By NELSON D. SCHWARTZ
FROM the outside, there is nothing playful about the drab, two-story Lego Idea House here, where designers gather in whitewashed rooms to dream up new toys. But upstairs, behind a series of locked doors accessible only to employees with special passes, is a chamber that might as well be toy heaven for kids — and more than a few adults.
Multicolored Lego creations in every imaginable size and shape spill from the shelves, from Indiana Jones’s biplane to Darth Vader’s fighter. Boxes stamped “confidential” hold potential future blockbusters, like Buzz Lightyear, the hero of the “Toy Story” animated films, as well as a police station bustling with miniature cops and robbers.
“It’s our way of looking at the world,” says Soren Holm, the head of Lego’s Concept Lab. “We have happy criminals; even they are smiling. The sun is shining every day.”
While that may be true of Lego’s toys, until recently it was hardly the case for Lego’s bottom line. But five years after a near-death experience, Lego has emerged as an unlikely winner in an industry threatened by the likes of video games, iPods, the Internet and other digital diversions.
Even as other toymakers struggle, this Danish maker of toy bricks is enjoying double-digit sales gains and swelling earnings. In recent years, Lego has increasingly focused on toys that many parents wouldn’t recognize from their own childhood. Hollywood themes are commanding more shelf space, a far cry from the idealistic, purely imagination-oriented play that drove Lego for years and was as much a religion as a business strategy in Billund.
Just as the toys are changing, so is the company. Jorgen Vig Knudstorp, 40, a father of four and a McKinsey & Company alumnus who took over as Lego’s chief executive in 2004, made it clear that results, not simply feeling good about making the best toys, would be essential if Lego was to succeed.
“We needed to build a mind-set where nonperformance wasn’t accepted,” Mr. Knudstorp says. Now, “there’s no place to hide if performance is poor,” he says. “You will be embarrassed, and embarrassment is stronger than fear.”
But the story of Lego’s renaissance — and its current expansion into new segments like virtual reality and video games — isn’t just a toy story. It’s also a reminder of how even the best brands can lose their luster but bounce back with a change in strategy and occasionally painful adaptation.
Founded in 1932 on the principle of “play well,” or “leg godt” in Danish, by a local carpenter, Ole Kirk Christiansen, this privately held company had a very Scandinavian aversion to talking about profits, much less orienting the company around them.
Mr. Christiansen’s family still owns Lego and its business may still be fun and games, but working here isn’t. Before Mr. Knudstorp’s arrival, deadlines came and went, and development time for new toys could stretch out for years; in 2004, the company racked up a $344 million loss.
Now, employee pay is tied to measuring up to management’s key performance indicators (K.P.I.’s, in Lego-speak). And cost-saving touches are encouraged when it comes to designing new toys.
That has helped to lower development time by 50 percent, with some new products moving from idea to box in as little as a year. Mr. Knudstorp’s bottom-line-oriented team, meanwhile, has shifted some manufacturing and distribution from Billund to cheaper locales in Central Europe and Mexico.
Nevertheless, Lego hasn’t entirely shed its Scandinavian sense of social mission when it comes to making toys. It kept quality high and never moved any manufacturing to China, avoiding the lead paint scare and grabbing market share when rivals stumbled amid multiple recalls.
Now, with profits swelling and the turnaround firmly in place, Lego is preparing for a future that moves well beyond the basic brick but carries big risks as well.
Last month, it opened its first “concept store” in Concord, N.C., where parents can bring children for birthday parties and classes with master builders; another concept store is set to open near Baltimore this fall. It’s all part of a broader retail expansion that will give Lego 47 retail stores worldwide by year-end, up from 27 in 2007.
In 2010, the first board game designed by Lego will go on sale in the United States, while its new virtual reality system, Lego Universe, will make its debut on the Web, with children able to act out roles from Lego games and build toys from virtual bricks.
Video games — yes, Lego is there, too — are increasingly important to the company, as are Lego’s legions of adult fans, who can now buy kits to build architect-designed models of Frank Lloyd Wright’s Fallingwater and the Guggenheim Museum. What’s more, the company is in talks with Warner Brothers about a mixed live-action and animation Lego-themed movie that would move the company and its Lego brand even further into the Hollywood orbit.
“Developing a movie doesn’t come cheap,” says Soren Torp Laursen, a 23-year Lego employee who heads its North American operations. “But five years ago, we were in the midst of a crisis, and now we’re in a growth phase. We are definitely taking bigger risks than we previously did.”
WHILE that shift has disappointed purists and prompted worries from experts that some of what has long made Lego special may be in jeopardy, it’s paying off, at least in the short term.
Amid a 5 percent drop in total United States toy sales last year and the industry’s worst holiday season in three decades, according to Sean McGowan, an analyst at Needham & Company, Lego’s sales surged 18.7 percent in 2008. And despite a worsening global recession, Lego powered through the first half of 2009, with a 23 percent sales increase over the period a year earlier. It earned $355 million before taxes last year, and $178 million in the first half of 2009.
The numbers are all the more impressive given the sales declines this year at the two biggest toymakers, Mattel and Hasbro.
“I was stunned when I heard how strong Lego’s performance was,” says Mr. McGowan, who has covered the toy industry for 23 years. “How could an $80 Lego set sell better than a $10 action figure?”
The answer is as multifaceted as one of Lego’s most complicated brick creations — and, like the best children’s stories, contains elements of luck, hard work and the loss of innocence.
SOREN HOLM looks down at the machine gun atop Indiana Jones’s jeep and winces. By the standards of video games like Grand Theft Auto and of other childhood attractions, it’s mild stuff.
But here in Billund, toy weapons have always been a touchy subject. “I can tell you there’s been a lot of debate about how far we can take it,” Mr. Holm says. Right down to Indy’s gun? “Oh, yes,” he says slowly. “Oh, yes.”
Since Lego overcame its initial hesitation about rolling out a “Star Wars” series a decade ago because the word “war” would appear on the box, the company has grown more comfortable with conflict.
“We’ve opened up slightly,” Mr. Holm says. After all, he adds, “when you give boys a bunch of bricks, they build a gun.”
In fact, Lego has opened up more than slightly. Whether it’s the Star Wars Assassin Droids Battle Pack or the Indiana Jones Ambush in Cairo set — featuring a pistol-wielding Indy against a scimitar-swinging local — many of Lego’s most popular toys today seem inspired by the special effects and violence of the big screen.
In the United States, Lego’s biggest market and the biggest toy market in the world, games with themes like “Star Wars” and “Indiana Jones” were among the reasons Lego sales jumped 32 percent last year, well above the global pace. But experts like Dr. Jonathan Sinowitz, a New York psychologist who also runs a psychological services company, Diagnostics, wonders at what price these sales come.
“What Lego loses is what makes it so special,” he says. “When you have a less structured, less themed set, kids have the ability to start from scratch. When you have kids playing out Indiana Jones, they’re playing out Hollywood’s imagination, not their own.”
Even toy analysts who admire the company and its recent success acknowledge a broad shift. “I would like to see more open-ended play like when we were kids,” says Gerrick Johnson, a toy analyst at BMO Capital Markets in New York. “The vast majority is theme-based, and when you go into Toys “R” Us, you’d really be challenged to find a simple box of bricks.”
Lutz Muller, an independent toy analyst in Williston, Vt., who has long followed the industry, estimates that 60 percent of Lego’s American sales are linked to licenses, double the amount five years ago.
And the coming “Toy Story” sets have retailers salivating, as Disney prepares to release the latest movie in the hit series next June. “ ‘Toy Story’ is a fit made in heaven,” raves Jerry Storch, the chief executive of Toys “R” Us, which has increased the shelf space allotted to Lego in recent years.
Nevertheless, acquiring licenses to make toys linked to hot Hollywood properties like “Toy Story” carries risks. “It’s a slippery slope,” Mr. Johnson says, and today’s hit can quickly turn into tomorrow’s dud, adding volatility that Lego never faced in the past.
Indeed, unlike the Cabbage Patch Kids or Atari or the Beanie Babies, it was Lego’s seeming aloofness from the market that helped it endure, rather than ending up in the back of the closet like those toys of yesteryear.
For longtime Lego executives like Mr. Laursen, it’s a delicate issue, and his own comments echo Lego’s ambivalence over creativity and hallowed Lego traditions versus the appeal of more profitable, Hollywood-influenced toys.
He says that “we’re definitely more commercially oriented” and notes that licenses play a bigger role in the American market than overseas. But he says that “we’ve never sacrificed our values, and have never been a fundamentally profit-oriented company.”
In fact, he says that there is often a long debate about values when acquiring new licenses, and that “we’re far from always agreeing to take on new ones.” He won’t specify which movies or themes Lego has passed on, but says that “there are many licenses out there that represent a level of violence that is not suited to Lego and doesn’t fit with the trust of parents.”
As Lego ventures deeper into video games and virtual reality with Lego Universe, the question of violence, not to mention commercial temptations, will become only more charged.
One answer, Mr. Laursen says, is to make “violence not explicit, but humoristic.” For example, when a minifigure “dies” in a “Star Wars” or “Indiana Jones” video game, he dissolves into a pile of bricks and then springs back to life, cartoon style.
“We think kids really want to have this good-against-evil play; they want this fighting against each other,” says Charlotte Simonsen, a Lego spokeswoman. “But we want to do it with a wink.”
Analysts add that the recession has proved to be an unexpected boon for Lego, as parents favor spending more time at home with traditional toys instead of going out to the movies or taking trips with the children.
Even parents who won’t let video games in the house, like Alyson Richman Gordon of Huntington Bay, N.Y., say Lego has retained its innocence, especially when it comes to toys built around the traditional bricks. “It echoes back to a bygone era,” she said. “And I find as a parent that I’m drawn to things from my own childhood that inspired my creativity.”
Lester Munson, a father of two in Alexandria, Va., agrees, even though he sees a difference between the Legos of his own childhood and those favored by his 8-year-old son, Jonas. “The most exotic thing I could build when I was a kid was an ambulance,” he says. “Now Jonas can build the Death Star.”
“I still like Legos, and I’m 41,” he says. “Instead of watching TV or playing computer games, the kids are building something, and Jonas and I will build stuff together. The pieces and the sets are a lot cooler than they were 30 years ago, and if the price you have to pay is these tie-ins, that’s fine.”
IT’S not only children who fight over toys. John Barbour, a former top executive of Toys “R” Us, recalls “a series of truly frustrating meetings” with Lego officials in Billund and New York at the beginning of the decade, which climaxed when Mr. Barbour bluntly told them that Toys “R” Us cared more about the Lego brand than they did.
The most popular toys would run out, he recalls, and Lego was simply unable to ship more or manage the complex process of producing the plastic pieces for its most complicated sets.
That began to change in 2004, after Mr. Knudstorp took over in Billund and Mr. Laursen arrived at Lego’s regional headquarters in Enfield, Conn. Besides reaching out to top retailers and cutting costs, they untangled a supply chain that churns out 29 billion pieces a year.
The changes also filtered down to the ranks of Lego’s toy designers, says Paal Smith-Meyer, head of Lego’s new-business group. The number of different bricks or elements that go into Lego toys has shrunk to less than 7,000 from roughly 13,000, and designers are encouraged to reuse parts, so that a piece of an X-wing fighter from the “Star Wars” series might end up in Indiana Jones’s jeep or a pirate ship.
That’s very different from when Mr. Meyer joined Lego a decade ago. Though creating a mold to make a new plastic element might cost 50,000 euros. on average, he recalls that 90 percent of new elements were developed and used just one time.
Nowadays, Mr. Meyer says, “you have to design for Lego. If you want to design for yourself, go be an artist.”
For those would-be Lego artists out there, the company has created a Lego Certified Professional program, selecting adult Lego enthusiasts who don’t work directly for the company but whose creations are aimed at Lego’s vast population of adult fans as well as museum and gallery shows.
It’s part of another broad new effort at Lego — reaching out to those adult fans, who maintain thousands of Web sites and blogs, like GodBricks, which features Lego creations inspired by different faiths, and the Brothers Brick, which showcases all things Lego, whether a life-size Lego house, news, or advice on how to shine up yellowing bricks (hydrogen peroxide).
“There’s a huge community of people that treat Lego as an art form rather than just a toy,” says Andrew Becraft, a technical writer at Microsoft who created the Brothers Brick blog. His site pulls in 125,000 unique visitors a month, and Lego officials estimate that 915,000 people worldwide attended Lego conventions and other events in the first seven months of 2009. Five to 10 percent of Lego toys are snapped up by adults.
In the past, Mr. Knudstorp says, “we considered the adult fans like vintage cars, a bit bizarre.” But he called on another longtime Lego executive, Tormod Askildsen, to work with adult fans. Now Mr. Askildsen journeys to Lego conventions organized by adult enthusiasts, while working with 44 Lego “ambassadors” from 27 countries, seeking advice about new toys and heading off public anger when older lines, like Lego’s 9-volt train sets, are phased out.
Ultimately, Lego came up with a new, profitable train set, after inviting the 9-volt enthusiasts to two workshops in Billund to brainstorm and help design it. “If you rock the boat, people will notice,” Mr. Askildsen notes. “They were fighting furiously for us not to give it up, but we were able to turn tension into opportunity.”
The same might be said for Lego as a whole, as it navigates the fiercely competitive toy market and ventures into movies and virtual reality while clinging as best it can to the more innocent, Scandinavian values that made it so popular in the first place.
“In the end, you’ve got to go where your consumer is going,” Mr. Barbour says. “And the reality is that themes and movies are what kids want. There’s no point in developing the best product in the world if you can’t put it on the shelf.”
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