Keep Calm and Carry On? That Seems To Be Early Post-Brexit Consensus

Posted by Marty Brochstein on July 07, 2016

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Much of the licensing industry was literally leaving Las Vegas as Britons voted and the ballots were counted on the “Brexit” referendum whose results point toward the UK leaving the European Union in 2018.

It’s no overstatement that since the media began calling the results at about 9:30 pm Vegas time – just before a host of industry executives were to board their red-eye flights for the East Coast – there has been a seismic reaction in world markets, in political circles and in the media. At this writing, the value of the British pound sterling against the U.S. dollar has declined about 10% since the results of the balloting became apparent. That’s the factor that has the most immediate attention of the licensing community; other longer-term adjustments will take time to sort themselves out.

How are companies in the licensing business moving forward? What changes are they making?

The short answer to those questions is that most executives with whom we’ve spoken say they’re going to let the dust settle before plotting any moves. “We’re not changing anything. Everyone was surprised by this, but we’re taking a long-term view with a wait-and-see approach,” said Rob Millman, SVP of Global Merchandising for the NBA, typical of many.

Said Dow Famulak, President of Global Brands Group: “Everybody wants to talk about it, but the truth is nobody’s sure about what the long-term implications are until you know specifics of [any subsequent] deal between the UK and the EU.” He added that “One of the things we’re looking at is how we can buy better; we always look at that, but there’s a sharper edge to it now.”

To some, though, the Brexit vote could go a long way toward addressing core issues they say are hurting the British licensing community. “Biggest challenge to British licensing community has been cross-border trading between Britain and EU,” says Rob Corney, Managing Director and CEO of UK agency Bulldog Licensing. “If this will prevent grey shipping, it will protect much of the community.” He and others have cited the problem of brand owners granting rights to multiple licensees within the EU, with a licensee in a small territory with a small guarantee selling “throughout the EU at lower royalty rate and lower price [which] encourages a race to the bottom.”

The immediate reaction to the vote in most quarters was VIBRANT, to say the least. The sarcastic email response from one global licensing agent to our inquiry: “We won’t hit our numbers for the year!  Exchange rate will kill us. Everybody else too!  What more do you need to know?”

Others, while more measured, also forecast significant effects on the U.S. – and to a lesser extent – European licensing business, much of it brought about by the drop in the value of the Pound. UK licensees who manufacture elsewhere “will be paying more for the goods they manufacture under license,” said LIMA UK Managing Director Kelvyn Gardner in a highly personal blog post on the LIMA website. “There is little scope for their passing on the increase to trade and consumer. UK retailers already fight hard with suppliers to keep prices low, as the public has little appetite to go along with increases, and no retailer wants to lose volume or market share by giving up a right to claim at least pricing parity with their competitors. Many UK licensees are already under extreme pressure, and an erosion of margin is the last thing they need.”

One U.S.-based brand owner received an email from a UK-based supplier within a day of the vote. The drop in the Pound, this licensee wrote, “will mean price rises are going to be needed, especially for the UK, as we see the pound losing its strength and years of uncertainty. The Euro, too, will be affected but ultimately the British public have pushed the pound out on its own…  We are about to do our pricing for 2017 and go out pre-selling, we also are about to have to pay for all our Holiday orders. We are pausing for a few days to work out a way forward with the pricing for the UK and Europe while the markets settle.”

Said Famulak: “We’ve already committed on prices to retailers and factories; it’s difficult to go back and reprice.”

What’s the longer-term outlook? As Famulak said, nobody really knows, and much will depend on the shape of negotiations between the EU and UK over trading relationships. There likely will have to be reworking of some licensing contracts, though Corney says that in most contracts, rights are granted for specific countries (not for “the EU”), so that aspect of redrawing agreements has been overstated, he says.

But some are at least beginning to chart a course forward. “On a slightly more positive note, it will take at least 2 years and 3 months for the UK to finally leave the EU,” wrote the previously cited UK-based supplier. “In this time we will evolve our business and we plan to have an additional facility within the EU so that we can continue to provide great service to all our European customers, and that is where our future growth will be.”

And one anti-Brexiter in the licensing business is humorously looking inward for help. “Who you gonna call?” asked Gardner. “A combined team of UK licensing heroes, Sherlock, Thunderbirds, Harry Potter, Doctor Who, James Bond, Danger Mouse, Gandalf, Merlin, Lara Croft, Alice in Wonderland, Tank Girl, League of Extraordinary Gentlemen  and the entire Court of King Arthur and the Knights of the Round Table may just about be able to rescue us all from our fate.”

Only time will tell.

This article originally appeared in the July 5 edition of Inside Licensing – click here for more information on how you can receive this twice-monthly newsletter, packed with trend info, industry insight, news, deals and contacts.