LEGO Expands to Beat Supply Chain Bottlenecks
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 toy maker is blaming a lack of production capacity for a decline in revenue growth and profits.
September 09, 2016
LEGO A/S reported a decline in revenue growth and profits for the first half of 2016, but only because the Danish toymaker needed time to add production capacity to meet increased demand for its colorful building bricks in North America.
The group, which has become the world's most profitable toy maker ahead of Barbie Doll maker Mattel, saw revenue grow 11 percent in the six months to 15.69 billion Danish crowns ($2.35 billion), while operating profit was up 1 percent at 4.66 billion, and net profit fell nearly 2 percent to 3.49 billion Danish crowns ($524 million).
LEGO has increased sales by an average of more than 15 percent per year in the last 12 years, with a 25 percent growth rate in 2015.
But while sales in Asia and Europe, its most mature market, grew by double digits in the first half of 2016 there was no growth in the Americas.
LEGO simply could not keep up with demand in North America, the world's biggest toy market in 2015, so it reduced its marketing activities, which led to the slowdown in the first half of 2016, Chief Financial Officer, John Goodwin told Reuters.
"It is particularly impressive that we continue our high growth in Europe where we have our most mature markets. At the same time, we are very satisfied to see high growth rates for Asia where we are making considerable investments in capacity and capabilities. In the US, we acknowledge that we have not provided the initiatives and support needed to keep the same high level of growth. As a result, we have worked closely with our customers and dialed up our initiatives in the American market, in order to regain momentum."
Significant investments in capacity and capability building for the future
During the first half of 2016, the LEGO Group has continued an already extensive global investment programme.
“We have worked closely with our customers and dialed up our initiatives in the American market”John Goodwin
LEGO, Chief Financial Officer
A new factory in Jiaxing, China has begun manufacturing LEGO elements and it will be under continued construction until 2017.
A significant expansion of the factory in Monterrey, Mexico, adding moulding, processing and warehousing capacity has started, and the new facility will potentially double the capacity in the future.
Furthermore, at the LEGO Group’s factory in Nyíregyháza, Hungary, groundwork for an expansion that may double the capacity here started during the first half of 2016.
The significant growth of the company is also reflected in the employee base.
To support the continued growth and globalisation of the company, the LEGO Group has added more than 3,500 new colleagues in the first half of 2016 compared to the first half of 2015, a year over year growth of +24%.
As a result, the LEGO Group currently employs 18,500 employees globally.
“As well as adding capacity, the substantial intake of new employees aims to add new capabilities to equip the company to be able to respond to future consumer needs and market trends."
"These investments in people and infrastructure will obviously have an impact on our short term profit growth. But they are part of our long term plan to sustain the development and delivery of fun, high quality, and creative play experiences for more children in more parts of the world in the future,” said John Goodwin.