Retail Sales Of Licensed Goods Off 4% in 2007, Buffeted By Economy, Gas Prices, Recalls, Business Conservatism

2007 will go down as one of the most tumultuous years the licensing business has seen in more than a decade, as retail sales of licensed merchandise in the U.S. and Canada fell 4% to $68.7 billion, according to the 31st Annual Licensing Letter Business Survey.

That’s the lowest annual sales since 1993's, $66.6 billion. On a percentage basis, the year-to-year decline is the largest since the 5% drop we reported in 2001.

The broad decline is rooted in a plethora of factors related to the general economy and the state of the retail business. With gasoline prices consistently over $3 per gallon, the credit crunch and healthcare costs rising, consumers are constantly reminded that their discretionary shopping dollars are diminished, if not mostly depleted. That’s not good for a business built largely on "want-to-have" — not "need to have" — merchandise.

"It's the economy, stupid," writes one agent, responding to our survey. "Four-dollar a gallon gas is not good for business for anyone. That, mixed with the state of the lending market, is a painful combination."

Of course, not all facets of the retail business were weak this year, particularly during the all-important holiday season. Unfortunately for those in the licensing business, though, the hottest category by far was consumer electronics — most specifically, flat-screen TV sets, cellphones, iPods and other gadgets that don't feed into the licensing business.

The positive effect of one category that does support licensing —videogame consoles — was mitigated by the fact that Nintendo’s Wii was far and away the winner in the 2007 console battle. That surprised some licensors and game publishers, who had bet their development resources that PlayStation 3 and Xbox 360 would dominate, so Wii versions of some licensed games won’t make it to market until 2008.

Conservatism In Corporate Sector

One drag on the corporate trademark business, say agents involved in that sector, is a higher level of conservatism among potential licensors.  Some clients are very concerned about "where they’re going in the store; they're most concerned about [whether] the licensed product will steal shelf space" from the core line. At a time when shelf space is tightening for everyone, the risk of the licensed line cutting into the core’s sales dollars is enough to put the kibosh on a licensing program.

Building on that point, another agent points to general business pressures on corporate executives. With the soft economy, they have "more on the line, they have to make their numbers, they're afraid of overpromising and underdelivering, so it may be harder to get plans approved and new categories approved."

Another management-based factor: "In this economic environment, there's more changeover in staffing of clients," with "brand champions" departing, making it necessary for the licensor and/or agent to "reevangelize and re-sell ideas."

Private label, though, is seen by some as less of a factor. One executive reasons that a rising number of "store brands" that others are complaining about are actually the result of direct-to-retail (DTR) licensing agreements.

One's view of DTR agreements seemingly depends on whether or not you're involved in one. One agent in the fashion business lists such relationships as Kohls/ Vera Wang, Macy's/Martha Stewart and JC Penney/Ralph Lauren as a positive developmnent in the past year. Meanwhile, many in the entertainment sector complain about, in the words of one, "all the retail real estate that Disney is sucking up via DTRs."

Disney Dominant

Within the entertainment licensing business, the biggest winner by all accounts has been Disney. We estimate that Disney could account for more than 40%, or well in excess of $5 billion, of the entertainment/character licensed merchandise market in the U.S./Canada.The Disney Channel spawned two of the hottest entertainment licenses of the year — High School Musical and Hannah Montana — while other properties such as Disney Princess and Cars continued to perform strongly. Hasbro's Transformers movie turned into one of the strongest boys' properties of the year,  draining some strength from Marvel's Spider-Man.

In general, movies took a back seat to TV. The spring and summer of 2007 became an object lesson in how films need to be looked at as very short-term promotional vehicles rather than sales-generating licensing properties.

"Retailers have become cautious, cynical and also, more importantly, demanding in terms of what their expectations are from a licensor" in terms of such things as displays, windows and financial support, says one agent. "It's no longer about how much money I can make for the retailer [through merchandise sales]; now it’s about how I can promote the movie" and generate store traffic.

The comparisons between 2006 and 2007 might have looked a little better if we had been able to assume an inflation factor for the just-concluded year. However, the consistent message in our discussions with licensing executives is that price points in licensed goods held firm, with retailers unwilling to take no for an answer.

Says one studio executive: "What continues to be a challenge is the increasing position of the retailer as gatekeeper. It’s nothing new, but it does seem to be stronger than ever in terms of getting something on the shelf and how long it stays.

"We've felt a related impact in pricing pressure, particularly in softlines and apparel," he says, particularly in mass channels, where "there's just tremendous pressure on licensees to drop prices to get placement."

Some draw a line from the overwhelming price point pressure that retailers place on manufacturers to keep prices steady directly to the kind of cost-cutting that showed up in the lead paint and other safety issues in Chinese-made toys. 
Lower Royalties And Guarantees?

With manufacturing and transportation costs rising, but an effective cap on retail prices, it would follow that manufacturers are looking for lower royalties for licenses. And some studio executives admit that they’ve reacted. "In a few isolated instances we’ve had to accommodate pricing pressure via royalty adjustments," says one. "It's a last resort for us, [along the lines of a manufacturer saying] 'If you don’t do this, we're going to lose the placement.'"

Other licensors and agents talk about how they’re spending more than ever on retail support, and one agent even says that "maybe we all have to start thinking about making less money" in the short term.

Some say the biggest changes are afoot with guarantees, with one entertainment licensor conceding that "crazy guarantees are hard to justify."

Says another: "Minimum guarantee pressure comes on new unproven properties. There’s a lot less risk capital in our business than there used to be."

That's the crux of a complaint we hear over and over — the seeming impossibility of getting new properties onto store shelves. "Dora and SpongeBob might be softer than they were in their heyday, but at least they're still listed" on big retailers' buying rosters, says one consultant. "New stuff can’t get on the shelf.

"A buyer will buy more SpongeBob and Dora rather than put something new there. Nick is going to continue to have shelf space."

More stridently than ever, those on the licensee side say they're willing to forego a questionable license. "A couple of years ago, we used to buy defensively," says one. "It’s gotten too expensive to play that game."

In the juvenile business, of course, 2007 was the year of recall hysteria. It's a story that continues to play out, particularly in the toy and accessories businesses. Retailers and manufacturers reassure consumers that their goods have passed rigorous tests. In early December, Hasbro ran full-page ads in major newspapers touting the fact that it hadn't been involved in any recalls related to lead paint (though it did have about a million Easy-Bake ovens recalled for other flaws).

As we reported in August, the recall situation has specific ramifications for the licensing business, where the bad publicity regarding one facet of a licensing program can taint unrelated products and licensees, as well as the licensor. Consider the imprecise nature of the following sentence, taken directly from a Reuters story four days before Christmas:

"Some of the most popular branded toys sold in the United States, including Thomas the Tank Engine, Curious George and SpongeBob SquarePants, have been pulled from shelves for unsafe levels of lead, small magnets or other hazards."

Of course, one could look at the publicity from a different perspective. "I’m a glass half-full kind of person, so you could say that it’s a safer Christmas than ever before," thanks to the spotlight on toy safety, says one top entertainment licensor.

While it’s still unclear how badly toy safety questions, and publicity surrounding toys made in China, impacted sales, there’s little doubt that it dampened the toy business for the second half of the year.

This report consists of consensus estimates taking into account responses to TLL’s Annual Licensing Business Survey, as well as ongoing consultation and discussion with key executives throughout the licensing business. Comments throughout this analysis were taken from responses to the anonymous survey, as well as interviews with a host of licensing professionals.

Source: The Licensing Letter; © 2008 EPM Communications, Inc.