Ins and Outs of Licensing

Our thousand cases of Trump Super Premium Vodka have already shipped to Russia this year. Four thousand more are backlogged, ready to ship. A distributor is lined up to purchase $7.5 million annually. China and India have put in their orders, as well.

How the heck do you sell vodka to Russia Apparently, Donald Trump is just that good.

Trump Vodka, manufactured by Drinks Americas which partnered with “The Donald” to license the brand, is enjoying worldwide popularity as well as a nod from the International Licensing Industry Merchandiser’s Association (LIMA), which has nominated it for the 2008 International Licensing Excellence Awards.

International demand and accolades aside, here’s how much weight a little license can pull: The Donald doesn’t even drink.

So how do you hook up your drink with a face or name that will garner global success? In other words, who can be your Donald Well, you license it, paying someone to allow you to use his or her name, image, and very aura for your product.

Depending on whom you ask, licensing can be a science, an art form, or a complete gamble. One thing is certain: it is alive and well in the beverage industry. In 2006, the U.S. saw $108 billion of licensing sales, with food and beverage tapped as the fastest growing sector.

Given the vast market of opportunity, both license owners (licensors) and license buyers (licensees) are looking to carve out their share of revenue and exposure, but not every licensing deal is created equal. In some cases the right character is tapped at just the right time and a brand explodes. In other cases, the parties proceed with caution, taking careful consideration of all legal implications. Recognition for the brand is built successfully over time.

Here we explore the ins and outs of licensing, from conception to conclusion, with a special focus on product development.

WHY LICENSING?

Beverage makers know a valuable license can both reinforce efforts to market an existing brand image, as well as expand its reach into other markets.

In the case of Socko Energy by Bliss Beverages, the drink was already on shelves in 2005 when wrestling icon Hulk Hogan tried the drink and “flipped over it,” according to Bliss president Mike Jannicelli. After some negotiations, Bliss decided to repackage the beverage as Hogan Energy Powered by Socko. Hogan was seen providing prime product placement for the drink on his show “Hogan Knows Best.”

“He’s the best promoter there is,” said Jannicelli, who said Hogan, he of the 24-inch pythons, is constantly seen drinking Socko and donning Socko shirts. “He’s just amazing,” he said.

Hogan Energy was picked up by Wal-Mart last year and is now distributed nationally.

A licensed image can also be used to launch a brand outright. R.W. Knudsen introduced its organic juicebox line this fall with the hope of a bear market. They have licensed The Berenstain Bears. The Bears, fond storybook characters for generations of children, have automatic recognition and can therefore save Knudsen the time and costs that other marketing efforts would require in order to reach their targeted consumer. The Bears can lend credibility to the juice, and possibly compel parents to pay more than the alternative (especially with the prospect of being #1 Parent just for bringing home the Bears).

Beverage companies have also been in the position of licensor. Starbucks, for example, is well-known for cross-marketing its company name to brand supermarket items such as ice creams and liqueurs. Its reputation as a purveyor of premier coffees in the café and RTD market triggers similar consumer associations of “luxury” in the supermarket aisles.

In every licensing deal, both parties should experience the benefits of licensing. The licensor gets exposure and cash. The licensee gets a quick marketing connection. This balance is the mark of a successful licensing program.

IMPORTANT CONSIDERATIONS

Woody Browne, president of Building Q licensing agency, said the first step in a licensing program is to consider what your company wants to achieve through licensing.

When Hansen’s was looking to connect its Monster Energy with a younger male consumer, it had only to look under its nose, according to Brand Manager Geoff Bremmer. “Monster had been working with …Lost Enterprises at their surf and skateboard contests and saw the opportunity to capture the consumership they sought.

“Lost brand’s loyal fan base and grassroots marketing program was already intact providing a great foundation to build an energy drink business on,” said Bremmer.

Sometimes, though, the connection is a bit superficial. Think: Rich man for a rich man’s vodka. Think: perfect.

Nevermind that Trump is a teetotaler, lending irony as well as image to his brand.

J. Patrick Kenny, CEO of Drinks Americas, noted that Trump brought more to the table. “The Trump Trademark means the most luxurious and best of class.

“I was recently in his new Chicago hotel checking on the vodka and in my opinion it is one of the most magnificent hotels I have ever been in. Mr. Trump didn’t personally pour the concrete or design the bar but he found the best person in the world to do so and the results are the same.

“My experience is Donald Trump demands, finds, gets the highest standards of quality and luxury. The point is not that he personally consumes it, the point is he manages to create it and his trademark represents it to consumers,” said Kenny.

In addition to Trump, Kenny has partnered with Paul Newman (Lightly Sparking Fruit Juice Drinks) and Dr. Dre (Cognac). He said Drinks Americas and the partners own the brands often 50/50.

The point is that, it’s not just the name, but the aura, according to Kenny. “We try to partner with icons – and I differentiate icons with celebrities,” he says, “An icon is someone who is global, transgenerational, and bears a premium image to go with the product,” he said.?

In order to hedge against risk, licensees may often consider an “evergreen character” such as Scooby-Doo or Barbie that they believe will instantaneously resonate with consumers.

However, certain characters can only carry so much weight, and they often cost more.

“There is a balance between evergreen and just somebody who’s been around a long time,” said Browne, “You see a lot of bad decisions with companies – they pick the safe thing, instead of being on target or on trend. In today’s tough economy, going safe is okay. But you’re not necessarily maximizing your opportunities,” said Browne.

Licensees must be circumspect about the opportunities they may see in retail. What was hot yesterday may not be hot today; what is hot today may not be hot tomorrow. Based on this information, licensees must make the best decision in light of their own marketing strategy.

PRODUCT DEVELOPMENT

While an important consideration for licensees is “Which license?” for licensors, the question of what will be done once the rights to the license are granted is of prime importance.

Angela Farrugia, CEO of The Licensing Company (TLC), said licensees should be aware that certain restrictions still apply even after rights to the license has been acquired.

“Every single step of the way, the brand owner has approval. Nothing goes to market without their knowing,” said Farrugia.?

This sentiment resonates with Monster’s Bremmer. “Each licensee has their own thoughts on where the brand’s priorities should lie and how the brand should progress,” he said.

If licensees are “logo licensing,” that is, attaching a logo or image to an existing product, the process may take much less time than if an entirely new product is being created around a license. Both parties should recognize that the process could be many months in development. Kenny of Drinks Americas said his licensing deals take two to three years from the first conversation to the first shipment to the shelf. Each licensing deal is dependent upon the unique factors at the negotiating table.

Farrugia works primarily with clients to develop new products inspired by licenses. If you ever wondered what a drink might taste like that is inspired by a jelly bean, Farrugia can speak to the experience of helping to create, build and brand it.

Farrugia is presently working with Jelly Belly Co. to produce beverages due out early in 2009 that not only bear the Jelly Belly logo and brand name, but also recreate the unique Jelly Belly flavor experience, as well.

Farrugia said the process of creating a licensed product from scratch may take as long as nine months, working with flavor technologists to replicate flavors, color and taste. But she said a detailed, time-consuming process is critical to success.

“The consumers won’t be fooled. They will buy a product once and if it doesn’t deliver on taste and flavor, they won’t buy that product again. The branding strategy must be right but also a taste and flavor strategy,” Farrugia said.

Browne also said the process should not be a hasty one.

“I liken licensing to the concept of just rushing in and snatching up a home run. If you’re going to be that random, you’re going to hit and miss. When you miss it looks really, really bad.

[Licensing is] mostly portfolio management and risk management. You have to be in it to win it. Usually, you win it slowly, with singles and doubles,” said Browne.STAR SEARCH

If the mention of Ovaltine conjures images of a little redheaded orphan, then the forefathers of beverage licensing did their job. In the 1930s, the chocolate malt flavor maker extended its brand name as the sole sponsor of the “Little Orphan Annie” radio program, and the relationship remains a touchstone for licensing in the U.S. beverage industry.

How have other beverage manufacturers captured those timeless consumer associations? Some have fared well, and some have sunk, both literally and figuratively, in a pool of competition.

According to branding expert Gerry Khermouch of Beverage Business Insights, “It can be very tough to figure out which brands stretch in the right direction.”

Khermouch cites Fuze Beverage’s NOS High Performance drinks as a success story.

At the time Fuze was acquired by Coke in February 2007, almost no bottlers had any interest in the NOS brand.

“The beauty of what Fuze did is that they first launched a can energy drink, then they had the inspiration to do a blue plastic bottle almost completely identical to the bottle car buffs attach to their engines.

“It was a case of where a totally unexpected brand could go off the charts. Everything came into alignment. The packaging matched product, and there was an influential set of consumers in beverages, cars.”

The “influential set of consumers,” however, does not represent a special interest market to Fuze. Former brand manager Bill Meissner – now with Talking Rain – said, “NOS has grown to a five million case brand in less than three years so we certainly don’t think it’s a Niche. It simply proves that consumers react better to marketing authenticity.”

Fuze reports on its website that NOS bottles were selling for over $25 on e-bay when the drink was first introduced. Today it ranks as Coca-Cola’s top energy drink and ranks among top 10 energy drink sellers in the U.S.

In contrast, Fuze’s attempt at performance water was undoubtedly a licensing failure. In 2004, Fuze launched its “Speedo Sportswater,” attaching itself to the Olympic brand swimsuit maker.

“In terms of rationale, it seemed to make perfect sense,” said Khermouch, “Speedo has credibility in hydration. But even at the time of the launch, there was quite a group of dissenters.

“Speedo doesn’t quite whet the appetite. Thinking about a chlorine-soaked swimsuit, it’s kind of gross. Is anyone wanting to buy a drink with the name of a bathing suit?” said Khermouch.

Ultimately, the skeptics proved right.

“It just wasn’t a licensing connection that consumers were willing to make,” said Khermouch.?

Meissner said, “I guess we learned not to name a drink after the most laughable piece of men’s sportswear in human history.”

THE LEGAL DOS AND DON’TS OF LICENSING

DO: Consider the investment you are willing to make toward a license.

DON’T: Assume that because there is no rate card for licenses, all prices are relative.

Danny Simon, CEO of The Licensing Group said, “There’s no guidance going into a deal, yet there is some standard in royalty rates charged in various categories of product,” Simon said. But no one is bound to industry standards. The value of a license is what the licensee agrees to pay for it, he said.

DO: Consider “What is a reasonable level of sales expectation? Licensees should have some idea of what they are forecasting sales to be or need to be,” said Simon.

DON’T: Rely solely upon market projections in determining contract terms, said Rebecca Stroder, an attorney who specializes in licensing. She said the biggest mistake she sees in licensing deals is when the licensor does not making any requirement for the licensee to actually sell the product.

“They get focused on a high royalty rate or what the licensee has projected as likely sales, and they are very optimistic,” she said.

DO: Contractually require that the licensee must pay a minimum royalty per year, or achieve a certain level of sales.

DON’T: Think only in dollar signs. Simon said the licensee may offer a generous advance and pay all royalties for contract period, and ultimately do well for the licensor’s bottomline, but if the product doesn’t perform and doesn’t meet expectations, the licensor does not enjoy the benefit of good exposure that a good license should provide.

DO: Know the industry standard. Generally, licensing deals are constructed with an advance and a royalty, or percentage of each sale of the licensed good. In the beverage industry, the standard royalty hovers around three percent of the wholesale price of the product.?

“With beverages, we’re dealing in consumables – the consumer often buys more than one. You have your six pack– each one of those cans is buying a royalty,” said Simon.

Contract length standards are typically 15 year terms, split over three terms of five years, said Farrugia. “We’re seeing a request for renewals to be negotiated up front,” she said.

DON’T: Forget contracts protect companies in the event of a problem. Jannicelli of Bliss said, You can always renew if your product is producing. If the product is a success, it goes as long as you want it to.”