LEGO can be clearly cited as the success story in the toys and games industry over the last few years. The toymaker achieved double digit sales growth in 2010, expanding its presence both geographically and through category extension.
Its global toy sales stood at US$ 3.7bn in retail value terms in 2010, making the company the third largest traditional toy player in the world with 5% of the global market, behind only Mattel and Hasbro.
In addition, the company continues to maintain its untarnished image and is admired by parents and children alike – a recent study by the Reputation Institute found LEGO's corporate reputation to be ranked fifth highest in the world, behind such companies as Google, and Apple. Together with Disney, LEGO was the only toy company to feature in the Top 100.
Product innovation drives growth in last two years
LEGO's product designers were the main reason behind its growth in 2009 and 2010. As a company, LEGO has traditionally focused on its home category – construction toys – where it has enjoyed dominant status for many years. While its share of the category remained steady, equally its growth prospects were limited by the growth of the category as a whole.
So LEGO got more aggressive, and in the last couple of years expanded its established building blocks concept into different categories. In 2009, LEGO Games were introduced, featuring buildable board games, which gained high enough consumer appreciation to make LEGO the third largest player in the category globally, garnering a share of 6% in Games and Puzzles. The new line was well received in most of the key geographies, taking a significant portion of the market.
Similarly in 2010, LEGO released Minifigures which quickly became a hit, and took the company into the pocket money segment. A coincidence or result of careful planning, the line appealed to cash-strapped consumers in the post-recession environment.
A large plus of such expansion has been that the new products have avoided cutting into sales of the main LEGO's business: construction toys. At its core LEGO kept toy buyer interest high by adding new licenses, and signing leading licenses into its products.
The company's own LEGO City and LEGO Technic lines were joined more recently by LEGO Ninjago, and the licensed properties kept excitement high with such the roll out of LEGO Star Wars and LEGO Pirates of the Caribbean.
Combating age compression
Another key aspect of LEGO's strategy has been its successful partnership with a number of developers to release LEGO branded video games. While cooperation between traditional-and video game companies is not new in the industry (Hasbro partners with Electronic Arts to release electronic versions of its games), LEGO is the most prolific and arguably the most successful in this area. Over 40 LEGO branded titles have come out since 1997.
Video games provide an effective defence against the trend of age compression trend in toys. Children, especially boys, are likely to move into video games at an earlier age nowadays, and the first game they choose is more likely to be something they are already familiar with from the traditional arena. LEGO's games are primarily aimed at this younger demographic.
Video games also extend the lifecycle of licenses – and help LEGO find game studios to develop its games, as these studios may not have existing relationships with either Star Wars or Pirates of the Caribbean licensors.
The most recent addition has been LEGO Universe – a massively online multiplayer game role playing game (MMORPG).
Competition is approaching
While LEGO ventures into other categories such as games and puzzles, other toy companies are responding by targeting LEGO's main construction category. Hasbro has recently announced the Kreo-X line, bringing existing Hasbro licenses such as Transformers into building blocks.
Similarly, LEGO's Duplo range aimed at pre-schoolers is coming under competition from a couple of companies. Mega Brands has been a competitor to LEGO for a number of years, and recently Mattel announced it was entering the segment with the Fisher Price Trio range, featuring toys with “click and snap technology”.
In the past LEGO has attempted to fend off competition by actively seeking patent protection for its technologies, indeed it currently owns over 600 patents. But this hasn't proved altogether effective at stopping new entrants, and with high activity in the category, we can expect to see a lot of future innovation coming in construction toys.
Analyst Insight by Giedrius Daujotas.
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23 June 2011