Food and Beverage Brand Licensing

Tuesday, June 16, 2009

Food and Beverage Brand Licensing

The Challenge of Building Brands
At every minute of every day, a battle is fought in the carts and aisles of the grocery stores of America. Brands fight for shelf space, mindshare, and, in that fleeting moment of truth, a coveted spot in the shopper’s cart. Consumers are the least impartial of referees; an infinite array of factors can impact a purchase decision. The challenge for brand managers and innovators is obvious: How can you ensure your product is selected over all its possible competitors and substitutes? And given the considerable resources required to launch any new product, how can you gain that share of wallet without losing your own budget?

For some brand executives, the answer might be brand licensing. When executed properly, licensing allows a product to leverage an existing brand’s attributes while mitigating some of the risks associated with building a new brand from scratch or the cost of deploying additional media against a current brand.

In licensing, because the brand already exists, awareness and attributes can be measured more exactly. Consumers are familiar with the brand, so research becomes more relevant, and forecasting more reliable. Timelines contract, and budgets dedicated to simply raising awareness can be used to promote sales and build equity. In addition, co-branded licensing lends new credibility to existing products and is a far superior attribute delivery to the hackneyed “new and improved”.

This paper explores the rewards and risks of inbound licensing and provides general ideas for marketers considering licensing’s potential fit into their product portfolio. Please note that this paper primarily discusses licensing in—i.e., engaging another brand for use with your product. Licensing out—as in licensing your marks for use by other organizations—is a different scenario and can be researched through a number of the resources listed in the appendix of this report.

The terminology below is centered on licensing opportunities within the CPG and/or food and beverage industries. Note that most types of licensing are not mutually exclusive, and that any given licensed product can incorporate two or more of the items below.
All marks referenced are property of their respective owners.

Licensor: The property owner.
Licensee: The party that acquires the rights to utilize a property.
Licensing in: The act of acquiring a license. Licensees license in.
Licensing out: The act of leasing rights to other parties. Licensors license out. [1]

Sara Lee Corp’s Hillshire Farm®: the licensee, licensing in MillerCoors Miller High Life®: the licensor, licensing out[2]
"Bringing together the great tastes of brats and beer has been a long standing tradition that began to take shape with our consumers," said Tim Roush, vice president, lunch and dinner brands for Hillshire Farms. "We knew we had an opportunity to provide this perfect flavor profile in a single product offering."

Entertainment Licensing: Comprises both “hot” (short-term) and “classic” (long-term) properties. Children’s entertainment properties make up the bulk of this segment—65% to 70%.[3]
Example: Kellogg’s™ Hannah Montana® cereal

Example: Spangler Candy Co.’s™ Mickey Mouse® candy canes

Lifestyle Licensing: Licensing a property across a broad spectrum of products, categories, and channels.
Example: Weight Watchers™

Co-branding: An arrangement where two brands appear on a single product.
Example: Seattle’s Best Coffee™ Cinnabon® ground coffee

Single branding: An arrangement where the licensed brand takes precedence on packaging.

Example: Barq’s™ Floatz® frozen novelty by J&J Snackfoods

Ingredient Licensing: Licensing a specific branded ingredient.
Example: Pillsbury Grands!™ made with Cinnabon™ cinnamon

Internal Licensing: Arrangement where a parent company owns two brands and uses one brand in conjunction with the other.
Example: Kellogg’s™ Nutri-Grain™ Eggo™ frozen waffles

Foodservice Licensing: Licensing a restaurant or foodservice property.
Example: Romano’s Macaroni Grill™ meal kits by General Mills

The Rewards and Risks of Licensing
The primary reward of licensing can be summed up in one word: leverage. Leveraging another brand through licensing reduces some of the risks and costs associated with building a brand from scratch. While large CPG firms dedicate years—and millions of dollars—to developing and launching a new brand, 88% of new products launched in grocery still fail despite that considerable investment[4]. In contrast, licensed products reach the market more quickly. While no hard data exists on licensed product success ratios, anecdotal evidence across firms indicates higher survival rates; of Cinnabon licensed products introduced between 2003 and 2007, 85% were still in the market after 24 months. Companies spend millions simply educating consumers on the existence of a new brand; by licensing an established brand, marketers can divert these funds to promotions that directly impact sales, creating an immediate win. Trial-driving efforts are also impacted by consumers’ brand familiarity and positive expectations.

Licensing can affirm a product’s existing attributes or create new ones. Done correctly, the result is not redundancy, but a firm entrenchment as category leader. For example, Pillsbury’s Grands!™ Sweet Rolls, the long-time category leader that now licenses the Cinnabon brand, are up 16 percent so far this fiscal year[5]. Leveraging another brand’s attributes can put a new spin on an existing product line, as California Pizza Kitchen demonstrated with its frozen pizza line with Kraft. Consumers gave California Pizza Kitchen and Kraft permission to create an upscale alternative and edgy flavor profiles in a highly commoditized category, allowing both the brand and the category to reach new users.

Leveraging a proven brand also improves research efforts. The licensor should provide information regarding their brand’s awareness levels, attributes, and core users. When researching the appeal of a licensed product, consumers can provide concrete responses based on a brand they know, rather than imagining their reaction to a hypothetical product they have yet to see or taste.

In addition to brand metrics, a licensor with an established licensing program can provide best practices for leveraging their brand in new categories and channels, as well as potentially connect licensees for cross-promotions. When multiple licensees integrate their marketing efforts, they increase media purchasing power, gain distribution for their promotions, and attain greater promotional power within specific retailers.

Further, licensing provides a platform for manufacturers to combat retailers’ private labels. Innovation through licensing gives shoppers a reason to spend a little more on a branded item. As Lynn Dornblaser, director of consumer package goods insight at Mintel, discussed in a recent edition of AdAge “now is the time for ideation and innovation for products that answer shoppers’ desired for value, quality, and pleasure.”[6]

Like any business model, licensing also involves risks. A licensee only leases the rights to use a brand; it does not own the brand. Licensees have little control over the parent company in most cases. This is especially notable when working with personalities and entertainers, as the licensees of brands from Martha Stewart to Miley Cyrus are likely to attest! Additionally, a licensee can be negatively impacted by the shortcomings of other licensees of the same brand. As Stephen Reily noted in BrandWeek when recounting consumer pushback against a major quick service chain for using genetically modified ingredients in its licensed food products “any problem with a licensed product will impact the host brand” [7]…and, by extension, other licensees.

Without the proper contractual considerations, a brand owner could transfer category rights to another party once the original licensee has developed a product and built up demand in the marketplace. Licensors and licensees must work together to develop a contract that protects both parties’ interests.

Structuring Inbound Licensing Activities
What is the best way to structure inbound licensing activities? Like so many other questions, the answer is: “It depends.” Inbound licensing can be structured in a variety of ways, depending on the needs and resources of the licensee.

Licensing in is often managed by the brand manager and/or innovation team working directly with the licensor. If the innovation team begins the licensing relationship, the brand team will often assume responsibilities once a product is in market. Additionally, marketing groups should always involve the legal team in an appropriate balance to ensure that both business goals and legal requirements are met. Managing activities in-house can sometimes lead to faster results, especially when negotiating the contract, educating a licensor on business processes, or developing the marketing strategy. However, if a brand team is overtaxed and understaffed or is not familiar with licensing, a direct approach might actually be the least efficient.

A company with diverse resources could create an inbound licensing department as one arm of an overall partnership development group. The brand team and the inbound licensing group should work together to determine how licensing will serve the overall brand strategy. This inbound licensing group communicates regularly with existing and potential licensees, acts as a filter when bringing opportunities forward to brand teams, and facilitates negotiations by engaging the appropriate legal groups. Designating a specific team allows development of inbound licensing expertise, which can then be deployed as a competitive advantage in the marketplace.

While many companies limit agency involvement to outbound licensing, agencies can also be used to source new ideas, procure inbound deals, facilitate negotiations, and manage contractual and administrative obligations for the licensee. Using the same agency for both inbound and outbound activities will likely create efficiencies and a more complete brand understanding, while using different agencies distributes risk more effectively.

The licensing structure should be the result of careful analysis of company needs, resources, and goals. Companies can also use a combination of approaches to organize licensing activities. Regardless of which arrangement is selected, a crack legal team and communication between all of the parties that touch the brand are essential.

What to Look for in a Licensing Partner
As with all business relationships, a partnership mentality is imperative to the success of any licensing arrangement. While some deals may be short-term transactions, most licensing collaborations are long-term, symbiotic partnerships. For a product to succeed, all parties must benefit: both licensor and licensee (and licensing agent, if applicable) must gain financially, and the end consumer must benefit through increased product value. All stakeholders should strive to understand the long-term implications of licensing—to both the brand and the bottom line.

Ask yourself the following questions when evaluating a potential licensor:
· Do I respect this company’s approach to marketing?
· Do they understand their brand? Do they understand my brand?
· Does this company treat licensing as a marketing vehicle or just a revenue generator?
· Does this brand complement my own? (in the case of co-branding)
· Does this company devote sufficient resources to licensing?
· Will this company be willing and able to support my needs as a licensee?
· What is their overall licensing strategy? Who are their other licensees?
· Do they share appropriate information freely?

You should also look for any hurdles that the brand owner requires of licensees; for example, consumer acceptance tests, taste tests, etc. While passing these barriers could add incrementally to timelines and expenses, these requirements ensure you will be surrounded by a cadre of quality licensed products bearing the brand owner’s name.

Structuring the Deal
The licensor and licensee should consider a number of factors when entering an agreement. A terms sheet should include the following items:

Licensee & Licensor General Information: Company names, types (i.e., corporation, private/public, etc), and addresses.
Type of Agreement: Single-branding, co-branding, etc.
Licensed Products: Proposed name, description, and packaging [i.e., package type(s), size(s), etc.] of licensed product(s). Include potential line extensions.
Term of Agreement: Length of term of the agreement, execution date and end date, renewal option(s), and volume & marketing requirements.
Territory: Countries/territories.
Exclusivity: Exclusive/non-exclusive to product category/channel/retailer.
Royalty Rate: Royalty rate by year(s), channel(s), etc. Royalties based on percent of net sales. Considerations for minimum requirement for product advertising/marketing.
Advance Royalty: An upfront fee applicable to the first year’s minimum royalty.
Minimum Annual Royalty Guarantee: Figure based on volume estimates and reasonable product sell-in.
Size of Business: Based on IRI reports, volume estimates specific to channel, retailer, etc
Other Conditions: Any requirements necessary for approval.

Royalty rates and minimum annual royalty guarantees (MARGs) typically have an inverse relationship, but are both highly related to the overall opportunity. For example, a product with 20MM in annual sales will likely garner a lower royalty rate than a product with 5MM in annual sales. The 5MM product will have a higher MARG (as a percent of total sales) than the 20MM item. A licensee might be tempted to either inflate forecasted figures to negotiate a lower royalty rate, or deflate the forecast to gain a lower MARG. However, this practice can come back to haunt licensees whose MARGs as a percent of actual sales greatly exceed their royalty rate. Accurate forecasting will achieve the greatest benefits for all parties and contribute to the long-term success of the partnership.

Keep in mind that a licensing agreement is more than the royalty rate or minimum guarantees. Also consider a variety of other factors in negotiations, such as unique marketing vehicles made available by the licensee or expanded distribution through the licensor’s restaurant locations. If licensees and licensors strive to understand each other’s overall goals, both parties can leverage the contract to their mutual benefit.

Is Licensing with FOCUS Brands Right for You?
In a sea of products, licensed items stand out. These products present a beloved brand in new and exciting ways, with immediate benefits to the consumer and the licensee. Consumers can enjoy the brand attributes they know and trust, increasing both their actual and perceived value. Licensees can breathe fresh life into existing products through co-branding, or catapult new items into the marketplace with a considerable advantage.

If you would like to learn more about the Focus Brands family of brands and how licensing can help to achieve your goals, please contact:

Cara Becker
Director, Brand Licensing
Focus Brands Inc.
Cinnabon * Carvel * Schlotzsky's Deli * Moe's Southwest Grill

[1] Karen Raugust and the editors of The Licensing Letter, “The Licensing Business Handbook”, fourth edition, EPM Communications, 2002
[2] Denver Business Journal, 4/6/09, MillerCoors, Sara Lee Team up on Beer Brats
[3] The Licensing Letter (from the Licensing Business Handbook)
[4] 2008 Annual Food Licensing Report, Cara Bernosky, IMC Licensing
[5] Matt McKinney, Star Tribune, January 17, 2009, Pillsbury’s Sales are Poppin’
[6] Emily Bryson York, AdAge, April 28, 2009, Recession Batters Plans for New-Product Launches
[7] Stephen Reily, BrandWeek, June 13 2005, Turning CPG Brands into Licensing Stars