How to Rebuild Lego

If it hadn’t been for the great depression, there probably never would have been a company called Lego. In 1932, when construction slumped in the Danish town of Billund, an out-of-work carpenter named Ole Kirk Christiansen began making toys from wood scraps. By the time the economy recovered, his business was doing so well he had given it a name — after the Danish words leg godt (play well). A few years later, Christiansen changed materials, buying his country’s first plastic-injection machine. And in 1958 he patented the interlocking bricks that children have been playing with ever since.

Today, in the aftermath of another economic crisis, the carpenter’s company is thriving once again. Revenue jumped 22% last year, to approximately $2.3 billion, pushing net profit up 63%, to approximately $442 million. “In tough economic times, you’ll often see retro products come back,” says Gerrick Johnson, a toy-industry analyst at BMO Capital Markets. “Parents spend money on stuff they know works. Rather than going to Disney World or on a trip, you get a $30 Lego set.”

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The company’s success is all the more remarkable in a virtual, Internet world. Its bricks are the ultimate in low-tech, crafted through a process that hasn’t changed much since Christiansen bought his first machine, and it’s up against high-tech toys that suck up Christmas shopping dollars.

In fact, it was only recently that analysts had all but written off the company as a casualty of the digital era. Lego moves 50% of its products in the two months before Christmas, but at the beginning of the decade, its supply chain was a tangle, as workers struggled to keep nearly 14,000 unique elements in stock. At headquarters, deadlines were rarely met. Model runs were kept around for sentimental reasons. Retailers found the company’s agents aloof. “They thought they knew about everything: pricing, product, marketing,” says Sean MacGowan, a toy industry analyst at Needham & Co. “They just had closed ears.”

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The man who taught Lego to listen is a former McKinsey consultant named Jorgen Vig Knudstorp. A 41-year-old Dane with an unassuming demeanor, Knudstorp succeeded Christiansen’s grandson as CEO in 2004, a year in which Lego posted $350 million in losses.

Since its founding, Lego had been focused less on its finances than on nurturing and education. But Knudstorp’s first lesson was this: the bottom line counts. “Cash flow is a bit like oxygen,” he says. “None of us are here in this room just to breathe the air. But if there’s not enough oxygen, we’re going to die.” Layoffs and plant closures were announced. For the first time, employee pay was tied to performance.

Knudstorp, who works in an office packed with toys, set out to rebuild the brand from the bottom up. He stopped chasing sales and refocused the product line toward core consumers: the serious builders. Meanwhile, he reworked his logistics, cutting by half the amount of unique pieces the factories produced. “Instead of growing, we actually insisted we didn’t want to grow,” he says. “We were lucky because we’re family owned, and that means we have the time to take such an approach.” Lego continued to struggle for a couple of years, but by the time the recession hit, the company was well placed to weather it. “The fourth quarter of 2008 was a horror show for most companies,” MacGowan says. “And Lego sailed through like it was no problem.”

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In many ways, its success is no longer built on tiny studded bricks. It has moved from the business of selling construction toys to marketing highly developed models, even entire worlds. It’s as if Lego has reinvented itself as a media company and the stories are told not in books or on film but in small interlocking blocks and through the imaginations of the children who play with them.

In 1999, the company struck its first license deal and began to produce sets based on the Star Wars movies. Since then, Lego has moved more and more into selling themed boxes. In an industry where licensed products account for roughly a quarter of sales, the company has offered products based on Batman, Harry Potter, Bob the Builder, Indiana Jones and SpongeBob SquarePants. Early last year Lego announced a multiyear partnership with Disney, acquiring the rights to produce sets based on a variety of the company’s intellectual properties. This year, Lego started rolling out products based on Toy Story, Prince of Persia and Cars. “They pretty much have almost every license you want in the toy industry,” says Lutz Muller, a toy analyst and the president of Klosters Trading Corp.

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Lego has also created story lines of its own, like its deep-sea-adventure series called Atlantis, selling the story online with a 22-minute movie, minigames, a 3-D website and augmented-reality content. The site is intended to provide kids with Atlantis’ major plot points — key battles, the discovery of the city — and its developers will be updating it during the year as new Lego sets roll out. “We’ve really focused on providing triggers for the boys to play,” says William Thorogood, a design manager.

Now Knudstorp faces his biggest challenge: how to adapt Lego’s plastic blocks to the pixel age. “We need to find out what is Lego in the digital space,” Knudstorp says. The Lego website pulls in 20 million unique visitors a month and includes a program called DesignbyMe that people can use to put together a virtual Lego creation, then order a physical copy, complete with an automatically generated building guide that they can print. “It’s taking the free-build experience and moving it to the virtual world and back again,” says Trine Balle Kristensen, an online-experience manager.

The Web has also allowed the company to feed an adult fan base. Mindstorms, a robotic tool kit that uses Lego bricks, has developed a cult following among engineers and software developers. In 2008, Lego launched a series of architectural models of skyscrapers designed for Lego bricks by a fan. “It would have been unheard of 10 years ago,” says Adam Reed Tucker, the operator of Brickstructures Inc., who pitched the idea at a conference.

But what the company lacks — for now — is an online experience to rival its physical toys. Later this year, Lego will make its most significant digital move yet, when it launches Lego Universe, a multiuser online role-playing game, in which participants become a Lego figurine battling evil in a world being consumed by a dark energy called the Maelstrom. “We’re basically trying to take the essence of the Lego brand and put it into the virtual space,” says Lisbeth Valther Pallesen, executive vice president in charge of the community, education and direct division.

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The game will be familiar to anybody who has played the Lego-themed video games for the Wii or PlayStation. Users will be able to design and decorate their own personal space, but most of the game will consist of combat, collection and the completing of missions. If Lego Universe succeeds, its product will be pure media, a world in which the company’s freestyle construction will be just a distant memory. On the Internet, at least, the little plastic brick that survived the Great Depression and the Great Recession could be a thing of the past.

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