Based on how amazing most of the new LEGO sets and themes have been in the past few years, it appears that the LEGO Company is doing very well. However, according to their most recent financial report, not everything is awesome in the world of LEGO. In addition, the toy industry as a whole has been struggling, with both Hasbro and Mattel seeing significant downturns with no end in sight. And, there is a great possibility that Toys’R’Us – the largest toy retailer in North America – will be closing its doors. While looking at these events individually may not be the cause of alarm, all of this happening at the same time is definitely not a good sign. So, I thought it would be a good idea to discuss all of this a bit…
Starting with the LEGO Group, the company released its full year financial results for 2017 at the beginning of March, reporting a 7 percent decline in revenue and 17 percent decline in operating profit compared to 2016. The decline was driven in part by inventory clean-up, and the flat global consumer sales throughout the year didn’t help. Niels B. Christiansen, the LEGO Group CEO said: “2017 was a challenging year and overall we are not satisfied with the financial results. However, we ended the year in a better position. In December, consumer sales grew in seven of our twelve largest markets and we entered 2018 with healthier inventories. In 2018, we will stabilize the business and invest to build sustainable growth in the longer-term.” You can read the full financial report here: LEGO GROUP 2017 FINANCIAL REPORT
Having said that, LEGO is still in amazing shape, with a net profit of DKK 7.8 billion in 2017 (compared to DKK 9.4 billion in 2016). They have had significant growth in the past decade, and The LEGO Movie (released in 2014) gave them a nice additional boost. After all that growth, a bit of pull-back is natural, even expected, so what is there to worry about? The worry comes from looking at the current condition of the toy industry as a whole. Companies don’t exist in isolation, and seeing the major decline of toy manufacturers and retailers, it makes a lot of sense for LEGO’s management to look ahead to the future with caution and careful preparation.
Just take a look at the chart above, (source) comparing the annual net profits of the big three toy manufacturers: LEGO, Hasbro, and Mattel. While LEGO has been happily climbing the ladder, with a little bit of flat-lining in the past couple of years, Hasbro has been going flat for almost the entire length the chart represents, and Mattel took a significant nosedive into negative numbers. Hasbro is one of the three big toy makers in the world, with brands like Monopoly, G.I. Joe, Furby, Transformers, Nerf, My Little Pony, Play-Doh, Lincoln Logs, and Kre-O. Mattel is another one of the big three, with brands including Fisher-Price, Barbie, Monster High, Hot Wheels and Matchbox, Masters of the Universe, American Girl, and WWE. In addition, Mattel purchased Mega Brands (Mega Bloks/Mega Construx) in 2014 to compete with LEGO in the construction toy market. Both Hasbro and Mattel are publicly traded, while LEGO is a family-owned business.
Hasbro and Mattel have been trying to stay afloat in the toy business by buying smaller toy companies – some of which turn out to be winners, and others losers. Hasbro even attempted to buy Mattel last year, which Mattel rejected. In addition, Mattel’s idea to compete with LEGO using the Mega Brand – at least so far – didn’t turn out as planned. In their year-end financial report, Mattel states that gross sales in their construction toy lines were significantly down, primarily due to declines in Mega’s licensed and preschool products. I find this particularly interesting because there is a great demand for Mega’s collector’s lines worldwide, but for some reason, Mattel is unable or unwilling to work out distribution. Mega fans have been baffled and greatly frustrated by this. If you thought LEGO’s distribution is sometimes lacking, and LEGO prices on the secondary market are too high, try buying some Mega Construx collector’s sets. The experience will make you cry. You can read Hasbro’s financial report here: HASBRO 2017 FINANCIAL REPORT, and Mattel’s here: MATTEL 2017 FINANCIAL REPORT
And to add to the misfortune of the toy industry, Toys’R’Us, the only large toy retailer still remaining in North America, is about to close its doors. The toy chain’s U.S. division entered Chapter 11 bankruptcy in the fall of last year, planning to restructure its business model to come out leaner and more manageable. However, it seems it was already too late for such a plan to work. Toys’R’Us operates around 800 stores in the U.S., and they have been in the process to close 180 locations, but now it seems that all U.S. locations will be shut down as they prepare plans to liquidate their operation. In addition, there are also talks about closing stores in the U.K. and Canada. Here are some resources to get a full picture:
- Why the Toy Industry Would Suffer if Toys’R’Us Disappears (Fortune.com)
- Toys’R’Us Prepares Plan to Liquidate Its Business (CNBC.com)
- Toys’R’Us is Prepping to Liquidate Its U.S. Operations (Bloomberg.com)
- Toys’R’Us to Close All Stores in Britain (NYTimes.com)
- Toymaker Trying to Rally Industry to Bid on Toys’R’Us Canada (Bloomberg.com)
The closing of Toys’R’Us stores is a huge blow to the entire industry. While Toys’R’Us isn’t the largest seller of toys (Wal-Mart is), it still accounted for a good percentage of U.S. toy revenue. In addition, Wal-Mart, Target, and other big box retailers only carry a limited selection of the most reliable sellers, while Toys’R’Us also stocked all kinds of unusual toys and interesting toy brands you couldn’t find anywhere else. All those brands are now in big trouble with their main outlet gone. Both Hasbro and Mattel had a significant drop in their stock prices directly related to the troubles of Toys’R’Us, and we will likely see a number of toy manufacturers going out of business.
The demise of Toys’R’Us is the result of a combination of huge debt, lack of innovation, and competitors with more aggressive prices. It has been common for people to go to Toys’R’Us to check out interesting new toys, then hop online and buy them for cheaper. So people are still buying toys, aren’t they? They will just have to go somewhere else to get them, and toy manufacturers will have to find new outlets to reach their fans.
But there is something bigger that’s troubling the toy industry as a whole; digital toys taking over kids’ interests. It’s not that kids are not playing. It’s just that they find digital games more interesting. And kids are not necessarily glued to the screen full time either. They game for fun, and they play sports for letting out their energy – not an unhealthy combination overall. Having fewer toys lying around also keeps parents happy, and physical toys falling out of favor is better for the environment.
So, when looking at the whole picture – all three big toy manufacturers seeing slumping sales, the largest toy retailer going out of business, and physical toys taking over by digital games – it makes sense that LEGO’s management is concerned. It also makes more sense why LEGO has been trying to break into the digital game industry, in spite of failing over and over again. And why their eyes are on Asia – a new market with an increasing population with disposable income, and an eagerness to experience luxury items like toys. Whoever can connect with the children of today in both old and emerging markets will win the race, while all others will fall by the wayside. The toy industry is not as fun and games as we may have imagined…
What do you think of all of this? How do you view LEGO’s financial report, the struggles of the toy industry, and the demise of Toys’R’Us? Would love to hear your opinions on this, so feel free to share your thoughts in the comment section below! 😉
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What a shame! But it was inevitable. The investor who bought them only cared about bogging down the company with massive amount of debt. They basically killed their golden goose.
Yeah, it appears that’s what happened. Very sad indeed… 🙁
I am so sad that TOYS R US is going out of business . I think the imaginations in kids has changed a bit too. They are not as creative in ( let say) story telling. Now don’t get me wrong, when a kid sees a cartoon character do something kids might reenact what they saw. It’s using there an imaginary story or character and act it out .( Sometimes). Also with the video game ages are changing so that younger children can participate. Not just but I see parents using technical devices to keep kids quiet. It very sad , you know . You and I have held a teddy bear to pretend it’s our best friend and entertaining ourselves that way. So, what’s next children are going to hug things that are robotic? As for Lego , the it still has an outlet for people to use there imagination and creativity. But , I wonder if it’s becoming more of a young adult/ adult thing than for kids? I know there are still kids out their that are still interested in Lego but, maybe not as much.
Good points. I have also noticed that kids these days immediately want to associate whatever someone is making, building, drawing, etc. with some known character from a film, cartoon, or game. Like they can’t make up their own characters. But kids are naturally imaginative, and eventually it will spill out some way or another.
As far as parents, I know many of them are glad that their kids aren’t constantly demanding toys. Games keep them occupied in their downtime, and the money goes for sports, summer camps, etc. – something that they feel is more valuable then a bunch of toys collecting dust under the bed. From all the physical toys, LEGO is probably one of the most versatile, so hopefully it will stay around…
Have you seen the kids cartoon nowaday? I cannot stand most of it watching with my kids as most have too much grow up being cool storyline. Look at teen titan, webarebear and all. Sigh
Here is another good article from today: http://money.cnn.com/2018/03/14/news/companies/toys-r-us-closing-stores/index.html?iid=EL
I agree, it’s a real shame. This will be a huge blow to toymakers. And there will be a lot more jobs lost all across the board.
Hm… that’s a good article too. Thanks for sharing. My heart goes out to all those people loosing their jobs…
Don’t kids like to go to toy stores anymore? The best part of going to toysrus has always been seeing the displays and browsing all the toys. Target stores usually have one display, and walmart doesn’t have any at all. Do you guys know how long the stores will remain open? I’m thinking of stopping by this weekend if it’s still possible.
Oh, yes! The displays! That’s the only reason I still stop by at Toys’R’Us from time to time. It’s such a thrill to see LEGO sets built and displayed! What I have read, it will take a couple of months for operations to wind down. There will probably be sales, so look out for those.
I can’t believe I’m reading this, and I still hope something will happen to save ToysRUs. It will affect the whole toy industry. Where can you go to see all the new toys?
I’m guilty of what the article says. Going to ToysRUs with my kids, let them pick the sets they would like for birthdays and holidays, and then buying them online. But that’s because their prices were almost always more than everywhere else, and they refused to price match. And it’s not like they created a welcoming atmosphere for me to feel like paying extra to support them. But still, it’s the only place to see most of the toys in person. So sad.
Sadly, all of that non-competitiveness has to do with being buried under so much debt. They just couldn’t afford lowering their prices, and hoped that we won’t notice. They also couldn’t afford hiring and training more people, conducting fun activities, making their locations more inviting, etc.
I was always wondering why Lego is so keen on entering the games market. They keep failing and they keep doing it again and again. But it makes sense looking at the bigger picture. Mattel’s chart looks especially scary. Are they going to go out of business too?
I was wondering about that too. But seeing the whole picture, wow! When I was a kid I played games, played with my toys, and played outside. What changed? Kids don’t like to play with real toys any more?
What I have seen, kids do more afterschool activities. There is a lot of pressure to do well in school, and also pick sports/hobbies that may have a future. Lots of college educated people can’t find a job, so parents are trying to set up their kids with options.
Mattel is definitely in big trouble. Barbie is doing well, but their other lines are not so hot right now. I wouldn’t be surprised if they cut their losses and only keep the winners.
My impression was that Barbie actually wasn’t doing so well anymore. That was a reason Mattel decided to broaden the spectrum of ethnicity and diverse body types in 2016.
(I’d have figured Fisher-Price still was doing decently well, though.)
Barbie is doing very well per their financial report. And I was told the same when I met the Mattel reps in Canada last year. That’s pretty much the main thing going on for them right now. I don’t know much about Barbie, but it seems that the diversification you are talking out was a successful move.
Toys r us always has raise the prices on Lego sets all the time . Only when a set first comes out is when sometimes you lucky and get the actual price. In fact , I talked to a Toy r us manager and asked why they do that . A shoulder shrug was the response. Not only that but Toy r us also likes to put Lego sets out early when there not supposed to. Now I heard that when a store puts out a product early before the launch date. They have to pay a fine . ( I got this information from a former Toys r us worker.) So, counting the times Lego has new sets are put out during a year that’s a lot of fines.
I see this too. Toysrus always has the new sets out first. Lego may fine them, but I doubt they really paid those fines. They haven’t even been paying their regular bills! I think toy companies are just happy to get anything out of them at this point.
Yeah, they haven’t been really tardy paying their creditors, so those fines are likely not enforced.
Oh, I’m glad it’s not Lego. Wow ! That would be the world coming to an end as we know it . But ,I do hope Lego is paying attention and won’t make the same mistakes ( or other New mistakes) like some of these toy company’s made. However, I know Lego is a lot more in tuned with there fans / customers. Also , did you notice that Lego has dabbled in the tech world alittle. But, Lego is not cutting everything else out and putting there eggs in one basket. Lego is smart that way. Do you guys remember a toy company called K B toys. That’s been gone for awhile. It’s just so sad. I may be a Lego kid now (actually just young at heart . ) but, I was a Toys r us kid first. Does anyone remember the toys r us jingle? I do. So, if you don’t want grow up because you’re a Toys r us kid , does this mean now that Toys r us is going to be gone ,does this mean we have to grow up? Lol.
Oh, yes, KB Toys. And there were some other toy store chains too, who’s names I don’t remember, and mom and pop small shops. And yes, the Giraffe is gone….. and our childhood too…. what a sad day. Our kids will not have the joy and magic of visiting a real toy store.
A very astute and will written post! ToysRUs in the UK will be closing, as they cannot find a buyer. I find that very sad but, it’s another casualty of a really tough retail environment. Outside of Christmas, it’s rare for me to go to TRU and ultimately I’ll go to whichever store is cheapest, online or not.
My kids (12 and 10) no longer have an interest in Lego due to digital. Little children love Lego, some adults love Lego but, that teenage market… That is something Lego has failed to appeal to. Even digital…. Lego games are for young children, older children are more interested in the kind of games that don’t align with Lego’s brand values and, in terms of building games for that market, Roblox, Minecraft…not Lego worlds…
I think Lego need to learn how to appeal to that demographic that they have missed out on by using Lego as a modelling kit in the ways that some of the microblock manufacturers have. A range of Marvel and Stsr Wars character models for example built out of Lego with detail but not ‘hero factory’ style. Brickheadz were meant to compete with Funko Pops but, they again appeal to a very different demographic than those buying Funko Pops.
For me, if Lego want to make more money, they need to rerelease some of the models that new collectors want, the ones that are selling high in eBay.
Nigel, thanks for sharing. Your thoughts are particularly valuable as you have two kids at the age that represent some of the toughest customers. How LEGO will approach the future is something we will have to see as things unfold. But they definitely keep a keen eye on the market, which is reassuring to know.
They did amazingly well with LEGO Friends, but they had to sink a billion dollars into research to make that happen. They also did amazingly well with Ninjago, which was sort of a happy accident, that they haven’t been able to duplicate since. Kids are tough and fickle customers. And just when you figure out what they want, they grow some more, and want something totally different. 🙄
I’m afraid my first reaction upon hearing that TRU was definitely closing was, “Oh cool, maybe I’ll be able to hit up a sale!” (I’ll be in the US for the next couple months.) TRU was a cool place to go as a kid but too much extra expense to be sustainable, with such easy internet buying nowadays for those who were savvy and convenient alternatives like Walmart for those who didn’t want an extra shopping trip. The downward trend of other physical toy companies is quite interesting though. It makes a lot of sense however that digital “toys” would be displacing the more sophisticated level of kids toys (especially with the less-mess line, never thought of that before!). I imagine toddler toys and younger kid toys will still have a market but the market for physical toys for 8-14-year-olds could well plummet – although there will probably always be some demand, of course. It seems to me like LEGO is in a stronger position than other toy brands, with one of the most versatile and well-known products in the market (instead of having its name divided between lots of different products), it should be able to stick around if it plays its cards well. I’m not sure that digital is a way to go for them. Maintaining something of a presence is probably a good idea, but just because of what LEGO is, the digital will most likely have to ride off a liking for the actual physical toy, so IMHO they should always throw their main focus there. Plus with their low-violence standards (although those have interesting loopholes), they don’t stand much of a chance in digital competition for a lot of teenagers, as you point out.
Yes, I agree that LEGO should stick to bricks. That’s what they are about and what they are known for. It’s a tough market though, especially with all the imitators coming out of China. The issue with physical products is that there is always someone else who can do something similar for cheaper. And fighting IP battles can be very expensive and drawn out.
And yes, LEGO is in a better position because they only have to worry about their own products instead of being all over the place like Mattel and Hasbro. But being spread out also has its advantages. Still, LEGO is ahead of the game right now, and they can take advantage of having some breathing room to grow and explore. They have almost faced bankruptcy before, so hopefully they will avoid making the same mistakes.
Don’t hold out a lot of hope for LEGO deals. My local TRU has been having a going-out-of-business sale for a month or so now. A few LEGO sets were marked down (BrickHeadz, the girls superhero sets, maybe Ninjago), but the discount last I checked was only 10 or 20% off. Probably 90% of the LEGO are marked with signs saying they won’t be marked down at all. (Same for gaming consoles, books, DVDs, and posters.) Now, that may change if/when the whole chain closes out, but
Christi, thanks for mentioning that. My store doesn’t have LEGO on sale either, but it wasn’t on the list of the initial 180 stores that suppose to close. I did stock up on Mega Construx though, as they have been having a BOGO 50% OFF sale, and Toys’R’Us doesn’t mark up the prices on Mega sets. I also bought several of those large LEGO storage drawers. They were 50% off, which is an excellent price for. 🙂
My local TRU was on the original list of closures. I’m assuming the things that weren’t marked down were going to be shipped to non-closing stores to be sold at regular prices (sensible idea). But, with all of the stores closing, maybe the LEGO sets and other things will end up being marked down at some point. There won’t be other stores to transfer them to now, and I doubt LEGO would take returns on that kind of scale.
Christi, I was told by the store manager at my TRU, that liquidation of all stores begins this week, and sales with start at 10-30%, then increase gradually until all stock is gone. They do have to liquidate everything in 60 days, so hopefully we will see some aggressive discounts. Of course, we are competing against other shoppers, so that also has to be taken into consideration. I agree that LEGO and other toy companies likely won’t want their stock back. They simply don’t have the infrastructure to arrange such a thing.
Well I guess I won’t expect too much then! I’ll probably try to swing by the nearest store anyways, but it sounds like it might be a better chance to pick up a deal on something else!
Definitely get the LEGO Toys’R’Us Giraffe. It’s a small set that’s going to be a collectors’ item soon. At my store, it is one of the few LEGO sets that was discounted. 😉
I’ll keep an eye out for that then!
Even though the Asian market might see an increase in disposable income, there already are a lot of local players operating. It seems hard to break into the market. Japan’s and Korea’s markets seem cut-throat and the Chinese market is extremely lax on protecting intellectual properties. Possibly the growing Indian middle class could be beneficial, although I haven’t got much of an understanding of how the country works.
And I guess the biggest toy chain here in the Nordic countries might be Danish Fætter BR, but it seems to do fairly well, as far as I know…
We just had someone here commenting from India the other day. Hopefully he will come over here as well. I find it very curious that LEGO has no or very little presence in India, and would love to know why, and what it is like to be a LEGO fan there. Rama, if you are around, would you please give us some insights? We would love to hear from you. 🙂
In other news, Barnes and Noble, a major bookseller in North America (they also carry Lego) dealt with poor sales at the end of 2017 by letting go 1800 full time workers in February. Some experts are saying that this is similar to what
Circuit City did before going out of business.
Yeah, I remember when Circuit City went out of business. It was one of my favorite stores. So much geeky stuff! The Barnes & Noble stores in our area closed already. Really sad, as I loved that store too. Now we have a Books-A-Million. Not nearly as nice…
I don’t have any kids so the only toy I buy (apart from a few of these little collectible figures called Nendoroids- often based on anime shows [I do enjoy a bit of anime now and then! ;)] and those you can’t find at TRU) is Lego. The nearest Toys R Us is about fifteen minutes away while the Lego store is about 35. Three main reasons I go out of my way is price, selection and the Lego VIP program.
Toys R Us does have one Nendoroid for on-line purchase. https://www.toysrus.com/product?productId=94350656
It looks like Nendoroids are mostly cute “chibi”/”super-deformed” doll-like models of characters from Asian and American pop culture.
That’s it! I also think part of the appeal I find in them is that they have interchangeable parts, including limbs, face plates, some have different style hair parts (usually the back) and props for them to hold.
A little like Lego maybe? 🙂
Too bad they don’t have them at the store! I’m planning to go to TRU tomorrow, and would have loved to check them out. 🙂
Or at least a little like Galidor… 😉
I was just about to ask you what Nendoroids were. Cute! How big are they?
Oh, I see now. It says four inches! Super cute! 😀
I guess that’s 10 cm in metric…
I just remembered… I saw this a few months ago.
https://graphicaldisposition.wordpress.com/2014/08/24/lego-nendoroid/
I like this one a little better, though:
http://alegoremagazine.com/wp-content/uploads/2017/04/img170419-05.jpg
Sorry, one more, but this I think is the cutest!
https://i.pinimg.com/originals/94/92/72/94927275e829ba06ec407af044b2e2a1.jpg
Yeah, I have a soft spot for certain cute things. Lego and cute. Who knew! 😀
Cute maid, there.
Gosh, those are adorable! I’m very impressed! 😀
Here is another recent article with an outlook for each toy manufacturer: http://fortune.com/2018/03/16/toys-r-us-closings-mattel-hasbro-lego-affected/
Good summary. Thanks for sharing, David.