Building an Empire One Block at a Time

In an Age of High-Tech Toys, Lego Is Reinventing Itself. The Old-Fashioned Bricks Have Never Been More Popular. Here's How the Company Does It
By Daniel Mcginn (With Samantha Henig) Magazine article from Newsweek Like most parents, Phil and Karyn Corless face a constant struggle to keep their home from becoming overrun with toys. They have a specially designated toy closet in their Coeur d'Alene, Idaho, home, and when playtime is over, they cajole their childrenEthan, 8, and Megan, 5to store their Play-Doh and Hot Wheels, crayons and Barbies. But there's an exception to this put-itaway rule, a toy that enjoys most-favored status: the family's Lego collection. "They're one of those toys that always stay out, because ... when [friends] come over, you know they're going to play Legos," says Phil, who has fond childhood memories of building elaborate Lego mazes for his hamster. "I've never seen a kid who didn't want to build something." Like potato chips and pandas, Legos seem universally appealing: does anyone not like them? For managers at the privately held, Danish-based company the popularity of Lego blocks is mostly a blessing. At a time when parents struggle to pry kids away from computer games, moms and dads feel good steering tykes to a wholesome, sit-on-the-floor toy that seems to invite creativity. But in the last decade, Lego experienced the downside of having a brand that's so adored. Emboldened by the public's fondness for its colored bricks, managers tried to expand well beyond toys and build Lego into a full-blown lifestyle brand. The company expanded its Lego theme parks, sold Lego software and created Lego clothing lines. Suddenly parents could send their child to school wearing Lego rain boots and a Lego backpack. Today Lego managers look back on that expansion with a shudder, asking: What were we thinking? Not every one of these products flopped, but they created no end of corporate distractions--and caused Lego to neglect its core business. Instead of dreaming up new toys, executives were too busy designing apparel and eyeing theme-park locations. Sales slid sharply: from 2002 to 2004, revenue fell 16 percent, to $987 million, and losses stacked up like so many red-brick towers. But lately, Lego's turnaround has gained a steady foundation. A new team of managers has rebuilt the brand by refocusing on toys. For evidence, drop by a child's birthday party; you'll likely find kids unwrapping Lego-brand Bionicle figures, "Star Wars"-licensed spaceships, Technic motorized bulldozers or Aqua Raiders undersea attack vehicles. Lego has returned to profitability, earning $256 million in 2006, according to the company. Lego's North American president, 43-year-old Soren Torp Laursen, says: "We learned the hard way we can't take our brand everywhere." Lego was founded in the 1930s by Danish carpenter Kirk Christiansen. The brand name came from the Danish phrase "leg godt" ("play well"). At first, Christiansen sold wooden toys. But in 1949 the company introduced its iconic interlocking plastic bricks. The toys became wildly popular in Europe in the 1950s, but didn't catch on in the United States until the company launched a big advertising campaign in the mid-1970s. According to company estimates, kids around the world today spend 5 billion hours a year playing with the blocks--which Lego factories produce at the rate of 33,000 bricks per minute. All told, that means 16 billion a year. The company is still owned by the founder's grandson Kjeld Kirk Kristiansen and his family, who are among Denmark's richest individuals.

As Legos grew to become a fixture in global toy chests, it faced minimal competition: in 1992, it held 90 percent of the U.S. market for brick-based construction toys. Still, other threats loomed. By the late 1990s, toy experts were fretting about "age compression," industry-speak describing how kids were abandoning toys--in favor of the Internet, videogames, trombone lessons and soccer practice--at younger ages than ever. To cope, toy companies diversified. They began moving beyond their core, [] At Lego's headquarters in Billund, Denmark, managers toyed with various expansion ideas. Lego's bricks are so iconic, managers figured, why couldn't they work just as well on all sorts of products? Mary Jo Hatch, a University of Virginia management professor, points to Richard Branson's Virgin Group, which began as a record label and expanded into airlines, cell phones, health spas and comic books, as a successful example of a company that extends its brand. But in their quest for growth, lots of companies try boneheaded extensions: Brandweek's list of the worst brand extensions of 2006 included Cheetos lip balm and Play-Doh perfume. Lego stumbled because its fans associate its brand rather narrowly with a fun building experience. "The company put out products that didn't have anything to do with what people expected of Lego," says Hatch. Even the colors on the new clothing didn't match up with the primary hues utilized for the blocks. And as Lego expanded, its toy line languished. Classic modelslike its fire stationwere discontinued. There was a single bright spot in the Lego toy lineup, however. In 1999, Lego began producing licensed "Star Wars" merchandise, which took off; items like the 3,104-piece $299.99 Imperial Star Destroyer capitalize on nostalgia for the older movies and the popularity of the new prequels. In retrospect, however, managers say that success actually exacerbated problems, because the "Star Wars" profits helped paper over the poor performance of the new non-toy businesses, allowing the muddled expansion strategy to continue longer than it should have. By the time Danish-born McKinsey consultant Jorgen Vig Knudstorp joined Lego in 2002, "it was a company that had lost its way," he says. In 2003, the company suffered a net loss of more than $300 million. "There could not be another year like thisthe company would have lost its independence." To rebuild, Knudstorp first focused on the finances. Lego sold off a majority interest in its theme parks to the Blackstone Group, the private-equity giant. It unloaded real estate to reduce debt. It outsourced entire departments: today IBM runs its tech department and DHL runs its warehouses. Ten years ago Lego employed more than 8,000 people; today its global payroll is about 4,000. Managers also decided to outsource the bulk of its manufacturing operations. At its U.S. headquarters in Enfield, Conn., last month, workers dismantled the last of the its machinery, which is bound for Jurez, Mexico. Today you can still find Lego clothing, but it's produced through licensing deals, which allow Lego to keep its attention where it should be: on toys. Walking around the annual Toy Fair in a New York City convention center this winter, U.S. president Laursen pointed to the fruits of their labor. Old favoriteslike the fire stationare back. There's a motorized Ferris wheel, offering a slightly more high-tech experience. Laursen, a 22-year Lego veteran who's worked in nine countries, has two children. His 6-year-old son loves Legos, but his 11-year-old daughter illustrates the company's challenge. She still plays with the bricks sometimeswhen she's not talking on her cell phone or plugged into her iPod. "We're desperately trying to hold onto her in the toy category," Laursen says, admitting he fears she'll soon completely forsake toys for cosmetics.