Lego: Building Blocks of Consumption

In China today, the definition of “toy” has changed tremendously compared to four decades ago when the country just began its reform and opening up. Companion robots, model airplanes, and STEAM (short for “science, technology, engineering, art, mathematics”) toys emerged one after another to replace traditional plush and plastic toys. In conversations about popular toys in the country today, Lego is always mentioned. Founded in 1932, the Danish toymaker’s flagship product is colorful interlocking plastic bricks. In recent years, the company has been working to expand in the Chinese market. In early November 2018, it participated as an exhibitor in the first China International Import Expo held in Shanghai.

“We are confident about the Chinese market,” said Paul Huang, general manager of Lego China. “China is currently going through a consumption upgrade, and Chinese consumers are attaching greater importance to branding and quality. Lego has plans to expand to more Chinese cities in the near future.”

Thriving Non-traditional Business

In late autumn, it is already pitch dark by 7 p.m. in Beijing. However, Lego Town located in the Chaoyang Park neighborhood in eastern Beijing was still bustling with people and showered in lights. The first floor of the two-story Lego Town building sells the brand’s various products and offers space for customers to test out the toys, while the second floor serves as the Lego Education center. In the 10-plus classrooms, kids were doing different tasks under tutors’ instructions. While younger kids used Lego bricks to build castles, palaces and zoos, those who are eight or nine years old were already using laptops to make their self-built Lego robots move according to instructions.

Enrolling in Lego courses is costly. Annual tuition can exceed 15,000 yuan for only one class per week. According to figures from Beijing Bureau of Statistics, the average monthly salary in Beijing stood at 8,467 yuan in 2017. However, the expensive price tags haven’t scared away many parents. “My boy started to study Lego courses at five years old,” explained Carol Zhou, mother of seven-year-old Yun Yun. “Now he can make robots perform tasks such as lifting and grabbing a specific object.” Yun Yun’s Lego education started with power machinery. Beginning with application of levels, axles and pulleys, Yun Yun soon learned building structural models and basic mechanical concepts such as intensity and stability before he was admitted to classes for designing and constructing Lego robots.

Lego Group’s global revenue in 2017 wasn’t good. However, the same year, it realized double-digit revenue growth in China. This growth not only came from the sales of Lego toys, but even more from the group’s non-traditional businesses such as Lego Education. Against the backdrop of China’s consumption upgrade, the country’s rising middle-income group has created great opportunities for the company to develop. Parents are enthusiastic about investing more in their kids’ education. Moreover, after growing up in the internet era, younger Chinese parents born in the 1980s and 1990s attach greater importance to well-rounded education and make more diverse choices. It is easy to understand how Lego-branded education, which is closely linked to STEAM education and innovation, is attractive in their eyes.

Loving China

In 1993, six decades after the company’s establishment, Lego began to be sold on the Chinese mainland. At that time, Lego toys, priced from several dozen yuan to 1,000 yuan or more for one set, were certainly luxuries in China, where the average monthly income still measured only several hundred yuan back then. Long after Lego first entered the Chinese market, the toys could only be found in upscale department stores in China’s first- and second-tier cities.

In the 21st century, after a marked improvement of both living standards and income of the Chinese people, Lego is investing more in the Chinese market. It has gradually accelerated its pace of branding and promotion in China and added interactive activities to attract a wider range of Chinese consumers. In 2007, Lego opened its first flagship store on the Chinese mainland in Beijing. Only a year later, a Lego certified store opened in Shanghai. In 2012, the Lego Town opened in Beijing, with two thirds of its space devoted to customer interaction. In 2013, Lego consumer interaction areas opened in Shanghai stores. During the process, Lego successfully expanded its offerings from children’s toys to adult-oriented products. Cooperation with a number of popular intellectual properties including Star Wars, Harry Potter, Frozen and Jurassic World has introduced Lego to more Chinese teenagers and adults.

With more disposable income, Chinese residents have helped Lego realize rapid annual sales growth and deeper explore the market of China’s second- and third-tier cities. In November 2016, Lego Group celebrated the opening of a new factory in Jiaxing, Zhejiang Province. Building its first Asian factory in China aligned with Lego’s long-term strategy of “staying close to core markets.” The toymaker aims to provide high-quality products to millions of consumers in China and across Asia.

Great Market Potential

According to China Toy Industry Review, revenue from the primary sector of China’s toy industry stood at nearly 236 billion yuan in 2017, an increase of 8.5 percent on a year-on-year basis. As the second largest toy consumer in the world, China has huge room for further development of the toy market. According to Euromonitor International, an independent provider of strategic market research, toy sales in China will realize an annual growth rate of five to six percent over the next five years.

Against this backdrop, Lego will clearly continue to expand in China. In September 2018, a Lego flagship store opened in Shanghai, and another is planned for Beijing in early 2019. Niels B. Christiansen, CEO of Lego, noted that to date, Lego has established 36 certified stores via retail partnerships in China. By the end of 2018, the company will have up to 60 stores across 15 Chinese cities, with the new stores mostly located in second- and third-tier cities.

Alongside brick-and-mortar stores, digitization is another field Lego is looking at in China. In January 2018, Lego announced a plan to team up with one of China’s biggest internet service providers, Tencent, to carry out cooperation in various fields. In September, the two sides unveiled a sandbox game for Chinese players, which will be released at the end of this year. “We believe the Chinese market is huge and hope that more Chinese kids and Lego fans will want to play with our products,” added Huang.