. While gross margin grew to 72% in 2019 compared to 71.4% in 2018, the operating margin fell to 28.1% in 2019 from 29.6% in the previous year. Lego’s net profit margin also fell to 21.5% in 2019, from 22.2% in 2018 (Lego Annual Report, 2019). The company’s sales and distribution expenses as well as the administrative and IT expenses grew in 2019 compared to the previous year.
- Product range growing increasingly complex:
Lego’s product range has grown increasingly complex over time. According to a research study conducted by Bartneck C, and Moltchanova E in 2018, Lego products have become increasingly complex which while challenges the more skilled and experienced audience can feel overwhelming for the less skilled and young builders. As the types of bricks required to build various models are growing more specialized, more and more sets share less and less similar bricks. The research shows that, “ The average number of brick types in a set has increased on average by 2.4% per year and the maximum number of brick types in a set has even increased by 4.1%. The bricks have also become more specialized since their expected occurrence in the five year period following the sets release has decreased by 4.8% annually.” While the research does not expressly conclude that its impact on Lego’s popularity among the young kids can be negative, it still highlights some difficulties that could repel the young builders.
- Target market mainly limited to children and teens:
The target market for Lego products is limited mainly to young kids and teens. While a large number of adults around the globe are also familiar with the brand, and several also like engaging themselves in creating monumental designs with Lego, the brand does not appeal a lot to adult customers. Parents shop for Legos for their kids, and the company also markets its brand as made for kids mainly. These factors limit Lego’s customer base. Otherwise, Lego can penetrate newer customer segments if it can grow its appeal among adult shoppers.
Opportunities:
- Digital games and interactive learning:
While the company has grown its focus on digital experiences, there is a lot of scope for faster growth and extra sales through investment in digital games and interactive learning. The popularity of digital games has grown worldwide at a significant pace. With the proliferation of the internet, more and more people including teens and young kids are learning through apps and playing interactive games online. In the coming years, this could prove to be a significant driver of sales and revenue for the brand. While there is a lot of competition in this area, Lego has a strong position in the toy industry and it can use its existing influence to drive more and more customers towards its digital offerings. The company can grow at a faster pace if it invests in digital apps (play and learn) for kids and adolescents.
- Diversification:
Another major option before the brand is to invest in diversification. The company can grow its business faster by expanding its presence into newer segments. While the overall range of sets and toys that it makes has grown in years, the core offering of the brand remains the same which includes the Lego brick and theme sets created using these bricks. Lego is an industry leading toy brand and it could use its existing influence to grow the product range it offers to its kids without diluting brand value or reducing its advantage in the industry.
- Brand awareness:-
The company should focus on growing its brand awareness in the market regions where its sales are lower. The company must invest in marketing to grow its brand awareness in emerging markets. It is essential if the company wants to strengthen its market position in these regions since faster growth is possible only if the company focuses on the unexplored markets. The use of digital channels to grow customer engagement in the emerging markets and increase brand awareness will help Lego grow its customer base there and sales and revenue. While Lego has strong sales in the Americas and Europe, it must focus on markets like India to grow its sales and revenue.
- Grow audience among adult groups:-
While Lego’s customer audience is limited mainly to kids and teenagers, it can grow its sales if it can increase its sales in the adult customer segment. Adults are also lovers of Lego, but the sales of the company in this segment are limited. Moreover, Lego had not been actively focusing on investing in marketing its products to the adult customer segment. A large segment of adults worldwide plays with Lego bricks to lose stress and disconnect from the mania of the day. The company can release special theme sets to draw more adult customers towards its brand and grow its sales. According to news sources, the company has been researching the adult customer groups over the past five years and plans to help more adults find fun through Lego bricks
Threats :-
- Counterfeits:-
The threat of counterfeits is a major challenge before Lego. Counterfeit products come for cheaper and can cause brand dilution and reduced sales. Many times customers get themselves in trouble after buying fake Lego products online. There have been several such cases where customers have complained of getting tricked into buying fake Lego products online. While these products are of lower quality and can be dangerous for the kids playing with them, they are also priced relatively a lot lower. The trouble is that these products sell openly online. There is a Chinese brand called Lepin that even markets itself as the best Lego alternative. From the Star Wars and the famous Lego Millenium Falcon, Lepin sells nearly all the theme sets that Lego sells including superheroes, City and Technik. The products made by Lepin are not of the same quality as Lego and priced lower.
According to customers that were tricked into buying fakes, these pieces do not go together as nicely as the original Legos do. So, that leads to poor customer experience. However, just like Nike Lego too does not have a very effective strategy to deal with counterfeits which can in many cases lead to reduced sales and revenue since everyone is interested in saving money. Many customers mostly realize the difference after they have purchased fake bricks or theme sets. At a first sight, it is difficult for the customer to identify the difference which only becomes clear after careful investigation.
The best alternative before Lego is to warn people about the perils of buying fakes, grow its brand awareness stronger, and provide people with the information they can use to identify fakes easily. One major factor that draws counterfeiters is that while selling Lego bricks is a profitable business, it is not as difficult to create a counterfeit as copying an Apple product or part. There is also some good news for the company as it won a major case against Lepin in 2020 when a Chinese court sentenced several people connected with Lepin to jail. However, the Lepinworld website is still operational and the threat of counterfeit products is still not over.
- Competition from diverse players:
Lego is facing growing competition from various players, including toy brands and other brands targeted at kids and adolescents. While Lego has focussed on growing its value proposition stronger and is investing in digitalization and innovation to grow its appeal among existing and new customers, the competition from digital players and makers of games and learning apps has kept growing. With the growth of the internet and the cloud technology that has brought a vast number of options related to learning and fun for kids, teens, and adults, the overall competition level has grown rapidly. Particularly, the competition from the makers of digital games has grown quite intense.
Apart from Bandai Namco, Barbie, Mattel, and Hasbro, several more competitor brands make toys and have continued to innovate to grow their attractiveness. However, the biggest threat is from the digital, since these products are highly engaging and mostly priced a lot lower than Legos. So, Lego faces an enormous challenge to maintain its market leadership in a hypercompetitive and hyper-digital era.
- Regulatory threats :-
Many times growth in new markets becomes difficult for Lego because of the regulatory barriers there. Particularly, in Asian countries, it can be complicated for international businesses to set foot and find faster growth. While Lego has found strong growth in China, it is still struggling in India because of the regulatory barriers. It depends on the political environment and government policies in India to a large extent. Lego is talking with the Indian government to form policies that can help it achieve faster growth. However, ultimately a lot depends on the government, and Lego’s task is not easy. The government’s policies affect the local business environment. If the government endorses policies that encourage play, it may help create the right environment for growing the demand for Lego products in India.
A few last words about Lego:
Lego is known as an iconic toy brand, and apart from its Lego bricks, it is also famous for its marketing strategy globally. Not just its products, the company is also unique in terms of its marketing approach, which has proved to be a driver of faster growth for the company. The US is the largest toy market in the world. Still, China has also grown into an attractive market for Lego products, and the company has been strategically investing in growing its presence in the Chinese market. It has achieved impressive growth there in recent years owing to its continued focus on the market. In 2019, while the company’s net revenue grew compared to the previous year, its net profits did not improve much.
The industry environment is changing fast but so are people’s preferences and their buying habits. Lego grew its focus on digital products and sales channels in recent years, which benefited the brand during the pandemic. Its sales remained impressive. However, the challenge from the digital competitors like those making play and learning apps and games or similar digital interactive learning products and services as Lego has kept mounting. In the longer term, the competitive pressure from digital products and services is expected to strengthen. Lego is readying itself for a hyper-digital era when maintaining its appeal among a crowd of digital apps and services will remain challenging. However, digital technology has also benefited Lego, which is digitizing all aspects of its business, including digital sales and marketing to its benefit.
While Lego achieved a significant win against Lepin (China) that makes counterfeit Lego products, counterfeit products remain a major threat, and dealing with the threat will continue to be challenging. Amid growing competition, the company must focus on diversification, growing its brand awareness, particularly in the emerging markets, and attracting new customer segments like adult customers through new specialized products. Lego products’ growing specialization and complexity can also be a threat to its popularity and sales in the longer term that Lego must address. However, Lego’s strong brand image and its influence in the toy industry is a significant strength that has helped it keep the competitive threat under control. Lego is set to remain a market leader over the long term due to its growing focus on innovation and penetration into new segments of adult customers.