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Aug 23, 2023

Lego CEO talks growing market share in toy industry

Consumers' state of play could be facing headwinds in the second half of 2023, but how exactly are consumers spending on play in 2023? The Lego Group CEO Niels B. Christiansen joins Yahoo Finance

Consumers' state of play could be facing headwinds in the second half of 2023, but how exactly are consumers spending on play in 2023? The Lego Group CEO Niels B. Christiansen joins Yahoo Finance Executive Editor Brian Sozzi to discuss consumer spending patterns in the toy industry and Lego's growing market share.

"We see kids having a lot of passion points, and we serve those," Christiansen says about what Lego is paying attention to. "Every year we grow our portfolio of Lego products, and that allows us to tune in and focus in on passion points that are there, and I think that together with the brand works really well for us."

While it may appear that U.S. consumer spending is displaying a pullback on toys, Christiansen details the consumer trends brands are really seeing: "I wouldn't say the U.S. toy industry has been particularly more challenged than the rest, but I do think... the fact that we have had a pandemic, and we've seen different spending patterns throughout a pandemic, and now we are back to what I would consider more normalization and I think that's what it is."

Christiansen also comments on Lego's presence in China amid the country's slowdown, while maintaining proximity to U.S. customers.

"The u.s. is the world's biggest toy market, and we have made really really good progress. we have really gotten to more kids around the u.s., and we want to be close. we want to produce close to where we actually sell the products because we don't want long transportation. we want a low co2 emission around that, and we like the proximity to consumers."

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BRAD SMITH: LEGO had a stellar first half of the year. The Danish-based toy company reported stable revenue of just under $3 billion for the first half of the year, up around 1.5% from the year prior. Yahoo Finance's executive editor Brian Sozzi has more on the company's latest results.

BRIAN SOZZI: Joining me now is LEGO Group CEO Niels B. Christiansen. Niels, great to see you here offer your latest results. You know, we've gotten I think from a US investor perspective, a lot of different mixed reads on the toy industry, some doing good, some doing not so good. From your vantage point, what's the state of LEGO?

NIELS CHRISTIANSEN: I think I'm very satisfied with where we are. I think we've continued our five-year stride to take market share, growing considerably ahead of the market. And we've done that again. Now this time in a market that has been slightly more negative than it has been for the years before.

I just think we have to keep in mind that we've had a kind of rapidly growing toy market for two or three years. Now maybe this is a little bit of an adjustment to that. And the five-year average growth in the toy market I think is pretty much where it should be.

Now, we've been able to every year take market share to the tune of growing 10 percentage points faster than the market. And the same is true here in this half year, the market is down 7. We grew 3, and I'm pretty satisfied with that.

BRIAN SOZZI: You talk a lot about in the release, taking market share. And you just mentioned it now. Where does that market share come from.? Is it other toy makers? Is it other play experiences?

NIELS CHRISTIANSEN: Right. I think it's a combination. It's a bigger share of the total toy market. So everything that's included in the toy market, that's what we fight over here. And at the end of the day, I think it's also-- it's children's time. It's what children do. It's what they play with. And we are just owning a bigger share of that year by year. And I think that's right on our mission.

BRIAN SOZZI: You know, we're still trying to get beyond the pandemic, Niels. How are children playing differently than before the pandemic? I imagine you do a lot of studies and a lot of observations inside the company.

NIELS CHRISTIANSEN: I don't think we can say that they're playing dramatically different. I think there's been different patterns during the pandemic, where we were all at home and parents were at home. And maybe there was a tendency of playing more together as a family. And now maybe it's back to normal in that sense. But I think for us, we see kids having a lot of different passion points and we serve those.

Every year, we grow our portfolio of LEGO products and that allows us to tune in and focus in on passion points that are there. And I think that together with the brand works really well for us.

BRIAN SOZZI: How are you designing LEGOs differently? How are the sets different today compared to a couple of years ago?

NIELS CHRISTIANSEN: Yeah, I wouldn't say there's a big difference to a couple of years ago. But, I mean, maybe one example on your question is we relaunched LEGO Friends. LEGO Friends has been around for more than 10 years. It is what we call a girl's first product.

It really tries to be into the how characters interact and what capabilities characters have. And we updated that to really better reflect the type of characters, the type of interesting topics for particularly girls, but for kids today.

And so in that sense, I think it is moving not year on year, but it has over a decade really moved. And I think we brought some interesting characters. We also brought different disabilities into the picture. So it's a better representation of real life in the sense. And we just know from all our studies, kids really like to see themselves and real life, things happening also in toys.

BRIAN SOZZI: Why do you think the US toy industry has been challenged this year?

NIELS CHRISTIANSEN: Now, I wouldn't say the US toy industry has been particularly more challenged than the rest. But I do think and you were alluding to it, the fact that we've had a pandemic, and we've seen different spending patterns throughout a pandemic, and now we are back to what I would consider more of a normalization. And I think that's what it is.

And looking over the five-year period, including the pandemic period, I actually think things are pretty have developed pretty well. There's just been a spikes and spikes and valleys on the journey.

BRIAN SOZZI: The major retailers that you sell into, they remain pretty focused on lean inventory-- Target, Walmart, you name it. How are they planning for this holiday shopping season?

NIELS CHRISTIANSEN: I think, I mean, the signals I'm getting are pretty good. I think our brand is doing pretty well right now. So you can also see in our results, we haven't had a big-- between consumer sales and revenue, that's where you would normally see building up and down of inventory. We haven't seen a big issue on our stock because it's been quite-- it's been quite relevant all the way through. We didn't build it up big time during last year.

So I think in that sense, it's relatively balanced. And I don't see a big difference to normal when I look into the in season and how they prepare for it.

BRIAN SOZZI: Speaking of the US, your company is making a big push, a big investment, a new headquarters what I believe in Boston, a new factory in Virginia. Why these big bets in the United States?

NIELS CHRISTIANSEN: I mean, the US is the world's biggest toy market. And we've made a really, really good progress. We we've really gotten to many more kids around the US. And we want-- on supply chain wise, we want to be close. We want to produce close to where we actually sell the products because we don't want long transportation.

We want a low CO2 emission around that. And we like the proximity to consumers. And that's I think it did us really well through the pandemic period that we were not the ones that had to transport products throughout the world from Asia or wherever we produce close to consumers. We produce also close in time.

So when we approach in season or Christmas and we know what's actually high on the wish list, then that's what we produce. And that helps us not to sit by January 1 with a lot of wrong stuff at inventories at our retailers. And I think that's kind of our business model that works pretty well.

And there, Virginia is really key to this huge market, the US is, and the progress we have. So I'm looking forward to get that on stream in '24 or '25 until the end.

BRIAN SOZZI: Within the factories that you currently operate that are open and the LEGOs that run through these factories, what are you seeing on inflation? Because I imagine, you know, folks that are reading the release on earnings, they see the operating profits down double digits, whatever it might be. And they think that inflation is still a problem for the toy industry. How do you see it?

NIELS CHRISTIANSEN: Yeah, I think there's a couple of elements. I think just to put the 19% drop in EBITDA into perspective, we really like the two years before we doubled it on 2020. So it's like, it's 100% up and 19% down. That, in my math, is still 81% up on three years ago. That's not that bad, actually, in this industry. So in that sense, I'm actually-- I think we should be more focusing on the label.

I think it's a strong label. But it has been impacted by the higher input costs. I mean, for instance, the raw materials that we brought into factories, some of that has spilled over-- had a tail into this first half. Now, we're out of that. The prices have normalized a bit. So I don't think we see it in the second half. But there was a bit of pressure on the first half from that.

Going forward, I think things are looking better on that point of view. The other part is really all the investments we have decided to do ourselves. And that's in the factory expansions we talked about. That's in sustainability across all the different measures. That's building our digital capabilities. We have now 1,800 digital experts working just on providing digital experiences for kids and digitalizing the company.

That's an investment that's not for this year or next year, it's an investment for the long term. And we have just decided to take those and to run them through and not make those kind of longer term investments dependent on whether the toy market does better or worse in a half year.

BRIAN SOZZI: China, a key market for LEGO, have you seen the slowdown there that a lot of other multinational companies have seen?

NIELS CHRISTIANSEN: Yeah, I'd rather say we haven't seen the acceleration out of the pandemic as fast as we had anticipated. So China, as you know, was a little bit later in the pandemic. Came out of the pandemic later. And we had assumed that they would return to traffic in stores and consumer spending the way we've seen it in other countries. And I think we've been a bit disappointed that that happens quite a bit slower.

So we're not-- we're not exactly where we thought we would be at this point in China. I don't think it changes the fact that it is a big market with a lot of kids and an opportunity for our brands. So we-- we're keeping our investments going. We're building stores in China. But we have seen that happen a bit slower.

BRIAN SOZZI: So you're still-- so you're not pulling back on investments in China. So how many stores will you open this year? And how many stores do you have there now?

NIELS CHRISTIANSEN: We have now just short of 500. We opened 54 this first half. And we'll be opening another 30 this year. So we will get past 500 LEGO brand stores in China by the end of this year. And as we talked about, we are increasing-- or expanding our factory in China. So we are-- we're building to get the brand out in China. But we're building everywhere. We're also making investments in Vietnam and in the US. And so it's not a-- it's not a single-minded China strategy, it's an opportunity to get to as many kids as possible. And China is just part of that strategy.

BRIAN SOZZI: Before I let you go, this is your first time on Yahoo Finance. So again, thank you for coming on. But as the CEO of LEGO Group, how long-- what sets do you put together? How do you interact with the brand? How long does it take you to put together something like that starship behind you? I mean, give us some secrets behind the curtain.

NIELS CHRISTIANSEN: Yeah, yeah. I'm afraid I cannot say that I'm the fastest builder in the world. I'm sometimes really impressed when I see some either kids or adult fans that are really, really good at building. I would like to build more than I do. I like to build vehicles. So I'm into vehicles. And I think some of those we've done have been just amazing. So those have been most of my builds.

But I do-- I really do like it. And I'm just amazed about the-- when I take a walk in our innovation department, where the LEGO designers sit. That is out of this world, the kind of creativity they bring about and how they do that. And that almost is as good as building.

BRIAN SOZZI: Why do people love the LEGO brand? So I just went around our office. And as soon as I said the word "LEGO," people's faces light up. It's a brand that I think you go in to many other places and they have that same emotion to it. Why do you think that's the case? Have you studied why?

NIELS CHRISTIANSEN: Yeah, I mean, we-- of course, we're looking into that. It's-- I have the same experience. No matter where I go, no matter who I talk to, I always get their LEGO story, I get this smile, and I get a positive attitude to the brand. I think-- I think it has to do with the fact that, I mean, we are family-owned.

The family has owned the company for 90 years. And there's been a very strong red thread on values through that. So the brand has not been built overnight or changed a lot overnight. So it's a matter of being, I think, super consistent and having been that all since you and I were kids and we were playing around. So it is, in essence, the same brand.

I also believe that we are honestly investing a lot and investing a lot in the brand, in sustainability, in providing experiences for kids that really matter. We are into learning through play. We want to make sure we are part of allowing kids to build skills they need in life. So I think there are a lot of things undergoing. The LEGO Foundation owns 25% of the company. And that 25% of dividends goes to the foundation, and it's donated out to kids in need, to things that would benefit kids.

So there is a real authentic thorough reinvesting into society and into kids that I think really benefits the brand as well. And then I'm super proud that in April, in RepTrak, we were named the most reputable company in the world. Now, that's something that humbles you. And I'm super keen to see if we can stay high on that list at least.