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Direct-to-retail occurs when retailer and licensor (franchise owner) come to an agreement directly with each other where the retailer becomes the licensee as well as the seller of the product. With this agreement, the retailer takes charge of the manufacturing process to produce the agreed products and obtain the right to sell them afterwards. In return, the retailer pays a royalty for the franchise, same as any other licensee. It is important to note that, in some cases, licensors can also be retailers. For example, both Disney and Nickelodeon are among the world’s biggest licensors who sell their own licensed products in their stores.
Source: Euromonitor International
In order to improve margins, many manufacturers have increasingly been distributing directly to retailers in recent years. Additionally, more new licensed properties are opting for the direct-to-retail (DTR) format just to get their licensing programmes off the ground.
Retailers are very keen on direct-to-retail as they want to be different from their like-a-like competitors by offering exclusive licensed merchandise in their stores. Many licensors are also open to DTR but they are very selective. They need to make sure that retailers care about their franchises. There is room for growth for both parties in this space and from a licensor’s point of view, there needs to be a balance, as there is a certain level of manufacturing capacity in the industry. If this is tilted too much towards retailers’ manufacturing via DTR, licensors could potentially risk their whole manufacturing process by overlooking the interests of their own manufacturers who have been dedicated and loyal to them.
The challenge faced by the character licensing industry in particular today is due to children being the main consumers and them not being loyal like they used to be. They tend to consume something different on a different platform every day. It is almost like they jump from one to another, presenting many challenges for the industry. If businesses are to fully exploit the commercial opportunities presented by the latest crazes, such as the Pokémon Go phenomenon, they need to act fast. The novelty of these licences could quickly disappear, leaving licensors and retailers with a missed opportunity.
It can be argued that retailers who work with their own suppliers can turn around products faster. As soon as a franchise is a success or a film ends up being a big hit, retailers can get on with the process straight away and quickly bring tie-in merchandise to store shelves. However, there is also a valid counter argument. Licensees can also turn around licensed merchandise fast. For example, if a retailer is working with a supplier who is based in China, India or Bangladesh, it will require considerable time to ship these products to Europe or North America. On the other hand, some licensees work with local manufacturers, enabling them to meet demand on time.
Sometimes licensors feel like licensees are not committed, and in order to get their licensing programmes off the ground they might go directly to a retailer. So, in some cases, licensors have no choice but to go with the DTR model, otherwise they would be risking the whole licensing programme.
It is a widely accepted fact of the licensing industry that margins are squeezed all the time and price wars are rife. If there is no licensee as a middle man, retailers can increase their margins, while also passing some of them to consumers, selling items cheaper than their competitors. In this regard, Primark, an Irish apparel and footwear retailer, is perceived as a hero by many. The company operates at the lower end of the price spectrum, with its rock-bottom pricing its main USP. Overall, the volume-based business relies on a stream of fresh stock and new trends to encourage frequent purchases.
Direct-to-retail has enabled Primark to offer cool and trendy DC Comics and Harry Potter-licensed merchandise at very low prices, which it would not have been able to do otherwise. It is the largest retailer partner for Harry Potter-themed products, while other collections include Looney Tunes and Family Guy. Considering the buoyant sales, its strategy is certainly working. In 2015, Primark was the third largest apparel brand in Western Europe, up from fifth place in 2011.
A combination of factors, including more brands entering licensing, limited shelf space and consolidation in retailing, have made DTR the ideal route for many licensors, helping them to get their merchandise on physical shelves. As highlighted at LIMA’s (Licensing Industry Merchandisers Association) Mind Mix Conference, Berlin, in May 2016, it is a growing trend that could also be a concern for some businesses which are in charge of managing the licensing programmes between licensor and retailer (ie licensing agents and/or licensees). Yet, it is important to bear in mind that while more retailers are becoming interested in DTR licensing deals, many are not necessarily equipped to manage the whole process. Thus, when franchise owners sign these contracts, they need to bear in mind that they will need to assist their partners in process management as well as quality control.