Every business involves risk; there are no sure things. And the licensing business has its own inherent risk profile, with decisions being made months and months in advance on products and properties whose success or failure depends in large part on correctly forecasting rapidly changing consumer tastes and desires.

Throw in the currents that are roiling the retail business, and companies all along the licensing food chains are seeking ways to mitigate their own risk while still being in position to take advantage of success. More and more, it’s about contingencies and flexibility.

For example, according to executives with whom we spoke during the recent home textiles market, once-standard five-year agreements are being replaced by three-year agreements, with escape clauses should a new property fall short at retail. And in toys, suppliers are frequently seeking to renegotiate formerly iron-clad agreements to help recover from the loss of major retailers such as Toys R Us.

“We are trying to build in contingencies going forward,” says an executive at one toy licensee. “Typically, it’s the licensor that builds in the contingencies, but in this case, we are going back and saying that based on our risk assessment, we would like to negotiate contingencies so that if a retailer files for bankruptcy we can get an amendment” that might lower the minimum guarantee for a period of time.

In general, says Howard Feldstein of giftware supplier Mark Feldstein & Associates: “Where at one time licensors were very inflexible when it came to licensing agreements with vendors, today there seems to be more willingness on their part to reduce guarantee minimums and contract lengths as well as opening up more sales channels to sell licensed product into.  This is a direct result of licensors recognizing the current retail environment of a shrinking brick and mortar retailer customer base due mostly to increased consumer shopping on the internet.”

Brand owners have a definite interest in helping licensees deal with market disruptions in the least disruptive way possible, points out Stephanie Wissink, Managing Director at Jefferies & Co., who follows consumer products industries. “Among media (entertainment) companies, there is a very clear awareness that the retail market is changing and that during these unanticipated periods of shock, there needs to flexibility in the agreements. When a [retailer] goes bankrupt and represents 10-12% of a company’s business, the last thing licensors want is companies shoving inventory anywhere to hit minimum guarantees, because then product will turn up in distribution channels they don’t want to be in.”

For some, risk mitigation involves heavy number crunching. Trevor George, President of Trevco, says risk impacts “how we define and compute a guarantee. In the past, licensees would throw money around. ‘I’ll give you $500k or $1M,’ we would say. It was a hunch… based on our subjective thoughts. Today, we don’t do that and we go beyond just evaluating how we’ve done with other brands that might be similar to the brand or license we are trying to get….

“We use a tool like Google Keyword Planner, that tells us how many times consumers search for a particular brand + product. So, for example, we know how many times someone searches for “Elvis + T Shirts” or “Superman Toys” per month, per year etc. This gives us a baseline or standard for potential “demand” in the market. Then we compare that search volume to how much we’ve sold from a similar brand with similar search volume. We check the royalties, and run some math to determine what guarantee we are willing to offer. In most cases, we come within 99 percent accuracy on that guarantee.”

While licensors will always push back against renegotiating deals, some are proving flexible in taking a tiered approach to guarantees. For example, Global Icons, which has a stable of corporate brands it represents, is using a “test and roll” approach in which a licensee with a retail commitment for a small number of stores may pay a lower advance and guarantee that increase, along with the royalties, as sales hit milestones, says CEO Jeff Lotman. And an initial 18-month “test” might come with a three-year renewal option if sales targets are met.

Steven Heller, CEO of The Brand Liaison, points to another technique for licensees lowering the risk on super-hot properties — a single guarantee for the life of the contract, rather than a minimum for each specific year of it. That lets the licensee earn out the entire guarantee up front, protecting against that hit falling off a cliff for years two and three while it’s still liable for the latter portions of the guarantee when sales are minimal.

Indeed, everyone in the licensing business recognizes the need to be flexible to keep pace with trends that are changing at an ever-faster clip. “In a fickle environment, retailers are looking for the next new thing more so than they did before,” says Iconix Home VP Lauren Steinke. “Business 101 today is having a flexible model in everything we do.”

Licensees also are more cautious in negotiating deals. In many cases that means bringing retailers into discussions with licensors earlier than in the past.

Major entertainment companies have retail development teams that deal directly with retailers in setting up programs, and licensees have long checked in advance with their customers about whether they’d buy into a license they were considering taking on. Licensees also are pushing for renegotiating royalty rates on an annual basis if sales are falling short of projections.

“The terms are much shorter now because retail is unpredictable and I don’t want to write a business plan for a license unless I know who I am going to sell it to,” says home textile supplier Town and Country VP Judi Alexander, whose company has licenses for Ralph Lauren, Brookstone, Nicole Miller, Christian Soriano and others. “Who knows, five years from now the retailer might not even be there.”

At the same time, retailers are changing their own risk profile to protect margins and stand out from the competition, most notably by upping their games in private label. It’s a time-honored way to achieve those goals, but also exposes the merchants to the chance the internally developed line doesn’t work, with nobody to supply markdown money or take back the unsold goods.

In many cases the push for shorter contracts, escape clauses and a more tiered approach to guarantees is tied not only to the retail climate, but also the increasingly shorter lifespan of entertainment properties.

And while streaming services such as Netflix, Amazon and others, are becoming bigger factors on the programming side, they play it close to the vest with the kind of viewership data that would help potential licensees gauge popularity. To counteract that lack of hard information, licensees are mining information about web searches and social media mentions, but even so are seeking ways to hedge against a property’s failure. That’s particularly true in children’s programs.

“The children’s programming[on streaming platforms] hasn’t been proven yet, and there is less of a track record. You really are going to want to protect yourself and have escape clauses if there is a lack of retail commitment,” says  an executive at a brand licensing agency.

On the other hand, there will always be the urge to try to hop on a hot property, when consideration of risk can take a back seat to wanting a piece of a suddenly ascendant “big thing,” as was the case with “Fortnite” and, more recently, Electronic Arts’ “Apex Legends”, which had 25 million registered users after its first week.

“People are willing to throw money at these because they know they have a better chance of succeeding,” says the agency executive. “I think people are willing to make a larger commitment on hot and trending properties like these (Fortnite, etc.) because they then know there is acceptance at retail and they worry about the ramifications later.”

Contacts:

Brand Liaison, Steven Heller, CEO, 855-843-5424, steven@thebrandliaison.com

Global Icons, Jeff Lotman, CEO, 310-873-3560, jeff.lotman@globalicons.com

Iconix Brand Group, Lauren Steinke, SVP Home, 212-597-4766. lsteinke@iconixbrand.com

Jefferies, Stephanie Wissink, Managing Director, 212-284-1713, swissink@jefferies.com

Mark Feldstein & Associations, Howard Feldstein, Marketing Mgr., 419-867-9500 x108, howard@mfagifts.com

Town and Country, Judi Alexander, VP licensing and Marketing, 646-898-0731, jalexander@tncliving.com

Trevco, Trevor George, Pres., 248-526-1400, tgeorge@trevcoinc.com