A Global Marketplace International Licensing of Foods and Beverages Makes Markets Truly Global

Dennis R. Henderson, Ian M. Sheldon, & Kathleen N. Thomas (202) 219-0866 (614) 292-2194

eter Paul Mounds and Al­ from the U.S. firm RJR Nabisco. nual reports suggests that the pro­ Pmond Joy... well-known Sunkist has licensed the Japanese duction of foods under license is at brands of American candy firm Morinaga to produce Sunkist least as great as the value of actual bars? Lowenbrau Pils ... an im­ drinks for sale in . food product exports and imports. ported beer? What about a Sunkist These are just a few examples of drink in Tokyo or Planters nuts in familiar brand names that are Licensing Expands Singapore? owned by firms in one country and Markets for Brand These and many other foods are produced and sold under license actually produced and sold by a lo­ by other firms in other countries. Products cal firm under license from a for­ Indeed, international licensing of It is commonly believed that eign firm. The candy bars are food brands is widespread. Infor­ firms sell foods in foreign markets brand names owned by the British mation gleaned from corporate an- either as exports from their home food and beverage company Cad­ bury Schweppes and produced in the United States under license by the U.S. company, Hershey Foods. The beer, brewed in the United States under license by Miller Brew­ ing Company, is a brand owned by the German firm of the same name. And what of the "American" foods abroad? Planters nuts in Sin­ gapore are produced by Britannia Brands, Ltd., a Singapore subsidi­ ary of the leading French food manufacturer, BSN, under license

Henderson is Otief of the Food Marketing and Distribution Branch, Food and Consumer Econom­ ics Division, Economic Research Service (ERS), USDA. Sheldon and Thomas are Associate Profes­ sor and former Graduate Research Associate, re­ spectively, with the Department of Agricultural Economics, Ohio State University. This article is Since the mid-19B0's, international brand licensing has grown dramatically. A large based on work conducted under a cooperative share of the food manufacturing firms that engage in international brand licensing agreement between ERS and Ohio State University. are beverage and confectionary producers.

September - December 1994 7 A Global Marketplace country or as products made in fa­ cilities they operate abroad. U.S. Licensing Beer Names Abroad: food manufacturers, for example, Keeping 'A Head' of the Competition annually export more than $20 bil­ lion worth of products, many of Facing import restrictions and cense to brew Budweiser is which are brand-name foods. And, intense competition, beer manu­ owned by Grand Metropolitan. U.S. firms typically sell more than facturers have turned to licens­ In responding to changes in $80 billion in foods produced by ing their brand names overseas consumer demand, some UK their foreign affiliates. as an alternative to export- firms apparently found it more Yet, that doesn't tell the whole ing. A profile of the brewing in­ profitable to acquire new brands story. A review of annual reports dustry in the United States and through licensing than through from 120 publicly held multina­ the United Kingdom (UK) pro­ independent product develop­ tional food manufacturing firms vides insights into how licensing men t. Others may have done so with annual sales of $100 million or can expand sales. in response to their competitors' more revealed that at least half are The brewing industry in both strategies. involved in some form of interna­ countries is dominated by a few However, this would explain tional product licensing. large firms with fringes of only one side-the inbound Many of these firms license for­ smaller firms. In the United side-of a license. To gain in­ eign firms to use their brands States, the three leading firms­ sight into the motivation for U.S. (called outbound licensing), and Anheuser Busch, Miller, and and other foreign firms to license produce goods under names li­ Coors-each selling a portfolio their brand names to UK brew­ censed from foreign firms (in­ of brand-name, heavily adver­ ers, two additional aspects of the bound licensing). Where there are tised beers, account for 83 per­ UK brewing industry are impor­ barriers to direct entry, outbound li­ cent of market share. In the UK, tant. First, not only do the lead­ censing is a means for a foreign brewing has been dominated by ing UK brewers own many firm to establish a market presence six firms: Bass, Allied Lyons, brands, they also spend large and, thus, generate some foreign Whitbread, Scottish/Newcastle, sums on brand promotion and earnings from its investment in de­ Courage, and Grand Metropoli­ advertising. This conveys a veloping a unique brand name and tan, with a combined market strong commitment to the mar­ product image without having to share of 76 percent. ket by the incumbent firms, manufacture the product. When Although total beer drinking which is visible to U.S. and other changes in demand create a need in the UK did not change much foreign firms and may discour­ for new products, inbound licens­ in the 1980's, there was a mark­ age their direct entry. ing represents an alternative to in­ ed shift in consumption from bit­ Second, the leading UK brew­ house development of a new ter to lager, a type of beer simi­ ers, unlike their U.S. counter­ brand. Consumers have access to a lar to that consumed in the Uni­ parts, are vertically integrated broader variety of products that ted States. (Lager is brewed with into retailing. During the 1980's, better matches their shifting de­ a bottom-fermenting yeast; bit­ the top six UK firms owned mands. Licensing arrangements be­ ter, the traditional-style beer in more than half of the licensed tween breweries in the United the UK, is brewed using top-fer­ pubs, which are tied to selling States and the United Kingdom il­ menting yeast.) In the UK, lager their owners' products. The lustrate the motivations and mar­ is brewed and marketed nation­ large brewers have recently sold ket conditions that often encourage ally by the major brewers; local some of their pubs, following in­ international brand name licensing brewers typically produce only vestigation by the UK Monopo­ in the food industry (see box). bitter. lies and Mergers Commission An international license, as re­ As tastes shifted, the large UK into this industry practice. They ferred to in this article, is a contract firms acquired licenses to pro­ also own a number of retail out­ by a food or beverage manufac­ duce and market foreign brands lets that sell beer and other alco­ turer which owns a brand name of lager. For example, Whitbread holic beverages for off-premise that is well established in one coun­ brews Heineken (Dutch) and consumption. Consequently, try (the licensor), with a firm in an­ Stella Artois (Belgian). Courage, firms entering the UK market other country (the licensee) to prior to its acquisition by Elders, could have problems gaining ac­ manufacture and sell the brand brewed Fosters (Australian) un­ cess to distribution channels. product in the licensee's home der license and now brews Therefore, direct entry may be country and/ or third countries. In Miller Lite under license. The ti- difficult.

Food Review 8 A Global Marketplace addition to exclusive use of the capitalize on in international mar­ brand name, the licensor often pro­ kets-notably ownership, location, vides some technical assistance for and internalization. producing the product and main­ taining quality control. The licen­ Ownership sor may also provide a product Ownership advantages refer to formula or recipe, supply critical in­ assets that are unique to the firm, gredients such as a flavoring ex­ which it wants to both protect and tract, and render some financial use to generate income. A licensee help for advertising and other mar­ may have assets in the form of un­ ket-development activities. In tum, derutilized production, distribu­ the licensee produces and markets tion, and/or merchandising the product in the specified mar­ capacity. The licensor's asset_is the kets and remits to the licensor part brand name and accompanymg of the sales revenues (in the form product image. of a fixed fee and/or per-unit roy­ alty). As evidence of such assets, we would expect both the licensee and Brand name licensing of food the licensor to hold leading posi­ and beverages has been used as a tions in their home markets and to commercial activity in the United be making substantial investments Brand licensing is an important, but often States for many years. For exam­ overlooked, aspect of international com­ in promoting their brand names. merce in food and beverages. Many fa­ ple, it has been common for lead­ For licensors, this leading position miliar product names produced by U.S. ing soft drink manufacturers to demonstrates control over a highly food firms actually belong to foreign firms. license the domestic bottling and preferred brand or product image. distribution of their products. For licensees, this leading position Such licenses have also crossed indicates control over an effective national borders. Cadbury Schwep­ production, distribution, and mer­ pes and Britvic Corona have long_ chandising capability. spent an average of nearly $350 mil­ held license rights to bottle and dis­ Nearly all the firms sampled, lion each per year for advertising. tribute Coca-Cola and Pepsi Cola, whether licensor or licensee, hold a This level of expenditures is nearly respectively, in the United King­ leading position in their home mar­ 4 percent of the value of their an­ dom. But since the mid-1980's, in­ ket for the class of product li­ ternational brand licensing appears nual sales, well above the average censed. Forty-one percent hold the advertising-to-sales ratio for all to have grown dramatically. A largest share of their home market, food firms. large share of the food manufactur­ and 73 percent have either the ing firms that engage in interna­ number 1 or number 2 position. The book value of a firm's li­ tional brand licensing are beverage Fewer than 7 percent rank below censed brand names is another and confectionary producers (ta­ the eighth largest. measure of a firm's ownership ad­ bles 1 and 2 illustrate firms that en­ vantage. Albeit substantial, these ter into licensing arrangements). The leading firms studied are are intangible assets. As such, they equally aggressive in licensing a are difficult to value, and many foreign firm to use their brand firms do not include them on their Licensing Offers names and in selling products in balance sheets. However, for the their home market under license Several Advantages companies in the sample that did from foreign firms. Most execu­ We examined trade literature so, the average value of their brand tives interviewed said they would names exceeded 12 percent of their and annual reports of many of the not license with another firm un­ total assets. An unpublished study world's leading food manufactur­ less that firm was already success­ as reported in Financial World ers and conducted personal inter­ ful in establishing a leading places the average value of 12 lead­ views with international marketing position in its own market. executives of several of these com­ ing internationally licensed food panies to gain insights int~ w_hat The firms involved in licensing brands at just over $7 billion each. motivates firms to engage minter­ have made substantial investments national brand licensing. in developing and promoting their Locational Advantages products and brands. Advertising Firms can realize locational ad­ Licensing abroad offers advan­ is one way of measuring such in­ tages that a firm may be able to vantages from licensing by avoid­ vestment. The U.S. firms studied ing barriers to direct international

September- December 1994 9 A Global Marketplace

Table 1 U.S. Firms License Brand Names Out to, and in From, Foreign Firms

Licensor Brand name Licensee

Anheuser-Busch (U.S.) Budweiser Labatt (Canada) United Breweries (Denmark) Guiness (Ireland) Suntory (Japan) Oriental Brewery (South Korea) Grand Metropolitan (UK) Bud Light Labatt (Canada) Hershey Foods (U.S.) Hershey's Fujiya Confectionery (Japan) CPC International (U.S.) Knorr Ajinomoto (Japan) Geo. A. Hormel (U.S.) Spam Newforge Foods (UK) K.R. Darling Downs (Australia) Hormel Lee Tan Farm Industries () Blue Ribbon Products (Panama) Bacon Bits K.R. Darling Downs (Australia) Adolph Coors (U .S.) Coors Molson (Canada) Kraft General Foods (U.S.) Kraft Epic Oil Mills () Miller Brewing (U.S.) High Life Molson (Canada) Miller Lite II Courage (UK) Kellogg's (U.S.) Kellogg's Ajinomoto (Japan) Ocean Spray (U.S.) Ocean Spray Pernod Ricard (France) Ranks Hovis McDougall (UK) Cadbury Schweppes (Canada) Pokka (Japan) Sunkist Growers (U .S.) Sunkist Morinaga (Japan) Haitai Beverages (South Korea) Rickertson (Germany) Cadbury Schweppes (UK) Welch Foods (U.S.) Welch's Cadbury Schweppes (Canada) RJR Nabisco (U.S.) Planters Britannia Brands (Singapore) Cadbury Schweppes (UK) Cadbury Hershey Foods (U .S.) Peter Paul Mounds Almond Joy Rowntree Mackintosh (UK) Rolos Hershey Foods (U .S.) Kit Kat Haute Brasserie (France) Killian's Red Adolph Coors (U.S.) Sodima (France) Yoplait Yoplait Foods (U.S.) L6wenbrau (Germany) L6wenbrau Pils Miller Brewing (U.S.)

trade-a concept often referred to commercial practices. Obviously, li­ ing the physical good can reduce as tariff-jumping. Examples of such censing local production in a for­ transportation costs, particularly barriers are import tariffs and quo­ eign market is a way to avoid for bulky and perishable finished tas, transportation costs, and local import tariffs or quotas. Licensing goods, such as bottled beverages. the brand name rather than export-

Food Review 10 A Global Marketplace

Table 2 Foreign Firms License Food and Beverage Brand Names in Other Countries

Licensor Brand name Licensee

Arla (Sweden) L + L Morinaga (Japan) Bond (Australia) Castlemaine XXXX Allied Lyons (UK) Swan Premium Brasserie Artois () Stella Artois Whitbread (UK) BSN (France) Kronenbourg Courage (UK) Elders (Australia) Fosters Beamish & Crawford (Ireland) Pripps (Sweden) Guinness (Ireland) Guinness Stout Elders (Australia) Lutz (Germany) Lutz Nichieri (Japan) Morinaga (Japan) Bifidus Yogurt St. Herbert (France) SOdmilch (Germany) Morinaga P.T. Enseval () Unilever (Netherlands) Lipton Morinaga (Japan) United Breweries (Denmark) Carlsberg Photos Photiades (Cyprus) Beamish & Crawford (Ireland) Suntory (Japan) Tuborg Frydenlund Ringes (Norway) Unicer () Cerveceria Modelo () Corona Molson (Canada) Kirin (Japan) Kirin San Miguel () Labatt (Canada) Labatt Vaux Brewery (UK) L6wenbrau (Germany) L6wenbrau Pils Allied Lyons (UK) Molson (Canada) Asahi (Japan) San Miguel (Hong Kong) L6wenbrau Strong Allied Lyons (UK) Jacob Suchard () Sugus Nestle Produtos Alimentaros (Portugal) Beacon Sweets (South Africa) Sanborn Hermanos (Mexico) Toblerone Milka Suchard Tong Yang Confectionery (South Korea) Nestle Produtos Alimentaros (Portugal) Van Houten Chocolate Products () General Food Industries (Indonesia) Sunshine Allied (Singapore)

As in the case of the beer market in A strong signal by an incumbent effective entry barrier. Licensing the United Kingdom, licensing can firm that it will fight the entry of avoids competitive fighting against provide a way around restrictive lo­ others through aggressive competi­ the foreign brand by the domestic cal commercial practices (see box). tion, such as intensive advertising licensee. or sharp price cuts, can also be an

September - December 1994 11 A Global Marketplace

Internalization bound licenses than in licensing American firms. Through out­ While a manufacturer could sell the use of their brand names bound licensing, U.S. firms extend a product to a foreign re_seller at abroad. Our discussions with ex­ their reach to foreign customers. relatively small transaction cost, ecutives suggest several possible Through inbound licensing, they the product's quality may ~e under­ reasons. First, there is a perception supply U.S. consumers with for­ mined by imprudent handlmg or among some U.S. executives that eign foods that otherwise might merchandising. To protect its prod­ American consumers prefer an im­ not be available. uct's reputation, the manufacturing ported product to a foreign-brand Brand name licensing is rational company has an incentive to do its product manufactured in the behavior-the licensor gains by own reselling and "internalize" the United States. Second, the large capitalizing on its good name in a transaction. size of the U.S. market may mean foreign market, the licensee gains that leading U.S. food manufactur­ License agreements typically from expanded sales and more effi­ ers can realize most advantages of cient operations, and consumers substitute for such internalization size without handling additional by including a quality-control re­ gain from a greater variety of foods products under license. Third, and beverages. Brand name licens­ gime that grants the licensor t~e some U.S. food manufacturers right to monitor product quality ing is a further example that food have purchased foreign brand markets are becoming truly global. prior to sale. Thus, the lice~sor and names rather than "rent" them licensee are jointly responsible for through a license. Fourth, a num­ protecting the quality and image of ber of leading foreign food manu­ References the branded product. facturers have built or bought Henderson, D.R., and J.M. Shel­ factories in the United States to pro­ Other Reasons for Licensing don. "International Licensing of duce their brands directly for the Branded Food Products," Agribusi­ We could not find data to meas­ American market. ness: An International Jou rnal, Vol. 8, ure entry barriers, excess capacity, All told, it may be that U.S. food 1992, pp. 399-412. product quality, and ~onsumer d~­ firms have an international com­ mand for product vanety as possi­ Katz, M.L., and C. Shapiro. parative advantage in developing t ble inducements for licensing. "How to License Intangible Prop­ their own successful brand-name r However, virtually all of the inter­ erty," Quarterly Journal of Econom­ food products-an advantage that ( viewed executives mentioned these ics, Vol. 101, 1986, pp. 567-589. translates into more outbound li­ f as factors influencing their interna­ censing than inbound licensing of Ourusoff, A., and others. E tional licensing strategies. brand names. 'What's in a Name? What the f World's Top Brands are Worth," 1 U.S. Firms Financial World, Sept. 1, 1992. Making Markets Thomas, K.N. "International More Aggressive Truly Global in Licensing Abroad Licensing of Branded Food and Brand licensing is an important, Beverage Products," Unpublish­ U.S. firms appear to be some­ but often overlooked, aspect of in­ ed Thesis, Ohio State University, what less aggressive in pursuing in- ternational commerce in food and 1994. • beverages. Many familiar product names produced by U.S. food firms actually belong to foreign firms. And, an even larger number of American brands of foods con­ sumed abroad are actually pro­ duced abroad under license from

Food Review 12