How long will the changes and accommodations made to licensing agreements last year remain in effect, and what will be their long-term effect?

Many licensing contracts were revisited and reformulated as the pandemic destroyed supply chain, entertainment, sports, retail – virtually every pillar on which the licensing business is built. For many, triage was the order of the day.

That’s the lingering question as the licensing community starts the new year with some optimism as vaccines are administered, potentially laying the groundwork for a gradual re-opening of global economies.

A different model?
“People still want to do business and are committed to licensing, but the model may be different,” says one brand owner. “Licensees are hesitant about longer term agreements and the level of guarantees.”

For the most part, licensing executives with whom we’ve spoken believe that the reformulated contract terms will carry through the balance of this year and potentially into early 2022. Ultimately, the pace of establishing “a new normal” will depend on recovery of retail, in local markets.

Accommodations that took hold as the pandemic arose took lots of different forms.  One licensee executive said she negotiated 30% reductions in minimum guarantees in some agreements, a couple of points off the royalty rate in others. In some cases, a renegotiated agreement meant giving licensees 18 months, instead of 12, to earn out the MG. And one corporate licensor took licensing agreements on a “case-by-case” basis where if a licensee wasn’t going to hit its MG for a given quarter in 2020, they would get up to a one-time 25% reduction for that specific period.

Testing ‘partnership’
It’s been a time that’s tested the notion of partnership between licensee and licensor, with each side acknowledging the other’s problems, but also faced with their own financial challenges in a chaotic environment.

“Licensors have been very accommodating and reasonable since the pandemic hit and this absolutely is the time you want to be renewing your license. But what that means beyond the current year remains to be seen,” says a licensee, whose company has agreements for several entertainment properties and renewed 4-5 contracts last summer on “very reasonable” terms.

That licensee illustrates on of the challenges going forward – how to project sales in formulating a contract. “What we did is… use the third quarter when sales were still soft” as a baseline. “We used those as a template for renewals based on what we believe sales might be for the next 10 quarters. On many renewals, I didn’t know what I was going to do [in sales] in 2021, or what the retail climate is going to be like, so my projections were grossly conservative.”

“In general guarantees are going down because everyone is gun shy and it is going to take some time for them to come back up,” says an executive at an electronics brand licensor. “Everyone had a tough year, but the consumer is still there and they still want content and product; that has been the overriding factor. We all can see the pot of gold at the end of rainbow.”