British royalties: Why the UK licensing sector is poised for growth

A strong currency, pre-recession GDP and bolstered consumer confidence have put the kids merch market back on track in the UK.
January 24, 2016

On the strength of the British Pound, the UK has weathered the recent economic storm in Europe and surfaced as one of the world’s leading markets for licensed kids merchandise. For a region generally known for wry cynicism and restrained enthusiasm, many UK licensing industry insiders have, of late, been singing the praises of the local licensing market. And a look at some recent stats will tell you why.

The UK’s licensing industry, the third-largest market for licensed kids goods behind only the US and Japan, is seeing an impressive resurgence, particularly in the character/entertainment category. According to LIMA’s first-ever global licensing industry study, character/entertainment licensing in the UK now accounts for a whopping 64% of the region’s total licensing industry—or US$7.67 billion in retail sales. That’s more than double the share licensed character/entertainment merch claims in the US (31%) and well ahead of the global average of 44.4%.

In addition, recent data from market research firm The NPD Group places the UK in a dead heat with Belgium for the second-highest growth (13%) in licensed toys from May 2014 to April 2015, behind only Mexico at 15%. “Overall, the economy is doing very well. GDP is back to pre-recession levels, job levels are strong in the UK, and more importantly, I think people are feeling more confident,” says Rob Corney, group managing director for Kent-based Bulldog Licensing.

In terms of what properties are spurring growth, major stakeholders in the UK character/entertainment industry mentioned two factors time and again—films and nostalgia.
“Nobody would touch film five years ago,” says Gurdev Mattu, MD at Leicester-based apparel licensee Fashion UK, whose portfolio includes Angry Birds and Paddington Bear. “Frozen, Despicable Me and Minions have really changed that.”

Indeed, Minions, the Despicable Me spin-off starring the cute yellow evil-villain underlings, knocked Frozen off as the top toy license in the UK the week before the movie launched there on June 26. Frozen had owned the top spot since July 2014.

“Without a doubt, Minions is the hottest license at the moment, I think on the planet, nevermind the UK,” says Stephen Gould, UK MD at London-based licensing agency CPLG, which manages Minions in the UK, as well as brands like In the Night Garden and Skylanders. “At CPLG, we’ve never seen anything as big as this, and we’ve had some big brands historically, like the original Star Wars in its heyday.”

Tim Kilby, brand director at Cheadle-based home textile and accessory company Character World, says movies seem to be the driving force at the moment in terms of making a quick win for retailers across many different categories. “And it’s not just the theatrical releases—you’ve got the home entertainment DVD and Blu-ray, so it’s like two bites of the cherry,” he says.

Star Wars fever has hit UK retailers and should further boost already solid merch sales.

Star Wars fever has hit UK retailers and should further boost already solid merch sales

Kilby adds that with the highly anticipated Star Wars: Episode VII—The Force Awakens hitting theaters this December, retail penetration will be at an all-time high for Star Wars products to drive footfall.
Just as iconic franchises like Star Wars return to the big screen, other British classics like Thunderbirds, Danger Mouse and Teletubbies are ramping up for a comeback on the small screen.

“Maybe that points to the fact there’s a little bit of caution possibly around some of the entertainment considerations and purchasing decisions,” says UK-based Tom Roe, commercial director of DHX Brands, the brand management and consumer products arm of DHX Media. “A lot of these very successful and nostalgic properties from years gone by have been brought back with varying degrees of success, it would appear, so far.”

Nonetheless, Roe has high expectations for DHX’s Teletubbies reboot, which returns to air on British pubcaster CBeebies this fall featuring familiar characters Tinky Winky, Dipsy, Laa-Laa and Po. The property has a raft of international broadcasters lined up (Nick, Family Jr., GULLI, Rai) and master toy partner Character Options in place. “We’re bringing back Teletubbies, although we’re doing it in a very different way, which includes a completely new audience. It will effectively be a new show,” Roe contends.

However, when it comes to nostalgic properties, it’s not a good idea to stray too far from what people have become accustomed to, according to CPLG’s Gould. When it comes to a brand like Care Bears, he says UK retailers like Mothercare (which specializes in products for moms-to-be and kids under eight) want the old imagery that today’s parents and caregivers grew up with.

“That’s where the emotional connection is,” he says. “Brands that seem to be prepared to be more creative style-wise when it comes to older imagery—that’s what’s working.”

But it doesn’t end with good creative and artwork. Retailers also want to see brand support from licensors to it alive and fresh in the minds of consumers, beyond just the TV show or movie, Gould adds. “They’re looking for the whole social media aspect of things, POS, cross promotions, and they absolutely love live events,” he says with emphasis. “Whether it’s an in-store promotion or something as simple as a costume character appearance—they cannot get enough of them.”

Tracy Griffiths, FremantleMedia VP of licensing and consumer products for EMEA and Australia, agrees with Gould. “There is a strong appetite for licensed products and cross- category promotions at retail.”
Without a doubt, the UK’s retail landscape is one of the most developed in the world for licensed kids entertainment merchandise, but having such a high level of sophistication has its drawbacks, says Bulldog’s Corney.

“Entrepreneurialism is lacking at UK retail,” he says, explaining that retailers in continental Europe are often more willing to partner on promotions like giving a gift with a minimum purchase. “It’s almost impossible to run those promotions in the UK because of things like club cards and loyalty programs. The data they mine from them is phenomenal, and they target people closely with their offers.”

Some of the biggest UK retailers mining that data are grocers such as Walmart-owned Asda, Tesco and Sainbury’s. Another good way to get your brand in front of a swath of potential customers is to partner with leading shopping centers like Intu, adds Griffiths.

As far as catalogs go, Argos—with its 740 stores—is the leading retailer and key driver for toy sales, with many campaigns starting after its seasonal catalog has launched. The Entertainer (100-plus stores) and Smyths (80 locations) have both been growing their store numbers year-on-year and are becoming a key part of any retail plans when launching toy-driven brands, Griffiths says. And of course, Toys ‘R’ Us is still very prominent across the region, with 85 outlets.

Other key mid-market players include the likes of Next, John Lewis, HMV and Marks & Spencer. As for independent stores, many are affiliated with Toymaster, an association that provides marketing and purchasing support to its more than 250 member toy shops.

On the fashion front, having a high-volume retailer like Primark (which has 270 stores in nine European countries and just opened its first US store in downtown Boston) on board is important to any campaign. And on the discount side, there’s Poundland (590 stores), B&M (450 shops) and Home Bargains (370 locations), all of which are becoming increasingly developed in licensed kids products.

The growth in discount retailers is an offshoot of the global economic recession of 2008-2009, contends Bulldog’s Corney. He says at the height of the tailspin, retailers and licensees were taking refuge in what they considered “safe bet” brands, like the Disneys of the world. It flooded the market with tired creative, he explains, as everyone was doing the same thing in slightly different ways. But now that the UK’s economy has recovered and consumer confidence has started to pick up again, retailers are willing to take on more risk, and in fact, are actively looking for points of difference through licensing.

Case in point—Shopkins. As one of the hottest girl-skewing brands on the global kids market, Bulldog reps the property in the UK. Since launching last June, the IP from Australia’s Moose Toys has sold well over 70 million units worldwide. Toronto, Canada-based Nelvana is also turning the grocery-themed collectibles into an animated TV series slated for spring 2017.

“We’ve had meetings with all the major retailers and we’ve been going into rooms of 14 and 15 buyers from different categories, as well as marketing people, who all want to find ways to better work together to make this brand as big as it can possibly be for all stakeholders. That’s a new trend,” Corney says.

When talking about retail, while bricks-and-mortar is still king, UK retailers of all shapes and sizes are continuing to expand their digital reach and offerings in order to keep up with the likes of Liverpool-based online retailer Shop Direct, which does 86% of its €1.7-billion (US$1.92-billion) business on the web.

Hot property Shopkins is getting the cross-category treatment from UK retailers

Hot property Shopkins is getting the cross-category treatment from UK retailers

Marianne James, Viacom International Media Networks VP of consumer products for UK & Ireland and European retail sales & marketing, adds that e-commerce continues to grow with many retailers focusing on their online and digital strategy across multiple platforms such as laptops, tablets and mobile. “Social media is also a key focus for retailers, as this is ever-growing in its importance to reach and connect with target audiences and customers,” she says.

FremantleMedia’s Griffiths asserts the growth of online retail has forced high street bricks-and-mortar retailers and shopping centers to become more inventive. In some cases, they’ve started pooling resources in order to lure shoppers into their stores. For example, Argos teamed up with Sainsbury’s to open new Argos digital stores within 10 of the grocer’s locations over the summer.

Whether for digital or physical retail, the general consensus in the UK entertainment licensing business is that licensees can expect to pay royalty rates of roughly 12%. However, Bulldog’s Corney cautions that figure should be taken with a grain of salt, since royalty rates can be category-specific. Whereas master toy licenses can fall in the 10% to 12% range, he’s seen digital command 45% to 50%, while commodities like confectionery can be as low as 4%, but more commonly sit around 5% to 6%. At €5 billion (US$5.65 billion), the UK’s confectionery market is significantly larger than its €3-billion (US$3.39-billion) toy market.

CPLG’s Gould agrees with 12% as a rule of thumb for royalty rates, adding it can fluctuate anywhere from 10% to 14%. But when it comes to minimum guarantees, it’s virtually impossible to pin down any kind of regional standard. Whereas the MG for a brand-new property in the UK could be US$5,000 to US$10,000 untested, a recognizable brand that is also performing well could command up to six figures.

Unsurprisingly, the hotter the property, the higher the royalty rates it can command. This is especially true when it comes to licensors in the music industry. Fashions UK’s Mattu says for some of the bigger names, his company could end up paying as much as 40% in royalties, but those tend to be one-offs. “Maybe they think they’ve got a short shelf life or want to milk it, or are just used to earning huge royalties out there in their music empires, so they want the same out of the rest of the consumer products,” he says.

Royalty rates aside, there’s a larger economic factor to consider for UK entertainment licensing market players—the free movement of goods clause in the 1957 Treaty of Rome (which established the original European Economic Community) that prevents anti-competitive behavior. “I think it’s something all licensors need to be aware of,” says Corney. “For instance, you can take a UK license for product X, but you can’t actively sell it into France. However, if a retailer in France wants to buy it from you, and they approach you unsolicited, then you are entirely within your rights to sell it to them.”

It’s not something that causes too many problems within Europe, he concedes, but it does come up a lot with North American or other international licensors, who are sometimes surprised to find their products selling in territories where they weren’t expecting them to be. “We do get a lot of phone calls from irate licensors,” he says. “Occasionally it puts licensees in a tough position when a licensor doesn’t understand the implications of the Treaty of Rome and puts pressure on them to not supply outside their territory.”

One of the biggest challenges this creates is when licensees grab a license for very beneficial terms in a smaller territory, knowing full well they can effectively turn around and sell the products into the rest of Europe. Despite the strict non-solicitation clause, Corney says it’s easy enough for licensees to skirt the legislation by claiming they were just showing the products in their showroom when along came a retailer from outside their territory.

“The area where licensors need to be most aware is when they’re dealing in territories that have much softer commercial terms, to make sure those terms are very specific to that territory so that the licensee isn’t trying to find a back door to take a pan-European license,” he says.

DHX’s Roe says licensing programs across Europe will often vary from one country to the next. For example, its Teletubbies licensing program in France will be very different from the one in the UK. “We’ll have several partners who will go across the region, such as Character Options and Egmont, but there’ll be a lot of local partners,” he says.

“You need to rely a little bit on decency and people being honorable. We try to work with best-in-class partners who will respect the rules of the game.”

- Tom Roe, DHX Brands

Like Corney, Roe says if local partners don’t stick to the parameters of the licensing agreement, it can put the brand owners on very shaky ground legally and lead to other problems. If DHX has a clothing partner in Germany, for example, and a different partner in Spain, and then one starts cutting into the other’s territory, it will have a huge negative effect on that local partner’s business.

“You need to rely a little bit on decency and people being honorable. We try to work with best-in-class partners who will respect the rules of the game,” Roe explains. “If you’re working with someone who you’ve worked with several times in the past, and who you know will want to work with you in the future—someone who you will be having renewal conversations with every two to three years—that’s when the honorable behavior kicks in.”

Despite this grey area, there remains plenty of optimism and confidence that the UK’s entertainment licensing industry will ride its current hot streak for the foreseeable future. However, due to the nature of the cutthroat retail industry, there’s certain to be some challenges along the way.

For one, securing shelf space for a brand-new property that is not linked to a powerhouse global toy company or studio can be a daunting task, according to FremantleMedia’s Griffiths. “With the proliferation of theatrical releases from studios such as Marvel and Pixar gaining global success, there is even more competition for companies looking to licensing and merchandising to help finance their content investments,” she says.

However, she notes her company has also picked up on retailers’ preferences for familiar brands, which is why she believes there is huge opportunity to build on the awareness and appetite for Danger Mouse, in terms of both the classic and new lines. The Danger Mouse reboot premieres on CBeebies this fall in the UK before a global rollout next year. Key licensees so far include Jazwares (master toy) and Penguin (book partner for English-speaking territories outside North America).

From a licensee perspective, UK Fashion’s Mattu says simply acquiring licenses has become harder, and currently he’s not only dealing with other licensees as competitors, but also with licensors and retailers as they delve into direct-to-retail deals. For brand owners like DHX, Roe says with only so much shelf space to go around, and so many strong brands on the market, the competition is more intense than ever as brands are being backed by huge amounts of capital in an effort to make them stand out.

On the licensing agency side of things, Corney says outside of securing physical retail space for products, one of the biggest challenges is making sense of all the crazy statistics floating around out there, particularly for digital properties. “If you’ve got two million downloads, that’s great, but how many people are actually using it?” he asks. “You have to be very honest with people and say, ‘These are the people who are actively engaging with the brand and these are the reasons why we think it’s licensable.’”

Corney adds that for two or three years when the app world first took off, many in the UK entertainment licensing industry tore up the rule book and forgot the basic rules of licensing, like considering entry price-points and whether or not the brand was scalable across categories.

“A lot of things came to market that were never going to work, and a lot of very credible brands are now struggling to break in because of that heritage,” he says. “But it will go. People have woken up to the fact that you have to have the intrinsic pillars that make a brand a brand.”

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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