Lego to exploit new Disney licences to challenge Mega Brands in preschool toys

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MONTREAL - Danish toy giant Lego is threatening to chip away at the very foundation upon which Canada's Mega Brands (TSX:MB) was built a quarter century ago by setting its sights on the preschool construction category.

Lego is attempting to knock the Montreal-based company from its perch as global leader in preschool plastic blocks by aligning itself with Disney and two blockbuster children's movies set for release beginning this year.
Toy Story 3 will hit screens in 2010, followed next year by the sequel to the immensely popular Cars. It joins other hot Disney properties such as Star Wars that have helped Lego to thrive.
"We will become a much more significant share of that preschool market in the years to come," Lego Americas president Soren Torp Laursen boldly predicted.
In addition to regular blocks based on Disney licences, Lego will also adapt them to its Duplo line of larger blocks that cater to toddlers. All tie in with its traditional building blocks.
Laursen said Toy Story 3 will represent a small proportion of its overall sales but will help attract the attention of parents to its preschool line.
For several years, Lego let the preschool market slide while it focused on getting its financial house in order. Now that it has restored its global dominance among boys five and older, the company wants to branch out to the very young and to girls.
Laursen denies that Lego is targeting Mega Brands, the company it has faced in court for many years over trademark infringement accusations relating to the design of the plastic blocks.
"It can be interpreted as that but we don't necessarily see it that way," he told The Canadian Press in an interview from London.
"We think there's room for both Lego and Mega Brands in the market but inevitably we will be challenging some of their business because we've let them have a big share of the preschool market fairly uncontested in the last five to six years."
Lego has no plans to introduce large blocks that have been Mega Brands' mainstay for 25 years. Nor will it battle on price.
Instead, it plans to appeal to parents who, especially in tough economic times, are looking for toys their children will continually turn to.
"We offer tremendous value for money, at least that's what consumers are telling us," Laursen said.
Lego's 2010 lineup of products will be introduced at the Canadian Toy and Hobby Fair, a trade show that opens Sunday in Toronto.
While the Canadian toy market was down last year, Lego grew its market share as its dollar sales increased 30 per cent and unit shipments were up 38 per cent.
Its current preschool product line grew more than 109 per cent from a small base, according to NPD Group research data.
Industry analysts are divided over whether Mega Brands should be worried by Lego's plans. They say the Canadian manufacturer retains a strong preschool brand despite its financial woes and magnetic product recalls.
"Poor little Mega Brands, every time you think they've turned a corner bam there's something else that hits them," said Gerrick Johnson of BMO Capital Markets in New York.
Johnson said Lego's Disney licences have solidified its base in the preschool aisle even if it doesn't come up with any other products for three or four years.
But Chris Byrne, a New York-based toy analyst known as the Toy Guy, doesn't believe Lego's growth from licensing will necessarily come at Mega Brands' expense.
Mega Brands said it isn't losing sleep over the competition.
Last year's introduction of Fisher Price's Trio brand failed to affect its market position, said spokeswoman Carine Sroujian.
"Right now Mega Bloks is synonymous with preschool construction toys which are of value and quality and we're maintaining that position," she said.
Mega Brands has high hopes for its licences with Nickelodeon and Thomas the Tank, the world's most popular boys preschool line in the world.
In fact, Mega and Lego switched key licences this year with Mega picking up Thomas and shedding Disney.
The Lego challenge comes after Mega Brands settled a lawsuit with the Rose Art founders and announced plans to reduce its monstrous debt.
"And now Lego is going after their lunch," Johnson said.
Laursen said there is growth potential for both companies since the Canadian construction category in only half the size that in Europe.
But Lego isn't just focusing on preschool. It is also introducing to North America this summer 10 new board games that are based on its construction blocks.
Last year's test in Britain and Germany proved them to be a big success. Priced at $10 to $40, the games allow children to build and play unique games under different themes.
The most popular have been Minotaurus and Ramses Pyramid.
Byrne said the games will do well because they're well-priced, appeal to family play and give Lego exposure in the game aisle.
"They are really awesome games. It's not just that you build the boards and play with them but the game mechanics, the game play is very, very good," he said.
Mega Brands is also set to launch three board games this fall that cater to younger children.
Match & Build and Domino Build use blocks while Streetz Racer features small cars. Priced at less than $15, they are more traditional board games.

Organizations: Mega Brands, TSX, Star Wars Canadian Press Canadian Toy NPD Group BMO Capital Markets Fisher Price Mega Bloks Nickelodeon Rose Art Match & Build

Geographic location: MONTREAL, Canada, London Toronto New York Europe North America Britain Germany

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