Construction Toys - LEGO vs. Everyone Else

By Lutz Muller
August 2013

The construction toy category continues on its phenomenal growth path. This is extraordinary because all the other toys – with the exception of the Electronic Learning segment of Preschool – continue to flag. In the United States, Construction toy sales at retail have over the past eleven years nearly quadrupled. The total toy market dropped in the same time span by more than 9% and if you back out construction toys from the total, the decline is an eye-popping 16%.

This is how the NPD numbers look like up to 2012 – the 2013 estimate is based on sell-through metrics generated by the Klosters Retailer Panel:

U.S. Construction Toy Retail Sales versus Total Toy Market [in $million]

The question is why Construction Toys should do so much better than the rest of toy land.

The answer is an easy single word – Lego. Lego is the only brand that drives an entire toy category where it is normally the other way around. And Lego totally defies the widely accepted view that kids are deserting toys and are embracing electronics such as smart phones and tablets instead. Lego is a success story to end all success stories and this is borne out by the fact that they are now the world’s most valuable toy company, having overtaken such heavies as Mattel and Hasbro.

In fact, things could easily have turned out differently. In 2003, the company nearly went out of business. They had recognized some years earlier that innovation was the key for future survival against a background of expiring patents, changing consumer preferences, price competition by brands made in China, and a flat to declining toy market place overall. Given these problems facing them, Lego management decided to innovate with a capital “I”.

They began to create electronic products such as the Galidor line – electronic games. They opened Lego theme parks and education campuses. They moved into movies, books, clothing, shoes, accessories, jewellery, video games, software and movie licenses. They nearly innovated themselves to death, literally.

Profitability dropped to zero and into negative territory, sales slumped, the kids deserted the brand in droves, and the gurus began to predict the imminent demise of the company. This is when, in 2004, Jørgen Vig Knudstorp, entered the picture as the new CEO and changed things. He mandated a strategy whereby you go back to basics, you stick to what you are good at, you focus on creating an absolutely superb product day in and day out and you make sure that the consumer you want to reach in fact hears you.

He took a leaf out of Michelangelo’s book. When the famous medieval sculptor was asked how he had created the statue of David, he responded that he had taken a piece of rock and simply chipped away everything that did not belong. And this is what happened at Lego - out went the theme parks, the jewellery, the shoes and all the other distractions that did not belong. It worked and the rest is history.

Jørgen Vig Knudstorp also recognized that licenses can be a good thing and went out and got the best. Lego now has all the top movie licenses from Disney – including Marvel and Lucas – as well as from Warner.

Equally importantly, he foresaw the dangers that manufacturing in China entailed and Lego is the only major toy company that still to this day does not produce there. He thus avoided the massive recalls by RC2 in 2007 and by Fisher Price in 2009 which grievously hurt both companies and were directly responsible for RC2’s seeking refuge in Takaratomy’s arms four years later. In fact, I attribute Lego’s success to a good degree to the fact that mothers of preschoolers feel safer with a toy not made in China, a manufacturing country they rightly or wrongly consider to be more likely to make toxic products than North America or Europe.

If there was a shortcoming in Lego’s marketing strategy, it was their total dependence on boys who accounted for well over 80% of all sales. The company recognized this and introduced late in 2011 a new product line focused on girls – Lego Friends. It became a run-away success to the point that they then and still now have problems satisfying demand and keeping shelves stocked. Today, girls account for about one-third of Lego’s consumer group, up from the 20% before Lego Friends.

Today, Lego has about 75% market share in the construction toy category. They have only one competitor worth talking about – Mega Brands. Just like Lego, Mega’s is a comeback story. Shortly after acquiring RoseArt in 2005, they were hit by several massive recalls of RoseArt’s Magnetix construction toys – recalls which nearly brought the company to its knees. They have recovered since then and have taken a few leaves out of Lego’s book – they make most of their products in Canada, they have a very strong license program, and they followed Lego into girl territory at the beginning of 2013 with the Barbie and Hello Kitty licenses. That proved to be a very good move for them since virtually all their growth of 9% so far this year was driven by their Girls range. Today, their market share in the U.S. Construction category is around 10%. By definition, everybody is small potatoes in comparison.

The two toy heavies – Mattel and Hasbro – are also trying. Mattel has had for years the Trio brand at ToysRUs which is hanging in there for grim death. Were it not for the fact that it is a Mattel product, the brand would have been tossed a long time ago.
Hasbro had entered the construction toy category before with their Built To Rule line released in 2003 under the Transformer and G I Joe licenses. Built To Rule never got traction and was finally withdrawn in 2005. Making a new attempt, Hasbro brought out the Kre-O line. Kre-O is made in Korea and was launched late 2011, again under the Transformer license. Since then, Kre-O has had its up and downs – after the Transformer license, it took Battleship, then G I Joe, and then Star Trek. For next year, Kre-O is expected to bring out a range under the Dungeons and Dragons license. The brand had its peak in 2012 with about 8% market share and has since then fallen to about half that.

There is also K’Nex, who has manufactured all of their bricks, rods and connectors in the United States since 1993. They have a range of interesting licenses such as Mario, PacMan and Angry Birds. They also handle Hasbro’s Lincoln Logs and Tinkertoy and their overall market share is in the neighbourhood of 6%. Because they do not rely on movie licenses to drive their business and manufacture within spitting distance of their offices, their outlook is generally regarded as more stable and potentially more promising than Hasbro’s Kre-O or of any of the other also-rans.

The most recent shelf space metrics at Target, ToysRUs and Wal-Mart demonstrate the relative importance of these brands:

There are indications that the major retailers, who are now resetting for fall, will in fact recognize the importance of the category and significantly expand its shelf space allocation. If this happens, both Lego and Mega are most certainly going to benefit.

Whilst Lego’s dominance, and Mega’s well-established #2 position are unlikely to be challenged by any of the current competitors any time soon, there are two that could change the equation.

One is Mattel. The company has one property that could totally upset the apple cart – Monster High, now the #1 Fashion Doll brand. Monster High is already widely licensed for a variety of toy and other non-toy products and the glaring omission of the construction toy category has competitors lying awake at night. The question that exercises the toy retailer buyers is whether Mattel is going to launch another construction toy line under the Monsters brand, or whether they are going to license it to somebody else and, if so, to whom. In the right hands, a Monsters construction line could become a really major contender.

The second potential surprise comes from World Wrestling Entertainment – WWE - whose master toy license is held by Mattel but who elected to grant the construction toy license instead to Bridge Direct of Hobbit, Power Rangers and Justin Bieber fame. The launch of the WWE range is expected for early next year and, given WWE’s popularity with Tween boys, could capture the third or fourth place in the line-up relatively quickly.

Whatever happens, a few things appear pretty clear. One is that Lego will continue to drive and dominate the construction category. The other is that there will be no shortage of would-be entrants into the field. And lastly – construction toys will continue to be impervious to the allures of smart phones and tablets.