Fashion and Luxury brands sell many product categories under one name. From apparel, to jewels, to fragrances, to eyewear. The question is do they design, manufacture and retail all of these categories by themselves in a vertical integrated model? The answer is, no. Most of them are entering into, licensing agreements. Today we are going to talk about Licensing. That is a widely used, contract, and even more strategy in these industries. Licensing is, can be defined as a marketing and a brand extension tool widely used by big corporation and small businesses and even startups. Entertainment, Sport, Fashion are the most visible areas in which licensing takes place. But don't forget other areas that are as important for licensing such as Universities, Colleges, Cities, Metropolitan areas with brands, Museums. So licensing is used, I said, in a very wide group of industries and product categories. Today we're going to talk about licensing according a precise schedule. First of all we are going to introduce the licensing concept and what licensing stands for, because the definition is very important to understand it. Second, we are going to focus on licensing in beauty and eyewear as this two are the most important categories for fashion and luxury. Third, we will ask who does what in licensing after introducing the concept of licensor and licensee. We will see what they do and how they share activities among themselves. Then we will explore a bit the pros and cons of licensing agreements, and the key success factors in order to manage a licensing agreement well. Last but not least, we are going to have a best case. We will discuss how to manage licensing with Rainbow. That is an entertainment company but also an active licensor in the field of fashion. So, let's start with a definition. What is Licensing? What is licensing all about? Licensing can be defined as the process of leasing a trademark, a piece of intellectual property, a copyrighted entity usually named as a property that is used usually in conjunction with Products, Services or even Promotions. The property, the piece of intellectual property can be a design, a sketch, a logo, a graphic, a saying, a cartoon. So there are many properties that can be licensed to a third party. In Fashion and luxury, usually it's very important to define the licensing. So the lease of this property according to quite complex system of rules and obligation. First of all it's very important to define who is licensing what. So the Licensor is usually the brand owner, the company, the entity that is licensing usually the brand with it's creativity and system of signs. The Licensee is the partner that might be a manufacturing partner. And in this case we talk about manufacturing licensing, or can be working on both manufacturing and retailing, and therefore is a globalizing in agreement. The licensor gives to the licensee the permission to use the trademark and the property and the style in a certain product category. So it might be apparel, eyewear, fragrance, home tech styles. Within a specific territory. Might be a country, a region, or the character or the property can be used at global level. And within a certain distribution channel for a certain duration. Usually the longer we will see, the longer the contract, the better is for the partnership. The brand owner receives for the lease of the property, a royalty. That is a percentage on wholesale sales from the licensee. And in addition to royalties, what is called a Contribution to Communication. Again measured as a percentage on wholesale sales made by the licensee. So, actually the advantage for the licensor is that all the business is made by the licensee. And if the business goes well, he receives back royalties and contribution to communication for the business itself. So being this the definition of licensing, let's say a few words about the origin of licensing. A licensing in fashion was born in France around the 50s to support the extension into new product categories of the Griffe. The French griffes such as Chanel, San Laurent, Dior and Carden. Licensing was, as I said, on extended categories. In particular, Fragrances. In Italy, licensing was introduced in the 70s on the car business. Meaning that the young designers of that time, Armani, Valentino, being without facilities and being with no money actually we're looking for a partner. A manufacturing and distribution partner to market their collection. And Armani and the Gruppo Finanziarlo Tessile is an Italian company that was based in Turin, actually established the first model of licensing agreement in fashion. Gruppo Finanzaiario Tessile producing and distributing Armani's collection in a global marketplace. So this was really the origin in fashion. Even if licensing was not started in fashion because we have to remember that the first licensing was in the entertainment industry. And in particular in the cartoon industries with Mickey Mouse and leased off the characters into other product categories. And let's now focus on the two most important product categories in Fashion and Luxury that are Eyewear and Fragrances. The eyewear business became very, very important for designers and luxury brands for mainly two reasons. The first reason being that eyewear became from a madical device, from something functional became something fashionable. A fashion accessory, a way to express the customer personality and not anymore something that you must wear to see well. And so, this made many companies enter into the fashion scene, many fashion designers. And another reason for the booming of the eyewear category is the fact that eyewear are very visible. You can see them on the face, you can see the logo, and the price is usually relatively convenient. So, they are an accessible category for those willing to enter into the fashion and luxury business. Most of the companies are actually the brand owners. So the licensors are not, of course, manufacturing and retailing eyewear. The other category because this is very complex. Distribution is very different from the distribution of fashion and luxury. Therefore, licensing is a major tool to help companies to market their eyewear collection. Most of the luxury companies that you know from Chanel to, actually, Armani and all the others, do rely on a few partners in the licensing business. The first, the global leader in production and distribution of eyewear is Luxottica, an Italian company that was established in 1961 in Italy, by Mr. Leonardo Del Vecchio. 7.3 billion Euro in 2013, in terms of revenues and more than 70,000 employees. Luxottica is a licensee for many companies. But Luxottica also has a portfolio of own brands, such as Persol and Ray-Ban. The other category that is very, very important, as I said, is fragrance. The fragrance category belongs to the world of beauty. The beauty industry is made of fragrances, skin care, and makeup. And accounts for something like 20% of the total retail value at global level of the luxury business, according to the figures provided by Bain and Company, about this industry. So, quite a huge market value. Quite a big part of turnover of many companies, such as Armani that makes a lot with the beauty category, but also Chanel, Dior. In particular, fragrances and makeup are the two categories within beauty, more influenced by fashion trends, of course. Rather than skin care when you need to have competences that are far from the fashion scene. So, these are also the two businesses were you find the most designers competing. The product life cycle is short. That all of the brand images is very important. This is also the business of gifting, so perfect conditions to be part of an overall lifestyle of a fashion of a luxury brand. Here we have, again, as in the eyewear category, a few large companies, the companies who operate as licensee. The first company here is the L'Oreal group, number one, followed by other licensees, such as Coty or Estee Lauder or Proctor & Gamble for the cosmetic division. L'oreal established in Paris in 1935 now is the first group at global level with 28 international brands in cosmetics. 23 billion sales in 2013 and over 77,000 employees. Brands that have their own license at L'Oreal are part of the L'Oreal Looks division. And you have brands, such as Armani, Diesel, Victor Ralph, Ralph Lauren. The other competitor is Coty, that again was established in France in 1904. Now, it headquarters in New York. 4.6 billion sales in 2013. And again, a wide variety of licensed brand such as Balenciaga, Bottega Veneta, Calvin Klein and Marc Jacobs. Now, let's talk a little bit about who does what in licensing because it's very important to understand what is the role of the licensor, so the brand owner and the licensee that is taking care of the execution of this strategy. Usually, the licensing process starts with the licensor. Of course, the licensor is the brand owner. Therefore, in fashion and luxury is the one providing the creativity, what we call as creative project. Creativity has to do with the definition of the mood, for instance, of the collection, and the inspiration, the themes and the so-called stylistic guidelines. Then, after the briefing from the licensor, the licensee usually is developing prototypes and samples according to the design direction. And is also entering into the manufacturing of the final product that will be sold to the final customer. In fact, the licensee is also the one distributing and retailing the different categories on license. And also defining the pricing strategy and the different commercial condition, condition of sales. In the retail and distribution strategy, the licensor is usually working on the creativity development when you have materials, for instance, for the point of sales, for the window display, for the visual merchandising. And sometimes, the licensor is also defining some parameters in the commercial policies, such as the return policies, the discount percentages, how to train and to select the sales force. Last, the communication strategy usually is the responsibility of the licensor, both institutional and brand communication strategy. And the media plan is, as well, managed by the licensor, so the brand owner. Usually what the licensee, partner does is the development of the media planning at local level and the management of the PR. So, quite a strong interaction among the two partners. And you easily understand that the partnership, as we will see in a while, is a key word for the positive outcome of a licensing agreement. Why entering into a licensing agreement? What are the pros and the cons? Let's start from the pros, so the benefits. It's clear that the first benefit is to share the risks and the costs of the new venture. In particular, when you are a start-up, because as we said, it's not that licensing is only for big corporation, but also start-ups can actually rely on the economies of scale, on the competence base of a partner in order to develop the business with less risk and less costs. Then, of course, you get, as a licensor, a flow of royalties over the time that are defined by the contracts, so from a financial standpoint is also convenient. And you have, by the way, a faster market penetration relying on the network of your partner, in particular at international label. About the cons, the disadvantages that you might have in a licensing agreement, of course, they are all related to the diminished control that the licensor has on activities. So, difficult to enforce controls, for instance, in terms of manufacturing, production with an issue of corporate social responsibility. Sometimes, you don't know who the producers are, where they are. And this, of course, might have an impact on the company, the licensor reputation and goodwill. A second element is the risk of parallel channels, counterfeits, so where the product goes in terms of retail because the licensor cannot control the distribution in detail. Of course, there is in any licensing contract, a very important point is the agreement upon the distribution plan, but of course, on a global scale this is usually quite risky. Last but not least, in a licensing agreement of course, the licensor is far from the market and from the consumer. It is in a situation where the company, the licensor can understand less about the evolution of the market and the needs of the market itself. Because of course, this knowledge is in the licensee partner. Therefore, what are the key success factors for a licensing agreement? So, based on the best practices we observed in our research and working with companies, what we understood in terms of what works well in this kind of strategy. First of all, it's very, very important to start with a creative project that works. A creative project is, of course, the responsibility of the licensor, so clear stylistic vision, clear stylistic guidelines. Because even if you are not competent as a licensor in the specific category, still you have to understand how to work with your style, your creative vision on the new category. And also dedicate people, managers in working on licensing. It's not something that has to be done only by the partner. So, the concept of co-makership is very important in the design definition. A second element is to enter into partnerships that are long term partnerships. So, licensing contracts can be one year, three year, up to ten, 20 years. So, there are, on the market agreements that are really long-lasting as weddings, actually. The longer the contract, usually this is to protect the brand equity of the brand owner because the two partners are working, more or less, for the same objective that is, maintain the brand value over the time across categories. A third element that is very important to take into consideration is the professional management of the contract. Meaning that you need to control the distribution outlet, the distribution strategy. Everything should be approved, products, new lines, new launches, local marketing strategies in order, again, not to infringe the intellectual property, not to dilute the brand equity, and distribution in particular is a key issue because if you think that the luxury brand might have a limited number of doors for its own core product, but then entering into eyewear or fragrances the number of doors are thousands. And this is the reason also why you enter in this business with a partner. Being thousands, of course, the control is important and cannot be performed by the licensor very often. So, in one word, the keyword for a successful licensing agreement is partnership. So, conceive and think about this agreement and not as something where you have two companies or two entities working on different strategies and objective but really something where you have a mutual goal at the end that is to maintain over the long run. The brand equity.
