US licensing Feature

Branding is not enough in the licensing industry

The US brand licensing industry is in crisis and unless action is taken quickly things will continue to stagnate if they do not get even worse

Deteriorating economic conditions By Weston Anson A quick look at the total figures for licensed product sales in North America in Brand has become the code word in 1996 compared to 2005 (see chart 1) licensing. The touchstone, cure-all and magic shows no growth in total industry sales. potion that everyone desperately uses to When accounting for inflation, the real describe their property or programme. There growth rate has averaged a negative 2% per is a naïve belief that branding is the year. Every year the North American licensing powerful talisman that will solve each industry is shrinking by 1% to 2%; in person’s licensing problems and that addition, sales of licensed products in branding will restore light to our traditional Japan have diminished more quickly than licensing business – a business that finds they have in the United States. There is itself in a very dark and difficult time. some growth in Europe, due to the Without question, the licensing business expansion of the European Union, as well as is in crisis. Revenues are down, with fewer in Asia (excluding Japan), which has helped good licensees, fewer blockbusters, fewer the industry. But the two largest markets, retailers, lower profits and more house North America and Japan, are both . Chaos and crisis reign in the old- witnessing their markets shrink. school traditional licensing business. And, Growth in the North American licensing the crisis has spilled over into Europe, Japan industry is not in its traditional area: and emerging markets. Because of an entertainment/character licensing. It has increasing number of licensing shows and experienced annual fluctuation, but has numbers of exhibitors and visitors, there is exhibited no real traction or long-term growth little focus on the profoundly troubling issues trends for a decade. Sports licensing has facing the business. seen resurgence and sports brands are Branding is not enough. If branding is not overtaking entertainment properties and the answer, then why not? If not, then the corporate logos. Celebrity estates are up in questions are: “what are the underlying recent years, but may represent simply a trends that are causing turmoil and why is temporary fascination with dead people in the licensing industry not adequately facing the and industries. up to these issues?” Forbes reports the top 10 celebrity estates There are multiple underlying trends took in US$172 million in 2005, but are forming the basis for our concern: these brands? Absolutely not. • Deteriorating economic conditions. The vicious cycle of licensing stagnation • turmoil and consolidation. and decline is subtle. Financial deal points • Consumer indifference. within licence agreements are deteriorating, • Wal-Mart-ism. making the licensing environment far less • Manufacturer consolidation. inviting. Licensed properties are losing • Shifting social values. their leverage: • Quicker cycles, shorter lines. • Long-term royalty rate trends are • House brands and other constraints. stagnant or slightly declining.

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Chart 1: Retail sales of licensed • Short-term royalty rate trends have no big-box retail brands, consumers have merchandise US & Canada, 1996-2005 clear pattern, with many instances of become more apathetic as to which licensed short-term decline. product they buy. The licensing programmes • Average guarantees are less than they look much the same and the products all were 10 years ago. look similar. In sports licensing, one or two US$72.28 bn US$71.21 bn • The average term of a licence major sports organisations have grown to agreement is shorter today than it dominate (it makes one wonder exactly how was 10 years ago. many more NASCAR t-shirts can be sold). • There is more giveback today in a licence Longstanding programmes such as Heinz, agreement than was ever contemplated Coca-Cola and Harley Davidson reveal 10 years ago. American consumers are growing indifferent to the so-called cache of branded, licensed There are increasing profit pressures on merchandise. Why? Me-tooism. Me-too less and less sales. First, because the products, me-too , me-too , power has shifted from the licensor and me-too colour ranges and a general sense licensee to the retailer, who determines what that whatever sells the most at Wal-Mart is margins the manufacturer/licensee will fine for the rest of the nation; all of this is receive. Second, as category has driving consumers to care far less about 1996 2005 increased, licensees no longer have the licensed products then they did a few negotiating leverage they once had. Third, short years ago. Source: The Licensing Letter, EPM Communications, Inc even major licensors are faced with reducing royalty rates and other payments as a result Creeping Wal-Mart-ism of these changing conditions in the licensing Just 25 years ago, Wal-Mart was a footnote industry. Category dominance, me-tooism in American retailing; 10 years ago, it was a and shortened lifecycles all affect the growing threat. Today, Wal-Mart dominates profitability of the licensor and licensee; and, every conversation about brand licensing and as that level of profitability is reduced for consumer goods retailing. No decision in both parts of the equation, the willingness to brand licensing is made today without first take risks and explore the outer limits of identifying how Wal-Mart will act and what its new licensed products and new concepts is competitive reaction might be to a new constantly being undermined. programme. Many categories see this impact of what we call Wal-Mart-ism: Home Depot Retail turmoil and consolidation has replaced the local lumberyard, Fry’s Being a famous brand, such as Bonwit Teller, Electronics has replaced the radio repair Dayton Hudson, Gimbles, Montgomery Ward, shop and Costco has replaced the local Rich’s, Garfinkels and Filenes did not save druggist, and none of them care about these retailers. Retailer consolidation licensing brands because they are the brand. continues at a break-neck pace and dominance by a handful of retailers, and Manufacturer consolidation category busters or big-box stores, continues Being a licensed brand is not going to to remake the face of retailing in North change the fact that in all major categories America. Consolidation has occurred among there is manufacturer consolidation. In toys, independent retailers (the toy, apparel and gift sporting goods, apparel, footwear and even channels are good examples), and soon there in the notoriously independent-minded will be only two middle-market department giftware business, the number of store chains left in the United States. manufacturers is shrinking. Where once The death of Main Street retailers there were thousands of members of the Toy guarantees that this consolidation will Manufacturers Association, currently its continue. Another aspect of the membership can be measured in the few consolidation is that the surviving chains hundreds (and they do not ever have a toy continue to expand product offerings, price centre or building any more). Underlying this points and house brands, and many compete consolidation is another trend – the one without any sense of differentiation other leading to offshore sourcing of US consumer than pricing. Simply put, there is too much products. Manufacturers have rushed economic power in too few hands in retail headlong into sourcing products in China and and having a licensing brand is not as other low-wage environments. The American important to retailers anymore. manufacturing industry has been devastated, particularly in those categories so critical to Consumer indifference licensing, such as footwear, toys, apparel, Driven by the commoditisation of American gifts and sporting goods.

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Shifting social values pressures are and what the future holds for The shifts in social values in America can un-innovative licensors. be seen everywhere – many of these are antithetical to the growth and future of Finding the solution licensed products. What are these changes? Is branding the answer to all of these Increasingly, young people are turning away problems? No, it’s not the real answer. from brand and logo merchandise (with the Calling a licensing programme a brand will exception, clearly, of shoes). In addition, the not change the following facts: continuing trend to ‘all-natural’ works • Category dominance by small groups of counter to the basic premise of licensing. properties will continue. Then there is the move across all of • The stranglehold on retail by a handful of America by its youthful consumers to a big-box stores will grow. street/ghetto-wear look, which again plays • Space and time for new programmes will against the success of traditional licensing continue to compress. programmes – although it does indirectly • Consolidation of the number of help the sales of sports-licensed products. manufacturers and potential licensees Another type of shifting social is the will continue. rising immigrant population, which has • The homogenisation of American society different economic, social and family values, will continue to stifle demand and growth and tends to be less deeply committed to for new, different, unusual and licensed properties. independent properties.

Quicker cycles, shorter lives What can be done is to use elements of Licensing programmes have a much smaller branding to address these issues – the very window of opportunity today, almost without things that make a broad-based consumer regard to so-called brand status. Even brand successful. They include product Disney and Star Wars have a much shorter innovation, , retailer period in which to make an impact, make a extension, customisation of product line and profit and get out of the market. In the early demographic extension. 1990s, a new licensing property connected A variety of creative responses and with a major movie would place its continuous experimentation with the future merchandise three to six months before the form and format of licence agreements are movie was introduced and the merchandise absolute prerequisites to maintain the future would remain at retail for three to six of the licensing industry. The answer, then, months after the movie hit the screens. is to take these branding elements of Today, that same movie property is extension, customisation and innovation, introduced at retail 15 days before the movie and apply them to a licensing programme. is released and stays on the shelves no Some of the concepts to consider include: more than 90 days thereafter. This increases • New methods of licensed product pressure on licensors and licensees to act distribution must be explored, as either and react quickly. new channels or enhanced channels – dry cleaners, grocery stores, ATM Rise of house brands and other constraints machines, banks, post offices, hardware In the last decade, perhaps the most stores, QSRs, phone stores, book alarming trend for traditional licensors is the stores, kiosks and, of course, multi-level rise of private-label brands and house marketing organisations. In fact, the Chart 2: Competitive constraints brands. House brands are the dedicated MLM is a key component of future brands that often begin life as licensing distribution for licensed product. Average length of licence vehicles, such as Mossimo or Ken Boxer. • Create hybrid deals, where traditional Average time at retail Further, private label brands, as used by trademark properties are joined with Number of successful licensing department stores and mass merchants software, technology or other elements programmes today, are also eating away at licensed to create a licensed property that is both Amount of retail shelf space product sales because private label more complex and broader-based than a (adjusted) merchandise is generally of equal quality and simple trademark licence. Average length of licence agreement stylistic content. In addition, time • Co-branding and the branding of retailer Average number of SKUs compression, profit pressures and the sheer names will increase. (per programme) proliferation of properties are also adding to • Without question, retail exclusive Average number of licensees this licensing industry crisis. Chart 2, which deals are an essential part of any Number of house brands details competitive constraints, gives a licensor’s strategy Private label sales simple but clear picture of where the • Endorsement and ingredient licensing

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programmes, à la Intel Inside or Splenda, products and services will be entered into will play a part in future growth. including debit credit cards, home • Multi-level retail deals where licensees improvement, large appliances, security (either retail exclusive or product based) services and products, automotive are selected for several levels of services, leisure and travel service and distribution from upscale department properties, and even real estate related stores to club stores, such as Kmart and services such as escrow and title Federated with Martha Stewart. insurance may experience licensing deals. • New licensed product and service • In addition to a general move to online categories must be opened up; from cell licensing, there will be many more online phones to transportation. entertainment licensing deals; and there • International expansion by American will be much more effort put into licensors is inevitable and cannot be left celebrity (both living and dead) licensing. to independent licensing agents in • There will be more licensing into food countries like China; rather, a forceful products and food retailing. licensor presence driving product sales overseas is imperative. The industry as a whole has to wake up • Celebrity endorsements accompanying a to the changes that have been going on all licensing programme may enhance around it. It continues to operate on the old, distribution. traditional bricks and mortar, pen and paper, • Self-contained kiosks possibly rented on good old boy network principles that it started a seasonal basis in shopping malls and with more than 30 years ago. Such models other high-traffic areas are needed. are going to become increasingly unattractive • B2B licensing must grow. in the fluid and globalising business environments of the 21st century. Direct-to-consumer licensing programmes (whether online, interactive or using new media), combining licensed product with entertainment and supplanting plain old- fashioned direct mail, may be the single most important tactical strategy that licensors (second and third tier in particular) could develop. The licensing industry, as a whole, must embrace these concepts if it is ever again to see the consistent growth of the 1970s and 1980s. Unique, direct-to- consumer, one-on-one licensed campaigns, combined with penetration of new distribution channels, must be mastered quickly. Furthermore, all those involved in the industry would do well to think about how it is likely to develop as we move forwards. Some trends that may become increasingly evident are: • There will be more multi-country and global licensing deals entered into instead of the traditional market-by- market approach that is currently employed in most instances. • There will be more licensing deals covering consumer services of all types, from dry cleaning to cellular services. • More licensing into real estate and life style properties will occur. • The online portion of licensing will grow substantially. There will be movement from B to C (business to consumer) – or L to C (licensor to consumer) deals. Weston Anson is chairman of Consor • Many new categories of licensed Intellectual Management, La Jolla, California

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