Lego’s move East highlights Toy makers’ challenges
Lego is now the ‘World’s most powerful brand,’ according to brandfinance.com. The Economist estimates there are on average 86 Lego bricks for every person on the planet. Although close to bankruptcy at the turn of the century, Lego has enjoyed success ever since. This culminated with reports last week of a 13% rise in revenues, with net profits rising 15% to just over $1billion in 2014. But what next for the Danish firm in its quest for continued growth – and what can other toy companies learn from Lego?
Currently the more traditional toy makers are facing challenges in terms of Europe as their primary and in many cases sole marketplace. As an ageing population in the UK and Europe posts a challenge in terms of a shrinking market; so too does the emergence of digital gaming which increases competition in the broader toys and games industry. So much so that more traditional firms are looking elsewhere for new opportunities. Indeed, Euromonitor, a leading market intelligence firm, predicts the Asia-Pacific region to become the world’s biggest traditional toy market by 2018, when it is forecast to overtake North America and reach €18 billion ($20.4 billion) in annual sales.
Although entering this market is a move fraught with difficulties, it is the rational (and perhaps only) next step. The region is in a healthier state economically than Europe. Looking at unemployment rates – a clear indicator of an economy’s health – China’s latest rate is 4.1% with Thailand, Singapore and Malaysia all operating at 3% or below – Even Taiwan, South Korea, Vietnam and Hong Kong are all below 4%. Compare this with the Eurozone as a whole at over 11%. Indeed 10 nations in Europe currently have unemployment rates of 10% or higher. From 2006 to Jan’ 2015 China’s disposable income, a significant variable in determining consumption in an economy, has almost trebled. More people in work and more disposable income can only be good for sales. Another key indicator, GDP, is expected to increase across Asia (and Australasia) for 2015 by 5.7%. Compare this with an average 0.7% increase for the whole of Europe and you begin to see the potential.
The demand is clearly there and will only increase due to the emergence of an affluent middle class. The loosening of China’s one-child policy and the inevitable baby-boom that will follow all suggest huge opportunity. Firms will also need an ever increasing workforce to support its unrelenting expansion; something China has in abundance.
Ahead of the game, in 2013, Lego increased its full time work force by 13% and invested $478m in production facilities. The most significant investment being a new factory in Jiaxing, China. Concurrent to this is the globalisation of its management, with regional offices being erected in London, Singapore and Shanghai. The intention is for China to be its base in the Far East from which it can further delve into the emerging markets of the region.
With a second Lego movie due to be released in 2017 and news that the brand is even venturing into television, Lego will hope to continue its growth in the East. I expect the firm to jostle with Mattel for the top spot in the toys and games industry with China and the Far East becoming the new battle ground for supremacy. It is surely a question of when, and not if, other entertainment companies will follow their lead.