Presenters at the recent Business Of Brand Licensing NYC Summit included executives from brand management companies Authentic Brands, Cherokee, and Sequential Brands and key licensees Global Brands, Hot Topic, and Target. Other important presenters included those from Hasbro and Nickelodeon, while notable attendees included Iconix and Marquee Brands. We came away from this inaugural event confident in the brand management business model, but increasingly comfortable with our view that brand owners should continually invest in their content to drive value.
Brands Should Continually Invest In Content. Like the approach taken by licensing powerhouse Disney, certain entertainment-oriented brands like Hasbro and Nickelodeon are increasing their investment in content to drive higher brand value and potentially command better royalty rates. Alternatively, we believe some brand management companies have underinvested in their “content” historically with marketing budgets that seemingly represent a smaller percentage of retail sales than those of leading wholesalers like Nike and V.F. Corp. As such, leading licensees like Global Brands Group may now be requiring minimum marketing budgets at 20% of royalty revenue. Still, the brand management business model remains attractive, in our view, in that it allows for a focus on front-end marketing and brand strategy, while generating guaranteed royalty revenue, high margins and strong cash flows with minimal capital requirements.
The Brand Management Business Model Is Ever-Evolving. Sequential (SQBG, Buy) looks to take more of a merchant approach than industry-pioneer Iconix (ICON, Buy) and seems more willing to prune underperforming brands. Meanwhile, Cherokee’s (CHKE, Buy) 360-degree approach and full turnkey solution allow it to leverage existing product and related design expenses, while preserving brand DNA and providing for not only a quicker-than-normal ramp to new licensing agreements but also the opportunity to market to retailers lacking significant design capabilities or manufacturing relationships. Beyond that, privately-held Authentic and Marquee are focusing on higher-end brands to drive value amidst the transition in consumer purchasing behavior to ecommerce, while lowering guaranteed minimums to make them more attainable. Authentic looks to keep its brands true to their DNA, while not expanding into new categories too quickly and not providing targets for revenue growth through acquisition. It also looks to drive value for its celebrity brands through increased impressions, while evaluating new channels such as mobile gaming. Meanwhile, Marquee is seemingly pursuing wholesale agreements over DTRs and spending more on marketing while still commanding strong EBITDA margins.
Direct-To-Retail Licensees Looking To Drive Traffic. Top licensing professionals from Hot Topic and Target (TGT, NC) stressed the importance of product differentiation, exclusives, and newness to drive consumer traffic. While we question Target’s decision to not renew Cherokee’s license beginning in January 2017 given the brand’s minimum royalty outperformance and better pricing power over private label versus other licensed brands, some of that may stem from Target’s desire to drive stronger traffic through its focus on baby, child, style, and wellness.
Apparel Brands Still Important To Millennials. While questions emerged surrounding the importance of brands to millennials given waning demand for logos and the like, we believe that younger consumers still care deeply about brands but now favor characteristics such as technical features (selvedge denim, athleisure moisture management, etc.) or a brand’s story. Part of a brand’s story is how it was originated, how its products are made, and its corporate approach to social responsibility—such as in Sequential and the Revo brand’s partnership with Bono to fight vision impairment.
