A quick look at the conditions leading to LEGO’s almost bankruptcy of 2005
Lego Group has been a shining star in the ongoing pandemic making headlines with their donation of US$50 million to provide essentials supplies to crisis-affected children. However, Lego did not stop there. They launched their new #letsbuildtogether campaign designed to bring the world together across multiple social channels sharing building ideas, challenges, and build a-longs (Christiansen & Goodwin, 2020).
Industry-wide toy sales continue to exceed the previous year’s earning by an average of 26% within the three-month period from April-June (Whitten, 2020). This unforecasted increase in demand has left many store shelves barren or empty. It’s crazy to think that a company that is currently performing well and resonates so strongly with consumers almost declared bankruptcy when it appeared to be at its height. This post will explore some of the marketing failures that contributed to its perilous past.
Throughout the 1990s, the demand for LEGO and other more traditional toys drastically decreased as the demand for video games and more technical toys rapidly increased. Unfortunately, LEGO’s patent for their interlocking bricks also expired, leaving the market wide open for competition. In 1998, LEGO announced their first significant fiscal year loss and laid off a 1/3 of its employees (Stern, 2018). Attempting to remain relevant to the changing market environment LEGO forged its first licensing relationship with Star Wars.
Star Wars changed the toy industry forever when its action figures couldn’t get on shelves fast enough for consumers back in 1977. Demand for toys based on movies was unprecedented before Star Wars, and the Star Wars model soon became a benchmark and standard for the industry. However, unlike the original Star Wars toys, which were successful in selling more than a year after the film was released, movie promoted toys eventually fell into cycles. Toys linked to movies today only perform well within specific parameters. Licensed products based on movies typically produce strong sales for extremely short periods. Failure to accurately forecast demand or have toys on shelves leading up to and directly after a movie’s release becomes a missed opportunity (Johnson, 2001). After a film withdraws from theaters, the demand window closes, and many remaining products gradually shift towards the clearance shelf. Since the demand window is limited, it’s not financially viable for companies to produce and distribute additional products once they sell out.
When LEGO produced its first line of Star Wars products 1999, it failed to estimate consumer demand, and the entire line quickly sold out. The following year they continued their Star Wars line, but it was not nearly as successful. The line moved slowly, and many of the sets ended up in the discount bins. Why did this happen? There was no new Star Wars film in the year 2000. LEGO did not understand the relationship between the American toy market and the movie industry. Furthermore, they continued to make the same mistakes with their Harry Potter license when it launched in 2001 and again performed below expectations in 2002. “In a year without Star Wars or Harry Potter movie launches, the unsatisfactory sales of products with movie tie-ins accounted for more than 50% of the overall sales decrease” (Rivkin, Thomke & Beyersdorfer, 2013) an estimated $220 million loss in 2004 (Stern, 2018).
The increased licensing costs and particularly the company’s inability to fully understand the supply and demand market dynamics significantly contributed to LEGO’s near bankruptcy in 2005.
How did LEGO recover to achieve the success it enjoys today? Well, that’s a story for a potential future post. Can’t wait? I highly recommend checking out the LEGO episode on Netflix’s The Toys that Made Us series. Harvard Business Review also offers several Case Studies covering the LEGO company in various topics, from Leadership to supply chain management.
LEGO is one of my favorite companies, and I love their products. This blog will definitely feature more LEGO centric posts in the future.
Works Cited:
Christiansen, N., & Goodwin, J. (2020, March). The LEGO Group and the LEGO Foundation support children and families impacted by COVID-19. Retrieved August 11, 2020, from https://www.legofoundation.com/en/about-us/news/the-lego-group-and-the-lego-foundation-support-children-and-families-impacted-by-covid-19/
Johnson, M. E. (2001). Learning From Toys: LESSONS IN MANAGING SUPPLY CHAIN RISK FROM THE TOY INDUSTRY. California Management Review, 43(3), spring, 106-124.
Rivkin, J., Thomke, S., & Beyersdorfer, D. ( 2013). LEGO: (A) The Crisis. HBS No. 9-713-478. Boston, MA: Harvard Business School Publishing
Stern, T. (Director). (2018). The Toys that Made Us, Season 2, Episode 3 [Video file]. Retrieved from http://www.Netflix.com
Whitten, S. (2020, July 21). Inflatable pools, water slides help fuel the fourth straight month of double-digit toy sales gains. Retrieved August 11, 2020, from https://www.cnbc.com/2020/07/21/toy-sales-up-19percent-in-june-as-online-shopping-surge-continues.html
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