Lego Prices vs. that of Crude Oil

[DrJB]

Here in the US, oil prices have fallen a good 40% over the past few months. Now, legos (made of plastic, derived from oil), have not been impacted by such drop in price... Any thoughts?

[GallardoLU]

Lego is not produced in the US.. so US prices on crude are a poor point to compare to. what we would need to know to have any indication on prices is where Lego sources its plastic from for each production facility. and then look to see where those are from and what crude prices are like for those countries. keep in mind though that raw material costs are usually a small % of overall cost of a product.

[davee123]

As I recall, the cost of the oil component of ABS plastic (as a material cost) is negligible. As I recall, if oil prices were to DOUBLE, you'd see something like a 1% increase in the cost of the ABS in raw material cost.

Oil prices affect LEGO prices far more due to transportation. Shipping overseas to different distribution facilities, etc. There's where you're likely to see a hit or savings in cost (if at all). But even that is only a portion of the overall cost (not sure how much).

But most of the time, you don't see a price reduction or increase thanks to the fact that LEGO sets its retail prices according to what it perceives the market value is. Your average US citizen doesn't really think "Oh, gee, that $20 set is too expensive now-- it should be cheaper thanks to reduced oil costs!" To them, a $20 set is basically the same value, so the price will be set accordingly.

DaveE

[Actor Builder]

LEGO is already way more expensive than the pure cost of the materials necessary to make it.

We're paying for LEGO because of the brand, not because of the materials. Any bloke with a 3D Printer could print "legos" but they wouldn't be authentic, and (Unless they found a niche market like Brickarms or the like) wouldn't sell for as much.

[dr_spock]

Here in the US, oil prices have fallen a good 40% over the past few months. Now, legos (made of plastic, derived from oil), have not been impacted by such drop in price... Any thoughts?

You can use the savings at the petro pump to buy more LEGO.

[Lyichir]

LEGO is already way more expensive than the pure cost of the materials necessary to make it.

We're paying for LEGO because of the brand, not because of the materials. Any bloke with a 3D Printer could print "legos" but they wouldn't be authentic, and (Unless they found a niche market like Brickarms or the like) wouldn't sell for as much.

The way you phrase it makes it sound like we're paying for the name alone—we're not. The kinds of "Lego" you could get from a 3D printer, or a clone brand, are very decidedly inferior in quality. So much goes into design, testing, and precision molding that other companies and individuals just can't match. That's where so much of the cost comes from—not just a surcharge for the brand name, but also the promise of quality that that name carries.

[fred67]

As mentioned, oil prices have little impact on the price of LEGO because it only accounts for a tiny fraction of what you're paying for. Mostly profit.

I know TLG gets a lot of defenders talking about great quality - and it does have great quality, no doubt - but it seems we've seen more complaints about quality in the past few years than before. I know I've had problems in the last year I never had before.

But the proof is in the pudding, as they say. By their own accounting, once again, for the first half of 2015 their PROFIT outpaced the increase in sales. There's a number of things that can account for that, but since it happens year after year, the conclusion is simple - profit margins increased. It's really just that simple. If people are willing to pay more, and sales keep increasing, they have little incentive to make LEGO more affordable.

[wgemini]

The thing is Lego pieces are fairly affordable. A pound of Lego contains about 300 pieces and goes for $10, albeit used. Even PAB is only $20. 10697 was only $40 (or $30USD) for 1500 pieces. It's the Lego sets that are expensive. People apparently value the design of the sets rather than the raw pieces.

Having said that, I am surprised that bricklink price guide consistently list the value of pieces above the set, so maybe sets are expensive because of rare pieces as well.

[BrickOn]

Lego is not produced in the US.. so US prices on crude are a poor point to compare to. what we would need to know to have any indication on prices is where Lego sources its plastic from for each production facility. and then look to see where those are from and what crude prices are like for those countries. keep in mind though that raw material costs are usually a small % of overall cost of a product.

Um the drop in oil price is definitely, definitely a global phenomena, not just a US one.

I am not sure about raw materials. However, energy prices (I guess in terms of manufacturing) are something lego is concerned about and does play a big in their business strategy. As such they have hedged against rising prices by investing in danish oil/energy companies in order to protect themselves against the rising costs of energy (this has been in place for a couple of years and was not something introduced in the current Oil climate)

But if oil prices are falling so are energy costs are currently falling (it may be wind farms that they invested in I can't remember without checking)? Maybe Lego is actually making short term loses there, no idea.. I read last year's annual report (out of curiosity), I have not looked in detail at this recent one.

Anyway its an interesting topic, I believe, although this is speculation, backed up with no hard facts, that lego has had good relationships with a number of oil companies over the years, but their dedication to the environment and sustainability may drive them to look at new ways of manufacturing lego and perhaps they aim to step away from reliance on fossil fuel based plastic in the very long term.

Anyway there are probably other considerations to take into account like changes in currency markets due to oil prices etc, I really doubt its as simple as oil prices go down, price of producing lego goes down.

[MAB]

As mentioned, oil prices have little impact on the price of LEGO because it only accounts for a tiny fraction of what you're paying for. Mostly profit.

It is not mostly profit. For 2015, revenue was 35.8bn krone and net profits 9.2bn krone. So only about 25% of what you pay is profit.

[fred67]

The price increases are mostly profit, not increases in production or material costs. If I need to phrase it another way - the biggest cost in the price of LEGO is profit, not materials, not shipping, not set design or quality control. The biggest piece of the pie is profit.

The simple fact is that LEGO has a HUGE profit margins compared to other companies - north of 25%, and increasing year after year.

I don't belittle them that fact, just pointing out that most companies with that kind of sales volume are happy with 5 to 10% profit margins. But if people keep buying it, TLG is absolutely right, and running their business correctly, to keep increasing prices until sales level off.

Edited March 4, 2016 by fred67