A Potent Alternative to Private Labels: Licensed Brands (DTR Licensing)
Private Labels offer several benefits to both retailers and consumers driving the popularity of this strategy. For retailers, private labels help them boost their profits due to higher margins as well as build consumer loyalty. It also helps in driving down the wholesale prices for national brands as private labels give retailers better bargaining power with their suppliers. At the same time, consumers benefit from the lower prices of private labels as against national brands.
However any retailers venturing into private label goods for the lure of higher margins need to be very cautious. Private labels typically sell at 20 to 40 percent below national brands as consumers are unwilling to pay similar prices for private labels as those of national brands. Add to this the marketing costs as well as investments in improving the quality or packaging of private brands, the margin advantage may quickly disappear!
This has made retailers rethink their private label strategy and led to the evolution of the Direct-to-Retail (DTR) Licensing model. Traditionally brand licensing involved brand owners partnering with manufacturers who would then try to sell the licensed products to various retailers. DTR Licensing however involves brand owners licensing their brands directly to retailers, thereby cutting out the intermediaries and resulting in higher profits for both parties. Simply put, in this case, the retailer takes charge of product development and manufacturing of the products agreed under the license agreement and has the rights to sell them through its stores. In return, the retailer pays a royalty to the brand owner, same as any other licensee in a traditional brand licensing arrangement.
For example, Walmart utilizes its scale and sourcing capabilities and enters into DTR licensing partnerships with several brands across various categories. Some of the examples include partnerships with brands including Starters and Danskin (apparel); Better Homes & Gardens (bedding, bath, furniture); Gold’s Gym (exercise equipment); GE (kitchen appliances) etc.
Similarly Future Group, the leading Indian retail company has also licensed several brands such as Lee Cooper, Daniel Hechter (apparel); Umbro, Champion, Spalding (sportswear & footwear); Laura Ashley (home furnishings); Sunkist (foods & beverages) etc.
In the last few years, well-funded Indian E-commerce retailers have engaged in heavy marketing investments and aggressive discounting to grow consumer traffic and build market share. However as the market matures, some of the leading E-tailers such as Flipkart and Myntra have recently forayed into DTR Licensing as they realize that it is critical to build an exclusive brand portfolio to differentiate themselves and improve their profitability to be able to build a sustainable business in the long run.
From a retailer’s perspective, there are several advantages to this approach over launching private labels:
Increased profits: Licensed retailer-exclusive brands enable retailers to offer premium products at favorable prices with maximum margins. Additionally exclusive distribution reduces price competition, minimizing the impact of the discount-driven market.
Unique shopping experience: Exclusive licensed brands help retailers differentiate their product mix and create a unique shopping experience for consumers.
Reduced marketing costs: Established brands offer the advantage of built-in brand equity and consumer loyalty thus minimizing the need for marketing investments.
Higher probability of success: There is a higher probability of quickly achieving good volumes and success with established brands.
Reduced product development time and cost: The strong equity inherent in an established brand offers retailers the advantage of predefined attributes, positioning, pricing and more. This simplifies product development and streamlines strategic planning—reducing total costs and accelerating time to market.
At the same time DTR licensing helps brand owners (licensors) expand their market presence and mind share, as well as drive incremental revenues, with the help of a focused retail partner. Also, retailers can get licensed products on shelves much more quickly and are in a position to rapidly adapt the program basis consumer feedback leading to higher chances of success.
Thus DTR licensing is a win-win model for both retailers and brand owners and at the same time it helps enhance consumer satisfaction as well. However it requires retailers to invest behind product design & development, sourcing and brand management capabilities to be able to do justice to the program. At the same time, at the brand owner’s end, especially for a nascent market like India, it requires a lot of patience as well as an active management of the licensing program by dedicated resources on the ground that bring knowledge of the brand licensing business as well as an understanding of the local market.
Also published at: Economic Times