With the new math left behind in wake of the global economic slowdown, a licensing category whose sales were down just 7% in 2009 can be deemed one to watch. That’s at least the case for the surprisingly resilient licensed food and beverage category in the US. Of course, on the kids entertainment side, food and beverage licensing is a bit trickier than other types to negotiate as the spectre of childhood obesity looms over the landscape. However, category sales generated an estimated US$12 billion at North American retail last year, and with that much money coming, IP owners are delving deeper into the space to shore up their bottom lines.

Working your way in

Those entering the food and beverage category are bound to encounter many hurdles unique to the sector, and IP owners have recently been turning to specialty shops focused solely on the category. In fact, New York-based CopCorp Licensing just contracted IMC Licensing, a Louisville, Kentucky-based firm that concentrates on food licensing, to help IP like It’s Happy Bunny and Ringling Bros. make more headway in the realm.

‘It’s a unique category unto itself,’ says Cara Bernosky, president and co-founder of IMC Licensing. ‘We started talking to Carole [Postal, president of CopCorp.] and discussing how we could achieve success in some new categories.’ So far IMC’s working on snack food and beverage deals for It’s Happy Bunny that should appeal to its core tween/teen demo, and a natural fit for Ringling Bros. would be foods that evoke the feeling of the circus like popcorn and peanuts.

‘The combined strength with IMC will help us pursue more and different opportunities than either agency might otherwise be given,’ says Postal. ‘IMC has spent years establishing great contacts and expertise in the food and beverage area.’ And in saying that, she hits upon one of the major stumbling blocks IP owners, particularly medium- to small-sized ones, face when they are looking to break into the specialized area – access to the

decision-makers.

‘The bigger food companies don’t do a lot of licensing and promotions,’ says Holly Rawlinson, president of L.A.-based licensing agency The Name Game. Throughout her career, Rawlinson has worked on a variety of food deals, including helping to develop Pokémon co-branded Kraft Marconi and Cheese, but she says getting to know the inbound licensing execs at the food manufacturers is difficult. ‘You don’t see them at events, you don’t have the contacts,’ she says. ‘Frankly, some of these companies might not even have a licensing person. So I think you might use an agency to cut through that clutter.’

Stu Seltzer, a partner at New York-based Marketing On Demand, works on both sides of licensing deals, including inbound licensing for mega-manufacturer Unilever. He agrees that getting to speak to the right people is reason enough to look for a speciality licensing shop. ‘It’s who has the relationship with people working in the industry,’ he says. ‘If you work with the big companies, you just have to understand their processes.’

The issue of access becomes paramount when you also take into consideration the consolidation of the food manufacturing that’s occurred over the past few years. Essentially US grocery store shelves are dominated by an ever-shrinking number of companies, such as Kraft, Unilever, Heinz, Nestle and Kellogg’s. With so few players, it is that much more important to have access.

Deal structure

Another aspect where experience and contacts come into play is in understanding the nuts-and-bolts of food and beverage licensing agreements. The first thing worth noting is that royalty rates are lower in this category and the deal term is going to be longer than that prescribed in standard deals done for other categories, such as apparel.

‘It does vary,’ says Bernosky. ‘But depending on product category and margin, you are looking at royalty rates of between 4% and 8%.’ She adds the lower rate is mitigated somewhat by the expected high volume. The rate is also set subject to whether or not specific ingredients are required to make the product and if fees for promotion and advertising are attached.

A full licensed food deal is also going to have a term of between two and three years. ‘When a company invests that type of money to change out its packaging, it wants to monetize it,’ says Rawlinson. ‘It’s not a quick in-and-out, it takes time to develop.’ And the long-term nature of the agreement is the primary reason the most successful kids food licenses at the moment, including SpongeBob SquarePants and Dora the Explorer products, are brands that have a decade or more of equity behind them. In short, the food aisle is not the domain for the fledgling or the fad IP.

Another unique aspect of the deal is what is known in the industry as slotting fees – essentially the price paid to put a SKU on store shelves that can affect royalty rates and even net licensing income, if you don’t know what to watch out for when signing a contract.

‘At a small regional grocer with a couple stores, you could be looking at US$10,000 for a SKU, but with a large chain that could rise to US$250,000 per product,’ says Bernosky. The fees also restrain flexibility in terms of adding SKUs to an already existing line. ‘You have to be aware of that process,’ Seltzer says. ‘You can’t just say, ‘Let’s add another SKU’, because it might cost you an additional US$600,000 up front.’

The manufacturer usually bears the cost of the fees, but certain contracts can call for them to be subtracted from royalty rates.

‘A licensor has to play close attention to definition of net sales,’ Bernosky told a recent LIMA-sponsored webinar on the topic. ‘If it’s defined as slot fees minus the net sales, it will really eat up revenue.’

Treading lightly

You won’t want to enter the food and beverage category without noting prevailing trends in health and wellness. All interested parties agree that concerns surrounding childhood obesity in the US are very real and that parents – and therefore licensors, licensees, sub-licensors and retailers – are tuned into the issue.

Scholastic Media, for one, has been blazing the trail when it comes to healthy food licensing with its stalwart IP Clifford. ‘We did it ourselves,’ says Leslye Schaefer, SVP of consumer products and marketing, referring to Clifford’s healthful food licensing deal in the much sought-after cereal category. The company previously had that all-important relationship with breakfast food giant General Mills, which taught Schaefer’s team the proper way to navigate the space.

Clifford Crunch organic cereal, which first went to market in 2005, is the result of a license deal between Scholastic and Cascadian Farms, a subsidiary of General Mills. It’s soon to be joined by Hero-brand vitamins, set to land at specialty US food and drug retailers in July. The deal, which puts the iconic big red dog on bottles of vitamins, is a good example of brand and manufacturer seeing mutual benefits in a competitive environment. ‘Hero saw in us an opportunity to extend distribution, and we saw in them a way to be associated with healthy products,’ says Schaefer.

Rawlinson says that while she agrees that the healthy trend is a real factor for the sector, she is not sure that placing a regular license on healthy snacks is going to prove ultimately successful. ‘I was just at Natural Products Expo West,’ she says, describing the annual conference held in Anaheim, California. ‘I didn’t see any licensing at all there except Clifford.’

Rawlinson posits are moms who shop in the organic food aisle are hesitant to pick up licensed products at all, whether or not they are classified as healthy. ‘I think a lot of the consumers of natural foods are moms that don’t necessarily want food that is licensed,’ she says. ‘Having a licensed character is not part of what is motivating them to buy; it’s about health.’

Seltzer, who points to success of the two-year-old deal between Safeway and Warner Bros. that placed Looney Tunes characters on a variety of its Eating Right house-branded products, says that the success can be had, but long-term is the only way to think about it.

‘When you see a character in the supermarket, moms think ‘junk food,’ and rightfully so,’ says Seltzer. ‘In the last 20 years, it has all been junk food,’ he adds. ‘But whether it’s SpongeBob or Looney Tunes,

I think you see that the licensors are trying to change that mindset.’