Emerging Markets And Brand Licensing by Dave Sharat

EMERGING MARKETS AND BRAND LICENSING

What benchmarks successful Brand licensing in emerging markets ? Surely there are more than one factor that steers the business, in as much as the several pitfalls that render deals going south. It would be hard to have a consensus on all but here are some that would ring a bell from your own times perhaps.

BITING OFF MORE..

This goes both sides of the fence.. licensors and licensees falling on their own swords. Over zealous expectations from a market and the need for presence in a new market on the one hand and in trying to “win”  the license, the prospective licensee often providing the licensor with a “best case scenario” instead of a more realistic case, on the other, are deterrents. The often hyped initial projections will then form the basis to develop minimum sales targets and royalties, which will then go into the contracts. Trouble looms when both sides agree to just about “any” terms in order to have a “get go” and the inability to achieve the objectives ultimately result in a stalemate. Getting in over one’s head, prospective licensees often try to secure multiple regions or channels as part of the deal. This may be because the licensee really believes it can take full advantage of all of the rights offered and sell its product into each of the channels or regions.

Creating unrealistic expectations also comes when licensees may not fully understand the true strength of the brand whose license they just acquired. The licensee may overestimate the power of the brand, believing the brand alone on their product will result in acquiring new clients or larger programs with existing clients.

Licensors often want the licensee to treat the licensed category with the same care they would treat a product category in their own organization. They expect the licensee to develop the product following the brand’s style guides carefully and to follow externally a similar protocol to the one that the licensor follows internally. The licensor wants the licensed product to be of a quality that the licensor would be proud to have on a retail shelf next to the internal product. Optimizing expectations on both sides is what’s key


DUE DILIGENCE 
The classic and most frequent mistake is to assume that a formula for the licensing or franchising of a brand in one market will work equally well, unamended and unadapted, in another market. There are many examples of brands which are large and successful household names in their home markets but have tried and failed in emerging markets.KFC Vs McDonalds in China, HOME DEPOT closing in China whereas B&Q  flourishing by consistently reading the market better have been highlighted before too. The animated cartoon ‘Little Krishna’ which was a hit on Nickelodeon India is another eg. Bu then to launch a merchandising range featuring bath mats and bedroom slippers was a great mistake: Little Krishna was, after all, still a god and never, ever would you place your feet on an image of a god! The lesson is – selling in a particular market would need understanding the minds of the buying public or the target audience. What works in one part of the world may not work at all in another part of the world.

TRANSCENDING BRAND STRENGTHS 

Assuming the brand is as well known and as highly prized in the local market, as it is at home, is another cry. It is remarkable how deluded senior executives in leading “Western” corporations are about how well-known their brands are in other markets. Even with the advent of the Internet, a brand may simply not be known to large swathes of the population in large parts of the world. As a result, in a negotiation with a potential licensee, the brand owner needs to articulate to the licensee the value proposition that is being brought to the table, and not to assume that this “speaks for itself”. Thus in a market which it plans to develop, a licensor would be well advised to offer additional marketing support and funding in order to assist a potential licensee,. This could include allowing the local licensee to get the benefit of bulk purchasing discounts on marketing materials, to offering prizes to fly successful sales staff to the head office. Patience and persistence in building up the brand in critical. A striking example of the difference between what might appear to someone sitting in the UK and what might appear to someone sitting in China is the story of Stockport County football (soccer) club which has just as much as brand resilience as Manchester United but then Stockport County club does not figure in any serious football rankings. This was because of the energetic efforts of the Commercial Manager of Stockport County, who regularly visited China, made sure that Stockport County was known in many different places, organized events and flew the team out for exhibition matches. As a result, the amount of goodwill attaching to the Stockport County brand in China was remarkable – even after the team’s fortunes in the UK had plummeted! At one point, one third of the club’s revenues came from China !

DIVERSE LICENSEE GENRES

Assuming that the licensee in emerging markets will have the same attitude to the license relationship, as licensees in mature markets is overrated. In many emerging markets, e.g. Africa, Russia, the brand owner must educate local licensees about what is involved in operating and managing a successful license, not just simply negotiating a deal, sitting back and waiting for the royalties. In Asian markets, the licensee will often take the view that if the license relationship has an initial term of 3-5 years it is likely (for whatever reason) not to be renewed. Thus they will be pushing for the best returns as they can, as quickly as possible, before the license is taken away from them. This, ironically, is at odds with the emphasis, much spoken of in Asia, about “developing a long-term relationship” with business partners. It perhaps suggests a certain cynicism towards Western licensors. Thus decisions which may not be in the long-term interests of the brand may be taken just to make a short-term profit. Licensors should invest much effort in selecting and educating licensees for the long term, who understand the overall strategy for the development of the brand. Naturally the licensor’s actions should support their long term assurances.

HASTY ALLIANCES 

Assuming one can quickly find the right partner and tie up a successful deal gets in the way eventually. It is very unwise to fly into a country to sit down for a few pre-arranged meetings, expect to tie up a successful and long-lasting deal with a licensee, and fly out a few days later. That is simply not how business works in many emerging markets. The importance of doing whatever it takes to check the track record, background and bona fides of licensees cannot be over-emphasized. It is prudent to invest time and find the right partner or agent. than close a deal with any partner. Plan for multiple visits.

EXIT STRATEGIES

Contrary to the above if a deal has to be done quickly, one must at least make sure that in the license agreement there is an ability on the part of the licensor (and this need not necessarily be reciprocally granted to the licensee) to terminate the license arrangement quickly, easily and cleanly if things are not working out. We know of situations of a license agreement entered into for a key territory for 10 years which was only terminable on breach of contract or insolvency. In a later acquisition of the licensor’s business, the purchaser could walk away from the deal when it discovers the license, not being prepared to buy the business with a commitment to that territory for 10 years and which could only be exited on breach. On the other hand, of course, one needs to give the licensee a reasonable “run in” period in order to establish the business and the profile of the brand and to generate revenue. Three years would usually be a minimum.

IP PROTECTION
Don’t worry too much about protecting your IP – it can be fixed later if need be. Wrong..wrong..wrong ! Especially in markets which are highly liable to infringement and piracy, if anything can be protected, it should be abinitio… not later. What may be considered “adequate” protection in Western markets from a trade mark perspective may well not be enough in emerging markets. The obvious example is the local language variations of the brand, including in local script if applicable. In several Asian markets, a brand will be known by a local  name, whether ones chooses it or not. It is always wise to control this. A similar problem arises if one allows the local distributor or licensee to register the local version of their name. When the parties fall out there is nearly always a fight over ownership.

In addition, all logos should be separately registered (this is not a situation where you should cut costs by registering the word and logo together) and different variations of the name (e.g. MARY QUANT and QUANT MARY.) In addition, domain names should be covered to a reasonable degree, and other types of intellectual property, such as design registrations, should be protected where possible. The more official certificated registrations that are on files, the stronger is the position will be when problems (as they very likely will) arise.

REGISTERING LICENSES

As a sequel to the above there are still some countries where recording a trade mark license agreement perse with the respective government authorities is important. These include China, Malaysia, Singapore and Thailand. This will secure the rights of the actual trade mark owner in terms of “use” of the trade mark, countering any vulnerability to cancellation for non-use, and will enable the trade mark owner to take direct enforcement action. In addition, it can be very important to ensure that royalties can be remitted from the country to the brand owner. In many countries an abbreviated or pro forma version of the license, which does not give away the sensitive commercial terms, is sufficient for registration purposes. Naturally, this kind of registration must be kept up to date when the licensee changes or other significant alterations take place.

SUPPLY CHAIN AUDITS

Failure to carry out checks on the supply chain can be disastrous for the brand owner. There are examples where there has been a good “master” licensee who has done everything required of it under a license agreement in the emerging country, but was given a free rein to appoint sub-contractors (and sub-sub-contractors). The result was that the product manufacture was poorly policed so that overproduction and counterfeits flooding the market. The answer is to exercise a great deal of vigilance over who is to be allowed to carry out parts of the distribution or manufacturing under sub-contract and in default refuse to allow this unless the ultimate brand owner has vetted such sub-contractors. Another aspect of this issue is what might be termed “brand hygiene”. Brands, have struggled ever to recover their public image and credibility after it was discovered that products at the end of their supply chain being made for them in “sweat shop” factories involving child labor. The complexity of the problem gets further accentuated by the fact that once these factories are shut down, the wave of local complaints of it destroying a key part of the local economy have to be combated.

ROYALTY AUDITS

It is extraordinary how many licensors, whether in emerging or any other markets, seem to have a fear and reluctance of enforcing the commonly-included rights of audit under license agreements. The most usual excuse given for this is that “this might be seen as an aggressive move by the licensor”. However, in experience, over 95% of these exercises reveal underpayments of some kind. Very often underpayment of royalties is not done deliberately or maliciously but simply through incompetence or an over-narrow conservative interpretation of what is covered under the license terms, especially as new product ranges come on stream. To overcome the issue of alleged “licensee hostility”, the best approach is to automatically audit all licensees on a rotation basis, say once every two or three years, so that licensees do not feel that they are being “singled out”. Having a pre-revenue audit can be helpful in checking/helping the licensee understand what is required and checking that the appropriate accounting processes are in place.

PIRACY ACTIONS

Some brand owners, comfortable in their home markets, ignore the problems of counterfeit goods in distant emerging markets. Levi’s Jeans is an example in Asia. The problem is that, unless you “stop the rot” early, it will grow and grow.Then the counterfeits not only will flood the emerging markets, but they will begin to start damaging sales in your “home” market. Inclusive provisions for dealing with the problem of counterfeiting in your brand management budget, followed by swift and aggressive action is necessary. This is far easier to do than it was 10 or 15 years ago. Today, there are well organized firms with extensive networks able to give early warning of problems and take swift action. In any anti-counterfeiting programme, the key thing is to make sure that the goods are destroyed (and not merely impounded, because they may well be sold out of the back door by the official authorities once the brand owner has disappeared…) and to make sure that any enforcement action is publicized loudly in the local press so that there can be no question that the counterfeiters know that you are a brand owner who will stand up for your rights. Often in that situation the counterfeiters will shift their attentions to your competitor, who does not take action to enforce its rights, seeing it as a “softer” target.

These are just some of the alerts in the process of licensing brands in emerging markets. It sure requires consideration of multiple issues: legal, cultural and commercial and it is always advisable to seek expert local advice if need be.

About the Author:

Dave Sharat has spent many years in licensing with companies like Disney, 4 kids entertainment and Animation International managing businesses laser focused on markets in Asia including India.