Licensing contracts and deal-making are receiving added scrutiny as billions of dollars in orders are canceled as retailers clear excess inventory.

And while off-price retailers (including Burlington Stores, Ross Stores, TJ Maxx, and others) have typically been the go-to for selling off excess inventory in the past, that channel of distribution is struggling as its low- and moderate-income customers cut back on purchases amid rising inflation.

To address this issue, some licensees are seeking to extend or cross-collateralize payment terms as they seek to find another home for excess inventory (the majority of which is in the apparel and home goods categories).

Many retailers expect inventory to clear by year-end if not sooner, but this issue—when compounded by ongoing supply chain issues—is weighing on licensors and licensees alike.

“This is all causing a major stagnation of new deals because of the uncertain climate, which leads to what kind of minimum guarantees can licensees agree to,” said Steven Heller, president of The Brand Liaison. “We have not negotiated any relief of existing guaranteed minimum revenue, but it is causing a complete pause in new licensing because they [licensees] don’t know what the terms should be.”

Discussions regarding licensing agreements have lengthened, said an executive at a licensing agency. These longer negotiations are also forcing licensors and licensees to sharpen their focus on apparel and home goods to ensure there’s a ready-made market for those products.

“It is nothing like what we had two or three years ago because the length of negotiations has expanded,” the agency executive said. “Now, the difference between expectation and reality for licensing is such that every deal takes ages to get signed. In apparel, it is forcing people to determine whether they are just making products because they can or whether there is a genuine purpose. Having another brand in the portfolio used to be a good marketing tool [for licensees]. Now it’s viewed as a burden.”

Walmart and Target’s canceling of billions of dollars in orders in Q2 2022 was well-documented in earnings released earlier this month. And the deep discounts being offered to clear inventory are expected to extend into the holiday buying season, hitting some off-price retailers particularly hard.

“There is a massive imbalance between inventory and sales across retail,” Burlington CEO Michael O’Sullivan said. “In normal times, promotional activity tends to be limited to seasonal merchandise and styles that haven’t sold well. But what we are seeing now is that there is such an imbalance between supply and demand that most retailers are aggressively clearly inventory.”

Moving forward, licensors may have little choice but to be flexible with contracts, licensing executives said. In the meantime, non-profit organizations like Delivering Good, which supplies products to social service agencies in 800 U.S. communities, could benefit from donations of excess products. Indeed, donations to Delivering Good surged during the pandemic to $289 million in 2020 and $200 million last year.

“Licensors are starting to understand they can be sustainable and impactful versus having it go through off-price, getting pennies on the dollar,” said Merrie Keller, director of product procurement at Delivering Good. “Companies, particularly public ones, have to have some corporate social responsibility (CSR), and consumers want to buy products from brands that are making a difference.”