LEGO is Collapsing Brick by Brick

LEGO has hit a brick wall in sales and now is stuck with warehouses full of bricks. This feels like a repeat of mistakes from the past.

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by Ethan Hausmann

Recently the LEGO company announced reduced profits for the first time in the past 13 years. This is a huge deal and not a good sign for the organization that almost went out of business in the 1990s. History might repeat itself, since there is an underlying problem.

Having over a decade of growth is exciting for any business, but apparently it was too good to be true. Click here to read some of the stats about the recent profit reductions.

How they got in this situation
Between 2010 and 2015 LEGO had enormous growth. In fact, their profits doubled. Unfortunately, the company was too aggressive in their growth strategy. Last year, sales slowed in Europe and North America, so LEGO was stuck with warehouses full of excess bricks.

Even though individually quite small, LEGO bricks by the carton can take up a lot of space. So boxes of them hogging precious warehouse real estate prevented new products from being produced for upcoming movie licensing deals. LEGO doesn't want to sell the tiny colored cubes for a loss, so they store them until demand picks up again.

Bigger problems
The main problem is that demand won't just magically increase. Keeping the bricks in storage will ultimately stunt growth. LEGO might be showing the same symptoms as in the past.

Back in the 90s LEGO suffered from an identity crisis. They thought they were losing relevance and decided to diversify into dolls, books, and clothes. This strategy did not work. They almost lost everything.

Fortunately, during this crisis, a new CEO took over and saved LEGO. His name was Jørgen Vig Knudstorp. He cut thousands of jobs, put the focus back on the tiny brick LEGO is known for, and reduced brick production by half. Instantly the company was lean and was able to focus on what made them great and unique in the beginning.

Fast forward to today and LEGO has its hands in movies, video games, and other merchandise. No wonder brick production went haywire. Nobody was watching what kids were buying. LEGO should get back to what makes them unique. Lots of other businesses can produce movies and make video games, but only LEGO has those special bricks.

Some lessons to be learned
A couple of important things can be learned from the LEGO story.

Number One, watch your operations. Letting production get out of hand will cost real money in initial production costs, storage costs, and lost revenue if you are forced to sell at a loss.

Number Two, go back to basics. What started your company? What product are you known for? Who is your audience? Diversifying reduces risk in the stock market, but can kill an organization. Determine how you are unique and stick with it.

Number Three, be a kid sometimes. Borrow some bricks from your children and build a city or a spaceship or a submarine. You are never too old to play with LEGOs.