LEGO is blaming a lack of production capacity for a decline in revenue growth and profits in the first half of the year, addressing that with big investment plans.
After a period of a decade of double digit growth from a sales point of view we thought now was the right time to investLEGO's Chief Financial Officer
LEGO has said it could have built bigger sales in the first half of this year but for bottlenecks in its supply-chain.
The Danish toymaker is blaming a lack of production capacity for a decline in revenue growth and profits.
Net profit was down two percent at 3.49 billion Danish krone (468 million euros) while revenue grow 11 percent in the six months to 15.69 billion Danish krone (2.10 billion euros).
Sales in Asia and Europe, which is its most mature market, grew by more than 10 percent.
But the company said that last year it could not keep up with demand in North America – the world’s biggest toy market – so reduced its promotional activities there, which led to the slowdown this year.
That has prompted a big investment plan, with the workforce already increased by 3,500 this year, a rise of 24 percent.
It is building a new factory in China – its growth engine in recent years – and will double the capacity of its plants in Mexico, supplying the US, and Hungary where a lot of Europe’s little plastic bricks come from.
For the first half of the year it is the world’s most profitable toy maker, ahead of Barbie Doll maker Mattel, but it has never managed to beat Mattel in full-year profits. The back half contains the all-important holiday season when toy sales soar.
“Right time to invest”
Euronews Business correspondent Anne Glemarec spoke to LEGO’s Chief Financial Officer John Goodwin.
Euronews: “Few European companies choose investments over profit nowadays. But LEGO Group added 3,500 employees globally and is building new facilities in China, Mexico, Hungary. What’s the plan?”
John Goodwin: “At the moment about 80 percent of LEGO sales come from countries that contain only 20 percent of the world’s children. So we feel that there are lots of opportunities there to reach more children around the globe.
“After a period of a decade of double digit growth from a sales point of view we thought now was the right time to invest, to recharge ourselves for that next stage of growth.”
Euronews: “Let’s focus on China, one of your target markets – the economy is losing momentum. What’s your sales outlook there? Do you expect a negative impact?”
John Goodwin: “We see a huge amount of potential for the Chinese market, primarily because of the hundreds of millions of households that we want to reach with fantastic LEGO play promise.”
Euronews: “The business climate has turned quite gloomy in Europe since the UK voted to leave the EU in June. To what extent might Brexit affect your business and your strategy?”
John Goodwin: “The UK is a really important market for us, as is free trade. So we’re monitoring the situation around Brexit very carefully. We want to ensure that we can continue to supply the UK consumers with a great LEGO play experience.
“So we gonna have to look to adapt to that change in circumstances as we get more certainty. But it’s something we are watching and monitoring very carefully.”
Euronews: “Last year, Brazil was one of LEGO’s star markets. Are your sales affected by the political and economic crisis in the country?”
John Goodwin: “Some of the American businesses have suffered under the economic downturn that we’ve seen over the course of the last 12 to 18 months and as a consequence we are seeing softer growth there, in those markets.
“But as I mentioned earlier, we are in the market for the long term, so what we’ll do is continue to look to see opportunities to build the LEGO brand and hopefully as those economies emerge out of the current difficulties we’ll see a pick up in those businesses.”
Euronews: “2015 was LEGO’s best year ever, but still, Mattel, remains the world’s number one toy maker. You’re second. Do you think you have what it takes to overtake them?”
John Goodwin: “Well, what we think is important is reaching more of the world’s children with the great LEGO play experience. That’s what we are single-mindedly focused on. Whether or not we end up being number one really is secondary, or even irrelevant in the context of what we are looking to pursue. Because at the end of the day reaching more children is what’s important to us.”