Friday, February 6, 2009

Lego's Decade of Financial Upheaval

In 1999, Lego reported its first financial loss (experienced the previous year). I was unable to find an official financial report, but I was able to find an old news article here and here. Oddly, Lego financial report for 2002 and previous seem to be missing. I assume they are simply called something else, maybe some one else can find them. The 2005 report came up in my search but the PDF would not load.





2008 Prelim

The above links show that Lego's financial crisis that began in 1998 did not begin to really improve until 2004. From that point forward the Annual Statements begin with "It was a good year...".

From day one of Lego's financial crisis they began a policy of reconstruction for the entire company. They knew the problems: straying from the Brick, too many negative profit licenses, too much property in the form of factories, warehousing, and under-performing parks, and too many redundant people. To complicate matters even more, the cost of materials and even quality of the product was proving to be an issue.

In the years to come, Lego sold factories, sold parks, dropped licenses, slashed the work force, slashed the management, and sold warehousing.

In order to operate with less warehousing, Lego had to change how they thought about their business. Their policy became one of profit goals rather than expansion of the product into new markets. Even the basic brick line was cut so that they could use less warehousing. But the biggest change would be how they handled quality.

Colors were a huge drain on profit. The old system required far too much warehouse space. So Lego cut the color palette down to a more manageable size. They also outsourced the color production to cut costs further. Outsourcing has proven to be a blessing as well as a curse. A wider profit margin at the cost of some quality control. It was not long before bricks were found to have several shades of one color in the same package. New and more cost effective production methods added to the problem by increasing the number of "bad" parts and in some cases making them more brittle and newer bricks also appeared to have a transparency that older bricks did not have. These quality issues, among other, were not welcomed by the adult fans of Lego.

In spite of growing quality issues and fan frothing, Lego began to emerge from its dire state in 2004. Since then the company has seen a mostly steady increase in profit right up to the end of 2008. By decreasing their assets and concentrating on profit rather than expansion, Lego has managed to see improved numbers even through the current global economy crisis.

I have read recent discussions where AFOLs claim that Lego has recently seen financial difficulties over the past few years. However, the above Annual Statements simply do not support this. Lego is still restructuring the way it does business and the numbers may not be quite where they would like them to be, but their current stability is far better than it was ten years ago. I suspect information is simply being scrambled between parties. When Lugnet was blosoming, it provided a central information cache. Recent members of the community were simply not there to see things unfold and many older AFOLs may have simply forgotten some of the details so they often do not correct the bad information that is floating around. Or maybe they just don't care.

In fact, it is quite possible that there is a repository online with all of Lego's financial history, but in my research I did not come across one, which helps to illustrate the problem. The information is there somewhere, but it is not easy to find.

So, the Lego company has had a rocky decade, but they are much improved. Their recent releases suggest that the company is feeling good about its position and are now more focused on what makes Lego a profitable and enduring entity.

Good job, Lego, and may the following decades be even better.

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