What are license fees in model licensing

Licenses as a strategic marketing tool in the fashion industry

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1 Reading sample: Licenses as a strategic marketing tool in the fashion industry By Hans-Gerd Kierdorf Text excerpt contains the pages and reading sample from: Henning Meyer (Ed.): Brand Management 2010/2011 Yearbook for Strategy and Practice of Brand Management Deutscher Fachverlag Frankfurt am Main ISBN Alle Information about the book at:

2 Licenses as a strategic marketing tool in the fashion industry 193 Hans-Gerd Kierdorf 1 Brands make fashion and brands are made. They are not made up. They are the result of consistent and constant work, enormous financial expenditures and they require constant maintenance. They are crucial company values ​​and of fundamental importance for the relationship between a company and its market. It is not for nothing that the most expensive brands are listed in rankings every year. Measures to strengthen brands have a high priority in the business plans. And, brand licenses in the most varied of forms are a continuously growing market. Many factors mean that brand companies in the clothing industry are faced with ever new challenges today: frequent collection changes, cost pressure and changes in the retail structure, initiated and accelerated by vertical providers such as H & M or Zara. They are forcing fashion brands to open up to new avenues. One of them is the licensing of the brand name. The key message of the term license is: A rights holder grants another company the permission to manufacture and sell products under his brand for a fee and thus to sail under a foreign flag, mostly invisible to the end user. If we now consider how valuable brands are, it quickly becomes clear that the licensing business is extremely attractive, but also carries great risks. This article will shed light on these facets of the licensing business with a focus on the fashion industry. At the same time, new developments and trends should be taken into account that are already moving the licensing world or that will become important in the future.

3 194 Hans-Gerd Kierdorf 1.1 Forms of licensing Merchandising and licenses have to be clearly separated from each other: The term merchandising describes all sales-promoting measures in which trademarks and logos are transferred to products from new areas. However, they do not only serve to generate direct profit through sales, but are to be viewed as a means of communication policy: They are intended to ensure that the consumer learns the brand in the first place. In contrast to licensing, new products are rarely created here; standard items are usually provided with an imprint. The different licensing models have already been explained in the relevant specialist literature and in countless publications and should therefore not be discussed in detail at this point. Whether co-branding, character license, seal of quality and origin, testimonials, patent or know-how license, sales license, manufacturing license or full license, the types of rights marketing are complex and exist in a wide variety of forms in almost all industries. Today they are an integral part of the value chain in the consumer goods industry. 1.2 Brand Extension Licensing Certainly the most sensitive, but also the most interesting type of licensing is brand extension licensing, that is, brand expansion through strategic partnerships. The aim of brand extension licensing is to transfer a brand beyond its origin, i.e. beyond its core competencies, to new products and thus also to new markets. This form of licensing is found primarily with fashion and prestige brands. By transferring the brand image and positioning properties and using them in mostly neighboring market segments, the brand experiences an appreciation in emotional and economic terms. The loyalty of a consumer to a brand and identification with the brand image represent an enormous economic factor that no fashion company can leave untapped.

4 Licenses as a strategic marketing tool in the fashion industry 195 The decision to diversify the product range is almost inevitable today and is favored by the increasingly changing retail landscape and the ever faster change in the market. There is a lot to be said for the granting of licenses. Long-term success will be achieved by those who clearly define their goal: to consolidate and expand the brand's existing potential. 2 Licenses in the clothing industry 2.1 Classic licensed products The license portfolio of a fashion brand usually includes the following product areas :. Shoes. Clothing (special areas). Leather clothing. Bags. Accessories (e.g. belts, headgear, gloves, umbrellas, ties & scarves). Socks. Lingerie & swimwear. Home textiles. Watches & Jewellery. Glasses. Fragrance In addition, there is a supplementary transfer to areas such as stationery, furniture and hardware.

5 196 Hans-Gerd Kierdorf 2.2 Fashion Licenses in Germany In view of the growing market for branded articles from the textile-related market, the agency Kierdorf & Partner (K&P) has, under the heading The Fashion Licensing Market in Germany Approaching an Often Underestimated Market, the total volume valued for fashion licenses. The new trend of retail licenses [cf. Section 3.2] was taken up and evaluated by K&P for the investigation. Otto-Versand, in particular, is significantly involved in this development and has entered into direct license cooperations with various brands such as Kangaroos, Venice Beach and bruno banani. The basis of the approach is initially the division of lifestyle licensing into two markets, which are defined as follows: On the one hand, there are global brands that are usually located in the luxury or premium segment. These include designer brands such as Dolce & Gabbana, Prada, Gucci, Calvin Klein etc. As they operate very selectively in the sales area under consideration and their sales tend to be international, they were excluded from consideration. Sports brands such as Puma or Adidas were also not taken into account, as they also operate globally. On the other hand, there are the brands that are particularly strong locally or nationally on which the focus is placed here. These include the brands evaluated in the 6th Spiegel Outfit Study (1) that have issued licenses and are in the mid to upper price segment in the competitive environment. Here z. B. Gerry Weber, Jette Joop, S. Oliver, Mexx, bugatti, Marc O Polo, Tom Tailor etc. to be mentioned. Another basis is that only the textile-related areas were considered. The furniture, housewares, etc. segments recently conquered by brands such as Joop !, Esprit and bruno banani were not included [cf. Chapter 5]. According to experts, the market volume to be estimated here is currently in the higher single-digit million range on a wholesale basis, with an upward trend.

6 Licenses as a strategic marketing tool in the fashion industry 197 The classic, textile-related license areas include: bags, shoes, stockings, lingerie, belts & accessories, home textiles (bed & bath), watches, jewelery, glasses, fragrances and not to forget those licensed assigned clothing collections that complement the brand's core products (e.g. leather, knitwear, shirts, jeans, etc.). If the classic licensing areas are now summarized under the aforementioned criteria, the overall total is an estimated total volume with licensed products of over 1 billion euros in wholesale, i.e. at manufacturer prices. The corresponding retail sales, based on an average calculation between 140 and 160%, are well over 2 billion euros in Germany. This magnitude is all the more impressive when you consider that important brands such as B. Hugo Boss, Strenesse and S. Oliver brought licenses back into the company or bought entire companies and integrated them as independent units. Fig. 1 (Source: K&P market study (1))

7 198 Hans-Gerd Kierdorf But how were these figures collected? The agency Kierdorf & Partner has been working in the license business for many years and was therefore able to fall back on extensive experience and various sources. These are actually existing license statements, interviews with licensors and licensees, discussions with experts and, in the very important area of ​​fragrance, the key figures of the GFK (Society for Consumer Research). Apart from that, all considerations relate to the year. The distribution shown in Figure 1 results, broken down by areas (shares in percent of total sales amounting to a good 1.1 billion euros): Brands included in the estimate: 2.3 Spatial space through licenses The success of clothing brands such as bugatti, Esprit, S.Oliver, Tom Tailor, Gerry Weber or Lerros, to name just a few well-known names, is no coincidence. Together they have excellent floor space capabilities, which means that collection structures, dates and processes are clearly based on the general conditions of the market and trade. With up to twelve collections per year, a standard range available all year round

8 licenses as a strategic marketing tool in the fashion industry (Never out of Stock program / NOS) plus intermediate and immediate programs, the offer is constantly updated and implemented according to the topic and the occasion. Vertically positioned companies such as Zara and H&M set a rapid pace in the fashion industry. By bundling design, manufacture, logistics and sales under one roof, you have accelerated processes and saved costs. H&M equips all of its branches with new goods on a daily basis, which can be optimally presented on the area, thus driving the industry forward. Because space availability increases sales rates and space productivity is the key to success at the point of sale (POS). A constant change of goods is no longer enough to keep an assortment exciting, because both the end consumer and, as a result, the retailer are looking for more than just variety. You want brands with an emotional statement, brands that are true to each other and provide orientation, that create trust and are clearly positioned. At the end of the day there is the crucial question about the climate of a brand: Do I feel something or do I feel nothing? (2) For brand providers, this means a decisive factor in addition to the logistical and infrastructural requirements: The product and brand profile cannot only be attached to a single product that has existed for years, but must consistently be based on the definition of the core value of the Fashion brands are identified and maintained. This can be found in the materials used, in workmanship and fits, in colors, designs and details. The coherent combination of these factors and the consistency in the handwriting determine the fashion statement that the end consumer uses to classify the brand. Marketing activities and POS design ultimately manifest the style. The emotionalization of brands supports this clear positioning, without which hardly any provider, from whatever industry, can be successful today: A selection process takes place with every purchase. Whether consciously or unconsciously, the customer is constantly weighing possible alternatives. Nowhere else are the charms of other brands more visible than at the POS. Whether in terms of price, whether through a special presentation or through promotional

9 200 Hans-Gerd Kierdorf support mere brand awareness is rarely sufficient today. In the meantime, the sympathy that a brand arouses has become all the more important. It increases the chances of use in the long term and ultimately results from emotions. Today it is of fundamental importance to present yourself in a lifestyle and personable way and to offer the consumer an emotionally stringent brand world with a high identification factor. Today this can only be achieved by those who venture into other product areas and break new ground with their brand. However, hardly any company can do justice to the necessary diversification on the one hand and the increasing specialization of industries on the other hand in a wide variety of areas. Even if technically and logistically conceivable, this makes little economic sense and cannot be realistically implemented in a reasonable time frame. Against this background, licensing represents an excellent alternative and solution. The licensor benefits from the product and in particular from the sales know-how of the respective industry specialist, while the licensee uses the positively associated brand image. License agreements are therefore not a stopgap solution, but an economically motivated collaboration between two companies that optimize their respective potential through a strategic partnership. In a kind of symbiosis, they develop and sell new and market-driven products, from the success of which both parties benefit. Complete themed packages can be offered to retailers, the range of expertise of the brand is expanded and the brand's area capability increases. Each partner does what they do best. Of course, quality and price have to be right; today's consumers are enlightened and know that they have to pay more for brands. They are ready for this, because brands offer them clear added value. They give security, convey a clear image and give people the opportunity to express their individuality. Brands are a clear statement. The brand supplier's space strategy is based on an outfit concept that allows identification with a brand from head to toe and

10 licenses as a strategic marketing tool in the fashion industry 201 will be continued up to the prefabricated house, which has already been implemented at Jette Joop. In fact, the presentation of goods using complete outfits is necessary today as a source of inspiration. However, the purchasing behavior of end consumers shows that consumers feel more comfortable with a mix of brands. This can be explained using various mechanisms. This includes, among other things, that brands are used as a self-affirmation and integration factor, function as an occasionally used differentiating factor or serve to get closer to one's own image and the wishes for the dreamed, personal future. This consumer behavior means that all people use very different brands at the same time, depending on their current, very personal needs. However, this must not lead to an uncontrolled diversification of the brand, because brands that initially experienced a huge boom experienced rapid saturation through overdistribution and thus a devaluation that could hardly be made up again. The methodical and target group-oriented design of the license portfolio and thus the preservation of the brand message has top priority. 2.4 The importance of sales channels Successful licensing is always based on the greatest possible understanding of the brand on the part of the licensor and the licensee. It is obvious that the licensee in particular is primarily concerned with generating high sales. The more clearly and more precisely the licensor must define and control which sales channels the licensed products reach; Otherwise the brand will inevitably suffer damage, lose sympathy and thus also lose its real monetary value. If a customer has given up his brand loyalty due to disappointment, trust can only be restored with the factors of time and money. Great care must therefore be taken in selecting the right licensee. This means that the licensing partner must enjoy a good reputation in terms of goods and fashion performance, and retailers must trust them to manufacture and sell licensed products with the licensor's brand identity. The right partner is therefore not necessarily the one with the highest level of performance, but rather the one who has fundamentally a cultural similarity

11 Licenses as a strategic marketing tool in the fashion industry 213 the way the licensee is accommodated, his product is presented as embedded in the company. It has been proven that the magalogue has a long stay in households due to its entertaining, informative character. This makes it a sustainable tool for customer loyalty that additionally strengthens the brand presence in the target group. The presentation in the magalog thus combines the interests of all those who benefit from the sale of a product world: Licensors, licensees and retailers strengthen their sales, network the sales channels using existing conditions such as specialist retailers and e-commerce. The brand statement is clearly emphasized and thus offers the end consumer a real decision-making aid for the personal, fashionable expression of his identity. Whether magalog, retail license or brand joint venture: What all these concepts have in common is that they are based on a varied, lifestyle, target group-oriented and comprehensive product world that is only possible through strategic partnerships and the targeted development of a product portfolio through licensing. 4 Establishing a successful licensing world using bugatti as an example For the men's clothing brand bugatti, which belongs to the Brinkmann Group, the brand owner decided 20 years ago to concentrate primarily on its core business of coats, outdoor jackets and clothing and to pursue further brand expansion through licenses. There are now 15 such partnerships that make a significant contribution to the success of the brand.Right from the start, emphasis was placed on the strategic development of the product portfolio and implemented through continuous, consistent license management. Licensors and licensees benefit equally from the long-term partnerships. The organization and implementation of regular licensee meetings contributes to efficient communication in terms of brand management.

12 214 Hans-Gerd Kierdorf Fig. 2: bugatti core products / bugatti license products 5 Fashion licenses conquer new markets In addition to the leather goods, cosmetics, optics and jewelry industries, to name just a few examples, the home textile industry is also increasing Brand licenses held. Many providers even have to observe a decline in sales of their traditional own brands, which customers often no longer even know, in favor of good licensed brands. Younger consumers in particular are no longer familiar with the traditional names from the home textiles sector. Names that were synonymous with top quality two decades ago are simply unknown to many today. This is different for fashion brands or topics from the character area (e.g. comic characters) as well as film & TV. This means that even the traditionally good own brands of well-known manufacturers are under increasing pressure to slip into comparability with private label products or the own brands of corporations. The resulting price pressure is forcing many

13 licenses as a strategic marketing tool in the fashion industry, 215 companies to look for alternatives. Many have therefore already decided to license a fashion brand. Bed linen and terry towels from Tom Tailor, Esprit, Joop !, bugatti and many others can be found in specialist shops. And ultimately, retailers in non-clothing market segments are increasingly relying on brand worlds that make presentation at the POS attractive and through which they can distinguish themselves. This structural development can be observed in many industries in which licensed products meet consumer demand for lifestyle brands and displace traditional names. The fashion know-how and the speed of the clothing industry meanwhile also set the pace and the fashionable direction for other product groups. When it comes to brand transfer, licensees benefit from precisely these fashion-specific factors. The fact that consumers are increasingly designing their homes with brands is not least due to the fact that people live differently today than they used to be: bedrooms are no longer taboo for visitors, people like to show taste and style here too. The increasing number of single households has also led to new consumer needs. Often it is solely due to the layout of the apartment or the lack of size: A room used purely as a bedroom is a luxury for many people today, and a bathroom should be attractively styled to the visitor in the absence of a guest toilet. Ultimately, both in the home textile industry and in the world of living, it is increasingly a matter of offering consumers coherent and highly identifiable products that do justice to their brand affinity and their desire for self-expression. The first partnerships between companies in the fashion industry and the furniture industry have already developed and are well received by customers. Initially, these were luxury and designer brands, but in recent years labels such as Esprit, bruno banani, Joop !, Diesel or Tom Tailor have jumped on this bandwagon and are determined to work on new markets. In the furniture industry in particular, there is currently a tendency to emotionally reach consumers with new brand names. Fig. 3: Fashion brands are conquering the living space

14 216 Hans-Gerd Kierdorf Further examples of brand transfers out of fashion :. Jette Joop with the Viebrockhaus by Jette Joop. Levi's with the 25-Hours-Hotel in Frankfurt am Main. Armani with the Armani / Samsung TV (Full HD LCD TV). Ed Hardy with car seat covers and car carpets 6 License management Successful licensing requires a high level of attention. Products and collections must be coordinated between the licensor and the licensee. Distribution requires monitoring, as does communication between licensor and licensee. But communication in the group of licensees must also be maintained continuously. This is the only way to identify problems at an early stage and to make optimal use of synergies. Experience has shown that this will not succeed without the necessary manpower. Anyone who, as a brand owner, decides to work with licensees must be clear that something like this cannot be done on the side. There are two options for managing the licensing business: Either you opt for an in-house solution and thus your own license manager, or you work with an external service provider who supports the licensing business with the appropriate know-how and experience. 6.1 In-house license management As a rule, it is initially a question of cost whether a new position is created for the strategic control of licenses. It is only to be expected after a certain time that this position will be completely refinanced through license income. Nevertheless, it is worth considering, because a contact person who is permanently available in-house for all internal and external matters knows the processes very well and can concentrate entirely on achieving the best possible result for the brand.

15 Licenses as a strategic marketing tool in the fashion industry The license agency As an alternative or in addition, it makes sense to work with an agency. An external consultant has a more objective view and the risk of operational blindness is minimized. External license consultants are active across all markets and have excellent contacts that go far beyond their own market segment. This is of particular value in the case of brand transfers in areas in which the licensor had no previous experience. The wealth of experience gained from working with other brands continues to provide input and optimization potential for your own licensing business. Since the fee for agencies is often performance-related, the financial outlay for the brand owner is easy to calculate. 6.3 The license fee Of course, the contractual agreements in the license business are as diverse as the business itself. Nevertheless, the license fee is such an important point that it should not be ignored at this point. For a basic orientation, one can assume a sales-dependent license fee between 6% and 10% of the manufacturer's selling price (minus discounts, discounts, annual bonuses, etc.). In addition, a minimum turnover is usually contractually agreed, which guarantees the licensor a guaranteed license income. This is to ensure that the licensee is actively working on his product area. An additional marketing contribution between 2% and 5%, also linked to sales, is customary in the industry and is intended to financially secure an adequate advertising presence. This is either controlled centrally by the licensor, or evidence of the relevant marketing activities must be provided by the licensee. Conclusion If the aim of a company is to expand and / or strengthen existing brand potential, the issuing of licenses can be viewed as a strategically defined tool: The core competencies of

16 218 Hans-Gerd Kierdorf Brand owner's adequate complementary license cooperations lead to increased end-consumer perception via new distribution channels, brand awareness is increased, space availability and lifestyle presence are supported and, last but not least, license income makes a not inconsiderable contribution to the financing of marketing measures. For a licensee, brand licenses develop synergies from which the development and expansion of his business as a whole benefit. In addition to the opportunity to tap into new target groups, the radiation effect opens doors in retail. While the development of a private label means a high financial and time investment, the risk in the context of a license cooperation remains manageable. It should therefore be noted that licenses can offer great potential for both partners. The basis for this, however, is always an actively lived partnership in which the common goal is the long-term focus and thus leads to mutual success. Notes (1) Spiegel Outfit 6: Target groups, brands, media (2007), Hamburg. (2) Werner, Michael (2008): in: TextilWirtschaft, Frankfurt am Main, no. 27, p. 36. (3) dto.