NEW YORK, NY; March 6, 2017—Sequential Brands Group’s Yehuda Shmidman did his best to put a positive contextual spin on the current state of retail at Li©ense Global’s sold out NYC Summit last week. Even if you didn’t agree with all of his assumptions, he made a compelling case for a future (five-plus years from now) in which we will “look at this [period] as the ‘2008 crisis’ for retail,” a reference to the financial collapse of that year.
Shmidman’s boiling down of the root causes of the current status of retail to two key factors — we are “overstored” at 48.4 square feet of retail space per capita in the U.S., compared to 23 square feet for the next largest market, the UK; and the disruptive effects of e-commerce — crystalized the themes that emerged in a day and a half of presentations by licensors, licensees, and agents at the Marriott Marquis in Times Square. (More on Shmidman’s observations shortly.)
Among the themes:
- Impact of Trumponomics — in particular trade agreements and tax structures — on the licensing business.
- A shift away from boomer-centric to millennial-centric shopper behavior, and the commensurate overwhelming challenge of embracing social media and staying ahead of trendlines. (A favorite presentation among Summit participants I spoke with was PepsiCo Creator Carlos Saavedra — yes, that’s his title, and licensing is part of his domain — whose talk centered on implementing experiential licensing-based programs that spur social media use and lead to new business concepts.)
- Continued rapid growth in licensors’ embrace of off-price and club stores.
- “The anxiety [that the] retail store-based consolidation that we are seeing is the tip of the iceberg,” as PVH’s Ken Wyse put it.
- Acknowledgment of limited growth opportunities for evergreen brands (e.g. “maintain” brands at Iconix, including Canon, Waverly, and Fieldcrest; “heritage brands” such as Izod at PVH. Of course both have developing as well as high growth or, as Iconix terms them, “driver” brands).
- Impact of just-in-time sales data which, combined with consumer ability to order instantly, requires substantially greater speed to market and, as Xcel Brands Robert D’Loren put it, “52 seasons a year.”
- Dramatic differences in how companies define “experiential” licensing, which might mean the Kola House restaurant in NYC’s meat packing district for PepsiCo, sponsorship of a half-marathon for Iconix’s Danskin Now brand, or arena eSports events for Activision Blizzard.
- Near-impossibility of countering counterfeits in many markets.
‘Trumponomics’ Trumps the Conversation
“How will Trump changes impact global trade?” PVH’s Wyse asked. Some were more uncertain than others of how trade policy will shake out. Robert D’Loren of Xcel Brands (and the financial co-founder with Neil Cole of Iconix who had previously run the retailer Athlete’s Foot) was the most emphatic. Having lobbied congressional offices in Washington, DC the prior day with the American Apparel and Footwear Association, he was convinced “the border tax will become law. We were arguing to phase it in to give us some time.”
Speaking of brand holding companies such as Sequential and Iconix, that specialize in licensing out all manufacturing, equity research analyst Eric Beder, of Wunderlich Securities, wasn’t hazarding a guess as to what the new administration will do on the economic front, but suggested that some of the proposals under consideration could deliver “a new tax structure that could potentially destroy every brand that doesn’t have core,” core being something that they make, market, and distribute themselves. (Interestingly, Iconix’s Dave Jones said earlier in the event that Iconix deems itself “asset –lite; we don’t make anything,” touting that as a positive aspect of its business model.)
Of a potential border tax, Beder adds, “A border tax doesn’t let you account for cost of goods [in your pricing]; and you can’t turn on a dime to manufacture in the U.S. It’s going to be tough for Republican senators in states like Arkansas to vote for.” Unlike D’Loren, Beder said, “I think it won’t happen, but it will keep rearing its head” and keep that state of anxiety high.
Meanwhile, Wyse noted that he’d made the infamous shirt and tie licensing deal with Donald Trump 11 years ago. “At some point, for various reasons, I wound up a member of Mar-a-Lago,” he said. “And recently I ran into the president there. He remembered me, and remembered the deal. We talked, and he was very much on top of the apparel business.”
As for the “2008 crisis for retail,” Shmidman likes to look to the book business, which he said is now “post-crisis,” for inspiration: 46% of book stores are gone, he noted, while in the apparel business, for which 15% of sales are online compared to 10%-12% for merchandise overall, only 7% of stores are gone so far. With the growth of online retailing, he added, “We have to be able to adjust distribution.” To that end, Sequential is increasingly focusing on building digital businesses for its brands. Example: Martha Stewart meal kits, a “pure digital business” that is “growing double digits month to month.” Earlier that week, Sequential had downgraded its guidance for 2017, attributing the decline primarily to weakness in the department store segment.
- Off-price retail sales were up 9% 2015-2016, reported Iconix’s Jones. But off-price, discount, dollar, and clubs are “mostly for our ‘maintain’ brands.
- PVH’s Wyse said off-price is “crucial — not for designer brands, though we certainly sell some Tommy [Hilfiger] and Calvin [Klein] at Costco. For our heritage brands it’s vastly expanded. We might have a halo [presence] at Macy’s or Belk. But where off-price might have once been 12% of business for certain brands [it] can now be 20%-40%.”
- “Retailers need to get better at e-commerce. It’s not something we want to be in on our own.” (Dave Jones, Iconix)
- Brand marketers and retailers need to “reimagine shopping, entertainment, and social as one.” (Robert D’Loren, Xcel Brands)
- “PepsiCo is doing something every agent in this room wishes every client did: applying metrics beyond dollars.” (Debra Joester, The Joester Loria Group, which represents PepsiCo). On a similar note, Scott Bannell, recently retired from Stanley Black & Decker (represented by Beanstalk), outlined the four objectives that company has for licensing: Increase brand impressions and touchpoints; please end-users so they buy more core; expand to new channels and partners; and use licensing income to invest in brand-building programs.
- “We are a media company, not an apparel company.” (Robert D’Loren, Xcel Brands)
- “We don’t sell posters anymore. We sell wall art.” (Dell Furano, Epic Rights, which specializes in licensing musical artists)
- “We are one year away from Amazon, WalMart, and Alibaba accounting for $1.5 trillion in sales.” (Yehuda Shmidman, Sequential Brands Group)
- “Retailers don’t want the brand, they want product performance.” (Scott Bannell, Stanley Black & Decker)
- “Don’t think you can give licensing part-time to someone on a team.” (Scott Bannell, Stanley Black & Decker)
- “Wall Street doesn’t like debt anymore, which hit Iconix and Sequential[‘s stock valuations].” (Eric Beder, Wunderlich Securities)
- For subscription box service Loot Crate, “every box has to arrive the same day, so the videos of people opening the boxes aren’t spoilers.” (David Morris, Loot Crate)
- Spirit Halloween’s 1300 stores do “the same volume in eight weeks as [parent company] Spencer Gifts does in a year.” (Eric Morse, Spirit Halloween/Spencer Gifts)
- Asked what licensors can do to help retailer Tesco, the retailer’s Rachel Wakley said, “Talk to us. Walk our aisles. Make sure your licensees sell your brand as well as you do. If you have to call me to ask for feedback about your licensee you’re probably working with the wrong licensee.”
- “If you can’t sell it in a tweet, it’s not good enough.” (Rachel Wakley, Tesco)
- “Let the customer tell you what they want, then be the best to deliver it.” (Rachel Wakley, Tesco)
- “If you’re rotten and toxic on the inside, no amount of makeup is going to cover that up.” (Drew Barrymore, actress and founder of Flower Beauty, a cosmetics brand available exclusively at WalMart, and other companies.)
Ira Mayer, co-director of the Institute of Branding & Licensing at LIU Post University, and former Publisher of The Licensing Letter, conducts competitive research for marketing and licensing companies. Contact him at firstname.lastname@example.org.
It’s no surprise that Iconix has performance issues.
With a broad portfolio of mostly second tier fashion brands, the question has always been just how poorly were some of the brands doing, and whether the successes simply weren’t big enough to carry the losers. On its roster, Peanuts was the odd-brand-out, adding entertainment to the mix; that acquisition, in which Charles Shultz’s family has a 20% stake, was reportedly a rocky road until Leigh Anne Brodsky (ex- of Nickelodeon) came on board to manage the entertainment side of Iconix. And that’s now the cornerstone of Iconix’s good news.
For Wall Street, Iconix has pitched itself as a business model boasting a built-in, long-term, guaranteed revenue stream (the minimum guarantees manufacturers pay for rights to make and market goods under Iconix’s owned or partially owned brands) — with no manufacturing costs, no inventory, no responsibility for returns, and some hot brands.
Iconix wasn’t the first to own a brand and just license it out, but it may have been the first to institutionalize the practice across a roster of brands. And Iconix did so with a twist: Direct-to-retail (DTR) deals such as Joe Boxer at Sears/Kmart — one of its earliest successes.
The Iconix model, with its emphasis on ownership of most of its brands (and a major stake in those it doesn’t own outright) and DTR exclusives, has become the template for Authentic Brands Group, Sequential Brands Group (whose CEO, Yehuda Shmidman, rose quickly through the Iconix ranks before leaving to launch his own brand acquisition efforts at Sequential), Hilco, and a few others.
Iconix has also accelerated interest among some traditional licensing agencies to look at the possibility of taking an ownership stake in some of the brands they represent, as Iconix itself has done with Peanuts, Madonna’s Material Girl brand, and others.
So what’s going wrong at Iconix?
- Too many mediocre labels that never gained traction, especially among men’s urban brands, with which they’ve struggled all along.
- Founder/CEO Neil Cole has been a great proponent of DTR, which worked for some brands. The problem is the company can’t force DTR for all of its brands, which was reportedly Cole’s goal.
- DTR was especially difficult to realize in foreign territories — certainly at the speed Cole had expected. There was little recognition in the home office, according to sources I’ve spoken with over the years, that European, Latin American and Asian markets don’t behave just like the U.S., or that individual countries in those regions behaved differently from each other, even after local agency partners in some territories tried to convince them of that.
Some of the other companies in this space — notably Hilco — are very disciplined about buying brand names cheap (often in bankruptcy court) and flipping the brand in 18-36 months. That’s admittedly a different business model (Iconix is in it for the long haul with its brands, sometimes to its detriment), but Hilco has the added plus of running a closeout business that offsets some of the lesser investments. But perhaps most important, that closeout business gives the company direct insight into the opportunity for some of the brands it manages through that process. Sort of like an audition.
With a Peanuts movie due in November, that property is in high growth mode; what happens once the movie has peaked is another question. The company also acquired Strawberry Shortcake from American Greetings earlier this year as part of its entertainment/character efforts; that story remains to unfold.
In some respects, Iconix and the other companies in its space are no different than music or film or publishing companies, where one hit carries the load for all, so long as “all” isn’t too over-leveraged.
There’s been a great deal of management turmoil at Iconix, what with the CFO and COO leaving earlier this year and now Cole’s resignation and the ascendency of Peter Cuneo to Chairman and interim CEO (for which Cuneo received 60,000 shares of Iconix stock). There also remain accounting issues to be resolved with the SEC. But a bad quarter isn’t the end of the road for Iconix.
The link at the top of this post is a Zack’s analysis of the most recent Iconix quarterly report; here’s the formal spin-positive release from Iconix itself.)
Just don’t count Neil Cole out of the licensing business. He’ll be back. What he accomplished has been significant for the licensing world. And I wouldn’t bet against him when he returns.