From almost going out of business in 2000 to becoming the biggest toy manufacturer in the world. This is an empire!

Dave Young:

Welcome to the Empire Builders Podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom-and-pop to major brands. Stephen Semple is a marketing consultant, story collector and storyteller. I'm Stephen's sidekick and business partner, Dave Young. Before we get into today's episode, a word from our sponsor, which is... well, it's us. But we're highlighting ads we've written and produced for our clients. So here's one of those.

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Dave Young:

Welcome back to the Empire Builders Podcast. Dave Young here, along with Stephen Semple. What Steve told me is that it's a little bit different episode today. We're not talking about the building of an empire, but the saving of the LEGO Empire, right? It was already an empire, and as empires sometimes do, I guess starting to collapse.

Stephen Semple:

Yep, yeah.

Dave Young:

And then something happened.

Stephen Semple:

Here's the thing that's remarkable. According to studies I've come across, when companies go through the type of challenge that LEGO faced, only literally one in 10 survive it. Most businesses do not survive it. And they not only survived, they went from being, I think they were the third-largest toy manufacturer to after facing this crisis, they became the largest toy manufacturer in the world.

Dave Young:

Wow. Okay.

Stephen Semple:

So not only did they survive, they thrived. And today they employ over 30,000 people, they have over 1,000 stores. And you can learn more about the early days of LEGO by going back to another episode, episode 28. Can you believe it was 28? We did it in the first year-

Dave Young:

Wow. Yeah.

Stephen Semple:

... of the podcast. But in early 2000, they literally almost went out of business. They were facing a moment where it was unclear whether they were going to survive and they were even in conversations to sell to other toy manufacturers. They were even in conversations with Mattel.

Dave Young:

Because I don't know exactly how this went, but I can hazard a guess that the pivot they were able to make was to just start prepackaging kits and licensing things from movies and other things, other toys. Because when I was a kid, I had LEGOs, but man, if you wanted to build something specific, you had to come up with that yourself, right? There was no kit that made a battleship or a Star Wars fighter or anything like that. You were lucky if you had a couple of the little window things and maybe one or two little figures, but that was about it.

Stephen Semple:

Ironically, it's part of what saved them, but also part of what almost killed them.

Dave Young:

Oh, okay.

Stephen Semple:

So it's interesting.

Dave Young:

Right, I'm leaning in.

Stephen Semple:

Yeah. So we go back to 1997, and basically sales had started to stall in '93, and so they were looking for other ways to grow the business because video games were coming in, all these other things were going on. And in 1997, Peter Eio is an executive with LEGO, and what he's noticed, because he's working in the US market, he's seen a trend in the toy business where half of the toys in the US are being sold under licensing deals. So he puts together a deal with Lucasfilms to do Star Wars. And at first, LEGO's really hesitant because they've never, first of all, done the licensing. Their real hesitation is the Lightsaber and blasters and the fact that it involves weapons. Because LEGO was always committed to, "There would never be any violent use of the toys."

Dave Young:

They're peaceful Scandinavians.

Stephen Semple:

Companies being run by Kjeld Kirk Kristiansen, who's a family member, and the grandson of the founder, they do some focus groups and they come around to it, because the evidence is that parents don't associate Star Wars with violence. So this wins over the execs. And while it's a departure from the past, they decide to do this licensing deal. And LEGO Star Wars is born because they wanted to do this. Now, 1998 was actually their first ever loss. And Kristiansen steps down, and Poul Plougmann comes on the board because he did a big turnaround in Bang & Olufsen, and he does an analysis of the decline.

What they believe at this point is children are playing with things differently. They want computer games. They don't want to build toys, they just want to open up a box and play. His belief is the strength is no longer in the brick; it's in the name, the LEGO brand. And he wants to extend the brand to other things, go beyond the brick. Now, what's really funny is whenever companies want to do this expansion of the brand, it's amazing how often it doesn't work. There's a really famous book, 22 Immutable Laws of Branding, and several of the chapters are, "Don't extend the brand." It's like when Gerber wanted to make adult food.

Dave Young:

Nobody wants that.

Stephen Semple:

Right. It's like, "Well, we make food, we can make it for adults, right?" It's like, "No, you can't. It's baby food." So anyway, they come up with lots of new ideas, they want to do a LEGO parkland in California, which is $130 million investment, and they plan on doing parks every two years. They want to do a chain of stores, mimic Disney. Now, the Star Wars tie-in is a huge success. It sells 200 million and it exceeds expectations by 500%, and it takes them almost back to profit.

The problem is it's not quite as profitable because of all the licensing fees, but they want to build on that success. They do a Harry Potter, they develop another tie-in with a Spielberg Moviemaker Set, which comes with the camera and does stop-motion. What's really incredible with that is one of our business partners, Gary Bernier, his two boys, Dylan. Dylan, who's now a partner. When they were kids, they had that and they did a ton of these stop-motion animation things that they posted all over YouTube and whatnot.

But anyway. And they decide to open up design labs around the world to come up because they're looking for these blue ocean opportunities. Now, one of the things they kill was Duplo, which is big bricks for little kids because they fear kids aren't going to be interested in that, electronics is going to take over. They rework LEGO Explore to not be based upon bricks. They buy a tech startup because they want to tie bricks into what's happening on the screen that they shut down after three years. So basically, in 2001, they developed all these new products and sales are up 17%, but they're losing hundreds of millions of dollars because all this money that's being spent on innovation.

Now, the best revenue are products with tie-ins, because kids love playing with things with stories. So your point, I bet it has to do with these tie-ins, which they did have sales success from that, but they're low on revenue because of all the licensing things. So here's what LEGO decides to do, and this is where the problem starts. They decide to create their own stories. So they create an action figure, Jack Stone. He's larger and it's a simpler set. This belief that kids into video games don't want to build complicated worlds, that's the belief of LEGO. Now, here's the mistake. You know who they never spoke to? Was someone who freaking designs games. If they talked to a game designer, what they would've actually learned is no, people do want complicated things.

So they also create this other world, Galidor, which has no bricks and snaps together body parts, but feels more like Transformers. And they decide to market using a TV show. Now, marketing a game using a TV show is not a new idea. It was done by Transformers, was done by He-Man. But you know what Transformers and He-Man did, is they brought in comic book folks like Marvel to help them with it.

Instead, LEGO hires a Hollywood producer. They create this live-action show. It's fall 2002, they release it. But there's this problem. First of all, the show's not very exciting, but secondly, retailers are not sure where to put the toy. Is it an action figure? Or is it a building toy? And kids don't like Jack Stone because for kids who like building, it's too simple. And for kids who like action figures, there's not enough action. It's that classic, "I'm going to try to appeal to both of these people and go into the middle." And what always happens when we go into the middle, Dave? Never works.

Dave Young:

Nothing usually, yeah.

Stephen Semple:

Right. So then they launched Galidor, which has got these big special effects, and it's high cost, and it's a poor story. It's mainly an ad. And they were so convinced it was going to be a hit that they flood the shelves with this stuff, and both struggle. The warehouse was full of stock, Christmas 2002 is terrible. The theme parks are losing money. They bring in this consultant Knudstorp, who is a consultant from McKinsey, and he digs into the state of LEGO. And in June of 2003, basically, he reports things are worse than everybody expects. LEGO may not survive the next two years.

Dave Young:

Stay tuned. We're going to wrap up this story and tell you how to apply this lesson to your business right after this.

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Dave Young:

Let's pick up our story where we left off. And trust me, you haven't missed a thing.

Stephen Semple:

And in June of 2003, basically, Knudstorp reports things are worse than everybody expects. LEGO may not survive the next two years because there's also no new movies. One of the things they did not anticipate when they did the movie tie-ins, sales drop when there's no new movie. And they had been losing money even when sales were good. It's now November 2003. It's a critical Christmas coming up. They're on the verge of bankruptcy.