Stifled by recession and suffering from withdrawal in the wake of a few high-profile property flameouts, licensing in German-speaking territories has dipped by between 3% and 5% since its US$24.5-billion valuation in 2001.

While that may seem like a discouraging statistic, many claim that the licensing field has simply leveled off to a more realistic floor and ceiling. The industry saw a boom five years ago when the concept of merchandising deepened its roots in Germany and Pokémania swept the globe. But the anime wonder may have inflated market expectations beyond realistic levels.

‘Pokémon was an outstanding success that happens maybe every 10 years or so,’ says Roger Balser, director of marketing for Hasbro Germany. ‘It would be wrong to wait every year for such a hype.’ So while they’re keeping feelers out for hit property rumblings, licensees like Hasbro have instead been backing solid performers like Bob the Builder and evergreens with a track record in Germany. ‘Even top-notch entertainment properties like Lord of the Rings cannot guarantee market success anymore,’ says Dirk Fabarius, managing director at German agency MM Merchandising. ‘We have observed a defined move away from risky, one-shot licensing towards crisis-proof cartoon classics and established brands.’

As German licensees switch into risk-averse mode, royalty rates appear to be rising. When the European License Marketing & Merchandising Association (ELMA) polled the German licensing industry in 2001 as part of the annual LIMA-sponsored Harvard/Yale survey released last June, royalty rates for hot entertainment properties ranged between 14% and 18%. Most product categories carried an average royalty rate between 6% and 10%, with the food and beverage category slightly lower at 4% to 6%.

After deciding that the Harvard/Yale study was tailored for the U.S. market and thus did not translate well to Germany, ELMA commissioned a German market survey of its own through the University of Hamburg’s Institute of Marketing, Retailing and Management Sciences. Conducted in the first half of 2002, the German study reveals a discrepancy in licensee/licensor royalty rate estimates:

Category Licensee estimate Licensor estimate

Accessories 7.8% to 10.9% 9% to 14.1%

Apparel 6.9% to 11.5% 9.8% to 11%

Food & Beverage 2.8% to 5.4% 3.9% to 12%

Gifts & Novelties 7% to 11.5% 10% to 12%

Music/Video/DVD 11% 10.3% to 15%

Toys & Games 8% to 12% 9.5% to 14.3%

PC games/Software 2.5% to 20% 7.5% to 13.1%

Meanwhile, many licensors and agents are now accepting lower guarantees. ‘Several years ago, licensees were willing to commit a huge minimum guarantee against the business because it was important to them,’ says Risa Nelson, Sesame Workshop’s director of licensing for Europe. ‘These days, they’re taking a more conservative approach, and guarantees are actually more in line with their projected earnings.’

Sony Pictures Consumer Products, licensor for the Spider-Man film franchise in Germany, considers lowering its minimum guarantee in times of political and economic instability or when a manufacturer is applying for a license in a non-traditional category that is cost-intensive to develop. ‘We would rather ask for a lower guarantee and have good product with strong marketing support than a large payment upfront and, as a result, cheap product with no marketing that nobody will buy,’ says SPCP VP of international licensing Bettina Koeckler.

But some licensees are not willing to pay any guarantee for new entertainment properties in the current market climate, says MR Merchandising & Retail managing director Marlies Rasl. Recognizing this, Rasl eschews representation of short-windowed film properties, opting for franchises with six or more years of sustained marketing support, like the Lord of the Rings troika. That strategy paid off in 2002 as MR and Lord of the Rings swept LIMA Germany’s 2002 Licensing Awards in all six categories: best promotion, best licensed product, best agency/licensor, best licensee, best retailer and best license.

Other licensors and agents are setting up support systems to offset licensee risk. ‘Many agencies still sell their licenses with little or no added value for their customers,’ says MM’s Fabarius. ‘We have expanded our repertoire from that of a traditional licensing agency to a full-service marketing agency that positions new themes on the market with the appropriate partners and develops innovative forms of marketing.’

For its part, SPCP is developing extensive marketing materials like tailored Powerpoint presentations, as well as offering regular broadcast updates for SPCP TV properties. ‘We also provide information from other licensees and make artwork and designs available worldwide as a creative guide and inspiration,’ says SPCP’s Koeckler. ‘We are now involving every part of the studio to support big releases, as well as organizing workshops for all partners – including retailers.’

Sesame Workshop is also focused on creative. ‘It’s really important to keep your brand as top of mind as possible and to invigorate sustained shelf life through new creative,’ says Nelson. To that end, Sesame recently appointed Jorge J. Ferreiro as VP of creative, Global Consumer Products and International Television Distribution. Ferreiro is currently developing new designs for Sesame Street’s infant, preschool and teen/adult programs in Germany.

But refreshing classics is a recessionary tactic that will only take the industry so far. Eventually, both licensors/agents and licensees will have to take a few safety-padded risks and develop programs for new properties. After all, from July to September 2002, the toys that topped NPD EuroToys charts were core toy lines from Zapf Creation (Baby Born) and Ravensburger puzzles/games. Only two licensed properties made the cut – Mattel’s Hot Wheels and Lego’s Bionicle.

However, the push for new properties comes with a few caveats. ‘Consumer buying habits in Germany differ significantly from those in the U.S. [and elsewhere]. They don’t appreciate over-promoted licensed products or properties,’ claims MM’s Fabarius. ‘German consumers are, in some ways, more demanding, conservative and quality-conscious, and they ask for products with an enhanced look, so value-added items with a high point-of-purchase appeal are critical.’ MR Merchandising’s Rasl concurs, adding that even in tough economic times, German ‘parents are looking more for high quality than low prices.’

But German consumers are also more fickle in the current market climate, which is affecting the performance of certain types of licenses and their associated product categories. For instance, according to results of the 2002 Harvard/Yale study, entertainment characters dominated the market (US$89 million), followed by fashion brands (US$70 million) and sports brands (US$12 million). The top categories for entertainment properties were apparel (21% share, US$18.6 million), toys/games (16% share, US$14.2 million), food/beverages, music/video (each 8% share, US$7.1 million), and gifts/novelties, publishing, accessories and video games (each 6% share, US$5.3 million). Together, entertainment characters and fashion brands comprised 80% of the market in Germany.

When ELMA conducted its German market study only a few months later, things had changed significantly. Fashion brands (US$8.6 billion) had overtaken entertainment properties (US$6.6 billion), and both accounted for 60% of licensed product sales – a considerable drop. The food and beverage category now dominates with 29% market share, followed by publishing (16%) and apparel (13%).