“BRAND” has become the code word in licensing. The touchstone, cure-all and magic potion that everyone desperately uses to describe their property or program. There is a naïve belief that “branding” is the powerful talisman that will solve each person’s licensing problems, and that branding will restore light to our traditional licensing business -- A business that finds itself in a very dark and difficult time.
Without question, the licensing business is in crisis. Revenues are down, with fewer good licensees, fewer blockbusters, fewer retailers, lower profits, and more house brands. Chaos and crisis reign in the old-school traditional licensing business. And, the crisis has spilled over into Europe, Japan, and emerging markets. Because of an increasing number of licensing shows and numbers of exhibitors and visitors, there is little focus on the profoundly troubling issues facing the business.
Branding is not enough. If branding is not the answer, then why not? If not, then the questions are, “What are the underlying trends that are causing turmoil?” and, “Why is the licensing industry not adequately facing up to these issues?” There are multiple underlying trends forming the basis for our concern:
1.Deteriorating economic conditions;
2.Retail turmoil and consolidation;
3.Consumer indifference;
4.Wal-Mart®-ism;
5.Manufacturer consolidation;
6.Shifting social values;
7.Quicker cycles, shorter lines; and,
8.House brands and other constraints.
Deteriorating Economic Conditions
A quick look at the total sales figures for licensed product sales in North America in 1997 compared to 2008 (See Chart 1) shows no growth in total industry sales. When accounting for inflation, the real growth rate has averaged a negative 2% per year. Every year the North American licensing industry is shrinking by 1-2%; in addition, the sales of licensed product in Japan have diminished more quickly than they have in the United States. In the past year alone, sales of licensed merchandise have shrunk in every type of property, and across all product categories -- on average a 10-12% contraction in one year.
The vicious cycle of licensing stagnation and decline is more subtle. Financial deal points within license agreements are deteriorating, making the licensing environment far less inviting. Licensed properties are losing their leverage:
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Long-term royalty rate trends are stagnant or slightly declining
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Short-term royalty rate trends have no clear pattern, with many instances of short-term decline
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Average guarantees are less than they were ten years ago
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The average term of a license agreement is shorter today than it was ten years ago
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There is more giveback today in a license agreement than ever contemplated ten years ago
There are increasing profit pressures on less and less sales. First, because the power has shifted from the licensor and licensee to the retailer, and the retailer determines what margins the manufacturer/licensee will receive. Second, as category dominance has increased, licensees no longer have the negotiating leverage they once had. Third, even major licensors are faced with reducing royalty rates and other payments as a result of these changing conditions in the licensing industry. Category dominance, me-tooism, and shortened life cycles all affect the profitability of the licensor and licensee; and, as that level of profitability is reduced for both parts of the equation, the willingness to take risks and explore the outer limits of new licensed products and new concepts is constantly being undermined.
Retail Turmoil and Consolidation
Being a famous “brand” like Bonwit Teller, Fortunoff, Circuit City, Dayton Hudson, Gimbles, Montgomery Ward, Rich’s, Garfinkels, and Goody’s did not save these retailers. Retailer consolidation continues at a break-neck pace, and dominance by a handful of retailers and category busters or big-box stores continues to remake the face of retailing in North America. Consolidation has occurred among independent retailers (the toy, apparel, and gift channels are good examples), and soon there will be only two middle market department store chains left in the United States.
The death of Main Street retailers guarantees that this consolidation will continue. Another aspect of the consolidation is that the surviving chains continue to expand product offerings, price points, and house brands, and many compete without any sense of differentiation other than pricing. Simply put, there is too much economic power in too few hands in retail, and having a licensing brand is not as important to retailers any more.
Consumer Indifference
Driven by the commoditization of American big box retail brands, consumers have become more apathetic as to which licensed product they buy. The licensing programs look much the same, and the products all look similar. In sports licensing, one or two major sports organizations have grown to dominate (it makes one wonder exactly how many more NASCAR t-shirts can be sold). Long-standing programs such as Disney, Coca Cola, and Harley Davidson reveal American consumers are growing indifferent to the so-called cache of branded, licensed merchandise. Why? “Me-tooism.” Me-too products, me-too pricing, me-too distribution, me-too color ranges, and a general sense that whatever sells the most at Wal-Mart is fine for the rest of the nation. All of this is driving consumers to care far less about licensed products then they did a few short years ago.
Creeping Wal-Mart®-ism
Twenty-five years ago, Wal-Mart® was a footnote in American retailing. Ten years ago, Wal-Mart was a growing threat. Today, Wal-Mart® dominates every conversation about licensing and consumer goods retailing. No decision in licensing is made today without first identifying how Wal-Mart® will act and what their competitive reaction might be to a new program. Many categories see this impact of what we call Wal-Mart®-ism - - Home Depot has replaced the local lumberyard, Fry’s Electronics has replaced the radio repair shop, and Costco has replaced the local druggist, and none of them care about “licensing brands” because they are the brand.
Manufacturer Consolidation
Being a licensed brand is not going to change the fact that in all major categories there is manufacturer consolidation. In toys, sporting goods, apparel, footwear, and, even in the notoriously independent minded giftware business, the number of manufacturers is shrinking. Where once there were thousands of members of the Toy Manufacturers Association, currently the membership of U.S. manufacturers can be measured in a few hundred companies (and they do not even have a toy center or building any more). Underlying this consolidation is another trend – the one leading to offshore sourcing of U.S. consumer products. Manufacturers have rushed headlong into sourcing products in India, China, and other low wage environments. The American manufacturing industry has been devastated, particularly in those categories so critical to licensing like footwear, toys, apparel, gifts, sporting goods, etc.
Shifting Social Values
The shifts in social values in America can be seen everywhere - many of these are antithetical to the growth and future of licensed products. What are these changes? Increasingly, young people are turning away from brand and logo merchandise (with the exception, clearly, of shoes). In addition, the continuing trend to “all-natural” works counter to the basic premise of licensing. Additionally, the move across all of America by its youthful consumers to a street/ghetto-wear look again plays against the success of traditional licensing programs - - although it does indirectly help the sales of sports-licensed products. Another type of shifting social value is the rising immigrant population, which has different economic, social, and family values, and tends to be less deeply committed to licensed properties.
Quicker Cycles, Shorter Lives
Licensing programs have a much smaller window of opportunity today, almost without regard to so-called brand status. Even Disney and Marvel have a much shorter period in which to make an impact, make a profit, and get out of the market. In the early
‘90s, a new licensing property connected with a major movie would place its merchandise three to six months before the movie was introduced, and the merchandise would remain at retail for three to six months thereafter. Today, that same movie property is introduced at retail 15 days before the movie is released, and stays on the shelves no more than 90 days thereafter. This increases pressure on retailers and licensees to act and react quickly and conservatively.
Rise of House Brands and Other Constraints
In the last decade, perhaps the most alarming trend for traditional licensors is the rise of private label brands and house brands. House brands are the dedicated brands that oftentimes begin life as licensing vehicles, such as Mossimo or Ken Boxer, and end up as house brands. Further, private label brands, as used by department stores and mass merchants such as CVS, are also eating away at licensed product sales because private label merchandise is generally of equal quality and stylistic content. In addition, time compression, profit pressures, and the sheer proliferation of properties are also adding to this licensing industry crisis. The chart below of Competitive Constraints gives a simple but clear picture of where the pressures are being felt, and what the future holds for un-innovative licensors.
Is Branding The Answer?
Is branding the answer to all of these problems? No, it’s not the real answer. Calling a licensing program a brand won’t change the following facts:
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Category dominance by small groups of properties will continue
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The stranglehold on retail by a handful of big box stores will grow
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Space and time for new programs will continue to compress. Consolidation of the number of manufacturers and potential licensees will continue
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The homogenization of American society will continue to stifle demand and growth for new, different, unusual, and independent properties
What can be done is to use elements of branding to address these issues. What are these elements? They are the very things that make a broad-based consumer brand successful. They include: product innovation, product line extension, retailer extension, customization of product line, and demographic extension.
What can be done? What should be done? What is possible? A variety of creative responses, and continuous experimentation with the future form and format of license agreements are absolute requisites to maintain the future of the licensing industry. The answer, then, is to take the branding elements of extension, customization, and innovation and apply them to a licensing program. Some of the concepts we believe are effective include the following:
- New methods of licensed product distribution must be explored, either as new channels or enhanced channels -- Dry cleaners, grocery stores, ATM machines, banks, post offices, hardware stores, QSRs, phone stores, book stores, kiosks and, of course, multi-level marketing organizations. In fact, the MLM is, we believe, a key component of future distribution for licensed product
- Create hybrid deals, where traditional trademark properties are joined with software, technology, or other elements to create a licensed property that is both more complex and broader-based than a simple trademark license
- Co-branding and the branding of retailer names will increase
- Without question, retail exclusive deals are an essential part of any licensor’s strategy
- Endorsement and ingredient licensing programs, a la “Intel Inside” or Splenda, will play a part in future growth
- Deals at several retail levels where licensees (either retail exclusive or product based) are selected for several levels of distribution from upscale department stores to club stores, such as Kmart and Federated with Martha Stewart
- New licensed product