The ins and outs of licensing

When executed correctly, licensing can help companies enter new categories and gain instantaneous shelf presence.

It seems like a sure-fire formula for success. Link your product with a celebrity, sports figure, chef, animated character or movie title, sit back and watch sales soar. In reality, the process of creating the next hit licensed brand is neither quick nor easy. If not approached carefully, there can be just as many pitfalls as there are benefits, say industry observers.

Pete Canalichio, managing partner with Licensing Brands, an Atlanta-based consulting firm, says for these reasons and others, companies are approaching licensing a bit differently today than they did prior to the recession. “Licensors, licensees and retailers understand that in today’s environment they have to work smarter to find those unique opportunities that will be successful,” says Canalichio. While brand owners look to licenses to help extend their position in a market or to enter new ones, he points out that a licensing program has to make sense for a brand’s overall value and long-term health.

“There is a lot more rigor being applied to these opportunities than in the past. Brand owners are much more thoughtful about what their brand stands for, its promise and how licenses help them to connect more with the consumer,” says Canalichio.

A successful programs considers the needs, desires and interests of all four spokes in the process—licensor, licensee, retailer and consumer, say observers. “The best licensing arrangements bring together all of those elements that are important to connect with the consumer to drive the purchase of that product,” Canalichio says. “Ultimately the brand owner is looking to strengthen their position in the marketplace and retailers are looking to see an uptick in the category’s revenue.”

There is no shortage of successful brand licensing examples, say industry observers. Restaurant brand licensing, which first emerged in grocery a decade or so ago, remains one of the most profitable licenses in grocery. “In the past three to four years restaurant brands have really come into their own,” says Nancy Bailey, vice chairman of Beanstalk, a New York-based global brand licensing agency and consultancy.  “P.F. Chang’s alone is about a $100 million program and is currently the No. 4 brand in frozen multi-serve meals.”

As Bailey explains, restaurant brands resonate with consumers on a number of levels including being perceived as a healthy frozen offering. “Consumers love these types of products because they identify them with providing a restaurant-quality experience less expensively and brands love the exposure because of the added value it brings them,” says Bailey.

Grocery channel is key
While there are a number of seasonal opportunities for brand licensing, the real opportunity lies in every day sales, says Cindy Birdsong, managing partner with Brand Licensing Team, an Atlanta-based branding agency. “The grocery channel is very important to companies looking to build out their licensing programs,” says Birdsong. “Where we have found the most success with licensing programs has been in categories involving home entertainment and socializing with friends and family at home.”
Still, she says, brand marketers often struggle with how to best use licensing to leverage existing brand equity and sometimes leverage the brand too far, which results in a disconnect with consumer.

Since being introduced a number of years ago, licensing has become a much more sophisticated process and companies are looking beyond simply slapping a logo on an existing item, say observers. They are seeking innovative product development and consumer research to help craft the best program possible. “Today, brand licensing is being approached from a more strategic perspective,” says Birdsong. “Before the process begins, brands are clearly defining what the objective is, whether it is being used to recruit new consumers or perhaps trying to get consumers to think of them in a new way,” she says, adding that this approach takes more time and resources, but it is among the most powerful ways to connect with consumers.

While there is no shortage of licensing opportunities, observers note that ingredient licensing in particular has become a hot trend. “Whether is it Pillsbury using Cinnabon flavoring in one of their muffin mixes or M&M’s in Tollhouse Cookies, brand licensing has helped all the parties involved bring added value,” says Canalichio.

Arm & Hammer, he adds, is another example of an ingredient brand that has successfully extended its category reach from baking soda to a whole host of products ranging from detergent and deodorant to toothpaste. “Since the baking soda was well-known for its ability to eliminate odors consumers had confidence other items featuring that ingredient would be effective as well so the transition to other categories has been profitable,” he says.

Bailey points out that the coffee category is benefiting from licensing as well. He says that the No. 2 and No. 5 brands in the coffee category are restaurants brands, namely Starbucks and Dunkin’ Donuts.

Chiquita, the No. 1 brand in produce, has also successfully parlayed its brand name into other categories. Bailey says while there are a number of reasons it has succeeded, first and foremost Chiquita has a tremendous consumer following and established brand equity.

Another reason the Chiquita’s licensing programs have prospered, adds Bailey, is because in many cases grocers have been open to featuring products such as Chiquita’s Banana Bread Mix in the produce aisle near bananas. She expects the same success from Chiquita’s upcoming fruit smoothie product that will be included in Kraft’s Lunchables for kids. “Additionally, Old Bay, known primarily for its seasonings, is about to introduce a line of crab cakes in the mid-Atlantic states. We think this will be a big hit with consumers who are familiar with the brand and equate it will quality taste,” says Bailey.

Aside from traditional brand licensing approaches, Birdsong sees a tremendous opportunity for grocers to leverage licensing and generate excitement by creating displays that pair low margin items such as food and beverages with higher margin licensed products such as plush toys. “For the grocer, this approach is very effective in building the in-store theater feeling while boosting incremental sales,” says Birdsong.

Do your due diligence
Clearly, brand licensing has a lot to offer but observers are quick to note a number of things must be in place for a program to be successful. “When the brand owner and manufacturer are strategically aligned, when the manufacturer is providing a product that is an ideal fit in a particular market where that brand is sold and the deal is structured in a way that is a win for all parties then licensing can be a very profitable venture,” says Canalichio.

“It comes down to being driven by consumer insight, understanding the marketplace and trends and developing products that are going to meet demand today or that will anticipate demand,” he says.

Canalichio says Cincinnati-based Procter & Gamble is a perfect example of a company that knows how to execute a top-notch brand licensing program. “To the consumer it is a seamless process to the point where they have no idea which products P&G makes and which are licensed because they all deliver on the brand promise,” he says. “The consumer ultimately has to be delighted with the product.”

Canalichio says that while retailers are understandably more inclined to place an order with a manufacturer when they see a prominent brand involved, at the same time they must also carefully review what the brand’s positioning is in the market to see if it will fit with their goals and that means examining everything from its value to its pricing.

Top 10 potential pitfalls of brand licensing
Biting off more than you can chew. Both parties should make sure that the terms of the contract are achievable. Avoid “best case scenarios” and instead ensure realistic terms are used when discussing sales targets and royalties

Getting in over your head. It is in everyone’s best interest to work with a comprehensive plan that details how the license will be utilized. You want to know upfront that the licensee is willing or able to create a plan and invest in the license.

Creating unrealistic expectations. A license works best when a great product is combined with a great brand to solve an unmet consumer need. However, even with a great brand there are no immediate guarantees. Both parties often need to work together to achieve positive results over time.

Logo slapping. Too often licensees fail to understand that a product needs to be developed from the brand perspective and not the other way around. This means carefully following the brand’s style guides and only using quality products. When these requirements are not met, the product often does not get approved or needs to be reworked, all of which adds up to lost sales.

Failure to follow the approval process. Licensees tend to underestimate the time and importance of following the approval process—one of the key reasons many products fail to receive approval on the first go round. This often results in missing ship dates or the licensee selling unapproved product, all of which can mean the loss of millions of dollars in sales.

Not understanding the contract. It is important that everyone involved—particularly those executing the day-to-day tasks such as sales, marketing, product development and design people—is familiar with the terms of the agreement.

Failure to invest in the license. Without the proper financial backing, it will be difficult for any of the partners to succeed. Licensees should make sure they fully understand the commitment because regardless of performance they will still be obligated to meet the royalty and other financial commitments of the contract.

Selling in unauthorized channels. Occasionally licensees are tempted to sell licensed product outside of authorized retail channels or territory in an effort to meet contract sales minimums or royalty commitments. Licensing contracts typically come with hefty penalties, including termination, if it is discovered that products are being sold in unauthorized channels.

Trusting the other party has your best interests in mind. Understand what each party wants to get out of the relationship before signing the contract and when possible obtain any details about the license’s history because there are times when a licensor may be exiting a category because they have a strained relationship with a retailer or failed in a category. Licensees are usually granted non-exclusive licenses, which may enable the licensor to directly compete with the licensee.

Failure to follow the terms of the written contract. It is a natural part of business to have both written and verbal direction on a project, but there is often disparity between what is written and what is discussed verbally. Get everything in writing otherwise if there is an issue later on you could be held liable for breaking the contract.

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