Lego constructs its growth strategy in Asia

“We need to reach out to even more consumers in the entire region and give them an insight into what it is that makes Lego unique,” a spokesperson for the company told Campaign Asia-Pacific.

Lego’s sales in the region grew 35 per cent in its most recent quarter, outpacing mature markets like Europe and America and helping it become the second largest toy company in the world, behind Hasbro. Consumer sales in China soared 70 per cent for the first half of the year, followed by Southeast Asia and Korea at 50 per cent and 35 per cent growth, respectively. Hong Kong, Taiwan, Japan and Singapore showed promising growth as well.

Lego has been selling toys in Asia for 30 years, and the region accounts for about 10 per cent of its revenue. The company believes there is room to grow. It has been appealing to Asian children at a time when parents, particularly in China, are relaxing their focus on academics and encouraging playtime in a trend recently reported in The Wall Street Journal.

As part of its plans for Asia, Lego is betting on a new manufacturing facility in China, which is scheduled to be completed in 2017. When ready, the facility will be a production and distribution hub for as much as 80 per cent of Asian demand, estimated Euromonitor analyst Roy Walker. “Local production will be a gateway to a much wider consumer base, minimising the time between order and delivery while also cutting costs,” he said.

Also in China, the company’s Lego Foundation is working with Chinese students from Tsinghua University to build a low-cost atomic force microscope using Lego's 3D-printed parts and other electronics. The foundation is also helping migrant children develop their creative talents.

Last year, Merlin Entertainments launched a Legoland theme park in Malaysia. The British company operates Lego-themed attractions under an exclusive Worldwide Licence from Kirkbi—owner of the LEGO Group and also a major shareholder in Merlin Entertainments. The company also recently inaugurated a new office in Singapore.

All this is at a time when the overall growth of toys is slowing in Asia. Euromonitor estimates that the category grew 11.6 per cent in 2011 but will see slower growth of 7.2 per cent between 2011 and 2016. More specifically, growth in traditional toys is set to fall from 11.4 per cent to 6.5 per cent.

The numbers are particularly pronounced in Southeast Asia. In Indonesia, for instance, market growth is expected to drop from 13.5 per cent to 5.1 per cent. Similarly, in Singapore the number is set to decline from 9.5 per cent to 3.1 per cent, while in the Philippines it will fall to 3.1 per cent from 8.7 per cent. In China, the growth of traditional toys is expected to slip from 18.7 per cent to 12.4 per cent.

Lego’s business model consists of a global portfolio, creating products with 95 per cent standardisation and only 5 per cent variation to suit local tastes, primarily in packaging. “We know from intensive consumer tests that our products appeal to all children—be it in America, Europe, China or Singapore,” said the spokesperson.  

Lego declined to comment on which segments it would focus on, but it is likely to apply its global strategy in the region. While it has traditionally focused on construction toys, a segment it continues to dominate, Lego in 2009 expanded into a category "building blocks and buildable board games", where it quickly garnered a 6 per cent share in the games and puzzles space, as measured by Euromonitor. In 2010, Lego launched a new line called Minifigures, which was also well received.

Lego’s biggest challenge in Asia is its underdeveloped retail network.  While Walmart and Tesco are growing in certain Asian countries, many markets are still dominated by small retailers that may not stock Lego products. “We do not disclose future plans, but naturally we will expand our presence in the region when and where we see best fit,” the spokesperson said.

Lego also faces a challenge from toy makers who sell similar products for lower prices. For example, Lego has demanded a ban on Hong Kong-based Best-Lock Construction Toys' minifigures. In 2003, Lego won a similar case against China’s Coko Toy.