Food Licensing Tip #1: Definitions & Benefits

Food Licensing 101: Defining Licensing and Understanding its Benefits

(This is the first in a week-long series of five articles about food licensing)

Licensing is an important marketing tool for companies or brands looking to raise awareness, increase revenues and expand their core business through new products, product extensions and expanded distribution opportunities. It is an industry that produces over $15 million in retail sales every hour, 12 hours a day 365 days a year. Recently LIMA (the licensing industry trade association) released a study entitled Licensing Industry Survey which estimates retail sales of licensed merchandise to be $110 billion (based on royalty revenues of $5.831 billion) for North America alone. It is difficult to find another industry generating this rate of growth and sustaining it year on year.

Licensing can be defined as the practice of leasing a legally protected "property"-- a trademarked or copyrighted name, logo, character, phrase or design-- for a predetermined amount of time. For example, Burger King licensed its brand for snack chips (see photo above) to a company known as The Inventure Group. In return for allowing its "property" to be used on the chips, Burger King receives money based on a percentage of the licensed products sold(what's called the "royalty rate"). In addition to the royalty rate paid to the licensor (Burger King), a guaranteed minimum royalty, (i.e. the "guarantee"), is usually required. A percentage of this guarantee is normally paid on signing as an "advance" against future royalties. It's really a promise by the licensee to pay for the use of the property.

The licensee has to pay this guarantee even in the face of total failure of the property. That might seem unfair, but if the chips cited above had bombed at retail (instead of tracking to sell $50MM annually), the stigma would be on Burger King ("I guess the brand isn't all that strong).

All terms of any licensing venture are clearly defined via a formal contractual agreement between the owner of the property (the "licensor") and a "licensee" (a manufacturer, retailer or distributor).

Unlike advertising or promotions (which we'll deal with later this week), licensing generates revenue while enhancing the popularity and profitability of brands at the same time. Other benefits of licensing include:

• Enhancing product relevance to consumers
• Creating an additional long-term revenue source
• Increasing new retail penetration
• Bringing added-value to products
• Creating instant consumer affinity to the brand name
• Penetrating new avenues of retail distribution
• Increasing visibility and reach
• Strengthening its competitive retail position

Stay tuned for my next featured article in this series: "How Do I Know If My Brand Is Ready for Licensing?" starting tomorrow.

(this article prepared with the assistance of Danielle Foley)

If you have specific questions about licensing you’d like answered, please feel free to email me, Bill Cross, at: bill (dot) cross (at) bslg (dot) com.