The Business Behind the Brick
Lego is a childhood classic among households across the globe (Tech Jury 2023). A titan in the toy industry, Lego has stimulated creativity in kids since its founding in 1932 (The LEGO Story 2012). Where did these little plastic bricks come from? What factors aided it in becoming the toy superpower it is today? This article will analyze the economic factors and history behind the brick.
The History of Lego:
In 1932, Ole Kirk Kristiansen, a skilled and respected carpenter, created copious amounts of various wooden toys in his woodshop in Billund, Denmark (The LEGO Story 2012). Kristiansen called the wooden toys “Lego,” named after the Danish phrase leg godt, meaning to play well. Following the rise in popularity of plastic molding machinery in 1946, Kristiansen decided to expand the materials of his toys to include plastic. On the England Ferry in 1954, Kristiansen’s son, Godtfred, had a conversation that would change the company's trajectory forever. While talking to the head of a large shopping center, Godtfred realized that the toy industry only presented children with pre-made solutions, lacking creativity and system. In the same year, the first Lego System was created. Using a wood predecessor to the bricks we are all familiar with today, the company started to sell these bricks across many countries. However, the bricks were unable to stay together and had to remain stationary to stay in their intended arrangement. Godtfred, searching for a solution to this problem, discovered the brick's clutch was increased with the addition of an interlocking tube system. Following a fire that destroyed the little Lego Companies workshop, the company decided to cease producing wooden toys to focus on the brick completely. In 1964, the company opened its first Legoland which received 600,000 guests within its first year.
Business Model:
Although Lego has a great product, it is not the sole reason behind the success of the company. There have been countless businesses in the last year alone that had billion-dollar ideas but failed to execute them in an economically efficient manner. So, how did they do it? Lego is a company that had its fair share of ups and downs. In 2004, the company almost went bankrupt after over-exerting itself with new products. However, Lego managed to survive and later thrive in the 2010s when it became the world's leading tire manufacturer for their little sets. Their product incorporates a quality mixture of playability and creativity in every set. Through Lego, children are no longer limited to the constructs of the past toys of society–they can build nearly whatever they can imagine. Along with the fact that the product is rock solid and tested in play, the Lego company has also been able to foster a certain monopoly on the interlocking studs and tubes long after their patent has expired.
There are companies that rival Lego on shelves, and they hardly see a fraction of the profits Lego makes. The most important factor of Lego’s success is the quality of the plastic Lego uses. As a result of using high-quality plastic, a certain exclusivity and stigma against Lego's competitors' duplicate products was created–a rivalry that is taken very seriously by Lego’s loyal consumers. However, Lego does far more than use high-quality products to stay ahead of the competition. Lego has quality stories to back their product, however, it does not inhibit the natural creativity of the product. Themes such as Ninjago and City have been popular for some time as they develop a sense of cohesiveness between their lines while keeping themes uniquely stimulating. Employing a unique use of media through shows such as Lego Ninjago to build characters and stories has proven to have been a worthwhile investment as the show is a staple in many peoples’ childhoods. Lego recently made a shift towards more 18+ display sets for adults who want a unique desk replication of their favorite Star Wars and Harry Potter scenes. Thus, they are creating products for people of all ages–while also targeting movies, books, and shows with die-hard fan bases.
Outside of their base product and media, Lego efficiently manages a several-pronged approach via amusement parks and retail stores. Legoland has been a huge success since its original introduction in Billund. Now there are Legolands around the globe in Denmark, Germany, the UK, the US, and Malaysia. In 2021, there were 9.4 Million visitors to Legoland, a drastic improvement from the year prior due to the COVID lockdown (Sheth n.d.). The 2021 numbers are about only two-thirds of what Legoland had seen in the 3 years before 2020–the park’s earlier average of around 15 million annual visitors. The ability to purchase Lego sets is easily accessible–both readily available online and in retail stores.
Inflationary Effects:
The prices of sets that used to cost $20 during childhoods are now in the range of $30-35, $100-120 sets are now closer to $140-160 price point (Schefcik 2022). To understand why prices are rising, it is critical to understand the economic concept of sticky prices. A sticky price is a market price that is resistant to quick changes, even when changes in the broader economy suggest that a different price would be optimal. The price of a product might be sticky because customers are less willing to buy the same product after a price increase. This is also affected by the costs associated with changing prices, termed “menu costs”. As a result, when a company is considering raising the price of a product, it must not only account for inflation but also the costs associated with actually raising the price. Another way to combat sticky prices is shrinkflation, which involves slightly lowering the quantity of the good but keeping prices constant. This is a technique Lego has generally avoided because fans of the product often analyze the price per piece with unique intensity. However, recently the company started to try both methods. Lego has made an effort to keep prices consistent for sets throughout their lifecycle which usually ranges from about 1-3 years on shelves (Chava 2021).
When a Lego set is first released, the value of the set naturally decreases due to inflation. In years prior, the inflation rate has stayed around 2-3% annually and Lego would usually absorb this loss of value. Lego analyzes the opportunity cost between raising prices and the resulting costs and demand effects versus just absorbing the losses. Lego decided recently that the latter was more cost-efficient. In June of 2022, inflation was the highest year over year it had been in over 40 years. Right now, inflation is sitting at about 3 to 4 times higher than the usual 2 to 3%. This has manifested in about a 0.43 to 0.95% monthly decrease in set value, though the values were projected to decrease in value by about 0.1 to 0.24% every month. Lego is willing to absorb about 6-7% of any given price value during its life cycle without feeling a need to adjust the set's price. However, current sets have exceeded that threshold causing the mid-lifetime price point increases.
Conclusion:
If you look at almost any toy manufacturer, you would be hard-pressed to find a company that is still relatively healthy and has been as active as Lego. Though your wallet might want to cry when you want to simply re-live a small piece of your childhood and pick up a set, the uniqueness of a brand like Lego makes it worth it. With such a strong product and business model, hopefully Lego will be able to find a sustainable balance in demand, price, and profit for the future.
References
Chava, Akhil. 2021. “The Economics of the Lego Brick.” Medium. DataDrivenInvestor, July 18, 2021. https://medium.datadriveninvestor.com/the-economics-of-the-lego-brick-cf872d5ded59.
Schefcik, Dave. 2022. “Greed or Inflation? An Economic Analysis of Lego Price Increases - Bricknerd - All Things Lego and the Lego Fan Community.” BrickNerd. BrickNerd - All things LEGO and the LEGO fan community, August 5, 2022. https://bricknerd.com/home/greed-or-inflation-an-economic-analysis-of-lego-price-increases-7-26-22.
Sheth, Nikita. n.d. “The Lego Business Model - How Does Lego Make Money?” Finty. Accessed March 2, 2023. https://finty.com/us/business-models/lego/#:~:text=Lego%20makes%20money%20by%20selling,retail%20business%20selling%20its%20toys.
Tech Jury. 2023. “15 Curious Lego Facts to Know in 2023 [Brick Here].” Tech Jury January 30, 2023. https://techjury.net/blog/lego-facts/#gref.
The LEGO Story - How It All Started. 2012. YouTube. https://youtu.be/qr_dTySMl7s.