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The largest brand licensing market has a presence all over the world. While there are strong numbers, there are unpredictable cultural, political and economic climates at hand. Are North American licensing companies prepared for change?
April 26, 2018
When it comes to North America, everything is bigger. Consisting of the U.S., Mexico and Canada, the region isn't just one of the world's biggest in terms of land mass, but also has one of the biggest economies and populations.
From the might of The Walt Disney Company felt in everything from theme parks to feature films and merchandise, or the power of Apple, which Forbes reports as the world's most valuable brand of 2017, North America is home to many of the world's best-known brands including Coca-Cola, McDonald's, Facebook, Google, Amazon, Nike and Microsoft, all of which show how deep into the global psyche American-born brands are.
The aforementioned brands are also representative of the North American culture. It's a region where people are told if they work hard they can achieve anything, and that anyone with a dream can fulfill it. It's not hard to see how this type of thinking has given birth to the huge tech companies and disruptive start-ups that are now part of the world's everyday lives.
According to The World Bank, North America had a population of more than 359 million in 2016, making it one of the most populous regions in the world.
However, as with many countries, the population in the U.S. is aging—albeit slower than some. The Population Reference Bureau reports that the number of Americans aged 65 or older is expected to double from 46 million to 98 million by 2060 (around 24 percent of the total population). This will present issues in the future as more people leave the workforce, with fewer, younger Americans to take their place.
North America also has one of the world's biggest economies. The World Bank reports that gross domestic product was $20.16 trillion in 2016. Recent figures from the U.S. Labor Department reveal that 313,000 new jobs were created in February—a new high since July 2016. However, wages did not grow at the same pace, with average hourly earnings up just 0.1 percent in February. This may impact on the buying power of the American shopper longer-term.
Another positive development, though, is that the unemployment rate in February remained at 4.1 percent for the fifth month running, which is a 17-year low. More people working will hopefully translate to more spending, particularly as Fox Business reports that the U.S. consumer confidence index increased to 130.8 in February, the highest since November 2000. In 2017, Mintel also reported that 43 percent of Americans described their economic situation as "healthy."
In November 2016, Donald Trump was elected as president of the U.S., and with that, the political landscape has begun to shift. Trump's policies on immigration have tightened which could have a wider-reaching effect–immigration is a major positive influence on the U.S.' population age. Pew Research Center reports that in 2015, 43.2 million people living in the U.S. were immigrants.
Trump's election also caused the coining of the phrase "post-truth" to describe the proliferation of "fake news" stories online. For brand licensors, this may have implications, as Mintel reported, that in a post-truth world, consumers are increasingly putting their money into brands they can trust. This may put long-standing, heritage brands in a stronger position.
According to the International Licensing Industry Merchandisers' Association's (LIMA) 2017 Annual Global Licensing Industry Survey, the U.S. is the largest single market for licensed merchandise, reporting retail sales of $144.5 billion. This is more than every other country in the survey combined–the U.K., which is the second largest market, comes in at $13.5 billion in retail sales.
When Canada's sales of $7.7 billion and Mexico's $3 billion are also factored in, North America as a whole achieved $155 billion of sales—an increase of 6.9 percent from the $145 billion in 2015. This equates to 59.2 percent of all reported retail sales worldwide. North America royalties from licensed merchandise were $8 billion or 57 percent of global royalties.
"North America is the biggest and most mature licensing market," says Jessica Blue, senior vice president, global licensing group, UBM. "We see this illustrated at Licensing Expo Las Vegas, the world's largest brand licensing industry event. Some exhibitors at Licensing Expo have exhibited every single year since the show began in 1980."
The biggest slice of retail sales from licensed merchandise came from the entertainment and characters segments, generating $48.2 billion in retail sales. This was followed by corporate brands ($38.7 billion), sports ($20.1 billion), fashion ($19.5 billion) and publishing ($16.1 billion).
In terms of product categories, North America's biggest sector for licensed merchandise sales was apparel at $22.9 billion. This was followed by fashion accessories ($18.2 billion), home décor ($15.2 billion) and toys ($15.1 billion).
North America significantly outweighs other territories for sales of licensed products in home décor (81 percent of all worldwide sales), lawn and garden (82.4 percent) and tools and hardware (84.9 percent), which suggests a mature home ownership market.
Maura Regan, executive vice president, LIMA, notes that changes in the market mean it's not business as usual for brand licensing, but that this is having a positive influence.
"What I'm seeing right now is that brand licensing and brand extensions are taking off in many different directions," says Regan. "Largely, this disruption has been driven by the changes in retail, which has forced brand owners to really think about what they're doing, how they're doing it and how they're reaching and connecting with consumers. That dictates that everyone has to think a little bit differently about what sort of line extensions they do in licensing and how they bring those concepts to market."
While toys may not be leading retail sales in North America, according to research organization NPD, the three top selling toys globally last year were all North American owned properties—Hasbro's Nerf, Disney's Star Wars and Mattel's Barbie. This further emphasizes the huge penetration that North American brands have in the global market.
Culturally, there are some differences in the market that impact licensing.
"The U.S. market is very pop culture-driven, so the kind of brands that resonate with consumers can differ greatly than those around the globe," says Blue. "For example, the European market has a lot more heritage and sports brands that are popular."
This favoring of pop culture brands trickles into almost every aspect of American life and has larger implications for adjacent product categories and across demographics.
"American children consume content very quickly and at a younger age, then they are on to the next thing," says Regan. "In the North American market, kids tend to go through brands a lot faster. Legacy brands absolutely do play on the fact that they've been around for a while and there's an emotional connection, but sometimes it just doesn't work. Nostalgia and legacy can only go so far because children even younger than ever before have an opinion and are comfortable expressing what they like and don't like."
For now, North American brands remain on top of License Global's Top 150 Global Licensors report. In the No. 1 position is global mega-brand The Walt Disney Company, with revenues of $53 billion from licensed products in 2017. Disney's portfolio includes Marvel Entertainment, LucasFilm, Pixar and more.
The rest of the top 10 is made up of even more North American companies. Media company Meredith Corporation sits at No. 2 with $23.2 billion of licensing revenues, and clothing group PVH Corp., whose brands include Tommy Hilfiger and Calvin Klein, is No. 3 with $18 billion. (Read more about the Top 150 Global Licensors in the full report on page T1.)
These top three brands alone show the breadth of the brand licensing market, from toys to media, fashion and characters.
It's not just a market for big name brands either, as Blue is sure to stress. Emerging brands also have a foothold in the North America market.
"Every year, we get about 140 to 150 new exhibitors at Licensing Expo. Some are brands that have been around for a long time that have just made the move into licensing and who come to the show to start their licensing program, or they're brands that are fairly new and are entering the licensing market as they are building their brand," says Blue. "We've seen some really interesting brands take off at Licensing Expo."
Examples include Elf on the Shelf and Grumpy Cat, which both had small booths at the Las Vegas show yet have seen their licensing programs expand massively around the world.
"They came from nowhere but became huge cultural icons with really successful licensing programs," says Blue. "Both manage it really well by taking advantage of the consumer products market in a thoughtful way that gets products into consumers hands."
Blue notes that persistence is key for brands looking to break into the crowded North American market.
"It's a big market and it is very competitive. Licensing is a long game. Brands can't expect to win the market overnight," says Blue.
The North American media landscape has changed with the proliferation of streaming video services like Netflix and Amazon Prime. Both of these companies have become forces to be reckoned with for traditional TV and film studios through their multi-billion investments in original, exclusive content.
The result is new, high-quality media franchises that draw huge fan bases hungry for licensed products.
"People are watching more content than ever before," says Blue. "There's no shortage of great entertainment, and we know that great content can make great consumer goods. It's also an opportunity for the licensing industry to shift how they fundamentally do business by improving speed to market. If a show is a hit on Netflix, people will want products. We saw that with Netflix's 'Stranger Things.' There was huge consumer demand for product with licensing flowing from there. There's a great opportunity for us as an industry to learn more about how to get things done faster."
Regan agrees that speed to market is becoming more important to the licensing industry in order to keep up with consumer expectations.
"What's consistent is speed to market," says Regan. "We're seeing the whole concept around fast fashion, which we've seen for a few years now, translate into many other product categories, even categories that traditionally would take an 18-month development cycle. Everyone is recognizing that that's a luxury that no one really has anymore. In order to stay relevant to the consumer, you need to be out there faster."
Regan also notes that technology is now starting to play an organic role in product development.
"We've been living with technology for a while, and everyone has been trying to figure out how to integrate technology into products. This is the first year where I've actually seen technology used in a non-gratuitous way, particularly in the children's space," says Regan. "The integration of technology into the play patterns of toys feels like a much more natural fit, whereas in the past it felt like tech for tech's sake. Technology is now being considered almost in the way you would think about a color or product application—it's just another attribute when developing great product. I think that's a huge step forward for the industry overall."
Plenty has been reported about the slowing down of brick-and-mortar retail in the U.S. and the subsequent closure of stores. Several big name retailers have either disappeared from the market or cut back their store footprint, such as Foot Locker, Michael Kors and Abercrombie & Fitch.
The recent closures of Toys 'R' Us in particular is likely to be felt among licensors in the toy space, as well.
"If you look in the children's space, what has everyone on edge is Toys 'R' Us," says Regan. "They've been a wonderful incubator for smaller brands to really take hold and then become bigger brands."
This changing retail landscape may just reflect the U.S.' need to shed some of its unnecessary retail space to create a leaner and more focused brick-and-mortar offering. After all, PwC's Total Retail Survey 2015 stated that the U.S. has almost seven times the retail square footage per capita of the next leading country.
The top brick-and-mortar retailers for licensed merchandise are still mass retailers Walmart and Target. There are challenges at the department store level, with Macy's selling off a number of locations and leasing the top floors of its Seattle flagship to Amazon, and Lord & Taylor sold its flagship Fifth Avenue store to WeWork.
Equally though, there is a strong trend for companies that began as online-only businesses to branch out into physical retail as a way of building their brand. Mattress retailer Casper, clothing company Everlane and eyewear brand Warby Parker are all recent examples of this. It's likely that this trend will continue as new brands look to find ways to increase their penetration and brand recognition among consumers.
"What's been exciting in the retail space is the transition from an online experience to a brick-and-mortar experience, such as with Amazon and its bookstores. That's a trend that's positive for brand owners and licensed goods," says Regan.
Interestingly though, LIMA's 2017 Annual Global Licensing Industry Survey reports that brick-and-mortar sales actually went up 1 percent in 2016 to 72 percent compared to 2015, with online retail subsequently down 1 percent to 28 percent.
Regardless of its current percentage of sales, as with other established shopping markets, e-commerce is the biggest growth area in North American retail. The U.S. Census Bureau of the Department of Commerce reports total e-commerce sales for 2017 were $145 billion, up 16 percent from 2016. This increase was faster than the retail sector as a whole, which reportedly grew 4.4 percent in 2017 over the previous year.
However, it's important to note that the U.S. Census Bureau says that e-commerce accounted for 8.9 percent of total retail sales last year, which shows that brick-and-mortar still makes up the majority of the market by far.
Dominating the sector is online retailer Amazon. One Click Retail reported that Amazon accounted for 44 percent of all online retail sales in the U.S. in 2017, or 4 percent of all retail sales through any channel. And it doesn't stop there.
Amazon reported that its sales jumped up by a third in 2017, with full-year revenues of $177.9 billion (across all Amazon activities). Although it didn't specify numbers, the company said that it added more "paid" members to Prime in 2017 than any other year, both in the U.S. and worldwide. It's also worth noting that One Click Retail also reported that Amazon's private-label brands achieved $450 million in sales last year. Private label brands are likely to continue to take a greater piece of the market pie in the future. Read more about Amazon's print-on-demand platform, Merch by Amazon, in the cover story on page 22.
E-commerce is only going to grow as a result of shifting consumer habits, including trust in online sellers and the proliferation of smartphones. While Black Friday has been a fixture in the U.S. retail calendar since the 1950s, its e-commerce equivalent, Cyber Monday, is now generating more sales. Adobe Insights reports that Cyber Monday generated a record $6.59 billion in 2017. This is a 16.8 percent increase compared to 2016 and makes it the largest online shopping day in U.S. history.
Blue says that the rise of e-commerce is actually creating more opportunities for brand licensors, thanks to the sheer number of new online retailers.
"The retail environment is changing and retail stores are closing, but people are buying more stuff than ever before so there's still a high consumer demand for goods. It's just how they're buying that is shifting," says Blue.
"We are working with the industry and helping to get in front of the new online retailers coming into the market and inviting them to come to Licensing Expo to learn about licensing," says Regan. "It's a great opportunity for smaller brands to work with smaller online retailers in a different way. It's an exciting time.
"I think the market is adjusting to the challenges at retail," continues Regan. "Consumers want to consume and people love brands—it's how they identify who they are and what they're interested in. We are all tribal in that sense—we like to be identified by these things, so we translate that to multiple product extensions through brand licensing. It's really exciting to see how licensing really is helping people to define their lifestyle in a way that makes them feel good with terrific products."
Perhaps the biggest challenge to North America's brand licensing crown is the fast-growing market in China.
"The U.S. and China markets are very different," says Blue. "It is interesting to see how the China market is impacting what happens in the U.S. more and more, and how quickly the China market is growing. It continues be very interesting to see the influence China has, and vice-versa, how the U.S. will continue to influence that market as well."
Blue notes that globalization has already made the licensing world a much smaller place, which can be easily seen in the micro climate of the Licensing Expo environment.
"Around 30 percent of our exhibitors at Licensing Expo Las Vegas are from outside of North America, and it's the same with attendees," says Blue. "There's a lot of international brand and thought exchange at the show and that's going to continue."
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