Disappointing results, showing the first drop in profits after a decade of growth, has led to the LEGO Group announcing 1,400 redundancies.
The LEGO Group’s fiscal results for the first half of 2017 show revenue down, operating profit down, net profit down and cash flow down – and the company is cutting jobs in response to the news. The bleak outlook comes after previous disappointing results, which the LEGO Group put a more positive spin on. This time around, it is not possible to put such a gloss on the figures, which speak for themselves.
From the LEGO Group’s press release (first half 2017, compared to first half 2016):
Revenue down 5 percent to DKK 14.9 billion compared with DKK 15.7 billion
Operating profit down 6 percent to DKK 4.4 billion compared with DKK 4.7 billion
Net profit down 3 percent at DKK 3.4 billion compared with DKK 3.5 billion
Cash flow from operating activities was DKK 4.6 billion compared with DKK 3.9 billion
Growing markets saw double digit growth, but existing markets such as the USA and areas of Europe saw revenue decline for the LEGO Group.
Operating profit was DKK 4.4 billion, down 6 percent compared with the same period in 2016. This was due to lower revenue and increased costs associated with investments in production capacity and organisational capabilities made to support higher expectations of revenue which failed to materialise.
LEGO Group Chairman, Jørgen Vig Knudstorp said, “We are disappointed by the decline in revenue in our established markets, and we have taken steps to address this.
“We are working closely with our partners and we are confident that we have the long-term potential of reaching more children in our well-established markets in Europe and the United States. We also see strong growth opportunities in growing markets such as China.”
Product themes highlighted as particular success stories during the period include City, Friends, Duplo, Technic and The LEGO Batman Movie.
During the past five years, the LEGO Group has built an increasingly complex organisation to support global double-digit growth.
Knudstorp said: “In the process, we have added complexity into the organisation which now in turn makes it harder for us to grow further. As a result, we have now pressed the reset-button for the entire Group. This means we will build a smaller and less complex organisation than we have today, which will simplify our business model in order to reach more children. It will also impact our costs. Finally, in some markets the reset entails addressing a clean-up of inventories across the entire value chain. The work is well under way.”
Talk within the toy industry suggests that certain underperforming product lines, including the Rogue One wave of LEGO Star Wars products, has led to huge stockpiles of inventory that is not selling through.
The statement released by the LEGO Group goes on to explain the number of employees affected by redundancy plans.
As a consequence of the plans, the LEGO Group believes it would need to reduce its total global workforce by around eight per cent. This would impact approximately 1,400 positions, the majority before the end of 2017. Currently the LEGO Group employs approximately 18,200 people.
The LEGO Group would provide the affected colleagues with redundancy packages which reflect their service to the organisation, including support in transitioning to new positions or new opportunities outside of the Group. Any changes would be implemented in accordance with local market regulation and in consultation with relevant employee representative bodies.
As well as changing the way that the organisation is structured, the LEGO Group plans to look closely at the product development side of the business, as explained in the official statement.
Pressing the reset button is one of two elements of a plan launched by the Group. The second element is how to return to growth. The Group is doing this by exploring adjustments to its successful formula for product development and marketing in order to achieve its ambition to reach more children around the world with LEGO play experiences that stimulate playful learning.
“We will find more opportunities to engage with kids and parents including innovative ways to blend physical building and digital experiences, such as our successful LEGO Life social platform and LEGO Boost building and coding set. We have a powerful and loved global brand, a strong business and are confident we can reach more children around the world.”
In light of the news, it is even harder to believe that the recent change in CEO was due to anything but these figures and an attempt to redress them.
The disappointing news will be frustrating for those affected by redundancy, particularly those who were hired recently due to the company’s growth, and will now lose their jobs due to it not having materialised.