2019—Year of the Exclusives?
LEGO has offered a couple exclusive sets at ComicCon for years, but there seems to be an explosion of regional exclusives right now. Let’s use the Brickheadz based on LEGO Movie 2 as a case study to try and figure out what’s going on.
Excluding one set from 2004, there have been one or more Limited Edition LEGO sets released at San Diego Comic Con every year. Most recently, in 2018 there were 3 custom sets, and 3 exclusive minifigures. Naturally, these exclusive sets fetch a huge premium for resellers on ebay. Fortunately for LEGO fans, there haven’t been very many other limited edition exclusive sets beyond the Comic Con sets, the extremely rare Inside Tour sets, and the annual employee gift set.
This seems to be changing in 2019. First, we learned about two gorgeous sets which would only be sold in Asia: #80101 Chinese New Year’s Eve Dinner, and #80102 Dragon Dance. As far as we know these are not a limited edition, but enterprising resellers in Asia are selling them on ebay for about double their retail price. More recently, we learned about four Brickheadz based on The LEGO Movie 2: The Second Part, which are not only exclusive to the United States, but limited to 5000 sets each, with two sets only available at Walmart, and two sets only availabe at Target. (All four are already sold out.)
Let’s be clear, The LEGO Group makes the most money when you buy full-priced LEGO sets directly from the LEGO.com online store. Amazon recognized many years ago that maintaining a warehouse is a lot cheaper than an expensive retail brick-and-mortar store, allowing them to sell the same products for less while still making a lot of money. LEGO has an even better deal than Amazon since they are both the manufacturer and the seller. It’s hard to understand why The LEGO Group would create limited edition sets for Walmart or Target.
In this article, we will use the four LEGO Movie 2 Brickheadz as a case study to try and understand if the primary motivation is to make money selling these sets, or if The LEGO Group has an ulterior motive.
Could Limited Edition Exclusives be Profitable?
NOTE: In order to estimate the profitability of these exclusive sets, I made many assumptions which could very easily be wrong. If you think my estimates are incorrect, leave a comment explaining why.
Let’s start with what we know: each of the four sets appears to be limited to 5000 copies for a total of 20,000 sets. Walmart is selling theirs for $15, whereas Target is selling theirs for $10 (but requiring users to sign-up for a Target Credit Card). That’s a retail total of $250,000 which might sound like a lot of money, but that’s a drop in the bucket for companies as large as Walmart, Target, and LEGO.
Retailers purchase goods from the manufacturer for a signifcat discount compared to the MSRP. Online stores like Amazon can sell at a lower cost while making money than a specialty brick-and-mortar store because online stores do not need to pay for premium retail locations and lots of employees. While wholesale discounts for products such as toys can vary widely, stores probably pay between 40% and 60% below retail. Let’s assume 50% since there is no way for us to know and it keeps the math simple.
Since there’s nothing inherently more expensive about the two sets being sold at Walmart for $15 as compared to the two sets being sold at Target for $10, let’s assume that The LEGO group assumed the same 10$ MSRP as the rest of the sets in the Brickheadz line. a 50% discount on a $10 set would be 5$ per set. By these estimates, both Walmart & Target paid $50,000 to The LEGO Group, for a total of $100k.
For The LEGO Group to make any money, they would need to ensure that the total cost for the Research, Design, Manufacturing, and Shipping of 20,000 LEGO sets is less than $100,000. Is that even possible?
First, there are research & design development costs. It is hard to believe that all four of these sets could go through the entire research and design process using less than a total of three months of design talent spread across the many employees required to make a set including: initial design, design iterations, product safety testing, photography, instruction manual design, and packaging design.
Again, we are guessing, but it is likely that the total cost to The LEGO Group for each employee is around $250,000 a year. The total cost would need to factor in obvious expenses such as base salary and benefits, but we need to also consider support personnel such as cafeteria staff, building reception, security, human resources, janitorial services, and managerial overhead. There are also amortized costs of the buildings they work in, computer hardware, travel expenses, and supplies (including lots of LEGO bricks). Many of their employees come from outside of Denmark, which means additional costs in recruiting and visas.
One quarter of that $250k expense is about $60k for R&D alone.
Lastly, there are distribution costs, but this part is easy. With the advent of container ships, transportation by sea has become so inexpensive that it is a negligible cost for the goods we buy. As such, we can estimate distribution costs to be 0$.
With an estimate of $100k in income and $90k in costs, The LEGO Group might only make $10k. That’s a horrible return on investment for a company as large and profitable as they are.
If it isn’t profitable, why do it?
There are many reasons why The LEGO Group might have decided to create these limited-edition retailer exclusive sets.
Here are a few reasons that you might or might not have considered:
- It is possible that learned through market research that the sets would not sell as well as they hoped, but only found out after Research & Design had alreadsy happened. With that investment being a sunk cost, they might have decided to make them available as an exclusive to high volume partners as a way to offset the R&D costs.
- It is also possible that the sets had already been designed, but they became a victim of internal politics or business strategy. For example, there may have been a decision to phase out the Brickheadz product line.
- Another possibility is that this was never meant to make money, but rather to act as a publicity stunt to coincide with the theatrical release. In this case, the R&D budget may have been internally billed to a marketing department.
- Lastly, they may have created this exclusive content to help convince two key retail partners to purchase even more LEGO sets for the 2019 year. This makes a lot of sense in the absense of Toys“R”Us in the US Retail landscape. For all we know, these sets were provided “free of charge” to Target and Walmart as part of a larger deal.
Of course, we will never know why they decided to release these four sets as limited edition retailer exclusives. Time will tell if this is a short-term marketing experiment, or a harbinger of even more limited edition exclusives coming soon.
See, the big problem with this is assuming it takes 3 months to design and photograph this, whereas people can come up with a design for a character over the course of a day, maybe two. I don’t doubt that official LEGO designers have better skills at this sort of thing, so three months to design it, get it approved (come on, they work in house, it doesn’t take that much time, even with a couple hours for a revision), and photographed is one hell of a stretch. I will say, maybe add a day or two for the time it takes to take designs that were already made for the minifigs and transfer them onto a plate, there is that. But that doesn’t take much extra time, especially considering the designs aren’t new.
Creative projects take longer than you think when you are working in a large corporation with many collaborators. You also need to factor in the amortized cost for those projects which do not get green-lit. I obviously could be wrong, but I suspect that I am more likely under-estimating the work rather than over-estimating it.
Walmart and Target are both huge, very huge business partner. Walmart has 3000+ store widly spread all over the USA.
When you have business partner of those dimension, if they ask you something, you answer “yes Sir”. The problem is that the question (from Target and Walmart) it was “placed” in the marketing and wholesale departments, not in retail and not in the AFOL Engament Team.
In a hyper-connected world (thanks to internet and to the social network) and therefore increasingly “small”, you can not think that an exclusive of the genre (but also that for the Chinese sets, although for different but equally important reasons) do not unleash, disappointment, disaffection to the brand and criticism fierce.