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Looking Back

2014 Optimism Revisited: Licensing’ Opportunities Rooted In Speed-to-Market, New Distribution, Globalization

Fall is the season when licensing executives tout their optimism about next year. That’s because most have abandoned their optimism for this year. It’s akin to the old adage about the Army—the best base is the one you were at last or the one you’re going to, never the one you’re at.

Much turns, of course, on the retail outlook. By fall, retailers have started to sense the reality going into the all-important holiday season. Back-to-school, for most, was good if not great this year. But very soon thereafter most retailers scaled back their fourth quarter projections.

Of course life looks better with a hit, and the merchandising of Disney’s Frozen has the potential to raise perceptions of licensed goods across the entire licensing community, internally and externally.

Released a year ago, and catching Disney and its licensees off-guard, Frozen turned into the highest grossing animated film of all time. Licensing was ramped up in time for the home video release. And momentum for the property continues as reflected in reports of frenzied sales of Snow Glow Elsa dolls and Elsa and Anna dresses.

Fall is also the season to review what licensors, manufacturers, retailers, agents, and other stakeholders have achieved—and to try to assess what those achievements mean for the coming year.

Product Development and the Need for Speed

Over the last few years, demand patterns for licensed goods have changed—retailers and consumers expect more new goods faster than ever—while the support mechanisms have not kept pace.

Instant printing and other technologies should be helping reduce the time it takes to manufacture goods, but that’s only part of the equation. Product development, approvals, manufacturing, shipping—the nuts and bolts of licensing—don’t move quickly.

Rapid decision-making at a company such as Inditex, which owns Zara and Mango, can be a significant differentiator in the fast-fashion category. Inditex has designers in factories who can make decisions relative to orders and production right on the manufacturing floor.

While Zara and Mango aren’t in licensing, as such, that process addresses only part of the equation on the need for speed; a great deal of the slowness in licensing is from the back and forth on development and approvals more than the manufacturing itself.

Then there is the matter of secrecy, as when video game companies don’t want to make information about their titles known, even under nondisclosures to their licensees, until the release date. That makes it difficult to have merchandise in the stores during peak interest.

In contrast, movie studios are involving their licensing divisions in script and character development in order to maximize the merchandising potential, though the actual availability of finished artwork often comes close to release date, making it difficult for licensees to have goods available day-and-date with release.

“One filmmaker who joined DreamWorks Animation film development meetings…recently voiced surprise at the extent to which decisions about a movie’s content and characters were being driven by the toy executives who joined the sessions,” reports The New York Times. “Mr. [Jeffrey] Katzenberg…was particularly intent on incorporating product-friendly elements.” We have heard similar reports from other studios, right down to which sex the lead character in a film should be.

Such synergy between film and merchandise development can ultimately help speed the process of getting goods to market as soon as there is demand, be that shortly after release, or in the home entertainment window, or as Episode II is prepped for quick release.

Disney, which is unique in this as in many other ways, is shrinking the time between the debut of a new series or character and when merchandise reaches the shelves. Similarly, Nickelodeon’s new show “Blaze” will have products out less than a year after the debut of the show, a first for that licensor. But Disney can force the issue with manufacturers and retailers to best even a one-year lag. No one else has that leverage.

Distribution Channels: Online

For licensed sports merchandise, online accounted for 10% of sales in the U.S. and Canada in 2013. That compares to 8.5% for licensed goods across all property types. We suspect that sports figure will have increased a point or two in 2014 (final word on that late in the first half of 2015), and will continue to outpace the growth of online overall in the immediate future.

Sports is unique on several fronts, though:

  • Fanatics has a near monopoly in managing league, team, and player websites selling licensed goods—as well as running its own sites competing with the league, team, and player sites.
  • TV exposure for the major sports is enormous, and there’s ample opportunity to promote online shopping through TV ads. This is a perfect combination for encouraging impulse purchases.
  • The leagues have vastly improved the way they merchandise special events, and their licensees have vastly improved speed-to-street (and online store) even for unplanned events such as hitting an unexpected milestone.
  • Sports leagues and teams have been speedy and high-profile in terms of personalization of merchandise online.

Online has become more valuable to other types of properties, too, but for many that’s more a matter of catering to niches than to a mass sports audience.

Most important is integrating online with more traditional distribution channels. The consumer today expects (even if it isn’t reality much of the time) a seamless experience across channels, whether researching or purchasing. Order online and pick up in-store. Order online for home delivery (with free shipping expected). Buy online and return in-store. Comparison shop online while in the store. And so on. This holiday season, Target is introducing an addition to its app to help customers locate items in the store.

In the music world, Merchbar is trying to be the Fanatics of music merchandise, claiming to offer more than 100,000 items from more than 3,000 music artists. Many have only one or two items, and many of these are vinyl LPs or other core music rather than licensed products. Also featured are bundles, such as a Tony Bennett/Lady Gaga signed CD with lithograph for $400. But the bulk of offerings are also the usual hoodies, t-shirts, and caps.

Distribution Channels: Brick and Mortar

The winnowing down in the number of major retailers appeared to slow somewhat in 2014. That isn’t to say retail is getting stronger, but more that the weakest players are losing in the battle of Darwinian natural selection.

JC Penney appears to be turning a corner; Sears and Kmart not so much. Best Buy is profitable once again but Radio Shack is still troubled, in a segment where low margins have destroyed many others over the years. (Remember Circuit City? Silo? Crazy Eddie?)

Teen retailers such as Aeropostale, Abercrombie, and American Eagle are reducing the number of their stores.

Specialty retail, particularly in apparel and accessories, continues to increase its reliance on capsule collections, exclusives, and other licensed means of differentiation. Forever 21, for example, introduced a limited-time apparel and accessories collection featuring animated Looney Tunes and Hanna-Barbera characters from Warner Bros.

Walmart, Target, Tesco, and Carrefour continue to experiment with different format stores, moving toward smaller rather than larger, and all have slowed their expansion plans. Carrefour’s clearly stated priority to investors: “Restore our success and profitability.” Tesco installed a new management team mid-year.

Differentiating Sports and Entertainment

Not so long ago, marketers could differentiate between sports and entertainment properties fairly clearly: Sports, barring labor disputes, reliably came around every year.

There was continuity of the sport and the teams, and the players changing teams or uniforms being re-designed were just additional ways to boost the licensing side of the business. The two sectors are behaving more similarly today.

Filmed entertainment in the “licensing age,” generally defined as starting with Star Wars in 1977, was a series of one-shots, with a Star Wars series, and a Batman series a few years later, exceptions.

Even then, when new episodes of films came out they were still thought of as one-off events, often with three years or more between releases, and the result was that sales would boom in a movie year, and drop off as much as 75% in a non-movie year.

There’s a parallel in sports: If a team wins consecutive championships (or several times within a few years), it won’t see the bump in sales that it sees the first time.

Today, successful film properties of the licensing kind are prolonged and sustained through multiple releases. Those peaks and valleys have leveled off as the studios market their sequels as just that, and as they release new “episodes” in much faster succession. Look at the film release schedule in the Nov. 17 issue of TLL with its 69 sequels due between mid-2015 and 2020 to see how prevalent this trend is, though one difference over the years is the degree to which the new sequels are based on existing source material.

Continuing the sports/entertainment comparison, “back then” even long-running TV series were rare long-term merchandising successes. Barney had his run, as did the Power Rangers, and others, but Sesame has been the long distance runner. Star Trek was another exception that made the rule, though it had major film support over the years as well.

Today, for TV properties, the “reboot” brings old familiar properties back to life — witness the $750 million in retail sales of licensed merchandise the Teenage Mutant Ninja Turtles generated for Nickelodeon in 2013 in the U.S. and Canada. That may or may not have staying power; it will be interesting to monitor the success of the various Disney Junior properties that have come on so strong so quickly, including Sofia the First and Doc McStuffins. Will their sudden rise be fad-like, or will Disney turn them into franchises? Stay tuned.

With the greater continuity of successful entertainment properties, and the wider array of media on which they are exposed, entertainment properties are establishing the long-term viability of sports properties. There are ups and downs—a movie year might be the equivalent of a World Series win in some cases—but more properties are establishing longer life spans.

Finally, sports and entertainment are increasingly merging in at least one additional way: cross-licensing, with examples ranging from MLB with Hello Kitty and KISS, and NFL Players Inc., NBA, and NHL with Domo, among others in the U.S., to the Australian Football League with Sesame Street, and the 2015 Rugby World Cup with Shaun the Sheep internationally.

Non-U.S. Properties Expanding Globally

As we reported in the 8th edition of “International Licensing: A Status Report,” the proliferation of homegrown properties in literally every territory around the world creates significant competition in those territories for everyone from Calvin Klein to Hello Kitty, Disney to Coca-Cola.

Equally important, many of these homegrown properties are starting to expand globally. Typically, such expansion begins regionally (Pleasant Goat and Big Big Wolf starting life in China but expanding throughout Asia) and then beyond (Violetta originating in Argentina and moving on to success in Latin America and Europe). Similarly, the Zenit soccer team in St. Petersburg, Russia, has expanded into Europe with its licensing program.

Food/Beverage/Restaurants/Chefs

The New York Times recently renamed its weekly “Dining” section “Food.” The intention is to reflect the extended array of reporting it delivers. In licensing, too, there is a wide proliferation of interest in food and beverages: More food and beverage brands, restaurants, celebrity chefs, and others are licensing out their marks. And there is a robust expansion in the number of licensed frozen and prepared items, wine and beer, and other food/beverage items, sometimes distributed in a variety of formats such as continuity clubs for wine licensed by Virgin, Zagat, the Wall Street Journal, and others.

It often seems as though there couldn’t possibly be room for another chef. Consider that Martha Stewart Living Omnimedia (MSLO) recently took a write-down in the value of the Emeril Lagasse brand while at the same time saying it will devote more resources to Emeril in the future. Yet fueled by popular TV series, the aisles at Target, Macy’s, Tesco, Carrefour, and other retailers continue to be filled with licensed cookware, the face on the package changing rapidly when a given line fails to move fast enough.

One of the more interesting aspects to monitor going forward is whether “kids as foodies” has staying power. As we reported this year, bakeware for kids is an emerging category, with Discovery building a Cake Boss Jr. line with Meyer Corp. and Moshi Monsters licensing Click Distribution for silicone molds, mixing bowls, cookie cutters, and other items. These joined more traditional on-going lines from Williams-Sonoma, Wilton, and others that are intended to appeal to kids via licensed characters such as Star Wars, Marvel, Disney Princess, Hello Kitty, and others.

Technology: Wearable and Otherwise

Wearable technology. We’re a little surprised that there haven’t been more deals yet for fitness items. Tory Burch is licensed to Fitbit, Biggest Loser to Garmin for Vivofit, Skechers to Sports Beat.

We suspect there will be more licensed fitness tracking devices at the Consumer Electronics Show in January, though this is a category where the media attention is likely greater than sales to date (let alone actual usage).

CES will also showcase wearable devices embedded into various apparel and accessories, typically tied to fitness.

Licensed ‘Devices’ and Content.

Fuhu has its DreamWorks DreamTab tablet incorporating various DreamWorks properties. V-tech’s Innotab line uses cartridges under license from Warner Bros. (Scooby-Doo), Nickelodeon (SpongeBob), and Disney/Pixar (Cars), among others. (Ironically, the picture of the device at Toys R Us’s website features DreamWorks’ Mr. Sherman & Peabody, from that ill-fated movie.) And Leapfrog’s LeapPad features Disney, Turner, Nick, Sanrio, and other characters.

Nokia is licensing its name to Foxconn for tablets, and anticipates licensing additional devices other than handsets (Microsoft has that license through the end of 2016), and other tech companies can be expected to follow suit.

Pets: The Reality Show

The pet products business has been heralded for several years now as ready to take off, but the reality is that much of that has been wishful thinking so far. The opportunity appears to be there, but pet retailers have their own brands, and individual categories aren’t that big.

Our Store Check Surveys this year, conducted by Project Partners Network, revealed a strong presence for private labels in pet and general merchandise stores with pet sections. Licensing could help stores better merchandise this category in-store (U.K. and European stores do an excellent job on that front, despite the fact that the category is much less developed for licensing there than in the U.S.), while co-branding with a licensee could be vehicle for adding a health component to such offerings.

Most licensing is around apparel (sweaters) and accessories (leashes, Halloween costumes) spotlighting sports teams and entertainment characters.

Still, there are lower-profile licensed brands you might not expect, such as Burt’s Bees, or Bed Head (called Pet Head in this case) that are entrenched, while some of the bigger ones (Martha Stewart) have had a harder time making inroads. We believe that brands that are extending into functional applications, such as Arm & Hammer, Body Glove, and the aforementioned Burt’s Bees and Bed Head, will have staying power. This was a modest growth area in 2014.

Social Media: More Opportunities, More Competition

This is the nut everyone wants to crack, from being the first to recognize a rising social media star to harnessing social media as a marketing tool. Social media makes it easy to pinpoint targeted audiences, but the competition to reach them is so great, and attention so fragmented, that it all boils down to more opportunities, more competition.

While we have reported about fashion, home, food, comedy, and other bloggers who have extended their brands via licensing, video blogger Bethany Mota is the one break-out story this year, with her direct-to-retail at Aeropostale. Two likely indicators of the success of that deal: It was extended into additional categories, and late in the year the same chain introduced an exclusive United XXVI collection featuring teenager Nash Grier and others who are featured in his virally-popular Vine comedy videos. Beyond bloggers, other social media outlets that have potential for originating new properties are Instagram and Pinterest. Also in this realm: Target had capsules with a handful of Pinners in the stationery/party category in 2014.

Slots and Lotteries

We admit it: While we’ve written (most recently in 2013) about the breadth of licensed properties that work for slot machines and lotteries, we have no sense the order of magnitude of this category. What we are hearing, however, is that the success of licensed properties for online slots is growing exponentially.

All gaming licenses are structured differently than for other consumer products, in part to comply with regulations, but also because the nature of the business itself is so different. From Hasbro’s Monopoly to Act III’s Three Stooges to King Features Betty Boop, this is a segment to embrace if you can. Some agents and consultants are even carving side niches with an expertise in this area. Nor is this category limited to working with traditional pop culture icons. Tapatio Hot Sauce has been licensed to Frost Productions for lotteries.

Touring Shows, “Experiences,” and Theme Parks

The number of licensed attractions (encompassing touring shows, exhibitions/“experiences,” and theme parks and rides, is also growing at a very fast clip. That Feld Entertainment was able to turn its touring Disney on Ice into a Frozen-themed production within six months is impressive — but there was an existing show, arenas were booked, and Feld and Disney have worked together on multiple shows for years. Still, that required new costumes, new routines to new music, and more. Getting that show on the road while the movie was still hot was a not insignificant achievement.

More typical is a 2014 Lionsgate announcement for a Hunger Games touring show set to embark in 2016, licensed to Dutch company Imagine Nation and Triangular Entertainment in the U.S.; or DreamWorks licensing Shrek to Merlin for a 2015 visitor attraction in London (with five other cities to be added over nine years).

The success of Kitty-Con, a Hello Kitty festival in L.A. probably portends similar events to follow elsewhere.

Theme park attractions are being licensed to foreign operators, in particular in the Middle East and Asia, and in some cases are being developed by the licensor together with local governments. Among the projects announced in 2014:

  • Ferrari Land Park at PortAventura, a resort in Salou, Spain (the first Ferrari Park opened in 2010 in UAE), licensed to private equity firms Investindustrial and KKR.
  • Fox has one project in Malaysia (2016) and a second, in tandem with Village Roadshow Theme Parks and the Korean government, in Seoul (no date specified).
  • Universal Beijing, with the first phase anticipated for 2019.
  • Shanghai Disneyland (announced prior to this year, but slated to open in 2015).
  • Shanghai DreamWorks Animation.
  • Warner Bros. is working on a park for Abu Dhabi.

Meanwhile, Cartoon Network’s Amazone water park, under license to Amazon Falls in Thailand, just celebrated its first anniversary.

Owning to License

When we published a financial analyst’s comparison of the performance of Iconix vs. Sequential Brands in our daily e-letter, TLL Daily Advisor, it was one of the most-clicked items we’ve ever run. Interest in owning brands with the specific intent of licensing them is very high.

As this is written, Sequential is looking to acquire Perry Ellis International. This business model isn’t panacea—not all brands work out—but when it does it is clearly very lucrative. Of course the number of brands available may be limited, and the prices will rise dramatically as more companies compete for them. To date, many of the brands acquired in this fashion have either been purchased in bankruptcy, been dead brands, or are celebrity brands looking for longevity past the family’s interest.

Nothing new there, but if the stock market continues its current rally (this is written mid-November), more investors will be looking to mine this business model, even as prices for acquiring go up.

Trend-Watching: Personalization and More

Personalizing jerseys and other items has been on the “trends” list for a couple of years now, but we’re wondering if that may have been more a passing fad than a long-term trend. It’s not that personalization has disappeared—that’s not likely to happen—but that the newness factor has worn off.

Given how popular the NFL and some of the other major sports leagues have said personalization of jerseys is, it’s surprising that it isn’t prominent on the league or team shopping sites run by Fanatics, despite the fact that it is high profile in ads during games. Going to a site cold, you have to search the term “personalization” to find them.

It may also be that other forms of personalized interaction with licensed properties are taking root—in particular the integration of social media including Instagram and Pinterest as well as Facebook, Twitter, YouTube, blogs, and others.

We’re hedging our bets here, because there appears to be growth as more properties and more platforms are involved. But if you’re thinking about personalization opportunities, look around to see how much is out there. This is one where anecdotal evidence can be valuable.

Something like this could well differ from community to community.

Other trends that appear to be increasing in significance:

  • Construction sets. LEGO’s ascendancy to the top tier of toy companies, and Mattel’s acquisition of Mega Bloks in 2014 suggest the toy makers anticipate continued growth in this sector. Girls are part of the mix now in terms of target audience for construction sets, and the competition for licensed properties—once the bane of LEGO, now the toy-maker’s acknowledged savior—is fierce.
  • App-connected toys. Toy Fair is coming in February; we’ll see the degree to which this trend holds over from last year. It appears to be standard operating procedure to have an app in just about any toy, but often they don’t add much value. We think this is still in its infancy—that no one has really discovered the “killer app/toy” that will define the segment. It will come.
  • Social responsibility. This is particularly acute at the moment relative to colleges and universities, where students are urging administrators to demand stringent guidelines (and enforcement) for where products are manufactured and under what conditions. As with “Made In [insert your country here, because this isn’t limited to the USA],” this movement isn’t limited to students and schools. However, the social responsibility aspect is probably strongest in academia.
  • STEM. Science, technology, engineering, and mathematics. The whole concept of STEM will extend well beyond classrooms and beyond properties that have a clearly delineated educational thrust, as has been the case thus far with assorted Scholastic, Nickelodeon, Genius, and other brands that are mining this territory.
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