Brand Licensing in Emerging Markets – Top 10 Mistakes

By Ben Goodger

Mistake 1. Don’t take account of the local market

The classic and most frequent mistake is to assume that a formula for the licensing or franchising of a brand in one market will work equally well, unamended and unadapted, in another market. This is well illustrated by the story of KFC in China. KFC is twice as large as McDonald’s in China, whereas the reverse is true elsewhere in the world. After a false start in Hong Kong in the early 90’s, when it opened 11 shops and rapidly closed them, KFC hired local management. They understood that KFC had an immediate advantage over a hamburger chain like McDonald’s because the taste of Chinese consumers is more for pork and chicken and far less for beef. KFC’s colour range prominently featuring red is also culturally advantageous in China, symbolizing good fortune and joy. In rolling out across China, KFC has adapted its product range to offer dishes which appeal to local tastes, e.g. in the mornings, “congee”, a kind of Chinese breakfast porridge. McDonald’s in China, whilst it has shown efforts in this direction, still trails a long way behind. There are many examples of brands which are big and successful household names in their home markets but have tried and failed in emerging markets. For example, HOME DEPOT closed in China in February 2011whereas B&Q has flourished by consistently reading the market better.

A totally different example, in a different market, is that many US law firms have opened up offices in London in the last 10-15 years. In some cases this has simply been a case of “parachuting in” the identical way in which the law firm operates in the US. In some cases this has actually meant supplying only US-sized legal paper for printers. Not surprisingly, this goes down very badly with locally-hired UK staff. Closer to our theme, an animated cartoon called ‘Little Krishna’ was a big hit on Nickelodeon India. But to launch a merchandising range featuring bath mats and bedroom slippers was a great mistake: Little Krishna was, after all, still a god and never, ever would you place your feet on an image of a god! The lesson is: if you want to sell in a particular market you need to understand the minds of the buying public or your target audience. What works in one part of the world may not work at all in another part of the world.

Mistake 2. Assume your brand is as well known and as highly prized in the local market as it is at home.

It is remarkable how deluded senior executives in leading “Western” corporations are about how well-known their brands are in other markets. Even with the advent of the Internet, a brand may simply not be known to large swathes of the population in large parts of the world. As a result, in a negotiation with a potential licensee, the brand owner needs to articulate to the licensee the value proposition that is being brought to the table, and not to assume that this “speaks for itself”. There have been many examples where, in emerging markets, an action for cancellation or revocation of a prior registration of the same or a similar mark, often very likely filed in bad faith, has failed, simply because not a convincing enough case was made out that the mark was “well known” enough in that territory, based on evidence of sales, advertising, and awareness of the public. Thus in a market which it plans to develop, a licensor would be well advised to offer additional marketing support and funding in order to assist a potential licensee,. This could include allowing the local licensee to get the benefit of bulk purchasing discounts on marketing materials, to offering prizes to fly successful sales staff to the head office. There must be patience and persistence in building up the brand. An striking example of the difference between what might appear to someone sitting in the UK and what might appear to someone sitting in China is the story of Stockport County football (soccer) club. This is near Manchester but the Stockport County club does not figure in any serious football rankings. Yet until recently, Stockport County was as well known in China, if not more so, than Manchester United. This was because of the energetic efforts of Steve Bellis, the Commercial Manager of Stockport County, who regularly visited China, made sure that Stockport County was known in many different places, organised events and flew the team out for demonstration matches. As a result, the amount of goodwill attaching to the Stockport County brand in China was remarkable – even after the team’s fortunes in the UK had plummeted! At one point, one third of the club’s revenues came from China.

Mistake 3. Assume your licensee in emerging markets will have the same attitude to the licence relationship, as licensees in mature markets.

In many emerging markets, e.g. Africa, Russia, the brand owner must educate local licensees about what is involved in operating and managing a successful licence, not just simply negotiating a deal, sitting back and waiting for the royalties. In Asian markets, the licensee will often take the view that if the licence relationship has an initial term of 3-5 years it is likely (for whatever reason) not to be renewed. Thus they will be pushing to make as much money as they can, as quickly as possible, before the licence is taken away from them. This, ironically, is at odds with the emphasis, much spoken of in Asia, about “developing a long-term relationship” with your business partners. It perhaps suggests a certain cynicism towards Western licensors. Thus decisions which may not be in the long-term interests of the brand may be taken just to make a short-term profit. You should invest much effort in selecting and educating licensors for the long term, who understand the overall strategy for the long term development of the brand. Naturally the licensor’s actions should support their long term words.

Mistake 4. Assume you can quickly find the right partner and tie up a successful deal

It is very unwise to fly into a country to sit down for a few pre-arranged meetings, expect to tie up a successful and long-lasting deal with a licensee, and fly out a few days later. That is simply not how business works in many markets. The importance of doing whatever you can to check out the track record, background and bona fides of licensees cannot be over-emphasised. It is better to take your time and find the right partner than close a deal with any partner. Plan for multiple visits.

Mistake 5. Don’t worry about exit

If a deal has to be done quickly, at least make sure that in the licence agreement there is an ability on the part of the licensor (and this need not necessarily be reciprocally granted to the licensee) to terminate the licence arrangement quickly, easily and cleanly if things are not working out. We know of an example of a licence agreement entered into for a key territory for 10 years which was only terminable on breach of contract or insolvency. In a later acquisition of the licensor’s business, the purchaser walked away from the deal when it discovered the licence. It was not prepared to buy the business with a commitment to that territory for 10 years and which could only be exited on breach. On the other hand, of course, one needs to give the licensee a reasonable “run in” period in order to establish the business and the profile of the brand and to generate revenue. Three years would usually be a minimum.

Mistake 6. Don’t worry too much about protecting your IP – it can be fixed later if need be

Wrong, wrong, wrong! Especially in markets which are highly liable to infringement and piracy, if anything can be protected, it should be. What may be considered “adequate” protection in Western markets from a trade mark perspective may well not be enough in emerging markets. The obvious example is the local language variations of the brand, including in local script if applicable. In China, your brand will be known by a local Chinese name, whether you choose it or not. It is much better to control this. Pfizer chose to ignore the local name for its Viagra product, which was “Wei Ge”, meaning “Mighty Brother”, instead preferring a different Chinese transliteration, which in practice nobody used. Inevitably, someone else registered WEI GE as a trade mark and started selling similar products in China. Pfizer should have covered all known names by which its product was going to be known in China. A similar problem arises if you allow your local distributor or licensee to register the local version of your name. When the parties fall out there is nearly always a fight over ownership.
In addition, all logos should be separately registered (this is not a situation where you should cut costs by registering the word and logo together) and different variations of the name e.g. MARY QUANT and QUANT MARY. In addition, domain names should be covered to a reasonable degree, and other types of intellectual property, such as design registrations, should be protected where possible. The more official certificated registrations you have, the stronger your position will be when problems (as they very likely will) arise.

Mistake 7. Fail to register your licence

There are still some countries where recording a trade mark licence agreement with the respective government authorities is important. Theseinclude China, Malaysia, Singapore and Thailand. This will secure the rights of the actual trade mark owner in terms of “use” of the trade mark, countering any vulnerability to cancellation for non-use, and will enable the trade mark owner to take direct enforcement action. In addition, it can be very important to ensure that royalties can be remitted from the country to the brand owner. In many countries an abbreviated or pro forma version of the licence, which does not give away the sensitive commercial terms, is sufficient for registration purposes. Naturally, this kind of registration must be kept up to date when the licensee changes or other significant alterations take place.

Mistake 8. Fail to carry out checks on your supply chain

This can be disastrous for the brand owner. We know of examples where there has been a good “master” licensee who has done everything required of it under a licence agreement in the emerging country, but was given a free rein to appoint sub-contractors (and sub-sub-contractors). The result was that the product manufacture was poorly policed so that overproduction and counterfeits started flooding the market. The answer is to exercise a great deal of vigilance over who is to be allowed to carry out parts of the distribution or manufacturing under sub-contract and in default refuse to allow this unless the ultimate brand owner has vetted such sub-contractors. Another aspect of this issue is what might be termed “brand hygiene”. Some brands, such as GAP, have struggled ever to recover their public image and credibility after it was discovered that clothing at the end of their supply chain being made for them in “sweat shop” factories involving child labour. Similarly, Adidas-branded world cup footballs were revealed to be being made by children in the town of Sialkot in Pakistan, which caused them a major PR issue. The complexity of the problem is illustrated by the fact that once Adidas had shut down the factories, there was a wave of local complaints that this was destroying a key part of the local economy.

Mistake 9. Do not exercise your royalty audit rights

It is extraordinary how many licensors, whether in emerging or any other markets, seem to have a fear and reluctance of enforcing the commonly-included rights of audit under licence agreements. The most usual excuse given for this is that “this might be seen as an aggressive move by the licensor”. However, in our experience, over 95% of these exercisesreveal underpayments of some kind. Very often underpayment of royalties is not done deliberately or maliciously but simply through incompetence or an over-narrow conservative interpretation of what is covered under the licence terms, especially as new product ranges come on stream. To overcome the issue of alleged “licensee hostility”, the best approach is to automatically audit all licensees on a rotation basis, say once every two or three years, so that licencees do not feel that they are being “singled out”. Having a pre-revenue audit can be helpful in checking/helping the licensee understand what is required and checking that the appropriate accounting processes are in place.

Mistake 10. Don’t take action against counterfeiters

Some brand owners, comfortable in their home markets, ignore the problems of counterfeit goods in distant emerging markets. Levi’s Jeans is an example in Asia. The problem is that, unless you “stop the rot” early, it will grow and grow.Then the counterfeits not only will flood the emerging markets, but they will begin to start damaging sales in your “home” market. You must include provision for dealing with the problem of counterfeiting in your brand management budget, and then take swift and aggressive action. This is far easier to do than it was10 or 15 years ago. Today, there are well organised firms with extensive networks able to give early warning of problems and take swift action. In any anti-counterfeiting programme, the key thing is to make sure that the goods are destroyed (and not merely impounded, because they may well be sold out of the back door by the official authorities once the brand owner has disappeared…) and to make sure that any enforcement action is publicised loudly in the local press so that there can be no question that the counterfeiters know that you are a brand owner who will stand up for your rights. Often in that situation the counterfeiters will shift their attentions to your competitor, who does not take action to enforce its rights, seeing it as a “softer” target.

[This article originally appeared as an INTIPSA TIP.]

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