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From the mag: Why Mexico’s licensing market is heating up

It's not only the temperature that's rising in Mexico right now. The country's US$1.3-trillion economy, second only to Brazil's in Latin America, is showing signs of warming up when it comes to entertainment licensing.
June 5, 2015

It’s not only the temperature that’s rising in Mexico right now. The country’s US$1.3-trillion economy, second only to Brazil’s in Latin America, is showing signs of warming up when it comes to entertainment licensing. With inflation down to 4% from 35% in 1995, and per-capita GDP forecasted to grow by 36% over the next five years from US$11,000 to US$15,000, Mexican citizens are poised to have more disposable income, which bodes well for licensors operating in the market.

There are three other factors suggesting that growth is on the horizon for Mexico’s US$1.8-billion licensing business. First, kids categories make up roughly 74% of licensed goods sold in Mexicom, and kids ages 14 and under comprise nearly 30% of the country’s population (compared to 19.4% in the US). Secondly, licensed goods account for only 2% of Mexico’s total retail sales—whereas in more developed countries, that number is around 4% to 5%—meaning there’s plenty of room for improvement if the country’s informal market continues to shrink. Finally, there’s Mexico’s proximity to the US, where it sends about 80% of its exports each year.

“There’s something incredibly inviting about Mexico,” says Dalia Benbassat, VP of corporate relations and acquisitions for Mexico City-based agency Tycoon Enterprises. “The market is big and densely populated, and Mexicans are good spenders if given what they want.” She contends that companies able to find a balance between adapting to the Mexican market, keeping price-points competitive and safeguarding brand integrity will enjoy incredible licensing success in Mexico.

Mexico’s retail landscape
Mexico possesses a highly developed retail landscape across all major segments, from small convenience stores, to big mass-market outlets, and every category in between. Not unlike the US, Walmart accounts for roughly 50% of the overall retail business, while Suburbia leads the mid-tier level and Liverpool dominates the country’s high-end market. But gaining ground on Walmart is Mexico’s second-largest retailer, Soriana, which bought 160 stores from Comercial Mexicana in January to boost its market share to 22% from 14%.

Notably, most retailers are concentrated in large cities like Mexico City, Guadalajara and Monterrey, but mid-size ones such as Puebla, Toluca and Léon also play an important role. Combined, these six cities make up more than 30% of Mexico’s population of 120 million. Outside the major centers, the level of development is quite uneven and often lags behind. In many of these areas, the country’s 15,500 convenience stores fill in the gaps.

Supplying Mexico’s numerous outposts—both big and small—with an abundance of licensed goods are all the major players in kids entertainment. Disney, WBCP, Cartoon Network and Mattel have their own representatives in the country, while many others are repped by licensing agents such as Televisa and Tycoon. “Having a local representative is always a better option than having someone travelling twice a year,” says Eduardo Figueroa, consumer products director for Spanish-speaking Latin America at Mattel. “You always need that executive who knows the retailer, from the processes and systems, to day-to-day buyers’ movements and preferences.”

The kids categories that tend to do the best at retail are toys/games (17%, US$295 million), back-to-school (16.4%, US$285 million), accessories (14.6%, US$254 million) and apparel (14%, US$242 million). “It’s all about role-play,” adds Figueroa. “Those products that make you feel like your favorite character or superhero.” For boys, the Iron Man mask from The Avengers: Age of Ultron film is an extremely popular role-play item at the moment, while dress-up costumes from the new Barbie in Princess Power movie are currently a hit with girls.

Tycoon’s Benbassat adds that entertainment has traditionally been the largest driver of licensed sales at retail in Mexico. “Whether from TV, film or digital media, entertainment has a truly expansive power. It’s easy to grasp by retailers and consumers, and provides loads of creative materials and associated publicity,” she says.

And thanks to the popularity of properties like Avengers, Superman, Spider-Man, Minions and Angry Birds, licensing is picking up steam in the infants and branded food categories, she adds. On the flip side, however, Benbassat notes there is significant room for growth in softlines, especially at high-end and mid-tier stores, where character-driven merchandise only accounts for a respective 20% and 35% of total kids softline retail sales (compared to 54% at mass retail).

Royalty rates right now
Licensed toy sales are primarily driven by advertising on traditional broadcast media, which has a 96% penetration in Mexico. However, digital channels are growing, and it’s likely this will change in the coming years as internet access continues to climb, jumping from 46% in 2012 to 56% this year.

When it comes to royalties, Benbassat notes they normally range between 10% and 12% on wholesale prices, with some exceptions. Minimum guarantees, she says, are normally based on projected sales and tend to be more aggressive when the property is hot. “Minimum guarantees are seen as competitive tools, but also as risky, especially considering the volatility of our currency,” she says. (The Mexican Peso recently lost roughly 20% of its value following the revaluation of the US greenback.) “This particularly affects our sector, as our licensees are normally bound to agreements in US currency and find themselves forced to sell more to reach the same royalties that were originally projected.”

Mattel’s Figueroa says royalty rates can range anywhere between 10% and 15%, and when a property is hot, the spread can be as high as 12% to 18% for categories like apparel, footwear and backpacks. “A common practice is to estimate minimum guarantees based on projections or previous-year sales, and the minimum guarantee should ideally be between 70% and 85% of that number,” he says, adding the amount can range from US$10,000 for a small property/category to millions for bigger ones.

Maca Rotter, managing director of consumer products at Mexican broadcast giant Televisa, adds Mexico’s royalty rates are generally on trend with the rest of the world. “We mostly follow the market rules of 8% to 12% in consumer goods, and depending on volume and profit margins, can go down all the way to 3%. It’s so variable,” says Rotter. Like Figueroa, she says minimum guarantees are tied to the property, category and its perceived potential with different demographics.

The pirate problem
While Mexico’s formal market for licensed merchandise is  pretty standard, it gets a little more complicated when you throw the US$74-billion informal market, which accounts for an estimated 60% of the country’s total business, into the mix. Cheap knock-off goods smuggled in, or produced domestically at hidden factories and warehouses (which are remarkably quick at responding to market demand), are undoubtedly a big cause for concern for the licensing business. In categories like DVDs and backpacks, piracy levels are pegged to be as high as 95% and 40%, respectively. Overall, Mexico ranks sixth in piracy levels worldwide.

However, Mexican law does protect brands and intellectual property. Pirates can, in fact, face jail time. Figueroa says in recent years, piracy has been declining because IP owners have actively employed external law firms to hunt down counterfeiters. He contends efforts to root out piracy, combined with the country’s improving economic situation, will continue to weaken the informal market’s position in Mexico.

Benbassat adds that local authorities have established a tighter grip on procedures and now require certification of rights for all trademarked merchandise coming in through Mexico’s borders. This affects not only counterfeiters, but also licensees importing goods from abroad, who must show possession of rights before reaching the border, and sometimes before the shipment departs.

When it comes to protecting IP rights in Mexico, there are two registration options available. The first is through IMPI, which offers trademark protection by product class, and the second is with INDAUTOR, which provides copyright protection for the creator’s life plus 100 years.

 

Tackling the market

How eOne’s Peppa Pig made a retail splash in Mexico

It didn’t take long for internationally acclaimed preschool property Peppa Pig, which has generated more than US$1 billion at retail worldwide, to become one of the most popular brands with Mexican preschoolers. Shortly after launching on Discovery Kids in 2013, Televisa picked up the series for its free-to-air channel, Bandai signed on to make toys, and a raft of licensees quickly filled in primary and secondary categories. “It took a year for the brand to have enough awareness in the market,” says Murilo Hinojosa, international territory manager for Peppa’s owner eOne Family.

Peppa products were officially launched in Mexico at high-end department store Liverpool at an event in November 2014. The promotion featured Bandai’s figurines and play sets, plush from Famosa (which sold out during the launch), storybooks by Random House, and activity magazines and sticker albums made by Panini. While the initial consumer products rollout followed the traditional route, an insatiable demand for Peppa products in Mexico led to several impressive sales feats (see stats below), and a larger CP program quickly took shape.

The toy range continues to experience a 96% sell-through rate at Mexican retail, and later this year, Peppa, now with a total of 44 local licensees, is moving into Walmart and the mass market. “We positioned it higher at first, because once you’ve reached mass, you can’t go back to high-end,” explains Hinojosa, adding that eOne expects to at least double the size of the Peppa business in Mexico this year.

The pervasiveness of piracy means you have to adapt to the market, he explains. In some cases, this means taking on unconventional licensing partnerships in order to cover both the formal and informal channels. For example, you might need two licensees making the same product—one for high-end with more detail, and another making more basic and less expensive items. “We don’t  usually have two licensees doing the same products, but in Mexico, it was something we had to adapt to and understand that the market is different,” he says.

This story originally appeared in the June 2015 issue of Kidscreen

About The Author
Patrick Callan is a senior writer at Kidscreen. He reports on the licensing and consumer products side of the global children's entertainment industry via daily news coverage and in-depth features. Contact Patrick at pcallan@brunico.com.

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