10 key trends in licensing and how to adapt to them
With licensing now a $100 billion industry, it has become a very attractive and widely used business tool, but companies seeking to leverage brand awareness, build brand equity and drive new revenues need to stay on top of the latest market trends in order to succeed.
The licensing of corporate brands began showing potential about 30 years ago, with Eastman Kodak, Sunkist, Sears, Caterpillar and Harley Davidson all proving to be early adopters. Kodak extended its brand into bifocal and trifocal (ie, progressive) eyeglass lenses, Sunkist into orange-flavoured soda, Sears into home maintenance and repair services and Harley Davidson into apparel, accessories and toys.
As these and other licensed properties came onto the market, licensing began to spread. Business managers started seeing the possible benefits for their companies, while marketers saw an opportunity to expand brand awareness and increase brand touchpoints. Financial executives liked the idea of boosting earnings and return on assets and trademark counsel valued the strengthened registration potential. Strategy managers viewed licensing as an easy and novel first step in testing their affinity to new businesses and new markets and at the top of the corporate tree, CEOs and boardrooms cautiously began to come round to the whole package.
None of this happened overnight; it took decades. Corporate leaders, usually slow to try new things, started to see their competitors taking advantage of licensing as a business-building tool. This fuelled their own interest in licensing. The trickle became a stream and the stream eventually became a flood. What was almost a $3 billion industry in 1986 is now valued at over $100 billion. Many people believe the number is much higher.
Brand licensing has evolved from a niche activity to a mainstream business pursuit. Almost 80% of all consumer brand owners are actively licensing their brand to leverage awareness, build brand equity and drive new revenue. This evolution carries with it some profound implications for licensing managers.
One: adjust for slower growth
With over 2,500 licensed brands now competing for qualified licensees, widespread distribution and consumer attention amidst narrowing retail channels, the growth prospects for any single brand are becoming more limited. This is in part a numbers game and there is no fighting it. With 25 or 30 times more licensors drawing on a relatively static number of potential licensees, finding and connecting with the right licensee partner is difficult. Brands may need to settle for a less than stellar licensee partner and accept the fact that they may have to share their licensee with other licensors or be willing to compete with their brand rivals for licensee attention and services.
While finding the right licensee is a challenge, securing reliable distribution can be even more difficult. Retailers are going out of business at an increasing clip and the market has become increasingly concentrated. In the United States, Wal-Mart is king of brick-and-mortar retailers with sales of about $481.32 billion followed by CVS ($184.77 billion), Amazon ($177.87 billion), Costco ($129.03 billion), Walgreens ($118.21 billion), Kroger ($115.34 billion), Home Depot ($94.6 billion), Target ($69.5 billion) and Macy’s ($25.78 billion). Amazon accounts for about 4% of retail, but 44% of e-commerce, while Wal-Mart’s e-commerce sales are growing rapidly in pursuit. Retailers are narrowing their offering and most have strong private label businesses, effectively reducing open shelf space for brands even further. What kind of business argument needs to be made to secure retailer interest and shelf space? Following this, how can a brand gain meaningful consumer attention in this increasingly crowded marketplace?
Is this impossible? No. Challenging? Yes. Will it take longer? Will growth come more slowly? Probably, yes. Brands must work to understand and acknowledge this situation and devise appropriate strategies; if they fail to do so they could be heading for trouble.
Two: greater commitment required
In this increasingly competitive market, just dabbling at licensing – which may have worked before – will not cut it. Instead, licensing requires more dedicated and qualified staff, greater financial investment and a longer time horizon.
Early licensing programmes often began with a relaxed approach. The job of licensing coordinator was often assigned to a marketing, finance or legal employee as a part-time, half-day-a-week responsibility. Their role was typically oriented to seeking internal corporate sign-offs and approvals on licences brought to them by their licensing agent. The agent generally developed a list of targeted extension categories, identified, screened and secured licensees and helped facilitate the approvals process. Licensing programme start-up costs were modest and it was fairly easy for new licensors to ease into licensing. One brand, which now has annual licensed product sales in the billions of dollars, initially had only two employees involved in licensing in the first four years of its licensing programme. They were both part-time on the job and neither had any previous background in licensing, marketing, sales or strategic alliances.
Today, having internal staff with experience in licensing or marketing is essential; the licensing learning curve is long and there is a pressure to get it right the first time. Brands can start with limited licensing staff, but need to be ready to quickly increase resources once licensees start signing on. The two-person, part-time team in the example above began to call for reinforcements after the first six licences were signed and the US economy went into recession. Competition in each of the licensed categories had heated up from both longstanding players in the field and from new licensed brands. Increased coordination with and among licensees, combined with stronger marketing support, became high priority and the dedicated services of a marketing and advertising agency was retained. Since then a full-time marketing chief has been hired and three additional client staff members have been assigned part-time responsibility for licensor and licensee relationship management. There are now three part-time attorneys and five senior brand licensing professionals involved.
Three: more creativity, more analysis and more thought
Differentiation and innovation are key to ensuring the survival of most businesses and licensing is no exception; consumers have exacting standards and high-quality and functional expectations of the products they buy. Retailers and e-tailers have to focus their resources on carrying products that sell through and provide reasonable margins. Products and brands that appear to be commodities are forced to lower their price to compete, but this sales model cannot provide a basis for long-term prosperity.
However, meaningful and effective differentiation is not easy to achieve and if a brand achieves some competitive advantage, it seldom lasts long. Fortunately, brands with rich and well-defined imagery can provide a platform for differentiation. The truck brand, Mack, is a prime example. “Built like a Mack Truck” is a widely known phrase in the United States, which is often used to describe exceptionally strong products, machines and structures. The brand’s ability to imply virtually indestructible and workhorse imagery to products (eg, lawn tractors, pick-up trucks and hydraulic jacks) makes it highly distinguishable in the marketplace. As such, an investment in research, creativity, design and market planning is necessary to establish and communicate effective points of difference and competitive advantage.
Picture: Jonathan Weiss/Shutterstock.com
Four: more involvement from top management
Among other things, top management must approve the larger financial and staff investment to ensure the success of a licensing programme. Fortunately, getting top management interested and onside is easier today than it was in the past. Licensing has gained a lot of awareness over the years and its perception has improved. Whereas it was largely seen as a short-term promotional activity, it is now increasingly viewed as a strategic business tool. Because there is now a stronger cadre of experienced professionals involved in licensing than was previously the case, fewer high-visibility mistakes are made. Past anxieties about product quality, image fit, market positioning and brand confusion have gradually receded.
Five: programmes must have solid strategic foundations and goals
Strategic foundations are important, partly because brands need solid reasons to pursue initiatives that will cost more, take longer and possibly have less of a financial return, but more importantly, because it has become increasingly apparent that valuable strategic benefits can be generated from licensing. Licensing can be used as a strategic approach to increasing brand value with returns that can far exceed royalty income.
As an example, Roto-Rooter, the famous US plumbing service known for unclogging blocked drains, was losing market share. TV ad costs were rising fast and Roto-Rooter could not maintain the same level of saturation advertising and top-of-mind awareness as it could in the past. While the company hoped that licensing could generate more money to boost its ad budget, the programme was able to accomplish much more. Through licensing, Roto-Rooter positioned itself as the consumer’s first line of defence against clogged drains, through its liquid drain cleaner, and this gave the brand strong presence and exposure at national grocery and hardware chains. Crucially, if the liquid cleaner failed to clear the drain blockage, a phone call to the 800 number on the product bottle brought a Roto-Rooter plumber out to finish the job. No other plumbing service or chemical company could offer a complete solution to the problem of blocked drains equivalent to Roto-Rooter. While the royalty income for the brand was strong, licensing has greatly improved brand awareness and driven core service business growth.
Kodak is another example. The brand was battling two issues. First, its market share of the film business was slipping in favour of Fuji, Agfa and low-priced generics, especially among young adults. One goal was to increase top-of-mind awareness against competitors and to establish a stronger connection with young adults. Second, digital technology was beginning to threaten the film business. In the 1980s, the brand enjoyed enormous awareness, respect and appeal and its licensing programme sought to build on this by extending it into new products and services that held long-term growth potential. Accordingly, the brand was extended into the fast-growing and largely unbranded field of medical optics (progressive eyeglass lenses and lens processing and customisation laboratories) nearly 30 years ago. To strengthen its connection with future photography consumers, the Kodak brand was also licensed into a full line of juvenile photography products, including special effects cameras.
Six: more variety in strategic goals
Typically, competitors use licensing to defend market share and increase awareness, relevancy and importance to consumers. The danger of falling behind, losing touch and disappearing is real and this is what forces companies like Roto-Rooter and Kodak to think creatively about what licensing can do for them. The list of applications for licensing is long and getting longer and includes:
- testing affinity to new product or service categories;
- reducing learning curve, avoiding start-up mistakes and getting to market faster;
- using it as a first step to joint ventures or acquisitions;
- expanding into new territories, new technologies or new channels of distribution;
- boosting top-of-mind brand awareness;
- enhancing and contemporising brand imagery;
- building and strengthening brand relevance among current or target consumers;
- acting as a potential takeover defence;
- filling product gaps and boosting channel clout;
- gaining technological, distribution and other insights into new businesses;
- helping to strengthen a brand’s legal registration or extending it into new territories and product and service categories; and
- boosting brand valuation.
The list will continue to grow as new practitioners come into the field with a diverse range of backgrounds and experiences.
Seven: one size does not fit all – more programme customisation
Many merchandising programmes tend to push intellectual property – almost regardless of what that intellectual property is – into the same t-shirt, caps and calendar product categories. Effective corporate licensing programmes cannot follow this model; one size does not fit all. Kodak, Winchester, the V&A Museum, Philips and Road & Track are different brands. Each has its own brand imagery. A good licensing programme should carefully build on and extend off of that brand equity; veering away from such a vision can dilute the brand and confuse consumers.
For practitioners, this means a different approach to licensing. Too many programmes are tailored around a licensor’s or licensing agency’s list of licensee contacts. These are often groups of professional licensees, typically companies in apparel, juvenile and promotional products that may have five, 10 or more licensed brands in their stable at any one time. They know what licensing is, they are constantly in and out of different licences and they are always on the lookout for new ones. For a licensing manager, these companies provide an easy answer to the question: where can I sell my intellectual property? This approach to licensing is used by many licensors and agencies. For a brand owner, it is a problematic approach and not the way to build a licensing programme for long-term growth. In fact, given the challenges at retail and increased competition among licensed brands, this approach will become increasingly less successful.
The takeaway for corporate licensing practitioners is to identify the particular issues, assets and the management team’s wish-list and then think creatively about how licensing can be constructed to address them. Build a programme that is custom tailored to your needs. Licensing is not an end product, it is a business tool that can be harnessed in many different ways.
Asia, the Middle East, Africa, Eastern Europe and other parts of the world are increasingly important markets. Over half of the licences signed in 2017 by LMCA were with licensees based outside of the United States. Asia, followed by Latin America, India and the Middle East are popular licensing locations. Whereas, five to six years ago, most foreign-based licensees took out licences so that they could sell into the United States, the story is different now. The focus has shifted to home markets, rather than those overseas.
Accordingly, programmes must be customised to individual markets while staying true to the brand and its core equity. Cultures, values, interests and goals in Beijing are different from those in Dayton Ohio, New Delhi, Moscow or Borneo. While the luggage may be similar, positioning of the Samsonite brand is quite different in China than it is in the United States. In some categories of goods, the designs, colouration and fit may differ by market. To achieve success, a brand must understand and cater to the specific market and customer. For licensing, this translates into the need for more local expertise and first-hand experience in understanding and navigating the nuances of individual countries and regions.
Nine: licensing professionals will be in increasing demand
Effective licensing professionals must bring together a wide range of attributes and capabilities. They need to be curious, optimistic, creative, sales-oriented and take on the role of the detective, analyst, strategist, psychologist, deal maker, negotiator and business executive. As a group, licensing professionals have evolved from lower and mid-level positions to a cadre of MBA holders, experienced in corporate development and international business. Formal licensing curriculums are now being offered in top-flight business schools in the United States.
Chief licensing officers are still fairly well dispersed organisationally. They can report in via legal, marketing, corporate development, M&A or general management and have dotted-line relationships across departments. Small corporate programmes ($100 million or less in licensed product sales) will generally have two part-time employees assigned to licensing, whereas larger programmes ($1 billion or more) may have 10 or more full-time employees.
Licensing is more commonly being treated as a profit centre that answers to top management. Five-year strategic plans and annual operating plan reviews with top management are becoming standard. The brand licensing function has moved up the corporate ladder over the past 10 years and will continue to do so at an accelerated pace.
Ten: a licensing career remains attractive
In spite of the challenges, the cross-discipline nature of the work and the direct link to seeing actual results will continue to make licensing a dynamic, fun and extremely rewarding career path.
In the right environment, licensing operates in the big white space defined only by brand imagery and the limitations of a company’s own expertise, capital and time. In turn, licensing can have a dramatic effect on helping a brand franchise and enhancing company profitability.
Corporate brand licensing has come a long way over the last 30 years. It has become a respected and sought-after business tool by top corporate management. The lack of formally educated practitioners makes licensing open to a wide range of people from diverse backgrounds. Chief financial officers usually study and come up through finance and chief marketing officers marketing, but chief licensing officers can come from a dozen or more different functional backgrounds.
What started out as a trickle has now become a flood of companies working to extend their brand and increase brand equity through licensing, which in turn has made it harder to achieve long-term success. All at a time when management teams want more.
Despite its current popularity, licensing – when done correctly and with an organisation fully aligned behind the initiative – still has a lot of potential with significant rewards coming to the companies that approach it with a smart, strategic mindset.
Dealing with challenges
Some advice in getting started or advancing the licensing cause:
Do not over-promise and under-deliver
Too many CEOs have heard that a competitor is successful with licensing and they want the same or better and quickly! Expectations and timing need to be managed. Emphasise the strategic side of licensing and do some upfront homework on competitor programmes; there are few overnight licensing successes. Ensure that all interested and relevant departments and personalities are aligned and involved in setting the foundation for licensing. Good relevant case studies are a great way to illustrate the possibilities and potential pitfalls. Set programme goals and tactics that are deeply rooted in the brand’s core business and cannot be easily washed away with a change in strategy, organisation or company ownership. Choose initial extension targets carefully and do not be rushed into signing the first few licensees. Solid success with the first three to four licences will always beat out deals that were done in half the time but are shaky or controversial.
Avoid using trainees to put together a programme
Even if the company has been smart and successful in other areas, licensing is not the place to learn on the job. If the company’s workforce does not already have solid experience and contacts, then hire someone who does. A good licensing agency can go a long way to building some early successes and can help to demonstrate what is required to take over and grow the programme.
Invest in developing a solid strategy before launching
A solid strategy should cover product, market positioning, consumer strategy, retail strategy and licensee targeting strategy. These strategies should be tested via research with consumers, retailers and in turn, prospective licensees. They must be validated and, if possible, quantified. When competing with other entrenched and licensed brands, market success is far from assured. Brands delving into licensing need the best licensee partners available.
Take care when choosing licensees
Steer clear of licensing to professional licensees; it is best to opt for someone who offers serious attention and a dedicated effort. At the same time, the biggest prospective licensee partner is not always the best. Big companies can be slow, bureaucratic, subject to sudden management changes and the size of the licence may not be all that important to their overall business. Think carefully and creatively and remember licensing professionals should be able to provide the necessary resources, contacts, know-how and experience. Success in a given category is the result of a good licensee.
Build long-term working relationships between licensors and licensees
This relationship should not be based around quick transactions. This means balanced business terms (ie, contract length, royalty rate, guarantees and performance minimums), effective communication, mutual goals and ongoing support. In addition, conduct regular licensee and licensor summit meetings. Alignment is essential in licensing, as is having a clear and consistent strategy across all licensees. Understand that there are two areas of leverage in licensing. One is about extending the awareness and appeal of a brand. The other is about leveraging the relationships, resources, strengths and cooperation between members of the licensee family and the licensor. Synergy between licensor and licensee and among licensees can make or break a licensing programme.