AS of mid-August, Italy was on the verge of entering a recession. The third-largest economy tied to the Euro behind Germany and France, the country’s GDP had contracted by 0.3% in its second quarter against zero growth year-on-year. One more contraction will officially push the country into recession – its fourth in a decade. And all signs are pointing in that direction.

Along with the shrinking GDP, retail sales were down for the 17th month straight in July, and inflation had hit its highest level in six years. While the staggering 65% spike in crude oil prices that’s been driving Italy into a state of stagflation has abated somewhat, it may be too late to turn things around for the remainder of this year and into 2009. Certainly, the entertainment licensing business in the territory has been damaged.

According to NPD numbers, the overall Italian toy market lost 7% of its value in 2007 – by June 2008, licensed toy sales were down by 2% from June ’07 numbers. And it appears that both retailers and licensees are becoming more conservative regarding the number of properties they choose to champion; they’re turning to licenses that are currently at the top of the sales heap and eschewing newcomers.

‘Companies are looking for proven characters and are not taking risks now,’ says Francesca Roman Gianesin, VP of Disney Consumer Products retail sales and marketing for Italy. But with sales that have doubled in the past four years in the territory and two of the top five licenses, she admits DCP is in a good position as tough times loom.

Joanne Lee, EVP at Italian prodco and IP company Rainbow, finds herself in a similar position. Rainbow’s Winx Club has been at the top of the charts in Italy since 2006 and may wind up with its best annual revenues yet. ‘Retailers are not taking new brands this year – only the top ones get shelf space,’ she says. So in a year when Lee had been warning partners that Winx Club was headed for a downturn, sales are actually up 60% for the first six months versus the same period in ’07. And the company has just introduced a new offshoot, Winx Club Fairies, to help fill expanding shelf space for the property. Although Winx just set up its first branded apparel and accessories corner in department store Upim’s 140-plus outlets last May, it now controls 35% of the retailer’s dedicated girls space. But despite the solid performance of Winx, Lee is hoping the Italian economy turns around soon. For as successful as the girls fantasy property has been, Rainbow is having a tougher time selling retailers and licensees on new boys actioner Huntik, which it’s planning to launch next year.

As for retail in general, the country’s landscape remains as fragmented as when we checked in on it almost three years ago, with the north dominated by hypermarket chains such as COOP, Carrefour and Auchan, and the south awash in boutique/mom & pop outlets. The nation’s 35,000-plus kiosks that specialize in the sale of magazines, small toys, trading cards and confectionery also continue to play a big role in the distribution of licensed goods, but even they have taken a hit.

According to Lee, kiosk sales dropped 20% in the first six months of the year. However, both she and Maria Romanelli, VP of licensing agency TeamWorks, point out that kids goods have weathered the storm fairly well so far. ‘Toy prices have risen too much at toy stores,’ says Romanelli. ‘It has made the cheaper trading cards and toys available at kiosks more successful.’

The Italian kiosk network is also still a good channel for promoting properties, adds Lee. At press time, she was in the middle of a 10-week promotion with top Italian daily newspaper Corriere della Sera, about three million copies of which are sold every day at the kiosks. The paper is offering consumers the chance to buy a new Winx book at a discount each week, and in the first week alone, Lee says more than 150,000 copies of the books were snapped up.