Prudent Licensing For Toy Companies
In our industry, where achieving retail listings can be so difficult, and where over stocks can literally kill a company, there is often a tendency towards ever increasing reliance on licenses to ensure products are a). listed and b). then sell through retail. Retailers prefer proven brands, as experience shows that consumers often prefer to buy brands they know, trust and love versus purely generic product. Retail is a hard trade, and retailers are often much maligned by toy companies for refusing to take risks, but when you are set to make a comparatively small percentage margin on a product bought at risk, this does not encourage a risk taking approach!
The issue for toy companies is that while extending licensing may seem to be the ‘magic button’ in terms of driving quick sales, it also brings with it significant risks and counter challenges to deal with.
RISKS OF LICENSING
1. Up front financial commitment – for a license with any strength, a minimum guaranteed, non-refundable payment will be expected/required by the licensor. This is a risk from 3 perspectives: a). increasing the financial risk of launching a new product in the instance where the product launch fails b). cash flow challenge, as you pay the advances up front some time before you can expect any pay back c). under recouped guarantees (i.e. where your sales don’t exceed the amount needed to recoup the guaranteed amount at a reasonable royalty rate) – this last factor is the bane of finance departments!
2. Loss of focus on your own brands – the reality is that the majority of the value in your company will be driven by your own brands – in terms of brand equity, long term stability and profitability. Yet if your sales team has some super hot license which everyone loves, you need to pay special attention that they use the ‘must have’ products to leverage additional listings for your own brands.
3. Beware the downward stretch of the roller coaster – the strength of most licenses will ebb and flow over time. Moreover, sometimes you may have a super hot license in your portfolio which drives huge sales. The challenge is that this in itself can create more problems for you, because no license sells at super hot levels forever. The massive movie franchises have slower years when there is no new release, the fads & crazes can reach peak sales for a while, but always cool down eventually. So if you suddenly find in a hit year that you have sales of perhaps 200% of your usual sales, the next year you may be back to 100%, or even less if your organisation has not planned for the down cycle of the license.
4. Licenses come and go – even if you manage to find that rarity of a license which has both huge appeal/sales driving impact AND longevity, licensors are unlikely to guarantee you the rights for longer than 3-5 years at most. More often than not, the end of a contracted licensing period sees a new licensee take over a product category, so beware the treadmill effect – if you play the licensing game, be willing to run the ‘hamster wheel’ to maintain your licensed brand portfolio.
5. Not every licensed brand or product works – strong licenses help to sell more products, that’s a proven fact in general, but beware the exception that breaks the rule – clearance stores are full of licensed products, some of which has just had it’s time, some of which just didn’t sell.
6. Not every licensor manages their licensee portfolio ‘fairly’ – the term ‘slice-ensing’ is used to describe a situation where a licensee tries to slice up the ‘pie’ into too many pieces, leading to poor opportunity or very muddied waters for the licensee. Beware what rights you are getting, and ensure they cover what you need. It is normally prudent to be sceptical of vague promises not to over license versus contractual stipulation!
There are three paths you can take in this business: 1). To pursue building your own brands only – this is often a long and difficult road, but ultimately fruitful…IF you make it. 2). Build a business based solely on licenses – this can be a quick starting, quick boosting approach, but beware building a business based on foundations in sand. 3). Combine both prudently for long term and short term success.
The last option would be the recommended course – if you look at even the corporate giants, with their huge portfolios of proven powerful brands, they still have a licensed portfolio – often around 25% of their total sales are licensed based, despite the vast riches of own brands they poses.
We run a Consultancy business helping toy & games companies get ahead. For more information, check out www.KidsBrandInsight.com/services
We also run a Strategic Sourcing Consultancy advising toy & game companies around the world on their Sourcing strategies, reviewing their vendor base & suggesting improvements. To date our Sourcing services have saved our clients $tens of millions. For more information on how we can help, just go to: www.ToyTeamAsia.com