TLG's disappointing 2017 financial performance

[Faefrost]

Lego currently has two inter related problems. Overstock or Oversupply in the channel, reducing demand for new merchandise. And oversaturation of individual products on the shelf space. To put it simply they have too many offerings. And when you give consumers too many decision points, they walk away. That's why their classic formula of 5-7 sets at stepped price points per line worked well. A collector or a parent could reasonably be comfortable buying the entire theme that they enjoyed. No decision points. Lego Batman has 42 individual sets on shelves... It's actually even worse over in the pink aisles. Yeah Friends is a top seller, and Elves does decent. But notice the glut of Super Hero Girls? Too many different boxes staring down at the child leads to a  tantrum, not a sale. Further it causes the backlog they are now experiencing as those sets viewed as "best" sell quickly and the aisles get clogged with unsold less attractive stuff, preventing restock. Those horrid Star Wars Buildable Action Figures are a great example of this. The merchants still have full cases of unsold Rey and Jyn Urso sets clogging shelves. Darth Vader and Stormtroopers sell. But others? Nobody ever asked for any of those Rogue One characters who's names the kids don't even remember 10 minutes after the movie. ("Ooo look! It's Stick Guy!") 

They grossly over produced waves of stuff tied to the three Lego movies. They would have been better served by tighter line control. They got away with it with TLM sets because many of those sets served double duty as classic City vehicles. Not so much Lego Batman. (I think Ninjago fared a little better with a slightly narrower product lineup). Once again the girl aisles hit the same problem. While sales their are fantastic they expanded into the aisle too fast and oversaturated the available offerings. Girls don't have the "Gotta Catch Em All" mentality of the boys. Fewer better full featured sets would be a better way to go there. Accross the staggered and stepped price point. Once again if your customers are having too much trouble deciding between which of your products to buy, they aren't buying any. And inventory backup occurs.

[TeufelHund]

These days I only collect Star Wars sets really because TLG just aren't producing interesting homebrand themes I care about any more. When I came out of my Dark Ages there was stuff like Castle, Pirates, Alien Conquest, Pharaoh's Quest etc available which appealed to me and were fun to collect, but nowdays they're not producing that stuff any more - everything has to be related to media (apart from City, it seems, which never really interested me much). So instead of sets that rely on kids' imagination to fill in the gaps, instead play is limited to kids imitating what they see in TV/Movies.

Also, once you've collected SW stuff for a while the release of so many remakes of older sets has limited appeal because chances are you already have an earlier version of that ship. If you're not into the Sequel Trilogy/Spinoffs you're not going to be spending too much on SW after a while.

[BrickJagger]

Same mistakes as 2003. I for one believe that this can be solved the same way as it was solved back then, but I'll wait for the hallowed licensed "evergreens" to start to lose money before I make suggestions.

[MAB]

11 hours ago, Faefrost said:

Lego currently has two inter related problems. Overstock or Oversupply in the channel, reducing demand for new merchandise. And oversaturation of individual products on the shelf space. To put it simply they have too many offerings. And when you give consumers too many decision points, they walk away. That's why their classic formula of 5-7 sets at stepped price points per line worked well. A collector or a parent could reasonably be comfortable buying the entire theme that they enjoyed. No decision points. Lego Batman has 42 individual sets on shelves... It's actually even worse over in the pink aisles. Yeah Friends is a top seller, and Elves does decent. But notice the glut of Super Hero Girls? Too many different boxes staring down at the child leads to a  tantrum, not a sale. Further it causes the backlog they are now experiencing as those sets viewed as "best" sell quickly and the aisles get clogged with unsold less attractive stuff, preventing restock. Those horrid Star Wars Buildable Action Figures are a great example of this. The merchants still have full cases of unsold Rey and Jyn Urso sets clogging shelves. Darth Vader and Stormtroopers sell. But others? Nobody ever asked for any of those Rogue One characters who's names the kids don't even remember 10 minutes after the movie. ("Ooo look! It's Stick Guy!")

6

I totally agree here. Offering too much stuff that competes with the rest of the range just means that sometimes the kid (or adult) cannot choose and ends up not buying, or realising you cannot have it all and not buying. And the re-stock problem too - shelves are laden with junk that doesn't sell and you cannot find the sets that you do want.

[r5-j2]

19 hours ago, MAB said:

I totally agree here. Offering too much stuff that competes with the rest of the range just means that sometimes the kid (or adult) cannot choose and ends up not buying, or realising you cannot have it all and not buying. And the re-stock problem too - shelves are laden with junk that doesn't sell and you cannot find the sets that you do want.

The annoying thing about this is that by letting nostalgia (in my case for the first 1977 on wards Star Wars flicks) rule our heads and open our wallets, we created a monster within Lego ,with an appetite for style (or lack of it,often ) driven by hard core marketing ,over content.Keeping on  churning out sets ,trying to squeeze as much money as possible from us the consumer ! 

Edited March 9, 2018 by r5-j2

[x105Black]

I blame Nexo Knights.

But seriously, there hasn't been a whole lot drawing me in these last couple of years.

[KotZ]

1 hour ago, Blk69 said:

Also TLG has gotten into bed too long with Toys R Us....all the exclusives.

TRU going under (which looks like they might soon) will be the best possible thing for LEGO to spread the exclusives out more.

[r5-j2]

All U.K. TRU stores are closing...so watch this space for what happens in the States.

[MAB]

Lego are still competitive. There are still the world's number one toy company and made $2 billion. They just had very good 2015 and 2016 and that growth hasn't continued for 2017 as they had hoped. 

[AFOLguy1970]

If the US TRU stores liquidate, things could really get interesting.  So far they have been stingy with the (non) discounts on Lego, but if all the stores end up closing, it is going to be a whole different animal.

[MAB]

The current UK TRU discounts on LEGO are nothing special. Since they increase their prices over RRP, the discount takes it down to only just below RRP, occasionally slightly better. But not as good as most other stores will do during their regular sales.

[Faefrost]

There’s a pretty solid rumor/report that TRU will in fact be entering liquidation in the States. 

[koalayummies]

22 hours ago, Blk69 said:

Also TLG has gotten into bed too long with Toys R Us....all the exclusives.  They would be better off having more vendors. 

Besides direct from Lego there is TRU, Walmart, Target, Barnes and Noble, Amazon... they have a fairly healthy retail distribution. The exclusive sets help get customers in to TRU stores (or their website), its for the benefit of TRU because many regular Lego buyers want the VIP points and giveaways and will default to buying direct from Lego. If they're forced to get a set from TRU then that does exactly what you're advocating for, more vendors. If no one buys from the other vendors then those vendors have no incentive to carry the product. Exclusive sets are a great incentive.

5 hours ago, Blk69 said:

What....TRU is closing in the UK?  That's not good.  Keep hearing Lego is being sold for a discount, that is not true in the US.  Walmart and Target will knock a few dollars off some city sets, but nothing you really would want.  

Google Toys R Us right now, they could be heading for liquidation in the US (and all stores) by next week. Should have bought more from TRU, there might be one fewer Lego retailer come Monday.

22 hours ago, Blk69 said:

One bright spot is that the knockoffs are getting pretty good quality.  Some  are even coming out with their own stuff.  Wonder in a few years if TLG will be the knockoff to them trying to catch up.  Wonder how much it costs to pay are robot worker (TLG) vs a Asian one?

Careful there. You're heading into dangerous waters.

[danth]

On 3/6/2018 at 8:51 AM, RetroInferno said:

I would have liked to put the blame on Star Wars

Can we? Can we please? 

[Faefrost]

At this point the more critical question will be what or how great an impact will TRU failing and closing have on Lego? No matter how you slice it it WILL have a heavy impact. TRU was the Last dedicated toy store. With acres of Lego selection. That will have some strong ripple effects at Lego and in the industry. 

Among the negatives is, among other things, Lego is not going to get paid for the current TRU merchandise. Further that merchandise will be out there in the channel somewhere competing with Lego’s new product. So their oversupply problems got worse. 

Further, from our point of view, the other Big Box merchants, Walmart and Target don’t like the high price, high risk, large $100+ sets the way TRU did. They prefer their lower to mid tier price points. 

Now long term, so long as this doesn’t lead to a massive crashing of the toy market in general, Lego may actually come out on top. But they will feel more pain, at least for this year. A few points in their favor. 

- unlike their largest competitors Mattel and Hasbro, Lego years ago widely diversified their retail sales chains. They have an expanding line of Direct to Consumer retail outlets, often in many Malls, plus a robust and refined D2C online store. Not to mention deep proliferation at other refined online merchants, Amazon, Walmart, Barnes&Noble, etc. 

- As other retailers are ramping up their toy offerings, Best Buy, Kohl’s, JCPenny’s, etc, Lego is the primary toy entry line. So they may actually be seeing some expansion there with lower price point product. This may also be in better or more favorable terms then they were getting from TRU, which demanded net180+ terms on product instead on net 30, 60 or 90. 

- Lego is a privately held company. Not publicly traded like Mattel, Hasbro, Jakks Pacific etc. Thise companies are already seeing 5%+ stock drops, just from one day of trading, today Friday, after the news leaked Thursday night. Monday is going to be a bloodletting for them. This will hugely impact their cash value, cash on hand and ability to secure financing, and in some cases may trigger a death spiral or a wave of mergers. To my eye Mattel is by far the most exposed. 

- Pretty much the full range of Lego’s product offerings are available from all merchants. Unlike the others where a retailer may sell one product line, but not another. Lego likely will not see the wholesale gutting of lines in favor of the lowest common denominator the way some others will. 

It’s going to be a rocky year for all toy fans. 

[RetroInferno]

56 minutes ago, Faefrost said:

Among the negatives is, among other things, Lego is not going to get paid for the current TRU merchandise. Further that merchandise will be out there in the channel somewhere competing with Lego’s new product. So their oversupply problems got worse. 

Are you sure?

I thought manufacturers sell their good at retailers in bulk and it's up to the retailers to get their money back via sales. What I mean is that it's Toys R Us' problem they are stuck with so much merchandise. 

Of course sales wise it's gonna hurt Lego because their biggest NA  physical retailer will close their operations, especially since the US market is weak enough as is.

Edited March 10, 2018 by RetroInferno

[Faefrost]

12 hours ago, RetroInferno said:

Are you sure?

I thought manufacturers sell their good at retailers in bulk and it's up to the retailers to get their money back via sales. What I mean is that it's Toys R Us' problem they are stuck with so much merchandise. 

Of course sales wise it's gonna hurt Lego because their biggest NA  physical retailer will close their operations, especially since the US market is weak enough as is.

Part of TRU’s normal terms was they get an extended Net 180 on merchandise. So they typically don’t have to pay for it until it’s in most cases sold. This creates some exposure for the toy companies. While suppliers are protected creditors in Bankruptcy, when there is no money, there is no money. Lego’s exposure is known to be about $35 million. Possibly a little more since the Bankruptcy Court provided some assurances for the Christmas season. Mattel is the worst with almost $150 million owed. And once again that doesn’t account for the business damage that that vast pool of unsold stock getting liquidated onto the market does. Lego or Mattel will never see a dime from that. It sucks to be a supplier when a retailer goes under. You get heavily screwed. Your unpaid for merchandise gets seized as a company asset to be liquidated in order to appease top level creditors, typically payroll and pension. You aren’t high enough on the lists to get even pennies on the dollar. And you are now competing with your own, essentially (from your point of view) stolen merchandise that is backed up by Federal Courts. It’s a pretty awful experience. 

I will say the fact that Lego only has $35 million exposure is a good sign that they saw the writing on the wall and were restricting TRU’s lines and terms of credit since last January. All of the other big players, and even some relatively small ones have 3-5x that much outstanding. 

 

[RetroInferno]

16 minutes ago, Faefrost said:

Part of TRU’s normal terms was they get an extended Net 180 on merchandise. So they typically don’t have to pay for it until it’s in most cases sold. This creates some exposure for the toy companies. While suppliers are protected creditors in Bankruptcy, when there is no money, there is no money. Lego’s exposure is known to be about $35 million. Possibly a little more since the Bankruptcy Court provided some assurances for the Christmas season. Mattel is the worst with almost $150 million owed. And once again that doesn’t account for the business damage that that vast pool of unsold stock getting liquidated onto the market does. Lego or Mattel will never see a dime from that. It sucks to be a supplier when a retailer goes under. You get heavily screwed. Your unpaid for merchandise gets seized as a company asset to be liquidated in order to appease top level creditors, typically payroll and pension. You aren’t high enough on the lists to get even pennies on the dollar. And you are now competing with your own, essentially (from your point of view) stolen merchandise that is backed up by Federal Courts. It’s a pretty awful experience. 

I will say the fact that Lego only has $35 million exposure is a good sign that they saw the writing on the wall and were restricting TRU’s lines and terms of credit since last January. All of the other big players, and even some relatively small ones have 3-5x that much outstanding. 

 

Thanks for the information, that puts the already dire north american market in an even grimer perspective for TLG.

[koalayummies]

12 hours ago, Blk69 said:

TRU was too greedy.  They had the volume of sales to offer good pricing and maintain their dominance,  Now look where they are.  They gambled on being the premium toy supplier and it failed!   Hope TLG is taking notes.

TRU priced the product the same as the competition; Walmart, Target, Amazon. Lego prices are fairly consistent across the board and one has to visit the various deal websites daily to catch an error or very brief sale on a specific set, wait for holidays or double VIP points etc.

12 hours ago, Blk69 said:

TLG is in for some rough waters.  Some knockoffs are so close to Lego you really have to look twice.  The big buss words on why Lego is so expensive is the royalties they have to pay for licences sets.  Lets look at the Modulars, $170 for the Downtown Diner.  Knockoffs will be like $50 or less on the street in China, $60/$70 shipped to US. Brick quality is close(not perfect) no licences fees.....why is Lego 2.5 times as expensive?  Are the Lego production robots really that much more expensive then a normal worker?  Doubtful TLG installed all those robots for their production costs to actual go up.  No licence fees in the whole city line ether.  Getting harder and harder to defend TLG pricing increases.  TLG just released they made too many bricks in 2017.....ya.......they serious under preformed on their sales.  They priced themselves out of what families can afford and the competitors are getting close in quality every day.  My local Walmart reduced their dedicated shelf space for Lego the beginning of the year (as much as half...seriously, they used to have two dedicated isles one Friends the other mostly city, Creator and Star Wars.  Now its all condensed to one isle and it not full, Friends sets displayed are reduced like 25% of 2017 numbers).  That should be a huge sign there, feel TLG is in for more pain in 2018.  

Lego is more expensive than counterfeits for several very basic reasons, or rather counterfeit products are cheaper than genuine products for several very basic reasons. Research and development. Product safety and testing. Market research. The counterfeit companies don't have to do these things nor many others that TLG does. They don't have to innovate, they don't do market research, they don't test their product, they don't have to abide by more strict product safety regulations (like the ones that ensure that the toys don't have hazardous and poisonous contents). They just steal. They even steal from builders on this site. What if someone stole from you and profited?

On the one hand you have a consistent complaint about Lego being too expensive, saying they should have more distribution and retailers and not getting enough deals from TRU but its doubtful you'll like the resulting industry fallout with TRU, a large Lego retailer, completely out of business.

Lego isn't in pain, they just haven't grown as much as they did prior. Most companies go through this.

Edited March 10, 2018 by koalayummies

[x105Black]

4 hours ago, koalayummies said:

TRU priced the product the same as the competition; Walmart, Target, Amazon.

I always noticed that TRU had higher standard prices than other retailers.

[fred67]

Yes, TRU often priced the merchandise OVER MSRP.  Not always, but often, when it came to LEGO.  I remember CMFs having a $0.50 premium at TRU.

As far as 

On 3/8/2018 at 6:53 PM, Blk69 said:

value and TLG will lose even more sales.  One bright spot is that the knockoffs are getting pretty good quality.  Some  are even coming out with their own stuff.  Wonder in a few years if TLG will be the knockoff to them trying to catch up.  Wonder how much it costs to pay are robot worker (TLG) vs a Asian one?

I think this is quite a reach - I doubt TLG will being playing second fiddle in the construction bricks market, but I wouldn't complain you're heading into dangerous waters, there, Blk69.

When TLG was operating in the red, and headed for bankruptcy itself, it was trying to compete with competitors like Best Lock and Megablocks, and they were pricing merchandise competitively with them - but part of their turn-around was the realization that they were a premium product, and what they were producing was far better quality and, more importantly, what they were producing COST MORE TO PRODUCE because of their high quality standards.  They started pricing their sets to actually make a profit instead of trying to compete with low-end products (rumor says they were actually selling some products at a loss without even realizing it, just because they priced down to compete - one of the reasons we lost 9V trains, supposedly).

Now it IS interesting.  I don't condone the knock-offs, but I absolutely do condone competitors like MB, Best Lock, Oxford, especially when their products are improving, which could in fact cause TLG to have to start being more competitive - and that would benefit us all.

I don't see why a slight drop in profits should concern anybody here - as long as they're operating in the black, they are doing fine, and the are still doing great.

 

[koalayummies]

1 hour ago, x105Black said:

I always noticed that TRU had higher standard prices than other retailers.

 

1 hour ago, fred67 said:

Yes, TRU often priced the merchandise OVER MSRP.  Not always, but often, when it came to LEGO.  I remember CMFs having a $0.50 premium at TRU.

Well $0.50 on a set isn't a huge deal especially if its go to TRU or drive further, as many would have to in order to go to a Lego store or pay shipping but I get that if one was buying a lot of CMF that would add up quickly. I never personally saw those or any other set priced higher than MSRP so I can't speak to that but the last time I got CMF at TRU it was 3 for $5 (Ninjago movie minifigures) so TRU certainly did have sales.

Edited March 11, 2018 by koalayummies

[zoth33]

On 3/7/2018 at 12:39 PM, bobasdad said:

Well said, fred67.  You summarized the issue perfectly, in my opinion.

Exactly its like the big oil companies complaining they only profited 3 billion instead of 4 billion.  I mean this had to slow down at some point.  Just like the economy of the world will have ebbs and flows.  As far as Toy R Us in the US not all stores are closing.  They are keeping the one in waterbury CT open.  I really don't think that's going to affect sales.  Everyone is buying things online now.  Amazon will soon take over the world the way they are going.  Lego just needs to have a little better set selection and start including more figs in sets and reduce the number of sets they release.  That's just my 2 cents.

[fred67]

Well, I know I said $0.50 premium, but looking at it as just $0.50 is not the intention - it's looking at it as a premium relative to what the price should be.  $0.50 on $3.00 (last time I cared, that's what they were going for) is 1 sixth, or more than a 15% premium.  They did not price every set that way, but they did charge over MSRP for a number of LEGO sets - it was all supply and demand, I suppose, and CMFs were greatly in demand, so they charged a premium.

 

[RetroInferno]

I remember perfectly when Rogue One jus came out and Toys r US canada priced Krennic's shuttle at 150$ CAN instead of 120$. 

It wasn't just the intention that was hurting.