Picking up the pieces

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From its beginnings in a humble carpenter's workshop in 1930s small-town Denmark to global toy megabrand today, Lego has now sold more than 320 billion of its construction bricks to generation after generation of children.

From its beginnings in a humble carpenter's workshop in 1930s small-town Denmark to global toy megabrand today, Lego has now sold more than 320 billion of its construction bricks to generation after generation of children.

Voted "Toy of the Century" by the British Association of Toy Retailers and Fortune magazine, there are surely few people alive not familiar with the multi-coloured pieces of "stud coupling" plastic.

Lego's proven ability to combine education with imagination, creativity with fun for kids of all ages, helped it comfortably to see off tough competition for the accolade from the teddy bear, Action Man and Barbie. Rival toy designers continue to drool enviously over the sheer power of its fundamental concept, its durability and its infinite expandability; Disney and Hasbro are said to dream of somehow acquiring its unique family-friendly brand power.

Still a family-owned corporation, despite being the fifth largest toy company in the world, Lego has proved for nearly three-quarters of a century to be both a source of Danish national pride and a respectable licence to print money.

Lego sets have flown off the toyshop shelves and the money has just poured effortlessly into the corporate and the Kirk Kristiansen family coffers. At least, until now they have. Two years ago Lego made a loss for the first time in its history when it went £23m into the red, and this year that bitter blow will be repeated when it loses double that on sales of nearly £900m. Despite intense marketing, no Lego product has made it into the crucial UK Top 10 Christmas toy list again this year and the Legoland park at Windsor has lost large numbers of visitors to appalling weather and competition (yes, really) from the Millennium Dome.

And while Lego and the Kirk Kristiansens hold a place in their homeland akin to the Danish royal family, there are now cracks in the fairytale Lego story as well as doubts about the direction of the company.

No one talks about it at Lego HQ in the small Jutland farming community of Billund, west of Copenhagen, but a court case thousands of miles away in Hong Kong has forced the family to admit that it was not the present chairman's grandfather, Ole Kirk Kristiansen, who invented the famous interlocking brick - as the story usually goes - but an obscure Londoner who later committed suicide.

Even the world of child's play has its "dark secrets", explains one toy industry insider, who is critical of Lego's "obsession with its clean-cut, fantasy image".

It seems that Hillary Page, a toy maker from Earl's Court, sent some sample stacking bricks to the Kirk Kristiansens in 1947 after he failed to win backing to develop them here. Two years later Lego - an abbreviation of the Danish for "play well" - produced its version of the idea, adapting the blocks by one-tenth of a millimetre to conform to metric standards and changing the shape of the interlocking studs on the top.

Later they were converted from wood to plastic and took the world and its millions of family homes by storm.

A troubled man, Mr Page did not live long enough to witness the extraordinary success of his brainchild, but his company was paid an out-of-court settlement of just £45,000 in 1981 for his residual rights.

Meanwhile, the Kirk Kristiansen family trust, reputedly one of the largest landowners in Copenhagen, has grown immensely rich as a result of Mr Page's idea and the profits it has generated. Just how rich cannot be said for sure as Lego is not obliged to and does not publish full accounts and the founder's grandson, Kjeld, who is now in charge, does not like giving interviews or divulging too many figures.

Now 53, the pipe-smoking Kjeld (as he likes to be known by his staff) was hailed as Lego's saviour when he appeared to pull it back from the brink after 1998's shattering losses with an unprecedented Fitness Programme designed to reduce costs and move the firm back into the black. But despite all the pain, Kjeld's measures have failed to stem growing speculation that Lego cannot survive alone - already its long-term rival, the French Meccano, has succumbed to the pressures of the modern toy industry and today's fickle fashions and gone into the hands of receivers.

Meanwhile, Lego has shed 1,000 jobs, a tenth of its workforce, to save £83m a year. It has also streamlined its management teams from an unwieldy structure of 15 different regions in Europe alone, each equipped with individual personnel, finance and marketing departments, to just three. There is also just one 15-strong global management team instead of five, but the high manufacturing cost base has still to be tackled, with one of its two main factories based in ludicrously expensive Switzerland.

Lego has also still to conquer the vital US market, where it has traditionally sold less than in far smaller Germany. Admittedly, it now sells twice as much in all the Americas as in Germany (a breakdown just on the US is not available) and growth this year has been at 18 per cent, but critics claim that this is still nowhere near enough in the world's most important toy market.

Lego is also badly hampered by making all its own products in-house. Most toy companies outsource practically everything, to give them the flexibility to cater to the ever-changing tastes of the 21st century. Its squeaky clean, safe image was also damaged by the rattle affair, after four youngsters on the Continent were found to have nearly swallowed the toy.

Although it passed several safety regulations with flying colours, it was forced into a massive worldwide recall of the rattles. "There was nothing wrong with the product but we mounted a huge global exercise to recall it to protect our reputation. It was basically a big branding exercise to emphasise our commitment to safety," says Lego's chief spokeswoman Eva Lykkegaard.

There are also doubts about Lego's management. Once considered highly progressive, Lego's corporate style perhaps owes more to the 1960s than today's cut and thrust. As Kjeld himself puts it, working for the firm "must be much more than a job" and should take place in "an informal and direct environment, with colour and life in the corridors".

While others in Lego explain it as a "company mission to nurture the child in each of us", critics outside say its executives are too cut off and inhabit a childhood world that no longer exists.

Their "Land of Childhood" at the Billund HQ in Denmark perhaps proves the point. Executives are encouraged - some claim even obliged - to go through it regularly to remind themselves of how it felt to be a child. They are stripped of their watches and shoes and made to dress up in a white paper catsuit closely resembling a baby gro in which they must pass through a series of pods representing the various stages of growing up - from womb to teenage rebellion.

The toddler section comprises an adult party in which massive legs appear to reach up to a very high ceiling, bottoms fart at your level and unwanted cigarette smoke floats into your face.

The teenager room contains record players and other paraphernalia from another age, and one outsider who was allowed to visit the "secret" site was reminded of a traditional childhood that simply no longer exists for most.

"It's another example of Lego executives living in the past and thinking about what their own childhoods were like rather than what it is like to be young now. It's a mistake they have to rectify," he says.

Although there are now some non-Danes and toy industry outsiders in the upper echelons at Lego, it still prefers to keep the key jobs for those Danes who have spent their entire careers within the company and who conform to the Lego type.

"Lego Man is clean-cut, evangelical about his company and product and an obsessive about the proper channels and producing a consensus through an endless series of meetings. He is very proper and professional but extraordinarily tight-lipped about the internal workings of the company. You just can't imagine him working for anyone else, and almost certainly he never has done," says one rival. "They need to bring in some fresh air and some fresh thinking."

And perhaps worst of all is that many of Lego's patents are beginning to run out on its core products, with all the dangers of cheap imitation from rivals unsaddled with its heavy corporate costs.

Lego's Ms Lykkegaard admits mistakes were made in the past, but insists that these have now been dealt with. "We've been spoilt until now with increasing growth over many years and the company became too complicated. A Fitness Programme has been introduced with an entirely new business system. We wanted to become one big global company and have set a very tight budget for next year that will ensure a £50m profit."

Lego's optimism is not widely shared outside its closely-knit ranks of loyal employees. Jon Salisbury, a seasoned toy industry watcher and publisher of UK Toy News, says: "I do worry about Lego. It doesn't perform in the toyshops as it used to in the 1970s and 1980s. It all started to go wrong in the 1990s when it failed to change with the times and it doesn't seem to have found the solution yet."

Lego, he says, has become a complacent and bloated empire. Even its much-heralded Lego Football (up to £35), its bestseller this year, has been unfavourably compared to the doomed Subbuteo and branded by one commentator as a "museum piece".

It is certainly difficult to see how it can successfully compete long-term with the plethora of computer football games that have captured both youngsters' and adults' imagination - and don't involve losing vital elements down the backs of sofas and into vacuum bags. It is also undoubtedly hard in this hi-tech, media-driven age for a set of pieces of plastic, however ingenious, to compete with the hugely popular virtual pet phenomenon and the TV or movie-linked merchandise.

This year's toy hit parade is topped by a series of robotic dogs, such as the Teksta interactive puppy (£40) and the Poo-chi pet (£25), Who Wants To Be A Millionaire? games and the perennial Barbie doll in her latest guise and fashionable outfit. Parents are spending more than ever before on Christmas presents - how many children now would be content with 1954's "Toy of the Year", the Sooty glove puppet, for instance - but they are not spending it on Lego. Today's instant gratification child does not want to go through the bother of constructing something with several hundred plastic bricks, when a virtual pet comes to life with a stroke of the back. The virtual pet craze, which started with the Tamagotchi obsession which saw some school pupils being sent home because they spent more time in class tending to their "animals" than focusing on their lessons, has moved up another gear. Kids grow out of traditional toys far younger than they used to.

There is currently no stronger status symbol in the British classroom than these virtual pets; with the more sophisticated models costing more than £100. Lego, with all its scope for creativity, does not have the same street cred. Kids want some clever electronic gadgetry to do the imagining for them.

"Lego became very confident in its eyrie on top of the industry. But the language of toys is now very different. Children are media literate and very fickle. Product concepts come and go at a far quicker pace. Lego have a similar mentality to Nintendo. Both have strong domestic markets and have consequently been very slow to launch new things. "But if they don't adapt quickly Mattel and the entertainment-based products will do it for them," says Mr Salisbury.

Kjeld has, at last, realised that Lego must forsake its ideals as an outlet for young imaginations and marry itself more closely with show business if it is to move with the times. Lego has set itself two missions by 2005 - to be the strongest brand amongst families with children, beating such giants as McDonald's and Coca-Cola, and more than doubling its turnover.

It has chosen two high-risk strategies to achieve its aim, but ones which have already had their impact on profits. In an extraordinary confessional statement to his staff, Kjeld put it recently: "We in top management over-estimated sales and our optimism resulted in too many cost-demanding initiatives...We were perhaps more driven by the wish for quantitative growth than for qualitative and healthy growth." The first new departure is into the crowded and fast-changing hi-tech world of robotics and media. The fourth generation of Lego toys - after basic construction, mobility with wheels (introduced in 1962) and then small figures for role and theme play (in the 1970s) - has introduced so-called "intellectual" bricks to "build behaviour into creations". These enable sophisticated youngsters to build a plastic pop band or construct Lego cars on their PCs and then race them in an onscreen computer game.

Both the Mindstorms and Mybot ranges contain programmable bricks allowing children - and adults - to make their own moving, talking toys which have been hailed by the Guinness Book of Records as the most advanced robots ever. Their microchips can handle 1,500 commands simultaneously and their popularity with grown-ups as well has seen them take their place on the shelves of computer stores, not just toyshops.

They are clever, impressive toys but they have also been expensive to develop and have yet to take the toy market by storm, perhaps in part because of their very complexity. Sales figures on these and other Lego CD-Roms proved impossible to obtain from secretive Lego after a week of inquiries, although Ms Lykkegaard said that the first Lego CD-Rom "Lego Island" had been a "tremendous success".

The other new area - licensing - surely accelerates the decline of the purely creative in Lego products that has been so jealously protected. It has so far negotiated licences with the Star Wars creator George Lucas, Disney, Harry Potter and Bob the Builder to produce themed Lego products.

Figures are sketchy once again, but Lego says it sold 2bn Danish kroner (£163m) of Star Wars themed sets last year, a feat which greatly contributed to its 30 per cent rise in sales. The others are only now beginning to come on stream, with Harry Potter goodies set for next year shortly before the release of the movie. "Finally Lego is getting into bed with Hollywood through licensing - a practice until recently simply unthinkable," says UK Toy News's Mr Salisbury. "But now Lego will have to play by Tinseltown's rules and work on the basis of a short life-cycle of one or two years, previously anathema to its whole ethos. Linking up with TV and the movies has its own risks, and negotiating with people like Lucas can be very tough. He's known as the most expensive licence around, despite the fact that Star Wars is not what it was."

But Kjeld is optimistic. "They fit together, the Lucas storytelling and our creative products. The same with Disney and Winnie the Pooh and Mickey Mouse and friends."

The danger is that this bid for long-term survival could impair Lego's greatest asset - its uniqueness and creativity. By hitching its name to other great brands, it may be diminishing its own.

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