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    The "Hazzards" of Lego Investing


    Bo and Luke Duke, the eponymous leads of the early 80's hit TV show The Dukes of Hazzard, were two rural Georgia “good ol’ boy” moonshiners that were always on the run from the show’s villain, Hazzard County Commissioner “Boss” Hogg. The show's story arc revolved around the efforts of Hogg and his sidekick, Roscoe P. Coltrane, to intimidate the Duke cousins into leaving them alone to hatch their nefarious, and often times illegal, schemes. Inevitably, Bo and Luke would wriggle out of Hogg’s grasp and thwart his plans, leaving “Boss” frustrated from another stunt gone awry.

    Bo’s and Luke’s travails provide a humorous parallel to the recent plight of Lego resellers. While resellers aren’t doing anything illegal (like moonshining), and The Lego Company (TLC) isn’t nearly as bumbling or nefarious as the oft-thwarted Hogg, there seems to be an emerging “cat and mouse” game akin to our favorite 80’s show plots between TLC and Lego resellers. In the recent past, Lego has made a number of decisions that could have a profound effect on the secondary market, and they still have other options that could further alter the resale market. To date, the biggest red flag for investors should be Lego’s recent crackdown on resellers. In the past, TLC allowed wholesale buyers to resell sets in any manner they chose, and many enterprising folk used eBay, Bricklink, Amazon, and other online marketplaces to sell these sets. Some flipped these sets quickly for retail price, while others bought and held until EOL for larger profits. However, TLC recently decided to stop this practice by limiting sales to retailers with a brick and mortar retail store, and forcing every retailer to sell 75% of their sets. After instituting this policy, TLC has now begun to flag buyers that make high volume purchases from Lego S@H and The Lego Store, and halted sales to these perceived resellers. In a year, TLC has swung the pendulum hard against resellers, and there’s no reason to believe it will stop.

    So, what else will TLC do to discourage reselling and make Bo's and Luke's life miserable? In simple terms, TLC can either try to limit demand, or increase supply. I have a hard time believing TLC would specifically ever try to limit demand of their own product, even in the secondary market, so their primary weapon is to alter supply. Other industries have found ways to accomplish this in a variety of ways that TLC could emulate, so here are some that may apply:

    Re-releasing retired sets

    While there is little precedent for this, it’s an option open to TLC and one they may be testing soon. Remember 7641 City Corner? It’s a set from the City theme that was released in 2009 and retired in 2011. It has enjoyed a profitable retirement, earning a nearly 85% ROI in a little under two years. According to Brickset.com, this set is scheduled to be released again soon under a new number, 60031. Everything else about the set appears to be the same: piece count, design and box all appear to be unchanged.

    What will a re-release do to the secondary market value of an existing set? FCBarcelona and Grolim, BP members and bloggers extraordinaire, have already outlined the effect “remakes”, or models that underwent a makeover, have had on retired sets in this blog (look for any entries with “Remake”), and this post respectively. To paraphrase, remakes were found to decrease the value of retired sets, and in some cases significantly. By extrapolating that concept, and by using our own common sense, we can assume releasing the exact same set a second time would crater the secondary value of the existing set. If TLC decides to begin re-releasing more retired sets to discourage speculative hoarding, investors could be left holding sets for a lot longer than originally planned. Even the threat of a strategic re-release or two may discourage investors from hoarding. In this scenario, investing in licensed sets would likely become more popular since TLC wouldn't be able to re-release any set with a retired license.

    Authorized Lego Reseller

    TLC could also get into the secondary market game to control retired set pricing. If this sounds absurd, keep in mind that many US sports teams have opened sanctioned ticket reselling portals for their own event tickets to curb scalping problems. A secondary market platform run by TLC could provide Lego a second “bite at the apple” and effectively set retired prices, especially on the low end. This is probably an unrealistic option since resale isn’t part of their core business, and I doubt TLC would divert any effort or resources from their core competency. Yet, it still remains an option to TLC, and it would likely have disastrous consequences for hoarders.

    Eliminate Exclusives

    Another way to tamp down the secondary market is to eliminate “exclusives” and “limited edition” sets. These are sets with limited production runs and a history of strong secondary market returns. While this would be a radical departure from their marketing strategy and is highly unlikely to happen, it would likely weed out a large percentage of the highest earning EOL performers. TLC would likely lose a substantial portion of their adult fan base if they ever did this, so I doubt they would ever consider this an option.

    Flood the Primary Market

    Another bullet in TLC’s arsenal is to flood the primary market with their sets, yet the severe negative consequences for TLC’s products and retail partners make this tactic less probable than any of the previous options. While this tactic would primarily affect hoarders, the resultant decrease in price from a flood of new sets could be a boon to flippers who sell in higher volumes for smaller margins. Imagine the falling prices on Amazon if TLC doubled production! I don’t believe TLC would enact any policy that would benefit one group of resellers at the expense of another group, and I know they would never knowingly reduce the perceived value of the Lego product line by increasing supply of their sets. This will not happen either.

    Right of First Refusal

    In the timeshare industry, timeshare and vacation club companies that sell properties often times add Rights of First Refusal into their contracts with new timeshare owners. This clauses forces ANY owner of the timeshare that wants to sell the property to give the timeshare/vacation club operator “first dibs” on buying the property from the seller, and allows the timeshare/vacation club operator to set the price for their resale properties. While this option is logistically impossible for TLC and their near-commodity products, it’s illustrative of another option a company has to set or control the price of their resale merchandise.

    While TLC may be emerging as a primary threat to resellers, there are still other hazards that face Lego investors today. These threats are all derived from either an increase in market supply, or a drop in market demand.

    While it’s been well chronicled in past blog articles, a speculative bubble always remains a possibility. However, it's important to define exactly what a speculative bubble is so that Brickpickers understand its risk. A speculative bubble, by definition, occurs when the value of a product greatly exceeds its “intrinsic value”. This increase in value can be fueled by speculation, by the presence of monetary liquidity in the market, or both. While “intrinsic value” is an abstract term, it’s easy to estimate it. Since a Lego set is nothing more than the sum of its parts, its “intrinsic value” is the part-out price. A quick look at Bricklink.com shows investors the value of a parted-out Lego set based upon sold prices of these pieces. Without reviewing every Lego set’s part-out price, a quick glance shows that many sets never perform as well as their part-out value. Until a large percentage of just-retired Lego sets are selling for significantly higher prices than their part-out value, there will not be a speculative bubble for Lego as a whole. That doesn’t mean a bubble will NEVER happen, so check the part-out values of your preferred investment themes sporadically to see if you notice a divergence between Brickpicker's value and the part out value.

    Another potential threat to the Lego secondary market is the refinement of 3d printing. BP member Yellow eloquently outlined concerns from 3D printing here, yet I believe that 3D printing’s physical constraints make copying Lego bricks nearly impossible, especially in the next 5-10 years. Lego uses ultra-precise injection molding with tolerances that are many factors tighter than current 3D printing can provide. Without meeting these tolerances, 3D printed bricks will not bite or grab like an injection-molded brick, rendering these copies useless to Lego fans.

    Finally, if the demand for a product in any market erodes, both the primary and secondary market prices will suffer, and previously realized ROIs will erode in step. In our case, this actually can be roughly verified by reviewing sales figures from TLC’s annual report. While it doesn’t specify a split between theme sales, you can monitor yearly sales figures and read the notes to get TLC’s opinion on why sales have reacted accordingly. Fortunately, TLC appears to be successfully designing new product lines, opening new licenses, and exploring new distribution channels for its brand, so any demand erosion would have to come from an external market shock which is nearly impossible to predict.

    The Lego secondary market is not foolproof, and it’s not riskless. Threats to this market will always emerge, so it’s incumbent on the savvy investor to continuously monitor the market for clues to where it’s going. Savvy investors, much like Bo and Luke, will continue to escape "Boss" Hogg, and make money!

    As always, invest accordingly.

     

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    For me in general the only time I buy in bulk at Lego.com is when they have there sale in May, and Black Friday, and I am sure most people on here do the same, and thats if they have a good sale, and most of the time there is a 5 per limit, which is no big deal, you can get your son, mother etc to order them, and as for going to the Lego store everytime I go on the sale day, they let you buy 5 of each, and you can go different time of the day. To me buying from Lego is not a problem, The Thing that would hurt us if say you buy 2 Haunted Houses from Amazon today, well to buy 2 more you have to wait about a week or so to order again, Now if Amazon would only let you buy the same item once or twice a year, now that would suck, I doubt it will happen. And about not having no more exclusives that will never happen, go into a lego store and count all the Exclusives, Death Star, SSDS, Ewock Village, B-wing, Tower Bridge and the list goes on and on. So no exclusives the Lego store would be half empty. And about a Lego Bubble, if you got the right sets you will do great, One thing that has changed with Lego in the last year or so is when a hot item is retiring the panic buying starts, and when the lego sign says SOLD OUT, well all hell breaks loose, you thought panic buying happened with the jabba's Palace, well wait til the Death Star, SSDS, Tower Bridge, and a few other's prices will jump $100-$200 in a few weeks and keep going up. So there could be a Bubble on those cheap $20 A-wings and other stuff that won't go anywhere. Why would anybody think that there would be a Bubble Bust on the Haunted House, Batman Arkham Aylsum, Ninjango 2507 & 9450 sets, and the Death Star and SSDS ETC. "The Only problem I see Lego Investors have is can they wait and hold on to there stuff for 2-4 years, the answer is no, Like I said before about 60% of people can't, they crack, there wife is complaining, car repairs, get married ETC. And one problem I even have is seeing 1000 Big Lego sets everyday, Its hard mentally sometimes I get the urge to sell I ain't waiting 3 more years, and I do a few sets now and then.   Ed

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    Great article. I really think that sometimes people enter this world without ever paying attention to the risks involved, so hopefully more people will now think things through before investing. This does not only apply to LEGO of course. To me, the largest threat of those you outlined above is the re-release of sets. Thankfully, considering the large amount of sets released each year, only a very smal quantity are ever remade.

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    I think some here think too much of the 3-D printing threat. You can already rent an entire factory in China to make limited runs of just about whatever you want much more cost-effectively, and much higher quality than 3-D printing.

     

    Also, by the time you can quickly and cost-effectively reproduce LEGO sets with 3-D printers that are readily available to home users, we will have ceased to care about LEGO. That's a bigger, more earth-shattering change than suddenly just being able to print LEGO sets...

     

    Another thing to consider is that for example, some weeks I print hundreds of pages for the work I do for my customers. Although I could, I never do this on my home printer or the printer in my office. I upload the job to FedEx, have them print it, and bill the amount back to my customer. I suspect in those areas where 3-D printing is prevalent, this service provider model will take hold...history tends to repeat itself.

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    I don't see them reissuing the same exact sets, the main reason is usually parts of the molds break, in 2008 The 7676 Attack Gunship was released, was suppose to be out 2 full years, I ordered 15 cases as soon as I got the Order Form, then 10 months later I got 10 More, ok a few months later I tried for more but my Rep said they had lots of trouble with the molds so the set was discontinued 7 months ahead of time. And if you watched The Modern Marvel's History Channel show 8 months ago it tells how expensive molds costs, and at the end of the Lego runs most molds are destroyed, so forget about Exact reissues.

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    Ed, FCB, emes - Thanks for the responses. 

     

    Ed - it's quite possible that Lego could put time limits on orders, but I don't see it with Amazon or TRU.  I also agree they will never get rid of Exclusives.

     

    FCB - I wonder if the threat of re-releasing sets will discourage anyone from invesment/reselling.  While I have my doubts, it would really stink to be holding 40 Ewok Villages only to realize TLG was going to re-release it two years after its original retirement.

     

    emes - Completely agree.  3D printing is not a threat to Lego, or the secondary market.  I do think it's interesting to think through all the potential threats to the secondary market.  Like many things in life, sometimes it's not the first threat that's the most dangerous, it's the second or third iteration of the original that becomes the biggest concern...

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    Well thought out article, Quacs.

    I doubt 3D printing will ever be a main contender truthfully unless it gets to the point of Star Trek'ish technology where you could faithfully reproduce any lego brick at a molecular level.

    Even though I had started the topic about City Corner possibly getting a straight up re-release in the forums, the more I think about it, the more I doubt it will actually come to fruition. Lego stopped doing that practice years ago because it was one of the main reasons behind the company almost going belly up. They figured out a much safer way with releasing redesigns since it is like the old model yet new again where die hard collectors must have it just for the sake of completion.

    Eliminating exclusives could kill some investments but I wonder if it would have much impact in the end really. In a way, that would be like going back to how Lego was when it started with no store exclusives at all and most retailers carrying just about everything. It may have a bigger impact nowadays than before though since all of us have become accustomed to the notion of store exclusives.

    And Lego knows better than to flood the market unless they want their stock to suddenly go south.

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    Thank you for the article Quacs, you've raised some very interesting points.

     

    I think that what some people lose sight of a little at times is that TLG is a large and successful business.  Every single decision TLG makes is made with the goal of increasing returns to their owners.  Literally every single one.  Profits rule, and some of the options theoretically open to them will never even be explored because they are just huge loss makers.

     

    Getting back to the root of the issue here, TLG have tightened rules in order to limit resellers.  I think this is due to those resellers impacting their own profits.  One of the main ways they do that is by buying in one market (usually the US) and selling to another below the price that Lego is sold for at retail in that market.  This affects primary sales and in turn TLG potential profits.  Especially for those S@H exclusives.  Another way is through reputation loss and possible brand image issues through some dodgy resellers etc.

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    I think the danger of Lego having exact re-issues (60031) would be a game changer. If Lego wanted to, they could simply re-issue whatever sets have had the best post life price performance (and why not?). Simply having the threat of your set being re-issued would absolutely impact all non licensed sets. As far as Lego Reseller, that has virtually already happened - in a way there is no longer an EOL. Another possible issue (that I don't believe you touched on), is if Lego took down the road blocks and made it easier for just about anyone to buy wholesale (those restrictions are very much what makes this all possible). There is also the possibility (far fetched as it might be), that one day Lego sells itself.

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    TOK/Grolim/StarCity - Thanks for the feedback. Great insights from you three. SBC, I think the option of TLC selling itself is real, although whoever buys it better have a LOT of cash! Selling Lego really opens up many more options, including ones beneficial to the reseller.

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    TOK/Grolim/StarCity - Thanks for the feedback. Great insights from you three. SBC, I think the option of TLC selling itself is real, although whoever buys it better have a LOT of cash! Selling Lego really opens up many more options, including ones beneficial to the reseller.

    Disney could certainly justify it (tons of opportunity for them).

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    LEGO would be STUPID to go after resellers.  I am sure many of us would quit buying if they made it difficult to resell their sets.  While I do not move the meter on sales at LEGO, I know they would HATE to lose my business and that of many resellers.  The amount I spend alone...many toy companies would love to have that much from anyone.

    And they could never get first right of refusal...

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    PB - I agree that many if the tactics listed are not probable. But thinking about possible outcomes is such an important exercise since it can lead to other possible outcomes that may be likely. Thanks for the feedback!

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    PB - I agree that many if the tactics listed are not probable. But thinking about possible outcomes is such an important exercise since it can lead to other possible outcomes that may be likely. Thanks for the feedback!

    Very very true

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    Great article and follow up comments!  Always a pleasure to read the articles I find on this site. 

     

    I would imagine that with all the new collectors emerging like myself it would be great to see LEGO successfully expand into the asian market to help allay concerns of oversupply of aftermarket products.  It would be an opportunity that would certainly help curb the impact of these hazards.  A recent article on Forbes discusses this very risk of LEGO moving asia.  One wonders if the recent purchase of bricklink relates to the possibility of a successful Asian invasion. 

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    rcm9, Agreed completely. Any Lego expansion into Asia will only help the resale market. There are a few veteran Brickpickers that have already cultivated buyers in Asia, and been very successful with sales there. Any Asian expansion will provide more market for enterprising BPers.

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    Amazon UK already has concrete limits on some lego purchases.  I bought 5 helicopter and 5 dirtbikes (technic).  2 weeks later---I still can't order more.  Says I have hit my limit of 5.

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    Interesting, but as one other article described the remakes in Star Wars sets, it's allready been happening. In 2011 we had 50 #6212s, X-Wings and before Christmas we sold 40 of them mostly overseas, Brazil, I believe the Brizilian Air Force in made up of those X-Wings. 6212 retired, a few sold for more then the X-Wing reissue, more money less mini-figures. Now it is a very slow seller. Lets face it the richest man in Denmark wants to be the richest man in Europe, not with software but Toys. TLC has had an attiutude change in the last decade cutting back on wholesale distributors. TLC hates the secondary market. They do not like us. They are watching the Web and many Web sites that mention the word lego. Personally I like the set 7641 and bought one at a secondary price, but still reasonable. We have to get strong in numbers so we can BOYCOTT this attack against the secondary circle. If we all dont rush out and jump on this remake, how many sales would they loose? Sure they will sell thousands, but how many thousands will they not profit from if we dont buy.  BOYCOTT just for a month, will there be a diffrence? Only they can say, which they wont, but they will still keep remaking and watching us.

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