Licensing: a strategic lever

Licences are a rapidly growing phenomenon (Warin and Tubiana, 2003), demonstrating an awareness of two facts. First, although brands are a form of capital, they still have to produce revenue. Second, this type of partnership enables the brand to acquire abilities or distribution that it had previously lacked, and so to be extended yet further. However, there is still an image problem with licences, which explains why they have experienced slower growth in some countries than others.

English-speaking countries, for example, have extensively exploited this concept. Yet in numerous other countries, licences are still restricted only to the luxury sector, sport and so-called ‘derivative’ products – knick-knacks from every sector that this pejorative name implies.

Furthermore, the current trend among luxury brands for announcing – as Gucci has done – that they are to cut the number of their licences has served to strengthen this negative aura around the licence. For some brands, such action has merely been a case of correcting the licensing excesses into which they had fallen, as part of a drive to recreate the rarity (and perhaps even quality) of their brand. Gucci was a typical example of this.

In reality, licences have now become a truly magnificent opportunity for improving business volume, brand capital and profitability. Why was this not the case before?

First, brand managers have now realized they need to focus on relationships. Beyond the product itself, the brand must forge links with its customers – and its best customers in particular – which are based on a rapport and mutual understanding. The products we currently refer to as ‘derived’ should really be renamed as ‘customer relationship products’. For example, one initiative taken by Orangina has been to rebuild its relationship with the young people and teenagers who had increasingly been abandoning the product in the face of Coca-Cola’s relentless encroachment.

Second, today’s brand is community focused, as in, ‘Tell me which community you belong to, and I’ll tell you who you are.’ In other words, the choices the brand makes in terms of promotional agreements reveal the community to which it belongs and whose tastes it shares. The decision by the Suze apéritif company to launch an annual limited edition, teaming up with J-C de Castelbajac in 2001 and Christian Lacroix in 2002, is an illustration of this principle, and has positioned Suze as the drink for lovers of arts and literature, revitalising a fundamental aspect of the product which this character brand had ignored for too long.

Third, the brand builds its status through its extensions. The one-product brand has had its day, and the brand is viewed no longer as a product, but rather as a concept. Once created, a concept develops and strengthens itself via extensions. Under this approach, the company acknowledges that the brand extension calls for industrial, logistical or commercial skills that the company itself probably does not possess in the short term. However, there are many other companies that do have the required resources, and can place them at the immediate disposal of the brand.

The strength of the brand is also linked to its geographical extension. Production and distribution licences are necessary in order to understand and penetrate continent-sized countries such as China and India. The product range of a luxury ready-to-wear brand such as Lacoste in Japan or Korea has to take into consideration the physical size of its customers and the specific sports they play. The local licensee is in the best position to develop an extension to the collection which improves the brand’s local relevance, while creative and quality control remain in the hands of the talented licence holder.

In sectors eroded by the dictates of concentrated large-scale distribution, the licence provides an opportunity to release some of the pressure. This applies to any sector in which companies have failed to create brands based on strong, intangible values, for this is the one thing that the distributor brands are incapable of copying. The principle operates across the most diverse categories, from spectacle frames to men’s footwear. It also applies to SMEs that, lacking the finances to create their own brand, manufacture and distribute under licence. This is how Weight Watchers has expanded its world distribution.

However, it would be a mistake to see licences as nothing more than a godsend to SMEs crushed by the excessive demands of concentrated large-scale distribution. They also represent an opportunity for multinationals making a late entry into a marketplace already dominated by other firms.

Creating a new brand makes the risk of competition too great. A better strategy is to use a ready-made one, thus circumventing the barriers to entry. This is what l’Oréal did with Ushuaia, a shampoo brand that has taken the name of a very famous French television programme on Channel 1 based on the Earth, the environment and its preservation. The licence owned by Channel 1 enabled l’Oréal to compete with Unilever and Henkel in the shower gels market, in which it had previously had no presence.

Lastly, the case of the J Dessanges hairdressing and beauty chain provides an illustration of a remarkable use of licensing in its strategy to increase its prestige, status and desirability still further. By using l’Oréal as its licensee to distribute a full range of large-scale distribution products, this upper range or even luxury chain not only created an exceptional source of profits, but also strengthened its brand via the licence. The whole of France is familiar with, and is now able to buy, products from the J Dessange Professional Range (which are, it should be said, the most expensive on hypermarket and supermarket shelves), while at the same time dreaming of one day being able to afford visits to the hairdressing salons, whose spiralling prices are driven by their luxury strategy.

After all, in the West, luxury derives its desirability from being well known to all, yet affordable by very few; and Dessange would not have been as desirable without this licence. It is worth pointing out that the company has launched a second, cheaper hairdressing salon brand (Camille Albane) at the same time as releasing a line of large-scale distribution products named ‘Camille Albane’. Here, the licence will serve as a motor to accelerate recognition and image, since the number of Camille Albane salons is still small. Hence its low profile.

Ultimately, the very nature of a brand can change as a result of its licences. Cacharel is an example of a licence that went on to become the true centre of gravity of a brand. Cacharel started out as a woman’s ready-to-wear brand in the 1970s, positioned to appeal to romantic women. A perfume licence was subsequently granted to l’Oréal, with the launch of Anaïs Anaïs, a worldwide best-seller, followed by Loulou and Eden.

In the last five years, four perfumes have been launched to appeal to today’s young clientèle: Noa, Nemo, Gloria and Amor Amor. For l’Oréal, the problem with the Cacharel licence is that it is built on nothing: the ready-to-wear business has since vanished into obscurity. This is precisely the opposite of the Armani and Ralph Lauren licences. However, for Cacharel, the situation is very different: thanks to the recognition generated by advertising and the worldwide distribution of its perfumes, the company is in a position to consider other licences for its brand. In this way, it plans to increase its royalties from s7.6 million to s12 million over five years (Les Echos, 7 July 2003). Cacharel has become a de facto perfume brand and is exploited through various other licences (household linen, lingerie, sunglasses, fine leather goods, scarves): an original business model.

As we can see, the licence can take many forms in the question of how to manage the brand over time: at launch, or during the growth, reinforcement, maturity or relaunch phases. It provides a source of accessible, creative solutions, taking competitors by surprise. It is truly a tool for increasing brand competitiveness.

No such discussion would be complete without considering the fiscal element of the licence, by which many multinationals have shifted profits from their local subsidiaries back to the head office through the mechanism of royalties paid in remuneration for the use of brands, logos, artwork and so on.

For example, it is common knowledge that Disneyland Paris is a commercial success but a financial disaster. More than 12 million visitors a year queue up to get into the park, yet given the scale of the initial investment and interest rates, and thus the venture’s current liabilities, the project could only start to turn in a profit if the banks were to write off their debts. Despite this, Disney Corporation still draws annual royalties for the concession of its brands and trademarks (all of the Disney characters) to Disneyland Paris.

Yet good fiscal administration knows that licensing may be a way to siphon profit out of a country and pay less taxes: it demands proof that a genuine service is being provided. If royalties are being paid, they should reflect real and tangible added value. Thus a holding that requires its subsidiaries in other countries to pay royalties for the use of a company name and logo may find itself required to produce evidence of the value of the service provided to the subsidiary through the use of this name and logo.

Paradoxically, it may be the holding itself that ought to pay for such a service. The holding’s name is often unknown to consumers; yet if it is listed on a stock exchange, a visible profile is essential. Unless the holding chooses to produce its own advertising (such as the LVMH group’s sponsorship programme), such visibility can only be created further downstream, by appending its name to all its subsidiaries’ products.

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