direct-to-retail models wearing on Licensed apparel

T he fact that topics such as 'How retailers can prepare to work directly with factories' crowded the seminar lineup at last month's MAGIC show in Las Vegas signals a big shift taking place in the US apparel market, and especially in the kids licensed clothing category.
September 1, 2008

T he fact that topics such as ‘How retailers can prepare to work directly with factories’ crowded the seminar lineup at last month’s MAGIC show in Las Vegas signals a big shift taking place in the US apparel market, and especially in the kids licensed clothing category.

Direct-to-retail manufacturing,

a business model on the rise over the last two years, has arguably had its largest impact on the apparel and accessories category to date. US mass retailers now regularly vie for properties along with their traditional suppliers (a.k.a. licensees) in the hopes of cornering a larger chunk of the US$3.6-billion licensed apparel pie. However, licensors continue to approach DTR apparel offers strategically and might not be throwing their properties at retail partners in exchange for large tracts of floor space as readily as one might think.

From a retail perspective, it’s easy to see why big players such as Walmart and Target are getting hooked on the concept – with each deal, they are guaranteed exclusive product to further differentiate themselves from competitors, as well as a higher margin. For example, an average licensed boys T-shirt might cost US$5 to manufacture. Licensees will typically sell it to a retailer for US$8 wholesale on an SRP of between US$10 and US$12. When the retailer removes the licensee from the equation via DTR, it can pocket the entire sales margin.

On the licensor side, a DTR deal can mean landing hot real estate in a climate where it’s becoming harder and harder to even get a foot in the door. And if it goes well, a DTR can drive easily renewed, high-volume business. Even the lower royalty rates of 4% to 6% quoted by industry sources are not a big deterrent to the right deal. Retailers pay royalties on retail prices, whereas licensees that typically pay between 12% and 14% do so on wholesale prices. Thus, the two deal structures can generate almost equivalent royalty revenues.

Additionally, kids entertainment licensing continues to drive sales in apparel. According to The NPD Group’s chief retail analyst, Marshal Cohen, hot tween licenses such as Hannah Montana can double apparel sales year on year, making an exclusive product offering more attractive to US mass retailers.

But entering into a DTR deal is not a decision that can be made in a snap, and apparel licensees aren’t being cut out of the equation as quickly as some might suggest. Paul Gitter, North American president of consumer products at Marvel Entertainment, says there are a number of questions to ponder. Can better product be created in dealing directly with a retailer versus a licensee? Will the deal land more retail space? Will the retailer provide more in-store support than it would for a licensee?

Gitter is also more likely to reserve DTR deal-making for retailers or distribution channels where the property in question previously had no presence. For example, Marvel got classic Spider-Man bedding and room décor into Pottery Barn Kids across the US this past February as part of a strategic move to help elevate the status of the brand

as well as complement its mass-market programs. Otherwise, Gitter prefers the wide retail reach that a traditional licensing agreement can engender. ‘If you have a strong licensee that’s got wide distribution,’ he says, ‘clearly you’ll get much better penetration across the market, versus going with just one retailer.’

Similarly, apparel DTRs can be useful for lesser-known properties; it’s one way to get guaranteed exposure when partners are not lining up at the door. With red-hot or classic properties, there isn’t the same sense of urgency; everyone’s going to want a piece of the action, and the licensor can control exposure and placement to some degree. And as an industry source points out, DTRs can be a bit of a gamble if a licensor has given over all rights to the brand to a retailer. If the program fails, the property is pretty much dead in the water – the retailer is under no obligation beyond its initial guarantee to make the license work, and the licensor can be left with an unsellable IP. A smarter move is to portion out DTRs based on exclusive designs and continue working with licensees to get product into other retailers.

It also helps to scope out licensees that come with retailer pre-approval. Cartoon Network’s VP of US consumer products, Christina Miller, says she’ll often float the names of three apparel companies she’s thinking of signing as licensees when she’s in discussions with retailers. She’ll ask if the retailers have worked with them, what that experience has been like, and what their creativity and market strengths are in terms of targeting specific kids demographics.

That said, some licensees are finding themselves mired halfway between their traditional role and that of work-for-hire contractor. Retailers, it’s worth noting, are not manufacturers and often don’t have the product development knowledge and sourcing expertise to mount large-scale DTRs. Experienced apparel licensees are filling the gap, doing the work on a contract basis, walking the retailer through the process, and hopefully, making up some lost revenue. But as Children’s Apparel Network licensing manager Albert Solano explains, it’s a lot like playing monkey in the middle. The manufacturer now has to answer to two partners, instead of the customary one, often creating more work for his company. The licensor, for example, may provide an apparel company with a style guide without first going over the designs with the retailer; so when product is made, the retailer may end up disliking the final execution, and then it’s back to square one.

For the past two years, Children’s Apparel Network has been running DTR programs for Disney properties at Sears (Winnie the Pooh, Mickey Mouse Clubhouse, Princess, Fairies, Cars and movie properties like Wall-E) and Target (Classic Pooh). The company isn’t a Disney licensee, but is using the DTR program to establish a good working relationship with Disney in the hopes of picking up a full-fledged license from its portfolio in the future.

Ironically, with so much change happening in the licensed apparel business through the rise of the DTR, there’s still never enough retail space to satisfy eager licensors, and the category requires a constant churn of innovation. Patti Buckner, VP of apparel and accessories at Warner Bros. Consumer Products, says she’s currently looking into new and nontraditional distribution options for licensed apparel, such as electronics retailers; WBCP could theoretically pair the Lego Batman video game, for example, with a Lego Batman T-shirt. And joining a crowd of many others, WBCP is also exploring new fabric technologies such as light and sound chips to spice up its offerings. Imagine a Scooby Doo T-shirt that says ‘Ruh-roh!’

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