2004 financial crisis: The transition of LEGO from survival to growth
The Lego Group began manufacturing the interlocking toy bricks in 1949. It is a renowned Danish brand in construction toys known for its interlocking plastic bricks that can be assembled and connected in many ways to construct objects.
At the beginning of the 2000s, LEGO was facing the most serious financial crisis to date. By 2004, things had gone awfully wrong at the LEGO group. Their products were competing for retail space on shelves already overstocked with unsold merchandise They had too much capacity, too much stock. It was sitting in the wrong countries. The retailers were very unhappy. The company had over diversified its product lines into areas such as apparel & retail stores, theme parks. The cash sources were being invested in low revenue-generating themed parks which were becoming an expensive distraction to management. The company was struggling with two fundamental challenges that grew out of this period - over stretching and over expansion. To survive through this sinking phase, the company needed to halt a sales decline, reduce debt, and focus on cash flow.
In 2004, Jørgen Vig Knudstorp was appointed as the CEO of the LEGO group and was handed over the responsibility to lead through this survival phase.
In one of the interviews, Jørgen said “You can really only build an adjacency to your core business every 3-5 years because it’s such a major undertaking in terms of culture and capabilities. Rather than doing one adjacency every 3-5 years, we did three to five adjacencies every year. So I think that’s what nearly killed us”.
So how did LEGO come out of this successfully?
In search of the basics, Jørgen asked- Why does Lego Group exist? What do we do better than anyone else? What makes us unique?
Ultimately, the answer was: “to offer our core products, whose unique design helps children learn systematic, creative problem solving—a crucial twenty-first-century skill. We also decided that we wanted to compete not by being the biggest but by being the best.”
Lego sold its theme parks business to Merlin Entertainments for about £250 million in July 2005 while in crisis. Selling off Legoland solved the company’s short-term debt crisis and enabled it to focus on the longer-term problem of falling sales. Lego avoided bankruptcy by doubling down on its core products: the bricks.
They spent a couple of years stabilizing the business and restore profitability. To rebuild profitability, the company had to refashion every aspect of its supply chain. They approached it holistically, analyzing every aspect of the company’s product development, sourcing, manufacturing, and distribution.
The focus of the years from 2004 to 2007 was not on the growth but rather manifold increased productivity. The main focus was on managing the business for cash rather than sales growth.
In 2013, the company achieved $4.5 billion of revenues and profits of $1.5 billion. LEGO became the largest toy company in the world. Return on sales had increased to 33% and sales per employee had doubled.
Lego savior, Jørgen in one of the interviews has shared the golden rule in business during a challenging period:
“Most companies don’t die from starvation but they die from indigestion. People lose focus on their core business as they pursue new adjacencies. The core business is the most exciting and hence continue to reinvent it every year”.