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The Future of Brand Licensing

<i>License! Global</i> talked with the opinion leaders in the licensing industry across a number of important categories, including television, retail and agencies. We asked them to look ahead and offer insights into some the the challeng

April 6, 2018

19 Min Read

<i>License! Global</i> talked with the opinion leaders in the licensing industry across a number of important categories, including television, retail and agencies. We asked them to look ahead and offer insights into some the the challenges and opportunities they see over the coming months and what effect external influences, such as the economy, will have over their business.

KAREN DODGE, senior vice president, chief merchandising officer, Toys "R" Us, U.S. i1_487.jpg

Which licensed product categories are likely to see growth or contract?

Dodge: Technology continues to bring a whole new world of innovation to the toy industry. The line between electronics and "traditional" toys continues to blur, and we've seen this holiday season filled with animatronics like Elmo Live! from Fisher-Price and high-tech items like the EyeClops Night Vision Infrared Stealth Goggles from JAKKS Pacific. We will likely see more growth in this category, and it will influence other traditional toy categories, as well.

In addition, kids everywhere are craving electronics of all kinds, and we believe that is another area of growth. This fall, Toys "R" Us began offering an extensive iPod assortment and Asus Eee PC laptops in-store and online. The popularity of Nickelodeon's "iCarly" series, which features original kid-created content, has kids using webcams to upload their own videos for a chance to be featured on the show. Toys "R" Us stores offer an exclusive "iCarly" webcam, which includes editing software this holiday season. While these may not be considered "toys" in the traditional sense of the word, they are high on kids' wish lists this holiday season.

Game systems like the Nintendo Wii have made video games more accessible and appealing to entire families, and there's a great opportunity for category growth with this new-found audience.

Where are the new opportunities?

Dodge: An opportunity to both build and solidify our customer base exists in our new companywide loyalty membership program, Rewards "R" Us, which rewards our most loyal Toys "R" Us and Babies "R" Us customers for shopping frequently in our stores or on www.toysrus.com. Members have the opportunity to earn "R" Us Dollars on qualifying purchases through special promotions, receive advance notice of in-store sales and events and are offered savings and discounts on top of those given weekly to all customers.

As the toy authority, Toys "R" Us has the unique opportunity to be at the forefront of identifying, and even setting, trends. With stores in 34 countries, our merchandising teams can track trends globally and can jump quickly on the next hot item. We also have great partnerships with entertainment companies like Disney and Lucasfilm and work with them to offer exclusive items that set Toys "R" Us apart as a specialty toy retailer. With Disney, we launched the exclusive Club Penguin line this year, tapping into kids' desires to extend play into a virtual world. Toys "R" Us has long believed in the enduring appeal of the Star Wars franchise. With the release of Star Wars: The Clone Wars this year, a whole new generation is getting to know this perennial favorite property.

Is the credit crunch/downturn going to force any changes in the business?

Dodge: We have been aggressive in examining every part of our business and making the appropriate adjustments to buffer the company against the economic challenges. At the same time, we continue to invest in areas of our business that will drive sales. We realize there are serious concerns about the economy, but toys and baby products are typically more recession-resistant than many other product categories. History has shown that the last thing parents will cut from their budgets are gifts for their children.

ELIZABETH KALODNER, executive vice president and general manager, CBS Consumer Products i2_207.jpg

What are the key challenges over the coming 24 months?

Kalodner: Just as individuals today are challenged to balance their personal financial holdings with a mix of short- and long-term investments, liquid and non-liquid assets, etc., we too must ensure that our portfolio is appropriately diversified to mitigate risk. We need to achieve a smart blend of properties, manufacturers, categories and retailers. With a library that includes current primetime hits in both reality and drama across multiple age groups, as well as the most extensive collection of classic television shows in the industry, CBS is well-positioned to meet the challenge.

Which licensed product categories are likely to see growth or contract?

Kalodner: As retail becomes ever more challenging, I expect e-commerce and direct-to-consumer models to prosper. And licensors will look for other opportunities that thrive on content and don't require dedicated space: live events, attractions and new technology platforms.

Where are the new opportunities?

Kalodner: With our celebrity-obsessed culture, I see an opportunity to sell merchandise worn or used by our talent in any variety of television shows—what we call the "seen on" business. And as so much of that interest in Hollywood personalities is by teens and for teens, the fashion category [apparel, accessories, cosmetics, fragrance, etc.] seems particularly ripe for CBS-owned shows like "America's Next Top Model" and "90210."

Is the credit crunch/downturn going to force any changes in the business?

Kalodner: I don't think anyone is going to answer "no" here. All four constituents in the supply chain—licensor, licensee, retailer and customer—are increasingly cash-sensitive and risk averse, and that situation will take its toll. As a licensor, we're going to have to be more efficient. With respect to manufacturers, I expect some changes in deal structures, reduced investment in capitally intensive projects and a reluctance to buy-in prior to retail commitment. And both retailers and customers are likely to buy more sparingly. At the same time, as we well know, a well-thought-out license can mitigate the risk in many categories, and that bodes well for the business.

DAVID ROTH, chief executive officer, EMEA and Asia, The Store, WPP's international retail practice i3_119.jpg

What are the key challenges over the coming 24 months?

Roth: The key challenge is the changing nature of the world's economy, which will lead to a concentration on price and value in the marketplace as consumers look at their priorities and the inelasticity of their wallets. The job will be to convince consumers to spend on product that is not necessary.

Which sectors are likely to see growth or contract?

Roth: This time around, I do not think there will be immunity for children's product, as the recession will be felt by all members of the family—including kids. I expect that consumers will trade down as they seek out lower prices and higher value. And the rate at which they trade down will be faster than in previous recessions, and the frequency of purchase will decrease. But if higher-value product is spot on trend and has pester power, it will sell. Weak licensed product will suffer, especially in the middle ground, but there will be growth in licensed product when it absolutely demonstrates top-of-mind fashionability and is of the moment—film merchandise, for example, backed by good publicity and word of mouth will sell. Celebrity product will succeed for the same reason.

Which product categories are likely to see growth or contract?

Roth: It's no joke that the lunchbox category will expand as people go back to taking lunch to school and to the office. There is already evidence that ready-prepared sandwich sales are declining. No major licensing product category will collapse. In good times, brands extend into many areas, some of which work and others do not. It's the peripheral areas that will?suffer the most as retailers reduce depth of range and product.

Is the credit crunch/downturn going to force any changes in the business?

Roth: There is going to be more sharing of the risk, which will impact all the key elements of the supply chain—especially retailers, licensors and manufacturers. Retailers will ensure that all parties share the risk more—it's already a trend, but it will accelerate. Consequently the market will concentrate into the stronger brands and stronger properties. Retail buys will be smaller as everyone tries to reduce their exposure. Retailers will prefer to have less stock and sell it out rather than overbuy and lose margin with end of season through heavy discounting. The pricing strategy is changing, with the trend toward stronger and faster markdowns accelerating.

DEBRA JOESTER, president and chief executive officer, Joester Loria Group i4_83.jpg

What are the key challenges over the coming 24 months?

Joester: The business community is trying to understand the time horizon for the recession, and until we have a better handle on when we will begin to come out of the current downturn, business will be challenging on multiple fronts. Strong retail sales are key to our business model, so the downturn in consumer spending will require appropriate measures by agencies, our clients and licensees. Agencies, like all businesses, are cutting costs, trimming staff and focusing on deliverables that are realistic over the next couple of years. The strategies that seemed promising early in 2008, such as focusing on global and emerging markets, are unlikely to present the cushion we anticipated.

At JLG, we are committed to investing in key opportunities that are targeted for 2010 and beyond. We are committed to protecting our established business while we look toward new opportunities in 2010. In addition, we are spending on research, dynamic presentation materials and travel to retailers over the next few quarters to ensure 2009 is secure and 2010 gets off to a great start.

Which licensed categories are likely to see growth or contract?

Joester: Most product categories will be soft, and even staples such as food may be vulnerable to less expensive private label options. Discretionary categories such as apparel seem to be hardest hit, while toys, games and electronics are more likely to hold up. As consumers try to exercise more discipline, impulse buys and purchases of products consumers already own will be easiest for consumers to eliminate. The must-have products such as Wii and game software and key electronic items will continue to sell well, especially as prices drop.

Where are the new opportunities?

Joester: At the close of 2008, we are beginning to build 2010 programs and opportunities. In 2009, we do plan to spend a significantly higher amount on retail promotions, gift with purchase, added value and other sales/traffic drivers to support our existing programs. A number of retailers are offering a menu of marketing support options that will allow us to retain market share and ensure sales for our established programs.

NEIL ROSS RUSSELL, managing director, children's and licensing, BBC Worldwide i5_66.jpg

What are the key challenges over the coming 24 months?

Russell: Apart from the obvious economic conditions, a key challenge is the fragmentation of the media for the tween age groups—children from 6 to 16. It is so much harder to talk to this age group because of the different channels and media they are using.

The flipside of that is the continuing consolidation of retailing as the percentage of independent retailers and specialists goes down. Properties are increasingly competing for shelf space with multiple retailers who use complex analytics, including sales per square foot, to make brand choices. So we are operating on a completely different scale of competition.

Which sectors are likely to see growth or contract?

Russell: There are many opportunities in the digital space. Video games are a growth area, and opportunities are opening up across properties. The addition of technology, where the prices are coming down, is also opening opportunities in toys—for example in premium plush. At BBC we're also looking at the great potential for adult brands, which will reduce our reliance on toys and move us into new product categories.

Which licensed product categories are likely to see growth or contract?

Russell: We'll see more on the green issue at retail and pressure to do the right thing, but we'll be struggling to achieve current price points. The two things are not easy to reconcile. There's a very strong likelihood that price points will break. Retailers will have to explain the reasons for that to consumers. But there will be people who will pay.

Is the credit crunch/downturn going to force any changes in the business?

Russell: It's inevitable that the economy will affect the business model, as it will impact every walk of life. The change will be retailer-led—we've already seen massive discounting—and there may be other seismic shifts. If big names start to disappear, it will impact the size of the market overall. We are all in this together, so we will have to be smarter and put more into our end of the supply chain—especially creativity so that the merchandise we produce is a genuine extension of the interest that people have with the brand.

JEAN-PHILLIPE RANDISI, senior vice president and managing director, Nickelodeon Viacom Consumer Products in Europe, Canada and Latin America i6_47.jpg

What are the key challenges over the coming 24 months?

Randisi: On a positive note, typically in times of economic crisis, entertainment performs reasonably or quite well. People like to escape reality, and many forms of entertainment are very affordable. There is a similarity of issues for retailers and licensors facing a slowdown in sales, with its obvious impact on profits. As a result, retailers may be less risk taking, ordering less product and then not re-ordering—this in effect means that they have no way of fulfilling the demand. There is growing pressure on licensees, and something will give. In some categories there is a tangible added-value from licensees, but not in all categories, and the current trend to direct-to-retail deals could lead to consolidations. However, consolidations create their own gaps in the market.

Which sectors are likely to see growth or contract?

Randisi: Because people will have to arbitrate how to spend their money, there should be growth opportunities for family entertainment-related properties. Despite fragmentation of the media, when you have to spend more time with the family you need common denominators. This creates opportunities for properties that transcend age groups. This is relevant for properties such as SpongeBob that cross age groups and genders. If you have £10 to spend, how are you going to get the maximum for it?

Where are the new opportunities?

Randisi: At retail, discounters and discounting is accelerating. Licensing will have to adapt its thinking to include distribution channels that have been neglected until now, both in terms of pricing and products. Licensors will have to look at the segmentation of our own businesses, as we will need different products for different retail sectors. And licensors will have to embrace direct-to-retail deals because they answer price structure issues, but it is not a case of one size fits all.

Is the credit crunch going to force any changes in the business?

Randisi: It would imply a high level of desperation to change the business model. But if there is a major collapse, we may have to ask if we do need all the properties that there are in the market. It's likely that there would be a concentration on certain properties, the safer bets. Other properties may not be viable. When sales go down, there is a question mark over royalties and fees—but it's an adjustment, a part of the landscape, not a challenge to the business model itself.

STEVE RUSSO, president and chief executive officer, FAB/Starpoint i7_35.jpg

What are the key challenges over the coming 24 months?

Russo: The market we are living through now is something most of us have never seen. In the accessory industry, we have witnessed ups and downs of particular trends and product categories, but dealing with lack of consumer confidence in addition to job loss and general fear is something quite unique.

The challenge an industry leader faces is to recognize sales and profitability will likely be lower in 2009 and possibly 2010 than in prior years due to the traffic slow down at retail and reduced consumer spending. We need to address our expense structure and pare down without affecting our long-term strategies. We need to make sure that we continue to service our retailer and licensor partners impeccably in a more cost-efficient manner.

We actually view challenges as opportunities in disguise and look at this time as one to restructure our company to become lean, efficient and focused. Having experienced high double-digit increases over the past few years, this seems like a perfect time to relook at our systems and procedures.

Which licensed product categories are likely to see growth or contract?

Russo: We are experiencing a slowdown in our kids' room décor business. This category grew exponentially along with the robust housing market and it seems logical that it would get directly affected by consumers losing their homes or struggling to make mortgage payments. Our goal here is to offer a focused program of great value products.

In so far as growth, we see core accessory categories such as handbags, footwear and scarves becoming the "feel good" purchase, which usually occurs when consumers are watching what they spend and wearing last season's clothes.

Where are the new opportunities?

Russo: Over the next 12 months we anticipate making one or two acquisitions. We are looking at companies that are in the $20 million to $50 million range that are marketing synergistic products and selling to a similar retailer base. We are seeing with the economic downturn and overall credit crunch, some great companies are having a difficult time providing the service needed for the major retailers profitably. In addition, we continue to cultivate our core businesses and broaden our customer base both in the U.S. and globally.

ANGELA FARRUGIA, managing director, The Licensing Company i8_23.jpg

What are the key challenges for the business over the coming 24 months?

Farrugia: Clearly, retail stability is right up there ... also the fact that all roads lead to Walmart right now. That makes for a very crowded licensing market place.

Retailers such as dollar stores are really to be taken seriously now. Other challenges are around the economy and lack of money in the family basket. We all have to get a good deal smarter.

Which licensed product categories are likely to see growth or contract?

Farrugia: Growth will come from food and beverage and commodity-based brands: everyone needs to clean their homes, feed their families, look after their pets, etc. Brands that are strong in these areas will hold their own and potentially grow. On the converse of this, brands that play in the "I don't really need this" aisle will surely be struggling.

Where are the new opportunities?

Farrugia: Again, food and beverage brands, particularly those with a distinct flavor profile and sense of fun will win. We have also noticed that "emerging designers" still hold a place in the product mix with retailers. Great brands will always shine through.

Is the credit crunch/downturn going to force any changes in the business?

Farrugia: Absolutely, it's unavoidable. Some agencies will just not make it. Advances and guarantees will be harder to secure, a return to real strategy at the heart of brand extension will be vital. On this point we should be grateful.

ROGER BERMAN, managing director, LIMA Japan i9_23.jpg

What are the key challenges over the coming 24 months?

Berman: The market conditions are the key challenge. We've seen a tightening of the market in Japan, and the country has officially gone into recession. We really have to respond to that. The problem is more extreme for the mass market than the upper tiers, which are generally less challenged sectors.

As there is less shelf space available for licensed product and retailers in the mass market become less interested in brand building, the challenge is how to entice retail buyers who are struggling to respond to the situation. They are challenged in finding properties that sell. And most people are trying to predict business for the next six to 12 months—they are not looking far ahead.

Which sectors are likely to see growth or contract?

Berman: The key sector for contraction is the mass market, and character accounts for the majority of that market. You can see at least the possibility in the upper tiers that properties will keep the same share or just have a slight contraction. Growth will come from brands, both lifestyle and corporate.

Which licensed product categories are likely to see growth or contract?

Berman: Japanese people will be staying in more—they are already eating out less, and family restaurants are slashing prices—so video games are seeing real growth on Nintendo DS, Wii and PSP. And quality properties—for example, children's picture books—is a very stable market in Japan, as are young adult women who buy character properties for themselves.

Where are the new opportunities?

Berman: Corporate sales promotions are another area for growth as businesses look to use characters in their marketing campaigns. At the recent Licensing Asia exhibition, much of the first-time business was from advertising agencies. There are opportunities in B2B as businesses look at licensing as a way to get out of current difficulties. We'll see more collaborative licensing as businesses give stronger consideration to this style of marketing.

Is the credit crunch/downturn going to force any changes in the business?

Berman: In Japan, the royalty rates do not change as part of the deal negotiation. Royalties are usually 8 percent to 10 percent of the wholesale cost and are negotiated on the size of the initial production—so the royalty is paid upfront on what's manufactured, not what's sold. What might change is the quantity of manufacture, and therefore the advance will be reduced. The pressure will be on the fees, not the royalty percentage. Other pressure points will be the ability of manufacturers to get credit to fund production and the increasing costs as factories close in China and stricter working rules are introduced.

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