THE AMERICAN WAY
Byline: Lisa Lockwood
NEW YORK — For decades, American designers have been extending their brands through licensing, producing many a millionaire and many a fashion empire. But in recent years, the idea of licensing has taken on new meaning, as more and more companies have become public, or have licensed their names to public companies. Now they’re not only answering to finicky consumers, but to unrelenting shareholders as well.
The pressure to roll out new products each season in order to show improved sales and earnings each quarter can take its toll on the time and talents of American design houses. Finding the right licensing partner is paramount.
But even with the right partner, the issue of control can get very ticklish.
“Going public under any scenario, or bringing in outside investors in a private placement, means giving up some control. You can’t run it like a family business,” said R. Fulton Macdonald, president of International Business Development Corp., a consulting firm here. “The more additional investors, the more you must think communally rather than individually or personally. That means a reduction in control.”
“Wall Street does put pressure on you,” he continued. “That’s why public companies, such as Levi’s, go private to get away from the intense spotlight of quarterly earnings. Stockholders don’t have the perks that designers have. They only have a dividend, and its size becomes so important. Wall Street is run by professional money managers. They put pressures on the management of the companies in which they’re investing. They intensely put the heat on and criticize every step. They’re more shrewd about people running companies. They know how to milk money.”
Macdonald noted that money managers aren’t designers, but they can say to the company, “‘I see these three companies have a fragrance license or a handbag license. Why don’t you?’
“They come whipping in with things. They want to know how many licenses you’ve signed up and how fast you’ll deliver fees,” Macdonald said.
“I think what we’ve seen happening is we’re looking at five major brands — Ralph Lauren, Calvin Klein, Tommy Hilfiger, Nautica and Donna Karan — and three others — Ellen Tracy, Mossimo and Guess — that control most of the licensing world,” said Andrew Jassin, partner in Marketing Management Group, an apparel consulting firm here.
“In the Seventies and Eighties, it was a lot easier to take a secondary brand and invest money in it and sell it to department stores. Today, it’s more difficult to sell it to department stores. There’s a substantial amount of real estate taken up by the Big Five and their own [private label] brands.
“Today, there are fewer licenses, but much bigger licenses,” said Jassin. He said such an approach gives a manufacturer a better shot at the department stores. “You also get a higher selling price for the same product.”
Powerhouses such as Klein, Lauren, Karan, Guess, Nautica and Hilfiger have had both blockbusters and disappointments in the licensing arena. But what separates these megabrands from their predecessors is their marketing muscle. Not only do their products run the gamut from jeans to fragrances to children’s wear to sheets and towels, they’re armed with big ad budgets, impressive in-store shops, a unified image and, above all, the necessary clout with the big stores. They’ve become a world unto themselves.
In licensing circles, maintaining control of product, image, advertising and distribution, while a constant challenge, is still a far cry from those of the Seventies and early Eighties.
Keeping on top of the licensee, centralized advertising and internal structures are all designed to insure a consistency of product and work to prevent erosion of the brand’s equity. In the Seventies, designers such as Pierre Cardin and Christian Dior went overboard in the licensing arena, signing on too many licensees and diluting their brand names. Several found their licensed products popping up in less prestigious distribution channels. This led some companies to retrench and pull many of the products in-house or relicense them to different companies.
Over the years, licensing executives learned that just slapping a name on a new item was no guarantee of its success. The customer has to see the advertising and promotional activity, as well as quality, value, price and taste level in the licensed product.
Some designers even pulled back licenses, believing they can do a better job themselves.
Take Ralph Lauren. For years, he threatened to pull his women’s wear business away from Bidermann Industries USA, believing that although profitable, the $120 million operation could be much bigger, even exceeding his lucrative men’s and boys’ business, which in 1995 was doing $550 million in wholesale volume. Two years ago, when Bidermann had fallen onto hard times, Lauren bought the license back and took the women’s business in-house.
But Lauren was far from soured on licensing: His deal with Jones New York for a better collection has been a boon to both Jones and Lauren, shattering initial projections, with a current wholesale volume of $200 million.
Donna Karan, who had struck a deal with Designer Holdings last year to do a women’s and men’s DKNY Jeans collection, saw the whole deal unravel at the eleventh hour. Karan’s firm was afraid that the Designer Holdings products would cannibalize the DKNY profit machine. Karan is now developing the jeans business in-house, but it remains to be seen whether Karan’s new chief executive officer, John Idol, who cut his teeth in licensing at Ralph Lauren, will eventually move toward a license in that product area.
In addition, Karan has spent years developing her own beauty business in-house, but it’s been a drain on the company’s profitability. Under board and shareholder insistence that the beauty business could thrive if licensed to a beauty expert, Karan signed a deal last week with Estee Lauder.
Idol told WWD he plans to become more aggressive in licensing.
“First and foremost, the thing you have to look at at Donna Karan Co. is that licensing is something we intend to use as a vehicle to enhance our Donna Karan and DKNY brands, and number two, it gives us the ability to enter businesses that we do not believe are our core competencies, such as eyewear and women’s hosiery. Both of those enhance our brand.”
As for the jeans business, Idol believes that’s one of Karan’s core competencies. “In men’s and women’s apparel, we’re very capable of producing men’s and women’s sportswear that is denim based,” said Idol.
As far as giving up control when you license, Idol said, “I don’t think you give up control. We will have appropriate mechanisms in our licenses to keep the balance to have approval on product packaging, advertising and in-store merchandising.
“The second thing is, it’s all about who you license with — if you’re with a world-class manufacturer who shares the same values with you. It’s more about the shared vision and how you execute the business. We view licensing as working with strategic partners. In any kind of balanced situation, you have a partnership,” said Idol.
“In all of our licenses, we have approval over all our distribution,” said Idol. “Usually, our licenses would have an anti-assignment right,” he added.
“We believe we have to build shareholder value and focus on our brand development. We believe we have to do it in a balanced way. That’s the way we run our business. We believe we should be doing everything we can each year to increase our profitability. We will definitely do more extensive licensing than in the past,” said Idol.
Some mega-deals end up being win-win situations for both partners. Calvin Klein’s fragrances with Unilever have been lucrative for years, doing over $650 million at retail worldwide. And Tommy Hilfiger’s fragrance deal with the Aramis division of Estee Lauder immediately brought more volume and brand extension to Hilfiger and a younger customer to Lauder. Both Tommy and Tommy Girl fragrances are expected to top $100 million in retail sales this year.
Today, when a company is granted a license, that product immediately becomes part of the world of that designer, sharing in the carefully cultivated image. That means becoming part of the luxurious world of Ralph Lauren; the young, hip and fresh world of Tommy Hilfiger, the sophisticated world of Donna Karan, or the sexy, edgy world of Calvin Klein.
Still, some companies contend that they aren’t feeling undue pressure to introduce new products just to please Wall Street.
Michael Newman, vice chairman of Polo Ralph Lauren Corp., said that being a public company has not driven his decisions to sign licenses.
“I do not believe that going public is going to drive us to do anything different with the business than if we were private. Ralph is constantly approached by many people with many ideas. He’s very disciplined with his brand.
“We do not see them as typical licensing deals. We offer design, marketing and imaging skills and provide an alliance with a licensing partner who has international expertise or product expertise. We apply a tremendous amount of control in a relationship,” said Newman.
Newman noted that all advertising emanates from Lauren’s company.
As for Lauren’s deal with Jones, Newman noted, “We brought the concept of what Lauren was, the design and creative direction to it. They provided their product development and sourcing expertise. Our expertise was for the designer and bridge world.”
Newman also noted that the Ralph Lauren Women’s Collection has done better since it was brought in-house from Bidermann Industries USA two years ago.
“We developed with that acquisition a complete strategy for all women’s products,” said Newman. “Our drive is not because we’re public. We’re not changing what Ralph does or how we grow the business.”
Asked whether Lauren is more apt to do more licensing or in-house endeavors in the future, Newman said, “Our growth strategy is what makes Polo so unique. It’s a totally multifaceted growth strategy,” with a mix of licenses and in-house divisions.
“The pressure of being public is no different than being privately held,” said Mossimo Giannulli, president and ceo of Mossimo Inc. That assessment might come as something of a surprise from Giannulli, who’s managing to keep his cool, despite punishing treatment by Wall Street. After an initial runup, his stock has fallen from a high of 50 1/8 in July 1996 to 10 11/16 on Friday. The public life, he said, “doesn’t make me hurry to do a deal. I make sure we’re selecting the right partners. I don’t view it as more pressure. I already put pressure on myself.”
Giannulli said he always makes sure he has the final say in design.
“There’s no way a licensee can do any product without me signing off on it. We have total last say around here. All the advertising and marketing is done by me. I wouldn’t allow a licensee to push me down a road.”
Mossimo has licenses in such categories as swimwear, accessories, shoes, tailored clothing and fragrance.
“All design emanates from here. We put together color stories, and we’ll work together with their design team to insure the looks work as we see them. It’s important that they respect the vision. We’re all working for one goal,” said Giannulli.
A Tommy Hilfiger spokeswoman said the company hasn’t felt the pressure to keep signing on licensees, and signs them when the timing is right for that category to enter the marketplace.
“We sign additional licensees in order to develop product lines which will complement our sportswear collections. Related lifestyle products and accessories are licensed as a result of our customers’ demands.”
She said Hilfiger collaborates with all its licensees. “We do maintain creative control — over design, advertising and marketing — as well as distribution.”
While most designers strive to keep tight reins on their names, there have been cases where designers have completely sold out. When Halston’s licensing program took a nosedive in the late Seventies, the late designer sold his business to Norton Simon and walked away from it all. After changing hands several times, the Halston name is now back in play.
Two years ago, Halston International embarked on a major licensing program to reintroduce Halston Signature and Halston Lifestyle products to the designer and better market, respectively.
“In all the licensing deals we’ve signed, we control product, design, packaging, advertising and distribution,” said Carmine Porcelli, vice president, managing director of Halston International. “In all our contracts, our license cannot be handed to anyone who takes it over.”
But Porcelli, a veteran of the licensing game, gave this advice: “Seventy percent of all licensing is not in design. It’s in policing.”
“I think designers need to really pay attention to what’s happening in that public offering arena. There are going to be concessions to meet that bottom line,” said Porcelli.
Bill Blass, which has been involved with licensing for more than 20 years and does about $800 million in licensed products at retail, “is holding its own,” said Gail Levenstein, vice president of licensing.
She explained that it’s often difficult to go up against such powerhouses as Calvin Klein and Ralph Lauren, since they command so much in terms of in-store shops and advertising.
“The fact that he’s [Bill’s] involved as he is, is a plus. He’s not rubber stamping his name on things,” said Levenstein.
“To Bill, it isn’t about money,” Levenstein said. “He wants to be involved.” Several of Blass’s licenses have switched hands over the years, through companies going out of business or just not working out. “Businesses have changed, stores have changed.
“We’ve been scatter-shot. We’re readjusting where we’ve been. Little by little, we need to rework the whole thing,” she said. “There were years when everything was fabulous [with the licensees] in the Eighties. Now the couture business is wonderful.”
Allison Malkin, apparel analyst for S.B.C. Warburg Dillon Read, noted that firms such as Tommy Hilfiger, Nautica and Jones New York — all of which are public — keep tight reins on the licensees.
She said that in Hilfiger’s case, they don’t do anything automatically and carefully plan introductions of new products. “They talked about home furnishings for a year and a half. They’re very careful about the selection of licensees.”
When Nautica licensed Chaus to produce and market the women’s line, the line was sold to only 70 doors. “When it didn’t work, they knew they had to fix it. They took a problem, where the line didn’t sell as strongly as expected, and managed to change direction so it didn’t turn out to be a big disaster. They’ve controlled their growth. Nautica is really behind Chaus.”
Malkin believes that in the case of Designer Holdings, the company expanded the CK Jeans brand too rapidly and, consequently, had a problem with overdistribution to undesirable stores.
“I definitely think licensing is a good way to go,” Malkin concluded. “It’s one way to expand your business without taking on too much risk.”