Lego said it would lay off 8 per cent of its staff and revamp its business after reporting its first fall in sales in more than a decade on Tuesday.
The Danish toymaker announced a 5-per cent decline in mid-year revenue a month after abruptly removing its chief executive, suggesting it is facing its biggest test since flirting with bankruptcy in the early 2000s.
Lego said it could not promise a return to growth in the next two years, a jolting acknowledgement for a group widely admired for embracing the digital era and tying up lucrative franchises from Harry Potter to Minecraft.
"We have now pressed the reset-button for the entire group," executive chairman Jorgen Vig Knudstorp said, acknowledging the business had grown too complicated.
He would seek a return to a leaner and more efficient organisation to respond to "losing momentum ... which we think could ultimately lead to stagnation or even decline."
Lego said revenues had disappointed in its core markets of the United States and Europe, after a decade of double-digit growth and launches spanning Lego sets, video games, movie franchises, robotics and smartphone applications.
Sales related to its Star Wars line declined slightly in the first half of the year, the company said.
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It marked a sharp reversal for a company that managed to expand and respond to rising demand in Asia when Mr Knudstorp was chief executive, even as the global toy market shrank after the 2008 financial crisis.
Mr Knudstorp, took the top job aged 35 in 2004, a year after Lego flirted with bankruptcy, and set about reviving Lego's core business. That included firing consultants and hiring new designers to come up with higher-margin products that were up to date but still looked like Lego, an abbreviation of the Danish "leg godt", meaning "play well".
Bali Padda took over as chief executive in January, but the Briton was removed just eight months later and replaced by Danish industrialist Niels B. Christiansen.
"I am very much accountable for the situation and for the results we're sharing today," Mr Knudstorp said.
Sales between January and June stood at 14.9 billion Danish crowns, still topping My Little Pony producer Hasbro's sales of US$1.82 billion and Barbie doll maker Mattel's $1.71bn.
Last year, revenue growth slowed from 25 per cent in 2015 to just six percent.
Lego said it would cut approximately 1,400 positions - including up to 600 at its headquarter in Billund, Denmark - the majority of them before the end of 2017. The company currently employs 18,200 people.
"We've been through a decade of very high growth and during those years we have invested a great deal," Mr Knudstorp said, noting that the company added more than 7,000 new positions between 2012 and 2016.
"We have now realized that we have built an increasingly complex organisation to a degree that makes it difficult for us to realise our growth potential," he added.
"What we have unfortunately recently seen is that despite the continued high level of investment, these have not materialised into a good harvest."
The unlisted company said in March that mid-single-digit growth rates were more realistic for the years to come, but revised those expectations downward on Tuesday.
"We are not saying specifically whether we will grow the next two years or not," Mr Knudstorp said.
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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