Hitting the Limits of Growth?

Disclaimer: Ok, this is quite a big and complex topic, so bear with me, if I don’t cover every aspect of it wholly. I also added some new information to the text since publishing it yesterday.

Strange how things work out sometimes. I was for over a year on and off writing on a post on the possibilities of a “peak Lego”, licensed themes, pricing and so forth. A big topic that is a bit off-beat to the usual tone of this blog, but too important to be ignored really. Today seems like I have finally a very good reason to finish it, reading the news that TLG has a 5% drop in revenue in the first half of 2017 and are going to lay off 1400 jobs worldwide as a consequence. Meh.

So first things first – how bad is it? Looking at the development of the net profits of the recent years, 2016 saw already a significant slowdown in growth (from about € 1.22BN in 2015 to about € 1.26BN  in 2016 , but compared to just a couple years back, was still on a high level. Just to give a ballpark-figure: the jump in profit from 2014 to 2015 was about € 270 million alone.

So while the slump in revenue is significant and, if profits don’t increase in the second half of 2017, it will set the company back to roughly 2015-levels, there is certainly no reason for panic. TLG has to do their homework, but they can handle it. Regrettably the first consequence was to lay off 1,400 people. 8% of its global employees. Given the fact that TLG had hired 3500 new employees in 2015, this number appears less dramatic though. But it is clear that TLG overestimated their growth expectations quite significantly.

The sheer numbers aside, I have no information whether there are any redundancy programmes for the people affected by these cuts or not. Since it is a global cut, the numbers for individual places might be comparably small. Still, it appears to be a rather drastic move, especially when taking into account that a lot of the manufacturing jobs are located in countries with low wages and rather lax social security laws.

Lego brand has had a massive expansion in the recent years. It is the largest toy manufacturer in the world, has license deals with big players like Disney and Warner Bros. about three dozens of different themes for its physical toys, movies, computer games and an impressive range of merchandise products – Lego seems to be everywhere.

This bears the question: do they have overexpanded themselves? Probably yes, I think. There are limits of growth every corporation reaching such a overwhelming global presence eventually has to face. Especially rapid expansion within a comparably short period of time bears the danger of not being sustainable. Many companies fell already in that trap, but while I see no existential danger for TLG, it is certainly not a trivial matter.

The population in the western countries (the traditional market for Lego) isn’t growing significantly, (with the US market being traditionally weak) and there is only a limited budged to spend on toys. Relatively new markets, like China offer new possibilities for growth, but have their own pitfalls (just dropping the term counterfeits here) and while they can potentially delay the  fundamental issue of market saturation, they can’t negate them.

What I expect is a downsizing in diversification. Which means less themes (keeping the most profitable ones) and perhaps less activities outside of their core business. Maybe outsourcing some fields, like TLG did with the Legoland parks.

Beyond that there will certainly be significant changes behind the scenes. In principle they should question every aspect. From logistics to marketing, to managment, to R&D etc. As a result they may do measures like relocate production and probably merging departments as well as slimming down administration and management.

These measures are pretty much standard. Cutting costs, optimising procedures, etc. Let’s have a look at what TLG is all about: the actual product.

Lego themes cover a wide range. Sometimes quite they are complementary, some are directly competing with each other. What is notable is that a lot of them are based on licensed IPs, which brings, apart from potentially very high sales, a whole bunch of issues too. IPs like Star Wars, superheroes and Minecraft  cost a lot of money and they make TLG dependent on the success or failure of something they have no direct control over. While the Star Wars-license certainly was a massive success for TLG, The Lord of the Rings didn’t fare so well and got cancelled rather unceremoniously after a couple of waves. Licensed IPs are also a departure from the original idea behind Lego as a construction-toy-system where every part is compatible to each other, towards a more closed-system-approach. Licensed Minifigures, for example, are usually flesh coloured and represent certain characters and the sets have often very specialized parts that don’t invite to take it apart and combine it with your other Lego bricks. The latter issue might not even been intentionally, but in order to make the sets more and more lifelike over the years, the designers applied more and more complex building techniques, which increases the inhibition threshold to take it apart again.

I am sure TLG is aware of the dangers of being overly dependent on foreign IP and therefore put a lot of effort its “homegrown” IPs like the evergreen City-theme, Ninjago, Elves and Friends. So far with mixed results. While City is highly likely to last as long as Lego bricks are made, other former hit-themes have either gone down (Space, Pirates, Castle) and new ones last only a couple of years usually. Ninjago is the big outlier here, being around since 2011 and makes the leap to the big screen this year. Since its never good to put all your eggs into one basket, they tried to push Nexo Knights as potential successor. But as it seems, it is likely to end soon, as it never met the high expectations (and marketing effort) set into it, while Ninjago seems to be still around in a couple of years time.

As for the chances of some classic themes to see a return – hard to say really. I know a lot of AFOLs would love to see castle, pirates and space return, but kids today are probably into different things than in the 80s and 90s. This said, it can be argued that Star Wars is right now taking the spot of a space-theme, Ninjago had a wave of (quite amazing, as I find) Sky Pirates, and Nexo Knights use at least some of the old helmet and weapon-designs. In the end Lego’s target group – children – will decide which themes will make it and which not and I am sure TLG is doing their market-research.

I’m not going to take a too close look at more adult-oriented themes, like UCS, Creator Expert and Architecture or Ideas, since, while they are usually higher priced than “regular” sets, they only make a relatively small number of Lego sales. Even if some AFOLs think they are the centre of the world.

Speaking of prices… that’s a quite emotional topic. Usually the emotions are disbelief and frustration. But seriously: Lego is an expensive toy and TLG’s success in recent years also had its effect on its pricing. It went up. Quite a lot. Which may also have contributed into this year’s slump. Looking back, for example, at when The Force Awakens came out, I was not impressed by the pricing of the sets (and actually never bought a single one). Now for The Last Jedi, the prices for medium-sized sets went up by about € 10, and for larger ones € 20 and more. Yes, the increase in other themes is not that extreme, but the overall trend is clearly upwards and I think that the limit of what people are willing to pay for has been reached.

All in all, It seems to me that, after Lego saw years where it was significantly hyped, it is now consolidating on a more sustainable level. When glancing on some nerd-culture websites recently (yes, I have a slight nerdy streak. Hey, after all I play with toys!^^), I saw a quite significant presence of Lego-related stuff. From our typical super-sized MOCs (car-sized Battleships from WW2 anyone?), to Minifigure-costumes for adults, to a complete human-sized house made of Lego bricks – you get the idea. But eventually the novelty wears a bit old. Yes, it was funny first. It was actually funny for quite a while. But right now the point is reached where for me it is more “Yes, you can do a lot of silly things with Lego, we all know that. So what’s next?” And I don’t think I am alone here.

As a conclusion I want to say that my love for Lego is unbroken, no worries. But I am definitely not a reality-blind fangirl. I love Lego for all the wonderful ideas you can develop with it, the cute Minifigures and the countless hours of happy building. However I clearly see the issues with certain decisions that have (or have not) been made by TLG and how this might affect our favourite toy in the future. I remain optimistic though. The news appear more dramatic than they are. I think TLG has been a bit too spoiled in recent years by their enormous success and are entering a plateau now. The company is certainly not a crisis and they have been through worse in the last 20 years. What happened though is that TLG received a wake-up call and I’m sure they have the time and resources to react. My hopes are that we see a less-hyped and maybe more reasonably-priced Lego in the future.