Thursday, 21 February 2013

The Profit Keeps Coming for LEGO

LEGO have released their Annual Report, which shows that in 2012 the company sold nearly three times as much product as in 2007. The numbers, once again, are impressive and it is great news for LEGO.  Product lines singled out as success stories are Star Wars, City, Ninjago and Friends.

The company’s profit increased by £127 million from 2011 to 2012, an increase of around 20%. That’s right, £127 million. But printed bricks are too costly to include. New mini-figure moulds mean the prices of sets keep increasing.

Some of the report is more dry practical details, like that packing facilities are to be moved closer to where the products are sold. The idea behind this is that then the company can better meet changing demand, so if a product is in short supply greater quantity can be rushed out to meet demand. This sort of makes sense in a way, but with a little scrutiny perhaps not- the bricks still have to be shipped from wherever they are manufactured, just because they are not shipped in the box, it doesn’t mean they get there any quicker. Strange.

Billund and Hungary will be getting additional production capacity which will please fans who are tired of the amount of parts coming from the Far East, and hopefully this trend of expanding European production will continue.

Sales of City and Star Wars topped the charts for LEGO yet again, and little comment is made on this as it is now expected. Ninjago and Friends were singled out as success stories however, the two themes following up the regular headliners. Friends exceeded expectations, which led to LEGO not being able to meet demand despite doubling the production originally planned. This is of course great news for LEGO as if the long-awaited girl targeted line had failed then it would have been an embarrassment. Now the company must keep the momentum going, and introduce other products aimed at girls to encourage them into other themes.

Ninjago didn’t get much of a mention, again as now the performance of this line is expected to be phenomenal. As fans know, however, LEGO have taken the rare step of extending Ninjago beyond its originally planned lifespan. This shows that interest in the theme has not dwindled this year, and it continues to show that home grown LEGO themes have huge potential in captivating children.

What is frustrating about all of this news is that LEGO are making more money than ever, but with less focus on quality than fans are accustomed to. LEGO Friends has been a huge success because as well as an unprecedented marketing campaign, the sets are well made and detailed. Part of this quality is shown by some Friends sets including printed bricks. LEGO Games was a success story when it launched, and those sets also include printed bricks. There seems to be no reason that LEGO couldn’t have just made a meagre £126.5 million and given fans printed bricks across all product lines (and somehow it seems unlikely that printed bricks would really cost the company half a million).

Meanwhile sets such as Star Wars become more and more expensive as LEGO are determined to produce more and more mini-figure moulds and throw them in with sometimes unrelated sets just as a way to jack the price up. As the price of sets has increased beyond the rate of inflation, with LEGO making these huge profits it would make sense for LEGO to freeze the price of sets for a year or two – and they might even sell a few extra sets if they were more reasonably priced.

So well done to LEGO, who yet again are laughing all the way to the bank. Clearly it is good for LEGO collectors to see the company do well, but it would also be nice to see LEGO give a little bit back in the interest of keeping the fans happy and on board.


Here's the press release from LEGO:

Successful LEGO strategy delivers continued strong growth

In 2012 the LEGO Group increased its revenue by 25% to GBP 2,549 million – nearly triple the sales of 2007. This represents the fifth consecutive year in which the LEGO Group delivered year over year revenue growth in excess of 15%.
Key facts from the LEGO Group’s annual report for 2012, which was published today:
• The year's operating profit increased to GBP 866 million against GBP 660 million in 2011, an increase of 40%.
• The operating margin increased to 34% from 30% in 2011.
• The year's net profit increased to GBP 611 million against GBP 484 million in 2011.
• The revenue increased by 25% to GBP 2,549 million against GBP 2,181 million in 2011. In local currency (i.e. excluding the impact of foreign exchange changes) revenue increased 20% year over year.
• The net cash generated from operating activities was GBP 680 million against GBP 430 million in 2011.
• In 2012 the Group paid GBP 208 million in corporate income taxes.

The LEGO Group reporting currency is DKK. Conversion from DKK to GBP is based on an annual average currency rate (however conversion of net cash generated from operating activities is based on year-end currency rate) in 2012 and 2011 respectively.

”It is a highly satisfactory result and better than we expected at the beginning of the year. This is due, first and foremost, to the fact that we were able to develop and launch products that children all over the world have put at the top of their wish lists in 2012,” said Jørgen Vig Knudstorp, Chief Executive Officer of the LEGO Group.
More than 60% of the LEGO Group’s sales are new launches every year.
“As a consequence we have huge demands on our development & supply processes. Year after year, we must be able to predict what will capture the interest of children and deliver this in relevant LEGO products – and in 2012 we succeeded,” said Jørgen Vig Knudstorp.

Production close to core marketsThe large demand for LEGO products in 2012 created significant challenges for the LEGO Group's production, but the company's strategy of locating its factories close to the core markets in Europe and North America showed its strength.
”Having our packing facilities located geographically close to our core markets and continuously optimising and improving production, means that we can better respond to demand from customers and consumers,” explains Bali Padda, Chief Operating Officer.

LEGO Friends significantly exceeded expectationsThe best-selling product lines in 2012 were LEGO City and LEGO Star Wars™, followed by LEGO Ninjago (launched in 2011). The new product line, LEGO Friends, delivered a strategic milestone in 2012, selling much better than expected and becoming the fourth best-selling product line. Even though the LEGO Group more than doubled its production of LEGO Friends versus expectations, it was not possible to deliver all of the products demanded.

Global growthWith double-digit growth rates, North America, Asia and Central & Eastern Europe delivered impressive results in LEGO sales in 2012, while the growth rates in some Southern Europe markets were more moderate but still in healthy single digits despite very challenging market dynamics.
”We are very satisfied with the strong growth in Asia, especially driven by the appeal of LEGO Ninjago, LEGO Friends and LEGO City. While Asia is a relatively small market for the LEGO Group, during the coming years we anticipate that it will become a new engine of growth,“ said Mads Nipper, Chief Marketing Officer.

To prepare for future growth, the LEGO Group continued investments close to the core markets in 2012.
· In the Czech Republic, the LEGO Group announced a significant expansion of its existing factory in September.
· The building of a new factory in Hungary near the existing LEGO factory in Nyíregyháza was started in October.
· As a part of the strategy to make Asia a core market, a new Asian head office in Singapore was inaugurated in the autumn.
· As a result of the strategy to locate packing facilities closer to core markets, the LEGO Group announced early in 2013 that packing facilities in Billund, Denmark, are to close down during the next 2½ years. At the same time large investments will be made in moulding and engineering capabilities in Billund.

As a result of the increase in sales and investments in production capacity, the number of full-time employees increased by slightly more than 1,000 from an average of 9,374 in 2011 to 10,400 in 2012. The number of employees is also expected to increase in 2013.

Expectations for robust growth in 2013In 2013 the LEGO Group expects that the global financial development will continue to impact the toy market in general. The financial situation in western and southern parts of Europe, and in North America, will continue to be under pressure, while Asia and eastern parts of Europe are expected to experience robust growth.
In 2013 there are high expectations for the LEGO Group's major launch - LEGO Legends of Chima – a play theme that takes place in a fantasy world populated by mythological animal tribes.

Based on the LEGO Group's momentum from 2012, it is therefore anticipated that LEGO sales will continue to grow in 2013, but the challenging global economic situation will result in lower growth rates in 2013 than experienced in 2012. This does not change the fact that the LEGO Group expects a satisfactory result for the full year.

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