Lego AS

Lego AS - SWOT Analysis

Lego A/S (Lego) involves in the development, production, marketing and sale of play
materials. Liquidity position, revenue growth, and diversified geographical presence are its
major strengths, where as cash position remains as the area of concern. The company could
benefit from strategic investments and capacity expansions. In future, its performance and
growth prospects could be affected by intense competition and stringent regulations.

Lego AS- Strengths

Strengths - Geographical Presence

Lego has a diversified global presence. By expanding its business throughout the world, the
company manages to minimize the risks associated with operating in a specific geographical
region. With its product reach in over 140 countries and territories, the company employs a
workforce of over 17,385 people to provide an extensive portfolio of toys and games. The
company has established operations in the major economies of Europe, the Americas, and
Asia/Africa/Australia. Lego operates through a network of 40 subsidiaries in Europe,
Americas, and Africa and Asia-pacific regions. It has manufacturing plants in Denmark,
Hungary, Czech Republic, Mexico, the US, Germany and the UK.

Strengths - Liquidity Position

The company’s liquidity improved in FY2018. High liquidity is an indication of the increasing
ease in funding the company’s day to day operations, which also improves its ability to
capture growth opportunities in the market. The company’s current ratio was 1.9 at the end of
FY2018, which remained same as in previous year. The company’s current ratio was higher
than one of its major competitors, Mattel, Inc, which reported current ratio of 1.8 during the
same period. The increase in current ratio could be due 45.8% increase in current assets,
which increased from DKK795,843 million in FY2017 to DKK1,160,356 million in FY2018.

Strengths - Revenue Growth

The company’s revenue increased in FY2018. This enables it generates more profits and
expand its business operations. In FY2018, the company reported revenue of DKK36,400
million, which grew 4% as compared to KK34,995 million in FY2017. The increase in revenue
was due to single digit revenue growth in the stable market groups in 2018 and it also
reported double-digit revenue growth in China.

Lego AS - Weaknesses

Weaknesses - Decline in Revenue

The company’s revenue declined in FY2017. Decreased revenue restricts Lego to provide
higher returns to the shareholders decrease the options of obtaining the investments and
restrict from expanding its business operations. In FY2017, the company reported revenue of
DKK34,995 million, decrease of 7.7% from DKK37,934 million in FY2016. The decline in
revenue was due to decrease in revenue from the established markets across Europe and
North America, which was attributed towards the inventory reduction across its value chain.

Weaknesses - Cash Position

The company’s declining cash position could impact the company’s operations. In FY2018,
it’s cash and cash equivalents stood at DKK89,904 million as compared to DKK180,292
million in FY2017. Lego also reported negative cash flows of DKK184,588 million from
operating activities and DKK390,700 million from financial activities in FY2018.

Lego AS- Opportunities

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Lego AS

Opportunities - Strategic Acquisition

Competitive market scenario influences companies such as Legoneeds to undertake growth
initiatives. These initiatives could enable the company to effectively handle the demand-
supply fluctuations in market. In November 2019, the company acquired BrickLink Ltd.
Through this acquisition, Lego plans to expand its connectivity with the adult customer base.
The company supports BrickLink’s activities and provide access of Bricklink digital studio to
the customers and helps them to promote creativity. In March 2019, the company acquired
Enerparc, solar developer in the US. Under this acquisition, it expands its operation in
renewable energy sector that helps Lego to generate more profits.

Opportunities - Capacity Expansions

Lego continued to expand its capacity in various places. As part of business expansion, the
company focused on establishing new stores in the core market. In September 2019, the
company planned to open a new 160 stores across worldwide. In the same month, Lego
planned to open various stores at several places including two new stores in Queensland,
Australia; 140 stores across 35 cities in China; 70 stores across worldwide; store in
Amsterdam, the Netherlands; 80 new stores in China; a new store in the US. In July 2019, the
company announced a plan to open a new store at up and coming mall in Auckland, New
Zealand.

Opportunities - Growth in E-retail

Lego offers its products through retailers, wholesalers and online platforms. Online retail
sector has been witnessing a strong growth in the recent years, mostly due to the increasing
internet penetration and the user-friendly shopping interface created by the retailers.
According to the report published by the Census Bureau of the Department of Commerce in
November 2019, the estimated retail e-commerce sales in the US for the third quarter of 2019
was US$ 145.7 billion, an increase of 4.4% from the second quarter of 2019. E-commerce
sales in the third quarter of 2019 accounted for 11.2% of total sales. Therefore, Lego could
look forward to the emerging growth opportunities in the e-commerce platforms to achieve its
business growth objectives.

Lego AS - Threats

Threats - Counterfeit Goods Market

As popular toy manufacturer, the company’s business is highly vulnerable to counterfeit
market. Its performance may be affected by the increasing influx of counterfeited products in
the market. The growing market for counterfeit goods has been on rise across industries and
is affecting the sales as well as the image of the established brands. Organization for
Economic Co-operation and Development (OECD) estimates a cost of US$500 billion a year
on the global economy due to counterfeiting and piracy activities. It accounts for about 5-7%
of the world trade. China and Hong Kong are found to be the major source of counterfeit
products. As a result of this, the imitated goods in this industry are eating into the market
share of the branded products, especially due to their low price offerings. Besides, low quality
of these counterfeits affects the consumer confidence and tarnishes the brand image of the
genuine company.

Threats - Intense Competition

Highly competitive market could impact the business operations of the company. The toy and
gaming market is highly fragmented with numerous brands and products competing for higher
market share. The company competes with several large toy and game companies in its
product categories as well as small toy and game designers and manufacturers operating in
local markets. It competes with companies offering branded entertainment with focus on
children and their families. The company competes on the basis of price, quality, brand,

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Lego AS

marketing network and play value of the product. Its major competitors include Mattel, Inc.,
Hasbro, Inc., Bandai Co. Ltd., Sababa Group Inc. and Simba Toys GmbH & Co. KG. Some of
these competitors possess broader product lines, substantially greater financial, marketing
and operational resources than the company. If the company fails to grow at or above the
growth rates of the categories in which they compete, its sales and results of operations could
be adversely impacted.

Threats - Stringent Rules and Regulations

As a global provider of toys and play materials, the company is subject to several regulations
in the areas of manufacturing practices, product safety and hazardous substances. The
company’s facilities and operations are subject to the regulations by various federal and state
agencies under Consumer Products Safety Act, the Federal Hazardous Substances Act, and
the Flammable Fabrics Act, and consumer protection in its international markets. These
regulations govern the aspects such as accounting standards, product safety, trade
restrictions, duties and tariffs, advertising directed toward children, environmental matters,
currency and financial matters, and privacy and data protection. The company’s failure to
successfully comply with any such legal requirements could subject it to monetary liabilities
and other sanctions that could harm its business and financial condition.

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