The one-two punch of the global economic downturn and November closure of Woolworths, once the UK’s largest purveyor of licensed goods, has left the territory’s consumer products industry struggling to regain its balance. Slowly but surely the UK licensing biz is recouping lost ground. But are current efforts affecting how typical licensing deals are structured from the advance on down and, ultimately, the relationship between licensor and licensee? Who’s bearing the brunt of the credit crunch? As the industry gears up for Brand Licensing Europe, taking place in London between September 30 and October 1, we put the questions to those in the know. The answers might surprise you.
Economic factors at play
An early victim of the global recession, the UK has been mired in what’s been charitably dubbed a ‘slump’ for more than 18 months now. According to the British Retail Consortium, the UK’s economy contracted by 2.4% in the first three months of 2009, the largest such contraction since the 1979 recession, and it’s predicted to increase to between 3.5% and 3.9% by the end of the year, with all-important consumer spending amounts shrinking by 3.4% over the course of 2009.
One of the major casualties of the slowdown was 99-year-old retailer Woolworths. Arguably the UK’s most recognizable high street establishment, Woolies closed up shop late last year as a result of increasing debt, lagging sales and the ever-present consumer credit crunch. Long a home to licensed goods of all stripes, especially kid-friendly categories, the 800-plus outlet chain that employed some 30,000 people was only the highest-profile failure in an anemic economy.
A 5% spike in retail sales in January 2009 appeared to soften the impact of the bankruptcy, but numbers quickly came crashing down after consumers had finished snapping up the extreme discounts offered by other retailers to lessen the blow of a mirthless holiday season. While July realized a like-for-like sales increase of 1.8% and a 3.6% increase in total sales over last year, the situation remains more than troubling.
Moreover, licensees may have borne the brunt of the blows thus far, particularly on deals made with Woolworths just prior to its demise. For example, BBC Worldwide just won a ruling against Woolworths’ administrators Deloitte over the jointly owned DVD distribution company 2Entertain. After Woolworths declared bankruptcy, ownership of Woolies’ 40% share in the company was up in the air. BBCW had offered US$164.5 million for the stake and had to take legal action to rescind the offer after the retailer went bankrupt. The initial rulings have favored BBCW, but experts believe the case will be stuck in litigation for the foreseeable future.
Guarantees taking a hit
Not surprisingly, at Licensing Show 2009 – the industry’s first big get- together following the Q4 2008 slowdown – a bit of a pall plagued UK attendees. Meetings in Las Vegas were as productive and plentiful as they ever have been, but the touch of grey on the horizon appeared when talk turned to upfront money/guarantees being offered on new deals.
‘One of the sayings that came out of Vegas was that £5,000 (US$8,267) was the new £25,000 (US$41,335) in terms of guarantees,’ says Janet Woodward, licensing director at London-based IP firm Coolabi. ‘Bluntly, no one is willing to put up the same guarantees.’ And it’s a refrain echoed by every licensor surveyed for this piece.
‘It’s clear that the licensees are looking to reduce advances and guarantees,’ says Ian Downes, president and founder of indie agency Start Licensing, whose stable of properties includes preschool puppet series Big & Small and kids fashion IP Bang on the Door. ‘There is definitely a move for licensees to reflect what is going on in the general economy.’
In short, it’s a credit crunch – a reduction in the availability of loans and a tightening of monetary policies that makes securing capital more difficult. As a result, cold hard cash, the kind that used to be given up-front to licensors in the form of guarantees and advances, has become particularly hard to come by in the UK.
‘You can’t expect to get anything close to what you got two years ago,’ adds Mark Hurry, director of commercial affairs at PPC Enterprises, who met with licensees in a variety of categories to pitch new preschool IP The Hive in Vegas. ‘I think the credit crunch has enabled some companies to reduce advances,’ he says, noting a general reduction in risk all around.
Downes even goes so far as to say that he’s run into the frightening prospect of the 0% advance. ‘A few people are floating no advances and no guarantees,’ he says. ‘I think that is just unreasonable.’ By not putting up any cash, licensees not only hit licensors in the pocketbook, he says, but it also shows a complete lack of commitment and emotional investment in an IP.
On the other side of the divide, licensees say the cash shortage and the tough retail landscape are making the reduction of upfront payments a necessity – a required, measured reaction to the new reality.
‘We are seeing it at the sharp and pointy end of the business,’ says Susan Stanley, licensing director of UK-based Smith & Brooks. The apparel licensee has about 20 licenses in its portfolio, mostly kid-focused ones, such as Barbie, My Little Pony and SpongeBob SquarePants.
‘The fact is that retailers are reticent to make long-term commitments to licenses,’ says Stanley. ‘They are looking more to the safe ground, so we are looking at playing safer ourselves in terms of minimum guarantees.’
According to the licensees, who traditionally deal directly with the retailers, the smaller guarantees are a direct result of smaller minimum orders from the retailers.
Woolworths’ failure took with it an estimated 30% of the shelf space dedicated to licensed goods in the UK, but ‘value’ retailers such as Peacocks, T.K. Maxx and Matalan have stepped up as larger players. Peacocks, for example, now has more than 550 stores across the UK and 76 more in international locales such as Russia and the Ukraine. Along with these outlets, the licensors and licensees surveyed for this story believe the grocery chains, such as Tesco, ASDA and Sainsbury, have renewed their interest in selling licensed goods.
However, both the value chains and the grocers are also squeezing shelf space and price points on consumer products new to their stores, and licensees are bearing the brunt of this pressure that they then presumably pass on to the licensors.
‘The value retailers are taking advantage,’ says Downes. ‘Because they tend to sell cheaper product, the licensees try to get the licenses for less and that affects the guarantees.’
Not only do the value retailers concentrate on delivering lower price points, they also have less shelf space to allocate as they try to deal with the enviable situation of having too many products and suppliers from which to choose. (For example, Peacocks stores are roughly only 4,500 square feet.) Grocers, as well, have less shelf space dedicated to licensed goods and are ordering much smaller quantities than the likes of a Woolworths ever did.
‘The minimum commitment has dropped,’ says Sandra Vauthier-Cellier, MD at 4Kids Entertainment International. ‘The retailers that are going to take the opportunity to increase their market share are really changing their licensing approach.’
‘There is no question,’ Downes agrees. ‘Retailers are tending to reduce their order numbers. Right now they will order 500 t-shirts, when two or three years ago they would have ordered 10 times as many.’
It’s all a question of risk and every player along the food chain minimizing their company’s exposure. ‘I would certainly say that there is a sense of people being more conservative in their business plans,’ says David Wootliff, licensing director at Hallmark UK. Wootliff acts as both a licensee and licensor and has a unique perspective on the emerging UK retail climate.
‘People are now entering into relationships where there is risk on both sides rather than just the traditional licensee-licensor relationship.’ Wootliff describes a new attitude towards partnership that he believes is emerging in the business. He feels that the decrease in up-front guarantees has levelled the playing field for licensees, and while licensors might at first bristle at the terms, an understanding that both sides of the business need to recognize the new retail reality is palpable.
With the shrinking of retail space – the direct result of the dip in consumer spending and consumer confidence – one licensor has even caught wind of a trend that is sure to send a chill up both licensor and licensee spines.
‘Some retailers [in Continental Europe] are asking licensees to do a sort of consignment deal,’ says Vauthier-Cellier, meaning that retailers would only pay for product that sells through. ‘It’s a sure sign that retailers are trying to be more creative.’ That said, it’s a model that doesn’t appear to have traveled into the UK just yet. As PPC’s Hurry contends, ‘I haven’t come across that and I hope I don’t.’
The good news?
The silver lining for those who make their living in licensing in the UK is that the fundamental royalty rates, the backbone of any licensing agreement, have changed very little despite the economic climate. ‘They are holding pretty well,’ says Coolabi’s Woodward, adding that in some smaller-margin categories, such as electronics, there’s been a one or two percent dip, but no major swing either way. ‘In that respect, the royalties, the dynamic hasn’t changed much,’ concurs Hallmark’s Wootliff.
The stability across all categories in royalty rates arguably lends a consistency to a sector that is otherwise in flux and perhaps their staying power will be a good jumping off point in ushering in an era of even closer relations between licensors and licensees.
‘We have to support our licensees with cash-flow problems,’ says Vauthier-Cellier. ‘This situation reinforces the partnership. It used to be a take-it-or-leave-it proposition but that’s not necessarily the case now. There has to be more synergy and cross-promotion to make it work.’
Licensor Wootliff seconds that emotion. ‘Strategic alliances are very important,’ he says. ‘I would hope that now people are entering into relationships where there is risk on both sides.’