Shelf Interest: Licensors Cut Exclusive Deals with Retailers

Step into an Office Depot these days and you’ll see crayons, markers, glue sticks and other items from Scholastic. Best known as a publisher of children’s books and educational materials, Scholastic initially linked with Office Depot for an exclusive branded product line of schoolbooks for teachers, but now it’s a sort of house brand for the chain. “Sort of” because such licensors are expanding the definition of private label and, along the way, providing a bright spot in the otherwise moribund licensing industry.

“It guarantees us shelf space, and it gives them something exclusive and a product array from a brand that has recognition with teachers, kids and parents,” says Leslye Schaefer, Scholastic’s svp, licensing. “Plus, the economics of them producing it themselves are favorable — from a margins or price standpoint, they can be more competitive.”

Welcome to licensing, 2009 style. In this craptastic economy, traditional thinking is out (bye bye retail-channelwide entertainment deals!) and creativity (Let’s make up a deal!) is in — and retailers and licensors are finding common ground.

“They usually mix like oil and water, but they’re working together in this recession,” says Steven Ekstract, global publisher of License! magazine. He notes that the emerging trend of exclusive licensing deals between a brand and a retailer allow the best of both worlds. “You think people are going to buy the cheapest thing they can, but they also want things they can trust because everyone wants comfort.”

Or, as Jamie Salter, CEO of Hilco, which has exclusive Tommy Armour and RAM Golf equipment and apparel lines selling at Sports Authority, puts it: “Retailers have traditionally not been good brand builders. They know how to sell on price, but they don’t know how to build brands.”

Years ago, retailers were primarily seen as distribution mechanism for companies like Procter & Gamble, Kraft and General Mills, which spent millions in advertising and creating brands. But the balance has shifted, and retailers learned long ago that sprucing up their house brands with new packaging and, in some cases, advertising, can reap dividends. According to the Private Label Manufacturers Association, such store brands now account for one of every five items sold in U.S. supermarkets, drug chains and mass merchandisers.
But there are some downsides to store brands. Retailers don’t like taking all the risk, and traditional store brands-those that were created by the retailer — don’t have the draw that a brand created elsewhere does. “Cyclically, retailers fall in and out of love with private label on a regular basis,” says Martin Brochstein, svp-industry relations and information for the Licensing Industry Merchandisers Association (LIMA). “What happens is, they’ll be selling a lot of brands, and they have a private label business. They look at those margins and say, ‘Wow, these are great-let’s get me some more!’ And then they beef up the private label a lot, and that’s great until something doesn’t work. And then they say to themselves, ‘Where do I go for the markdown money? Oh, wait a minute, it’s us — we own it.'” At this point, brands start looking attractive again, and the next stage of the cycle begins.

Meanwhile, the licensing business has its own issues. The competition is tighter than ever, and there are fewer breakthrough properties. Promising entertainment up-and-comers such as Wow! Wow! Wubbzy! and Yo Gabba Gabba! haven’t turned into Dora the Explorer dollarwise. Even Disney seems to have run out of steam.
“The only variable is if there’s a super-hot property out there that commands consumer and retail attention and defies what’s going on in the marketplace,” says Debra Joester, president of the Joester Loria Group, New York, the licensing agency for Jeep, Care Bears and Discovery Communications. “But today, that property doesn’t exist.”
Brochstein agrees. “The definition of success is smaller than it was five or 10 years ago. It was easier to have an $800 million or $1 billion licensing program on a tentpole film then,” he says. “It’s incredibly difficult if not impossible now because there are fewer retailers and so many more properties. Memorial Day used to kick off summer movies. If I’m a boy, I got Wolverine, Star Trek, Terminator. Which one am I supposed to spend my increasingly scarce disposable income on?”

A marriage of convenience for licensors and retailers makes sense, especially as retailers have gotten much more sophisticated about private label. “They now have in-house departments,” Brochstein says. “And so they have much more of a vested interest in making private label work because they have infrastructures to feed. So it’s more entrenched than it’s ever been.” Brochstein points out that companies such as Iconix and Cherokee are “making a very nice living” doing direct-to-retail licensing of their brands. Such brands are basically house brands.

Direct-to-retail licensing isn’t new. Discovery Communications just renewed its exclusive line of Animal Planet toys and plush for Toys “R” Us, which started as a 10-year deal in 1999. But the economy is prompting more such deals. On the eve of the Licensing 2009 International Trade Show, which has moved from New York to Las Vegas, the LIMA Statistical Survey determined that royalties collected by licensors for the U.S. market totaled $5.7 billion — a 5.6 percent decrease over the 2007’s $6 billion. There’s generally a lag factor in tracking revenues, so the full impact of the recession may not be reflected until next year’s total is tallied.

“The recession is causing sales…and royalties to be down and licensees to renegotiate their financial commitments. It’s making it more difficult to close deals,” says Michael Stone, co-founder, president/CEO of the Beanstalk Group, a New York agency that lists Ford, Procter & Gamble and Jack Daniel’s among its clients. “But it’s also opening up opportunities [for brands and property owners] to develop retail-exclusive programs.”

One such program was via Kohl’s, which has an exclusive arrangement to sell Food Network-branded housewares in a deal brokered by licensing agency Brandgenuity, New York. Kohl’s also has a line on Chaps, Dana Buchman, Simply Vera by Vera Wang, Mudd, Hang Ten, LC Lauren Conrad and other exclusive brands. According to the company’s last quarterly statement, exclusive and private brand sales comprised 44 percent of total store receipts.

“These are exclusive to them, and they are responsible for the sourcing,” Brochstein says. “It works like any other licensing deal. The brand owner has approvals, and all that. It’s just there’s no third-party manufacturer who is supplying Kohl’s.” Wal-Mart, meanwhile, has launched several brand exclusives, such as one with CBS Consumer Products for an America’s Next Top Model line.

Last December, the superstore debuted fashion-forward togs, bags, hats and room decor for juniors and young women. Apparel is being added for spring/summer.
Gap also put together a deal with Peanuts, Old Navy did another with Marvel and Zara launched a direct-to-retail deal with MTV. Hot Topic’s fourth-quarter profits were up 19 percent because of its program based on the hit movie Twilight.

As that deal shows, when retailers choose the right property, they can buck the recession. “As retailers are consolidating their inventory, there’s a risk aversion; they’re limiting their exposure,” says Liz Kalodner, evp and general manager of CBS Consumer Products. For brand licensors and licensees, she says, “The margins are high, and generally it’s quite efficient to [create an exclusive brand] as you are producing for a specific retailer, so you know your quantities ahead of time.”

That’s not always the case, of course. “We’ve seen some successes and some failures recently,” says Joester. For every Kohl’s there’s American Living, JCPenney’s project with Ralph Lauren, the first line created by the designer that didn’t bear his name — or his fancy prices. Brochstein says deals like that don’t work because they aren’t a good fit. “The [properties] that succeed have an image, expectation or performance. They mean something to the consumer,” he says.
Still, for every deal gone wrong, the math is too compelling right now. Licensors need the venues, and retailers need strong, cheap brands that will draw consumers. Exclusives are the only way that, say, Toys “R” Us can compete with Wal-Mart on something other than price.

At the same time, licensors are adapting to the times by realizing that in this economy, it’s better to go for base hits rather than home runs.

“I would never bash where I came from, but the rules of ‘Do it our way!’ aren’t working anymore,” says Imagi’s Corbett, a former marketing/promotions executive at Warner Bros. and Disney. “We are more flexible in our partnerships. It used to be all about licensing fees, but people are being more creative now — making back-end deals from box office. We’re all in this economic downturn, and people want to get deals done.”

Ekstract agrees. “Everyone is saying, ‘If a retailer can get behind this, we’ll give them an exclusive,'” he says. “If you roll out [the same merchandise] everywhere, it just becomes a price battle. And no one wants that.”