It’s hitting home now. With Q1 having ended Tuesday and sales figures rolling in over the coming weeks, licensors and licensees are in deep discussions about the financial damage wrought by the coronavirus, and what to do about it.

In many cases there will be relief – pushing out minimum guarantee payments due April 30 a month or more and extending some licensing agreements set to expire. But it won’t be easy.

Back and forth
For example, when one licensee last month broached delaying a major MG payment, the brand owner resisted. But after two weeks of discussions and a widening of stay-at-home orders, store closures, layoffs and other pandemic-related measures, the licensor relented. The result was an open-ended waiver of the payments with a requirement of frequent financial updates as business improves, says an executive of the licensee.

One large food brand says it has waived MGs  for some of its 100 or so merchandise licensees through year-end, with standard contracts resuming in 2021.

For some of its licensees, MGs will be prorated based on when the licensee’s business started to decline. Licensees are required to disclose “very specific” business details and give 30-day business updates going forward, says a company executive. Royalty rates remain unchanged as do the MGs for many of its large food licensees that make annual payments, he adds.

“A daily struggle”
In many instances, requests for concessions are being considered on a case-by-case basis. One electronics brand licensor concedes that “some of the smaller licensees frankly are not going to survive at all, so we are writing off those guarantees. Certain licensees who are not hit quite as hard will have payments delayed but not relieved. It is a daily struggle.”

“The conversations between licensees and licensors are ongoing, but the discussions on whether to push out will be on a month-to-month basis,” says Anthony Shaut, Director of Royalty Audits at the Spielman Koenigsberg & Parker accounting firm.  “We are advising our clients to stay in touch and maybe discuss what a two-month business plan looks like.”

So far, suppliers of such recreational products as toy, puzzles, board games, building sets and outdoor activity toys have fared better than many others. MGA’s sales of Little Tikes products doubled in March, while Basic Fun’s sales of Lite Brite items on Amazon increased seven-fold last week, says one report.

“Demand slump”
But despite some bright spots, the toy category in general, like every other category save for essential products, is in a “demand slump” from retailers, says Basic Fun CEO Jay Foreman. Ironically, this comes just as the Chinese supply chain that was interrupted late last year into the first part of this year has begun to regain its footing, and is expected to be in full operation by May.

“Some accounts like big box retailers are still drawing goods, but most specialty retailers are closed, and Amazon is focusing for the next several weeks on essentials,” Foreman said. “There are a lot of challenges. We can get all the goods we need; we’re just not sure yet when full demand is going to come back on line.”

Bioworld is holding manufactured goods at its suppliers until stores start to reopen, says Jason Mayes, the company’s Director of Marketing.

What’s normal?
When business resumes, there is some question as to what “normalcy” will be, in terms of both consumer demand and the retail landscape overall. There’s no doubt that “Anyone who is fully dependent on brick and mortar retail without having a firm e-commerce strategy in place is in a bad way right now,” says one brand owner. The last couple of days have seen big retailers such as Macy’s, Gap and Kohls furlough tens of thousands of workers. Some chains, including Ross Stores, TJ Maxx and others, have cancelled orders through mid-June and others have delayed them until the June-August period and changed to 90-day payment terms instead of the more typical 30 days, said an executive at one entertainment licensee.

And whether consumers — many faced with unemployment or having had savings and retirement accounts drained — will return to pre-coronavirus spending levels is an open question. Even online business has been affected, with Amazon apparel sales declining an average of 40% each week in the mid-February to mid-March period, according to a report from McKinsey & Co.  In a March 20-22 survey of U.S. consumers, 63% said they expect to spend less on apparel than they usually do, McKinsey said.

As a result of  the uncertainty about how consumers will respond once business returns to “normal,” licensees and retailers will be reluctant to build up inventory, says Lewis Stark, a partner at the Prager Metis accounting firm.

Conserving cash
“Companies are conserving cash and are not taking the risk associated with building up inventory,” says Stark. “Production of goods will be minimal in the short term to meet online demand. It will ramp up after consumers start buying, which may cause short term shortages in the marketplace as manufacturing catches up with demand.”

McKinsey says it expects stores to re-open on a regional basis rather than all at once. Indeed, J.C. Penney, in extending store closures indefinitely, said Tuesday it would reopen them “gradually” based on local, state and federal guidelines. And Urban Outfitters said Tuesday in a news release that it would “suspend the payment of rent temporarily and delay or cancel some planned new store openings.”