The Three Most Common Reasons Companies Don’t License Their Food Products — Debunked
posted in news on 8/24/17
Like most CEOs, I spend a good deal of my time developing business. That means I’m often pitching prospective clients, some of whom invariably raise the same questions. In the interest of demystifying my profession – I run an agency that helps companies connect with new customers – let’s consider these objections one by one by starting with the food industry. In this case, we’ll call our prospect Maria.
Maria worries that licensing out her venerable brand is too risky. “How can I entrust an outside sales force with our name, our logo, our reputation?” she asks.
Licensing wasn’t born yesterday. Indeed, CPG companies that specialize in food have been lending out their brands for decades. This is an industry that generates $263 billion in revenue every year. You don’t put up numbers like that if you’re selling snake oil. What’s more, the best CFOs know better than to house all their eggs in a single line item.
Instead, they diversify their revenue streams to draw customers who wouldn’t ordinarily interact with their brand. They recognize that the more streams they have, the better their business can weather a dip in any one of them.
Here’s a case study: At one time, Welch’s sold juice, jelly and jam. That was it. Then, in 2001, the company traded on that equity to create fruit snacks. They now generate $82 million in retail sales every year — with royalties growing by 9%. Welch’s own annual report acknowledges this marvel: “The most promising developments in 2015 were new paths to growth through a diversified product portfolio. This is the best way to ensure a healthy, growing company and a secure, profitable home for grapes.” In this instance, rather than causing risk, licensing curtails it.
Fair point, Maria concedes. “Yet if we were to go ahead and do this, our potential royalties would be relatively small compared to our overall revenue,” she counters. “Is this undertaking really worth the hassle?”
This is actually one of the worst misperceptions about licensing. To be sure, licensing is neither quick nor easy; to do it right, as with anything, requires time and manpower. In fact, “about 75% of consumer packaged goods and retail products fail to earn even $7.5 million during their first year,” per a Harvard Business Review article.
But here’s the thing: These expenditures don’t fall on your balance sheet. Everything from capital investment to manufacturing, from shelf talkers to slotting fees — this is all the responsibility of your partners.
For example, for most of Oreo’s history, the company has been synonymous with its namesake cookies. Today, you can find the Oreo brand in ice cream, ice-cream cake, cake mix, milkshakes, candy bars, churros, brownies and so on. That’s a testament not only to the power of branding but to the power of brand licensing.
At this point, Maria is just about on board. She’s nodding and smiling and you can feel the meeting coming to a productive close. Then her colleague interjects: “Won’t sales of all this licensed stuff eat into sales of our original stuff? We can’t jeopardize our cash cow.”
Far from cannibalizing sales, licensing makes your existing customers even hungrier for your brand extensions. For example, consider cross-promotional opportunities. Do you crave a Twinkie? Then we’ll entice you to buy a Twinkie ice-cream cone, as a result of which you’ll get a coupon for the original sponge cake. Such tactics are how we make the proverbial pie, once thought to be zero-sum, ever-larger.
Remember Hostess, Twinkie’s creator? Several years ago, the famed snack-cake maker filed for bankruptcy. Today, the company is not only filing cream in Twinkies, Ho Hos and Snoballs, but it’s also associated with frozen novelties and ice-cream flavors. And overall sales? They were up a cool 17% last year.
So where does this leave us? You’ve already done the heavy lifting of building a brand — consider what other ways you could look to further its success.
Founder and CEO, Global Icons
As seen on Forbes: