For Lego, Pink Is the New Black

Toy maker reports 40% operating profit increase in US during 2012, thanks in part to initially controversial sets for girls

For Lego, Pink Is the New Black
Lego Friends, a new line aimed at girls, has proven to be a huge hit (Photograph by Nick Ferrari for Bloomberg Businessweek)
Photograph by Nick Ferrari for Bloomberg Businessweek

In December 2011 the Danish masters of toy bricks and minifigures launched Lego Friends, a new line of building sets aimed at girls, to much skepticism, reflection, and even, in some quarters, #LiberateLEGO opposition. None could argue that the company hadn’t skewed “boy” in recent years, with seemingly endless iterations of Star Wars, police, and ninja-themed sets. Still, the new pastel color palate and taller, slimmer lady minifigures (introduced on our cover), and scenarios—suburban home, beauty parlor, and “New Born Foal” horse stable—suggested to some that the company was retrograde, pandering, or even sexist. Maybe so. In any case, it’s working: Lego Friends is a huge hit, exceeding Lego’s own wildest expectations.

On Thursday the Lego Group reported that Lego Friends became the company’s fourth-bestselling line in only its first year (behind Star Wars, Ninjago, and Lego CITY, and surpassing superheroes), helping the company record the best financial results in its 81-year history, with a 25 percent increase in revenue globally (to $4.04 billion). Moreover, Lego Friends’ performance has silenced any remaining naysayers within Lego who doubted the brand could appeal equally to both genders. (In 2013, Lego Friends will have another wave of products grouped around a “School’s Out” theme. Sets will include a detailed school and various after-school activities for the friends, such as martial arts, soccer, magic, and dance.)

“Our data show that we tripled the number of girls who are building with Lego bricks in the U.S. market since the launch of Friends, and we’ve significantly shifted the gender split among Lego users,” says Michael McNally, Lego’s U.S. spokesman. Independent data appear to back up Lego’s claims. Retail researchers NPD Group tracks Lego Friends in its Building Sets category. If you compare Lego Friends dollar volume with similar volume in the Dolls Play Sets category (where it is sometimes merchandised in stores), Friends comes out on top: the No. 1 property of 2012.

A closer look at the company’s annual report, meanwhile, suggests that Lego and its chief executive, Jørgen Vig Knudstorp, will be hard-pressed to top 2012. (Because the company is private—it is 75 percent held by Kirkbi, a holding company controlled by the founding Kirk Kristiansen family, and 25 percent by the Lego Foundation in Billund, Denmark—it doesn’t publish quarterly earnings. But it has made its annual report public since 1997.)

•  The year’s operating profit increased to $1,373 million, against $1,057 million in 2011, an increase of 40 percent.
•  The operating margin increased to 34 percent, from 30 percent in 2011.
•  The year’s net profit increased to $969 million, up from $776 million in 2011.
•  The net cash generated from operating activities was $1,100 million, against $666 million in 2011.

There are even numbers an economist and deficit hawk can love: In 2012 the Lego Group hired more than 1,000 people and paid $330 million in corporate income taxes. (The 1,000 employees represent nearly a 10 percent increase in its global workforce.)

Aside from the surprising contribution of Lego Friends to Lego’s bottom line, what’s most remarkable about these figures is how successful Lego has been selling in shaky, even moribund European markets and just how far it has come under Knudstorp. Though his typical Scandinavian reserve likely would prevent it, Knudstorp could reasonably claim he’s the best turnaround artist in global business. Just 36 when he was promoted to the top spot nine years ago, Knudstorp is only the fourth CEO at the company and the first who’s not a member of the Kristiansen family. Moreover, it’s difficult to imagine now, but at the time of his promotion the company was losing the equivalent of 1 million Danish kroner a day and getting mail from fans pleading, in the words of one letter Knudstorp will never forget, “to please not die.”

A bona fide intellectual (he holds a PhD in economics from Aarhus University), Knudstorp is in many respects an anti-Steve Jobs. He doesn’t start with a vision of what Lego ought to create next and relentlessly refine it; he’s a systems guy, obsessed with devising a method for his engineers to do deliberately what Jobs did instinctively. This is how he came to approve Lego Friends. He didn’t have an epiphany one night. Instead, he set parameters for his R&D department and let them deliver.

“Adapting as a business can mean moving to a new technology, or it can be achieved through acquisitions,” Knudstorp told me in a September 2011 interview. He pointed out that Lego’s fundamental technology—snug stud-into-tube bricks that hold fast but come apart easily—hasn’t changed since 1958. Over its eight-plus decades, he went on, Lego hadn’t been involved in a single noteworthy merger or acquisition. “For us,” he said, “the challenge is in some ways bigger: to take known constructs and organize them in new and surprising ways.”

Not unlike making something new out of Legos.

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