Construction Toys - Lego vs. Everyone Else
The construction toy category continues on its phenomenal growth
path. This is extraordinary because all the other toys -- with the
exception of the Electronic Learning segment of Preschool --
continue to flag. According to
, in the United States, construction toy sales at retail have over
the past eleven years have nearly quadrupled. The total toy market
dropped in the same time span by more than 9% and if you back out
construction toys from the total, the decline is an eye-popping
The question is why construction toys should do so much better
than the rest of toy land.
The answer is an easy single word -- Lego. Lego is the only
brand that drives an entire toy category, where it is normally the
other way around. And Lego totally defies the widely accepted view
that kids are deserting toys and are embracing electronics such as
smartphones and tablets instead. Lego is a success story to end all
success stories, and this is borne out by the fact that it is now
the world's most valuable toy company, having overtaken such
heavies as Mattel (
) and Hasbro (
In fact, things could easily have turned out differently.
In 2003, the company nearly went out of
It had recognized some years earlier that innovation was the key
for future survival against a background of expiring patents,
changing consumer preferences, price competition by brands made in
China, and a flat to declining toy marketplace overall. Given the
problems it faced, Lego management decided to innovate with a
It began to create electronic products such as the Galidor line
-- electronic games. It opened Lego theme parks and education
campuses. It moved into movies, books, clothing, shoes,
accessories, jewelry, video games, software and movie licenses. It
nearly innovated itself to death, literally.
Profitability dropped to zero and into negative territory, sales
slumped, the kids deserted the brand in droves, and the gurus began
to predict the imminent demise of the company. This is when, in
Jørgen Vig Knudstorp
entered the picture as the new CEO and changed things. He mandated
a strategy whereby you go back to basics, you stick to what you are
good at, you focus on creating an absolutely superb product day in
and day out and you make sure that the consumer you want to reach
in fact hears you.
He took a page from Michelangelo's book. When the famous
medieval sculptor was asked how he had created the statue of David,
he responded that he had taken a piece of rock and simply chipped
away everything that did not belong. And this is what happened at
Lego -- out went the theme parks, the jewelry, the shoes and all
the other distractions that did not belong. It worked and the rest
Jørgen Vig Knudstorp also recognized that licenses can be a good
thing and went out and got the best. Lego now has all the top movie
licenses from Disney (
) -- including Marvel and Lucas -- as well as from Warner (
Equally importantly, he foresaw the dangers that manufacturing
in China entailed and Lego is the only major toy company that still
to this day does not produce there. He thus avoided the massive
recalls by RC2 in 2007 and by Fisher Price in 2009, which
grievously hurt both companies and were directly responsible for
RC2's seeking refuge in Takaratomy's arms four years later. In
fact, I attribute Lego's success to a good degree to the fact that
mothers of preschoolers feel safer buying a toy not made in China,
a manufacturing country they rightly or wrongly consider to be more
likely to make toxic products than North America or Europe.
If there was a shortcoming in Lego's marketing strategy, it was
its total dependence on boys, who accounted for well over 80% of
all sales. The company recognized this and introduced late in 2011
a new product line focused on girls -- Lego Friends. It became a
run-away success to the point that Lego then and still now has
problems satisfying demand and keeping shelves stocked. Today,
girls account for about one-third of Lego's consumer group, up from
the 20% before Lego Friends.
Today, Lego has about 75% market share in the construction toy
category. It has only one competitor worth talking about -- Mega
Brands (MBLKF.PK). Just like Lego, Mega's is a comeback story.
Shortly after acquiring RoseArt in 2005, it was hit by several
massive recalls of RoseArt's Magnetix construction toys -- recalls
that nearly brought the company to its knees. It has recovered
since then and has taken a few pages out of Lego's book -- it makes
most of its products in Canada, it has a very strong license
program, and it followed Lego into girl territory at the beginning
of 2013 with the Barbie and Hello Kitty licenses. That proved to be
a very good move for the company since virtually all its growth of
9% so far this year was driven by its Girls range. Today, its
market share in the U.S. construction toy category is around 10%.
By definition, everybody is small potatoes in comparison.
The two toy heavies -- Mattel and Hasbro -- are also trying.
Mattel has had for years the Trio brand at Toys "R" Us (TOYS),
which is hanging in there for grim death. Were it not for the fact
that it is a Mattel product, the brand would have been tossed a
long time ago.
Hasbro had entered the construction toy category before with its
Built To Rule line released in 2003 under the Transformer and G I
Joe licenses. Built To Rule never got traction and was finally
withdrawn in 2005. Making a new attempt, Hasbro brought out the
Kre-O line. Kre-O is made in Korea and was launched in late 2011,
again under the Transformer license. Since then, Kre-O has had its
up and downs -- after the Transformer license, it took Battleship,
then G I Joe, and then Star Trek, For next year, Kre-O is expected
to bring out a range under the Dungeons and Dragons license. The
brand had its peak in 2012 with about 8% market share and has since
then fallen to about half that.
There is also K'Nex, which has manufactured all of its bricks,
rods and connectors in the United States since 1993. It has a range
of interesting licenses such as Mario, PacMan and Angry Birds, It
also handles Hasbro's Lincoln Logs and Tinkertoy, and its overall
market share is in the neighborhood of 6%. Because it does not rely
on movie licenses to drive its business and manufactures within
spitting distance of its offices, its outlook is generally regarded
as more stable and potentially more promising than Hasbro's Kre-O
or of any of the other also-rans.
The most recent shelf space metrics at Target (
), Toys "R" Us and Wal-Mart (WMT) demonstrate the relative
importance of these brands:
(click to enlarge)
There are indications that the major retailers, who are now
resetting for fall, will in fact recognize the importance of the
category and significantly expand its shelf space allocation. If
this happens, both Lego and Mega are most certainly going to
Whilst Lego's dominance and Mega's well-established #2 position
are unlikely to be challenged by any of the current competitors any
time soon, there are two that could change the equation. One is
Mattel. The company has one property that could totally upset the
apple cart -- Monsters High, now the #1 Fashion Doll brand.
Monsters High is already widely licensed for a variety of toy and
other non-toy products and the glaring omission of the construction
toy category has competitors lying awake at night. The question
that worries the toy retailer buyers is whether Mattel is going to
launch another construction toy line under the Monsters brand, or
whether it is going to license it to somebody else and, if so, to
whom. In the right hands, a Monsters construction line could really
become a major contender.
The second potential surprise comes from
World Wrestling Entertainment
-- WWE -- whose master toy license is held by Mattel but who
elected to grant the construction toy license instead to Bridge
Direct of Hobbit, Power Rangers and Justin Bieber fame. The launch
of the WWE range is expected for early next year, and given WWE's
popularity with tween boys, could capture the third or fourth place
in the line-up relatively quickly.
Whatever happens, a few things appear pretty clear. One is that
Lego will continue to drive and dominate the construction category.
The other is that there will be no shortage of would-be entrants
into the field. And lastly -- construction toys will continue to be
impervious to the allures of smartphones and tablets.
This article was first published by TDmonthly on
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
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