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How Lego will avoid disappointments of Christmases past this year

Half of the Danish toymaker’s annual sales are made in the weeks before the yuletide

Lego minifigures: great fun unless you accidentally walk on them barefoot. Photograph: iStock

Thu Dec 22 2016 - 12:10

Hot dogs have nothing to do with The Beatles' film Yellow Submarine. But when Justin Ramsden was seeking to make a Lego version of the Yellow Submarine itself, they proved vital.

Mr Ramsden, a British designer at Lego, was struggling to get the right look for the railings on the submarine’s bridge, as part of 40 different prototypes he tried out.

“I took out every single brick we have in red. As soon as I saw the hot dog, I thought: how can I make this fun and easy to build?”

Four hot dogs create a suitably curved effect atop the $60 (€57.40) Yellow Submarine, likely to find its way under many Christmas trees this year.

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But as well as Lego’s inventiveness – the set also includes teeth bricks repurposed into a rudder – the product highlights the extraordinary logistics set-up behind the Danish toymaker’s festive success.

So crucial is the Christmas period to Lego that more than half of its sales – DKr36 billion ($4.8 billion) in 2015 – are made in the few weeks beforehand.

Past yuletides have been littered with stories about how the privately owned toymaker, the world’s second-largest, has not been able to keep up with demand, leading to shortages of certain sets and disappointed children.

Thousands of parents who, for instance, searched in vain for the Lego Hogwarts Castle or Elsa’s Sparkling Ice Castle can testify to that.

Investment programme

Lego has responded with its biggest ever investment programme, all financed out of its own cash flow, investing DKr8.6 billion in plants and equipment over the past three years.

It has built a new factory in China and is doubling the capacity of its plants in Hungary and Mexico, as well as expanding in Denmark and the Czech Republic.

The objective is to have production sites very close to its main markets of the US, western Europe and Asia to enable a quick response to changes in demand.

“In the past we have been a little behind,” says Bali Padda, who, as chief operating officer, has been the driving force for the investments.

Mr Padda, a Briton who will become the first non-Dane to be appointed chief executive of Lego and who takes up his post on January 1st, adds: "It has been quite a journey for us. We have been investing year on year in creating extra capacity."

Jorgen Vig Knudstorp, outgoing chief executive and soon-to-be chairman, says that, finally, Lego has the right number of moulding machines to cope with demand, while the toymaker has also tried to plan campaigns "proactively" with retailers to ensure they have the right products at the right times.

He adds that things seem to have gone better so far this year.

“But, having said that, Christmas happens over a relatively short trading period . . . As products run out of stock, or there are very specific components that are missing, or the realisation that that particular product is really, really hot and it happens within a few weeks, it’s almost virtually impossible to flow the goods to the shelves,” Mr Knudstorp says.

Changing whims

A look in Lego’s factory in its home town of Billund, central Denmark, shows just how it goes about keeping up with the changing whims of children’s taste.

Chresten Bruun, head of the factory, explains how the 768 moulding machines that produce about 125 million pieces of Lego each day are divided into two types.

One, called “green flow”, is for high-volume, standard bricks. The other, “red flow”, is for more specialised, unusual bricks.

Lego’s recent success in becoming by far the world’s most profitable toymaker, with Dkr9 billion earnings last year – achieved by converting plastic that costs $1 per kilogramme into sets retailing for about $75 a kilo – owes much to the balance between the green and red flows.

For much of the year, and particularly in the far slower first half, most of the machines churn out millions of standard bricks under the green flow. These are then stockpiled until later in the year.

But the real secret is in Lego’s ability to use a single brick, such as the hot dogs, in multiple sets, allowing it to quickly adapt to changes in demand with relatively little hassle, even in the build-up to Christmas.

Mr Bruun explains how the little round yellow bricks, well known as Lego faces, only become that at the point the specific features of a construction worker or racing driver are printed on them; up until that point they are just an element that could be turned into a pineapple or some other item.

“The cost of storing the blocks is low compared with the alternative, which is to have extra capacity,” he adds.

Later in the year, capacity is freed up for the special bricks such as the orange tiles used to decorate the popular Lego model of a Porsche 911 GT3 RS as more machines switch to the red flow.

“We want to produce them as late as possible so we can follow the demand,” Mr Bruun says.

– (Copyright The Financial Times Limited 2016)

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