Toy industry hitting a Lego brick wall

How to build a global toy company out of Lego? A digitally savvy child would probably not add 160 (real) bricks-and-mortar stores. The Danish manufacturer of plastic bits is more imaginative. Retail expansion plans released this week accompanied first-half figures showing profits falling. The extra shops should snap neatly on to a robust growth model.

Family-owned Lego is withstanding industry tremors better than listed rivals. Play has gone digital. Lego has used all the parts in the toy box. Electric parts interact with iPads. Products inspire blockbuster films. To protect the brand, the Lego family is taking control of Merlin Entertainments, which runs Legoland theme parks.

Maintaining growth is hard as markets become saturated. Lego says it sells 70-billion components a year. Assume linear growth since 1958, when it produced the first bricks. That would mean it has made 2-trillion bricks. Parents see bricks as capital assets, storing those that have evaded the vacuum cleaner. But this does little to damp demand. For most kids, Lego bricks are consumables, used to build a must-have kit then discarded.

Lego’s revenues dropped in 2017. They grew 4% in 2018, and by the same in the first half of 2019. Higher investment resulted in first-half operating margins falling below 24%. Without a second-half recovery, that would be the lowest since the financial crisis. Store expansion should help secure sales growth.

US rival Hasbro is pushing into China by acquiring Peppa Pig franchise owner Entertainment One. Its operating margins have fallen to 13%, according to S&P CIQ. Barbie dollmaker Mattel is reporting operating losses. Lego starts from a stronger position than both.

The world can accommodate another 2-trillion Lego bricks, even if its vacuum cleaners cannot. /London, September 3

© The Financial Times 2019