At the consumer level, willingness to pay premium prices for luxury goods relates fundamentally to product quality and brand equity, where heritage, authenticity and realism are key attributes, often closely-guarded and cleverly-marketed, to support all-important notions of luxury and exclusivity. Although part of this is pure image, knowledge and product quality have a major bearing on the consumer's purchasing decision. A hand-stitched bag made in a company-owned Florentine workshop from locally-sourced hide, using long-standing and trusted suppliers, will typically be seen as more desirable product by the consumer than an equivalent bag produced under licence in China. The typical luxury consumer is relatively price insensitive and sophisticated with respect to brand and product knowledge, and will shop and pay for quality and exclusivity.
At the investor level, the mix of licensed and non-licensed business and the overall licensing philosophy of companies is closely scrutinised and a key determinant of company valuations. Luxury goods companies selectively disclose, and investors carefully review, data on the mix of owned and franchised or licensed operations. Whilst companies in the sector have a number of differentiating characteristics, so-called 'pure luxury' companies (e.g. Gucci) tend to have a limited number of strategic licences and high degree of control over their operations, whereas the so-called 'specialty apparel' companies (e.g. Polo Ralph Lauren, Hugo Boss) rely on a greater mix of licensed sales and will typically have a lower degree of operational control over their businesses (see table 2). These benchmarks and industry segmentations have a major bearing on valuation and a company's access to external capital.
So from the perspective of the consumer, business manager or investor, licensing plays an important role for companies in the sector, driving many aspects of product choice, corporate structure, and overall corporate valuation.
Current licensing strategy has been shaped largely by the experience of the 1980s, and early '90s, when many luxury goods companies (particularly those with a couture or single category heritage) embarked upon, and then unwound, a proliferation of licence agreements. Views on licensing within the industry have changed significantly over the past 20 years as company structures have evolved and as the weaknesses of a series of early licensing arrangements became apparent. Whilst Yves Saint Laurent, Gucci and Burberry are quite different companies in terms of brand profile, business heritage and market positioning, their experience with licensing over the past 20-30 years has helped to shape today's thinking on the appropriate role of licensing within the industry. (See our thtree case studies.)
Licensing remains central to many aspects of luxury goods businesses, but is now used more selectively and judiciously by companies than in the 1970s and 1980s. Licensing continues to be an invaluable tool for extending product or geographical reach, particularly into areas where the specialist skills of a partner are naturally required. What is key is the nature and number of licences and the degree of control maintained by the licensor. The model of a small number of tightly-controlled licences granted to experienced partners for strategic product categories (e.g. fragrance, eyewear) or key territories (e.g. Japan, China) is now widely seen and accepted in the industry. As companies in the sector mature, the fashion is to seek full ownership of the licensed business to increase control and provide a platform for greater value extraction. This said, licensing will remain a key component of most companies' growth strategies for the foreseeable future, or as a means to exploit the strength of a luxury brand, such as the recent Bulgari and Armani license deals with partners to develop 'designer' hotels. But licensees will need to add genuine value to the licensor's business and be able to meet exacting standards with respect to product design, quality and distribution. Given the outlook of strong growth and profitability for the sector, licensing should remain a highly attractive business for those able and willing to meet these criteria.
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