My retailer, my vendor:

When merchandise based on Steven Spielberg's sci-fi weeper E.T. debuts at Toys `R' Us stores later this fall, consumers won't see the name of a traditional toyco emblazoned anywhere on the product. That's because the licensee, in this case, also happens...
June 1, 2001

When merchandise based on Steven Spielberg’s sci-fi weeper E.T. debuts at Toys `R’ Us stores later this fall, consumers won’t see the name of a traditional toyco emblazoned anywhere on the product. That’s because the licensee, in this case, also happens to be the retailer. As part of a three-year agreement TRU signed with Universal Studios Consumer Products Group (USCPG) and Amblin Entertainment last fall, the toy retailer effectively became the master licensee for the property, giving it exclusive rights not only to toys, but also to other major categories like electronics and sporting goods.

Though it wasn’t as comprehensive a deal, in February, Disney inked an apparel agreement with Kmart for the U.S., giving it rights to develop an exclusive line of children’s clothing featuring Disney’s name and characters. That agreement followed similar apparel deals the studio signed with stores in the U.K. (Tesco) and Sweden (H&M), as well as Nordic retailer Lindex. Such deals, known as direct-to-retail licensing agreements, are by no means new to the industry, but their scope and frequency have been growing of late.

With manufacturers currently taking a gun-shy stance towards entertainment licensing, licensors are increasingly finding it easier to partner with retailers to get merchandise for their properties to market. And retailers-always eager to differentiate their product offerings from their competitors-are only too happy to accommodate them.

Though direct-to-retail agreements don’t represent a major part of Toronto-based Nelvana’s overall licensing business, it is an option the company is looking at more seriously, says Sid Kaufman, executive VP of worldwide merchandising. In the past, Nelvana has granted exclusive licenses to bookseller Barnes & Noble to create and sell wall hangings for Franklin and Little Bear, and at press time it was negotiating exclusive deals for two of its properties with specialty retailers.

‘Our goal, first of all, is to make the best product, and second of all, to make sure that the product is promoted properly so that the consumer is aware of it,’ says Kaufman. ‘And in today’s marketplace, there are limited places you can go to get those two very simple objectives accomplished.’

For Universal, which will rerelease the E.T. film in spring 2002 to commemorate the property’s 20th anniversary, a key consideration for signing the direct license with TRU was to protect the longevity of the brand.

‘Toys `R’ Us agreed that it would take the brand and develop it over many years, and that’s what we wanted for E.T.,’ says Tim Rothwell, executive VP of merchandising at USCPG. Though Rothwell says Universal could have landed any number of traditional licensees, he feels by locking in with a global retailer such as TRU, it reduces the chance E.T. will fall victim to the rapidly shrinking selling windows most theatrical properties are subject to.

‘The last thing we want to see is one of our brands burn out over a six-week period. Hundreds of millions of dollars go into the development and the marketing of these properties, and to have them at retail for a couple of months and then suddenly disappear in the form of a markdown doesn’t do anybody any good.

‘When a retailer says they’ll give you special placement in the store with in-store signage and marketing support, and on top of that they’ll support the property longer, then you have to look at the numbers. It may turn out that you’re actually protecting the brand because you’re not beating it up over a six-week period,’ says Rothwell.

Though one of the main theoretical advantages to inking direct agreements for licensors is that retailers will have more incentive to make sure the product does well (like any other licensee, they must pay royalties and guarantees), there is a downside to such deals. By hitching their fortunes to one retailer, licensors are abandoning the potential sales and exposure that would be available to them if they licensed a third party that would sell it to all retail channels. What’s more, it’s unclear whether licensors are able to garner the same level of royalties and guarantees for exclusive agreements as they could if they had gone the traditional route and granted a license to a vendor.

Jackie Blum, president of licensing, sales and marketing at emap, which manages extreme sports brand Gravity Games, says she is willing to give a retailer a break on the terms of a direct agreement if it will allow the property to prosper in the long run. ‘I think the reality is that when you sign a direct-to-retail license, in general, you’re going to take a lower royalty in exchange for the assurance that product is going to be put in front of the consumer,’ says Blum.

emap recently signed a deal with Toys `R’ Us granting it exclusive rights to create Gravity Games bikes and accessories, pogo sticks, trampolines and electronics, as well as exclusive distribution of products created by the other Gravity Games licensees like Jakks Pacific (toys) and Basic Fun (keychains). As per the deal, TRU will establish Gravity Games areas in all of its stores this fall.

Another potential minefield for licensors who sign direct licensing agreements with one retailer is that they could alienate licensees, who are being entirely cut out of the equation, or worse, other retailers, who are missing out on stocking the product.

Though Universal’s Rothwell recognizes that direct-to-retail agreements could negatively impact the business of licensees, he feels that in some instances such deals are necessary, given the attitude of some vendors toward entertainment brands. ‘A number of licensees have gotten to the point where they buy up all of the licenses and then they just pull out the one that retailers want to talk about. Consequently, your brand is not being presented and sold in as the main property because they’ve got 12 other properties in their bag,’ says Rothwell.

As for retailers, Rothwell feels that any backlash that may occur due to a direct agreement is mitigated by the fact that every retailer has signed, or is trying to sign, exclusive distribution deals. Whether it’s Kmart (Martha Stewart), Target (2Grrrls and Mossimo) or Wal-Mart (the Olsen twins), retailers long ago discovered that carrying product for well-known brands that your competitor doesn’t have is an effective way of drawing consumer traffic and boosting sales.

For Toys `R’ Us, exclusive content is one of the major planks of a revitalization strategy that the retailer embarked on a year and a half ago. In addition to E.T. and Gravity Games, the toy retailer has since signed direct licensing agreements with Home Depot, Animal Planet and Scholastic, among others. ‘Our goal is to try and build evergreen properties that people come to identify with our stores 52 weeks of the year, as opposed to looking at a traditional licensing situation where people try to work within a six-week window, do as much business as they can, and then throw the stuff out of the store,’ says Warren Kornblum, executive VP of worldwide marketing and brand management at Toys `R’ Us.

So far, the strategy appears to be working. Exclusive merchandise-which includes both TRU’s proprietary brands and licensed exclusives (the company doesn’t break out the numbers)-accounted for 13% of TRU’s

overall revenues in 2000, up from 5% in ’99. And TRU’s CEO John Eyler projects that figure will grow to 20% this year.

Beyond giving consumers another reason for regularly visiting a store, product derived from exclusive licensing deals also allows retailers to take higher margins. Because retailers are selling a product that isn’t available anywhere else, they don’t need to be as competitive on price, says Lauryce Graves, executive VP of merchandising at FAO Schwarz.

While licensed exclusives (which account for 5% to 10% of the chain’s annual revenues) help to differentiate its merchandise from other stores, it also gives licensors another outlet for product they would be hard-pressed to get a licensee to create. High-end collectibles like a US$225 Lamoge Yoda box or a US$100 Darth Vader Nutcracker (both of which Lucas licensed FAO to create), for example, are some of the items the chain specializes in. ‘For most manufacturers, those types of products offer too limited a market, but for us it’s a good fit,’ says Graves.

By signing exclusive licensing deals, retailers are adamant that they aren’t trying to cut into an area that has traditionally been the business of vendors. ‘We honestly hope that our suppliers are beginning to understand what we’re trying to do with [our exclusive merchandise]. We think it’s good for the whole industry. Our business was up with 19 out of 20 of our key vendors last year, and that was during a period when our exclusive content went up significantly,’ says TRU’s Kornblum. He also notes that in many cases where TRU has a direct license, the company will use its existing suppliers to manufacture product under contract. Nonetheless, the optics on such deals aren’t great.

‘I think the major licensees in major categories feel like their customer is competing with them all of a sudden,’ says Nelvana’s Kaufman. However, some vendors, like Brian Dubinksy, CEO of L.A.-based toyco Manley Toy Quest, downplay the impact that direct-to-retail agreements could have on manufacturers. ‘When a licensor gives an exclusive to a retailer,’ says Dubinksy, ‘it’s usually because they don’t have anywhere else to go. If you’re a licensor and you have the opportunity to sell your program to all retailers, then you’re not going to grant an exclusive. With only one channel of distribution, you’re definitely not going to maximize your sales efforts.’

Dubinksy is also dubious of the claim of some licensors that direct-to-retail agreements will protect the longevity of a brand to a greater degree than traditional third-party deals can. ‘Either a product sells or it doesn’t. Do you think a retailer is going to keep merchandise on the shelves if it doesn’t? They’re going to mark it down and close it out,’ says Dubinksy.

Though it’s tempting to dismiss the increase in direct-to-retail signings the industry has seen in the last year as cyclical-a point of leverage, perhaps, that licensors can use in their negotiations with vendors-many believe such deals will become more common as the marketplace becomes more cluttered with properties. Josh Kislevitz, senior VP of domestic licensing at New York-based agency United Media, thinks it’s only a matter of time before a studio names a retailer master toy licensee for a major theatrical picture.

‘If you backed up five years ago, you would have said nobody in their right mind would have done that. Things change. The movie properties have not performed up to everybody’s expectations. If you get a retailer-and really, we’re only talking about the top two or three chains-one of them could make a major movie-based program work,’ says Kislevitz.

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