Rock steady – UK Licensing market makes solid strides

AT first blush, it may appear that the UK kids licensing landscape has changed little since KidScreen last examined the market in 2005. Bratz still has a chokehold on the girls segment, while Star Wars continues to hold its own with boys. And the highly competitive preschool category, meanwhile, has yet to see another break-out über-brand like Bob the Builder or Teletubbies. But upon closer examination, several socio-economic seeds sown back in 2005 are now evidently taking root.
September 1, 2007

AT first blush, it may appear that the UK kids licensing landscape has changed little since KidScreen last examined the market in 2005. Bratz still has a chokehold on the girls segment, while Star Wars continues to hold its own with boys. And the highly competitive preschool category, meanwhile, has yet to see another break-out über-brand like Bob the Builder or Teletubbies. But upon closer examination, several socio-economic seeds sown back in 2005 are now evidently taking root.

Since the country’s last recession ended in fall 1992, the British economy has enjoyed the longest period of continuous economic growth in its modern history. That said, cumulative public debt is now up to US$2.1 trillion, making the UK consumer market sensitive to interest rate fluctuations. ‘Generally speaking, British retail is in good shape,’ says Stephen Gould, co-MD at 4Kids Entertainment International. But, he adds, a fragile status quo exists. Recent interest rate hikes intended to settle down housing prices and inflation have started taking a toll on consumer spending and are pegged to continue to do so over the coming 12 to 18 months.

Additionally, while the British Retail Consortium pegged UK retail revenues at US$524.5 billion in 2006, the fact that the retail sector generated almost 6% of the country’s GDP means seemingly small market ripples could put the territory on the cusp of an arguably overdue downswing. And that very real threat has licensors speaking more frankly than ever on the state of UK retail.

For one, the woes of Britain’s largest retailer of licensed goods, Woolworths, have been well-documented over the past few years. In June 2005, for example, the chain was suffering a 40% slump in share value following an earlier takeover by a financial buyout firm. And 2006 sales slipped more than 6%, leading to losses of US$26.3 million compared to a US$34.8-million profit the previous year. So by this past spring, analysts who had once assessed the iconic retailer as ‘bad company, good management’ had dowgraded its status to simply ‘bad company.’

Despite Woolies’ woes, the industry has kept publicly (if not privately) mum on the situation – until now. ‘Woolworths has procrastinated in its focus on reinvestment and redevelopment

and is now engaged in a rapid program of realignment, which offers the opportunity to spread the cost of latent investment and renewal across its commercial trade base,’ Gould says. In other words, Woolworths expects its commercial partners to pony up funding to assist in its repair and renewal.

By and large, UK licensors agree they have to continue to pour more energy into cultivating retail partnerships. As Ian Downes, founder of independent agency Start Licensing, notes, ‘Sometimes we can get consumed with our properties and forget that there are other business challenges facing retailers.’ In that vein, he argues licensors have to be more selective about which properties they introduce into the market and need to work harder on developing partnerships.

Retail Innovations

Few licensors have been more active than Disney Consumer Products in developing stronger ties with UK retailers. Mirroring developments on this side of the pond that saw the property powerhouse construct new digs at Wal-Mart’s Bentonville HQ two years ago, DCP has taken the retail-lab concept to the UK. Earlier last year, the company set up franchise-based media rooms in the head offices of retail biggies Tesco and Asda in an effort to immerse their buyers in the world of Disney brands. The Disney-Asda partnership led to the development of a direct-to-retail toy line last summer – a first for the UK market.

As pioneering as it may be, Disney’s new strategy is drawing mixed reactions from industry pundits. ‘Disney has to be careful because it’s a small and incestuous market,’ warns Lisa Shapiro, entertainment division MD of agency The Licensing Company. Janet Woodward, head of licensing at IP company Coolabi, concurs, noting that Disney’s deals have ‘the potential to polarize toy lines so that we end up with certain licensors only supplying certain retailers.’ She adds, ‘If I were a Woolworths toy buyer, I wouldn’t be too keen to take a Disney license right now.’ And according to 4Kids’ Gould, rumors are abounding that the Disney partnerships may be alienating other retailers.

‘This relationship has somewhat decreased the range of brands that Asda supports,’ says Gould. ‘But from an IP perspective, it makes perfect sense to pursue a strategy like this. With retail being so fickle, anything that secures retail equity must be applauded.’ Taffy Entertainment’s UK MD, Louise O’Toole, also approves of what she calls shrewd market moves on Disney’s part. ‘The reality is that we all need to be more in touch with retail,’ she says. ‘Disney has a fantastic portfolio and not many licensors have the capacity or resources to work on that scale. It will be interesting to watch.’

For its part, Disney says that it continues to stay diversified in its relationships with retailers. ‘Asda and Tesco are so far out of London,’ explains Mike Connolly, VP of retail sales and marketing for the UK and Ireland at Disney Consumer Products. ‘So we opened up field operations to get better aligned with their retail strategies and become part of their growth patterns.’ As for DTRs, Connolly says that Disney will continue to pursue them, though he admits that over the next five years, 90% of the company’s business will remain in traditional licensing. ‘DTRs allow for incremental market growth in industries that we aren’t actively practicing in,’ he says.

As with Disney importing US tactics in nurturing retail relationships, UK industry players predict the market will also begin to witness more trends already common in the States, particularly DTR deals. ‘More and more, core licensing efforts will be supported by direct-to-retail and virtual licensing to get innovative product into the market as quickly as possible,’ says Alan Fenwick, Cartoon Network Enterprises’ VP for Europe, the Middle East and Africa.

Room to grow

Perhaps the largest growth opportunity for UK licensors right now is the online catalogue and retailing business. On one side of the trend coin, UK retailers are waking up to the notion that multi-channel retailing allows them to communicate licensed brands more strongly than relying exclusively on bricks-and-mortar shelf space. ‘I remember circling items in the Sears catalogue when I was a kid; that business is alive and well in the UK,’ says DCP’s Connolly, a US import. ‘Catalogues – both print and online – are picking up significant traction in the UK market.’ On the other side of the coin, we see more licensors running their own e-commerce sites in partnership with their licensee bases.

‘We’re looking to offer the world of our properties to alleviate the pressure of in-store space,’ says Fenwick. ‘Retailers can take a number of product lines in a risk-free environment that links to the Cartoon Network website. We’re offering a solution that gives retailers control to expand any given property within their own buying remits.’

Cartoon Network’s online storefront offers the company the opportunity to test new properties and ranges of product before it approaches licensees and retailers. This provides case studies on the retail demand for its brands and helps the company get a foot in the door at larger shops; the opportunity for retail partners lies in linking from their websites to the CN online store to offer their customers the entire line of goods for a given property.

In most cases, the Cartoon Network e-tail hub permits linked partners to offer 60% to 80% more SKUs than any one off-line retailer can carry. CN works on a revenue-sharing model with retail partners, giving them a cut of each purchase made via the retailer’s link to the CN store. ‘This way,’ notes Fenwick, ‘we can fully utilize our online store to…be proactive in identifying and responding to new trends earlier than our core licensing model allows.’

Of course, it may be some time before the multi-channel trend secures a stronghold in the market. According to the British Retail Consortium, more than a third of consumer dollars are spent in bricks-and-mortar shops, and internet sales currently account for less than 4% of total retail sales, despite strong growth in recent years.

A stable licensing market

Retail challenges and opportunities aside, the UK licensing market remains relatively stable. The NPD Group’s License Tracker pegged its retail value at US$5.12 billion (to the end of March 2007), and notes an average of US$8.60 is spent per week per child on licensed products in the region. As for what British kids are hankering for these days, two fast-growing licenses over the past 12 months that have really driven the market, says John Hales, account manager at NPD Eurotoys UK. ‘[BBC Worldwide's] Dr. Who, a uniquely British license, was a great success, thanks to the universal appeal of the new television series,’ he says, adding that Disney/Pixar’s Cars has also been a ‘fantastic license,’ emulating the success of the feature film.

And in an interesting twist, though TV-led properties for boys are still strong (52%), they appear to be even stronger for girls (59%), who put less stock in film properties (4%) than boys (24%). According to Hales, Bratz remains the top license for girls, followed by Barbie, Disney Princess and Winnie the Pooh.

Bratz appears poised to remain on top of the girl property heap with its first-ever live-action film having hit British theaters on August 17, and Disney’s Asda and Tesco partnerships should keep Disney Princess going strong. But if Cartoon Network has its way, The Powerpuff Girls may provide Bratz and Barbie with some stiff competition next year. Capitalizing on the brand’s 10th anniversary in 2008, CN is looking to bring PPG back to its original girl-powered ‘saving the world before bedtime’ essence. Targeting girls four to nine in fashion/beauty, sports and music categories, the company will divulge its full Powerpuff merch program plans later this fall.

On the product category front, there hasn’t been a major shift in terms of what pulls in the lion’s share of sales. Toys are still tops, having posted double-digit sales growth over the past year, followed by apparel, DVDs, publishing and back-to-school. ‘Licensing is a thriving and growing industry in the UK,’ says Hales. ‘It has been consistently growing for the past three years, registering an uptick of 2.5% over the last 12 months.’

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