One-on-one with Li & Fung’s Rick Darling (Part 2): Licensing best practices, retail differentiation and expansion

Posted by Carol Spieckerman on July 11, 2011

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I had the pleasure of speaking with Rick Darling, president of LF USA, following his terrific keynote presentation at the International Licensing Expo in June. LF USA is a subsidiary of Hong Kong-headquartered Li & Fung Limited, the multinational consumer goods export and logistics group. Darling oversees LF USA’s rapidly expanding business in the U.S., where its portfolio of owned and licensed brands include top entertainment companies, celebrity brands and fashion labels. A key partner to the world’s major department stores and mass retailers, LF USA combines innovative design, merchandising expertise, and deep retail relationships with Li & Fung’s global sourcing platform to strengthen world-class brands.

In part two of the interview (Part One can be accessed here) we discussed licensing best practices and keys to retail differentiation and expansion strategies. The following are highlights from our conversation:

Carol Spieckerman: Rationalization is, of course, a big term in retail, in terms of products, brands, and even suppliers. Licensors are also, as you mentioned, carrying out their own form of rationalization, by either cutting back on their licensee bases or eliminating them altogether and doing more direct-to-retail programs. Is there anything that your fellow licensees can or should be doing to stay in the game and hedge against this, or is it just inevitable?

Rick Darling: I’m going to be pretty blunt. There is some inevitability as licensors begin to rationalize their expense structure and their profit models. It’s very, very expensive to operate a brand in the traditional licensing model with multiple licensees in each product category, in each country, in each region of the world. Licensors are finding themselves with thousands and thousands of licensees rolling up to a number and if they have 30% fewer licensees, they still get to the same number.

Now, that said, I don’t think it’s all gloom and doom for the smaller or midsize company. What they need to do is make sure, number one, that they are truly excellent in design, product development, compliance, and quality control in their particular category. The mediocre guys are lost unless they spend the time and money to make sure that their products in their particular category are the best, regardless of whether they’re competing with someone like us or competing with smaller people. That is always number one, it’s the product. Number two, they need to take their expertise in the particular brand that they may have licensed and begin to think about other product categories.

By having excellent product and more product categories, they become more important to licensors. Most of these guys already have their brand established at retail and most of the retailers involved are in a lot of other product categories. I talk to a lot of people that say, “Well, I’m only good at this one thing, this one product.” My opinion of licensing, particular in the entertainment space, is that what licensees are really good at is managing the brand or managing a portfolio of brands. They can have tremendous flexibility if they open up their minds. It’s either partner with people or start a new division and try to broaden the range. Those are the two things that licensors will continue to look at. They’re not going to walk away from really good partners that provide fantastic products that grow through a standard product category.

Spieckerman: I think that speaks to what you mentioned in your presentation from a retailer relationship standpoint – becoming more meaningful to your retailers by expanding with the ones you already do business with.

Darling: Exactly. Listen, there are very few good retailers left in the United States so you need to do business with all of them. Once you have a relationship, they all sell a lot of different product categories and you need to really think about how you can penetrate that retailer across their categories. It’s the exact same thing taking place with licensors. Everybody is trying to figure out how, in a consolidated market, to take advantage of their position. If your position involves a fantastic relationship with the retailer and you’re in the T-shirt business, there is nothing that says that that great relationship can’t allow you to move into the jean business, or the sweater business, or the kids business. That mentality has to be there if you’re going to grow.

Spieckerman: Also, you talked about some really exciting emerging markets and where you see global growth potential. You mentioned Brazil in particular. Lately, everyone seems to suddenly be excited about Canada. What are your thoughts on the viability and growth potential in the Canadian market?

Darling: It’s actually quite interesting that all of us kind of looked up and found Canada. When the US market was growing at 3% or 4% or 5% a year, nobody bothered. What’s happened now is that a lack of growth in the US is forcing people to look everywhere. Frankly, Canada is a relatively easy, direct, and understandable move that expands your market. It’s that simple. So you’ve got US retailers now beginning to open up, like Target taking over Zellers. Almost every other major retailer that we’ve talked to has a Canada strategy over the next three to five years, and so the market is now being taken very seriously on the supplier side as well.

The Canadian market is not going to grow necessarily in its overall size, but you have suppliers and retailers that are going to compete with their Canadian counterparts for that market. It’s very clear and those lines are already being drawn. From our perspective, we have a Canadian business and we are about to expand our Canadian presence. It’s a very important part of our portfolio that can’t be ignored and, in terms of being outside the United States, it’s clearly the most accessible and probably the most readily available market that we’re looking at.

Spieckerman: Li & Fung has continued to grow, not just through new business models but also through acquisitions. What are your criteria for acquisitions? Have they changed? Are they going to change in the future?

Darling: They evolve. We are an acquisitive company, strategically, so acquisition is an important part of our growth plans. Of course organic growth is critical as well, but we are a company that has become pretty good at acquiring and integrating companies. That said, we look for companies that have profitable track records. We don’t do turnarounds and we don’t do fix-ups. We buy successful companies that are leaders in their particular product category. We only buy companies that we feel we can add value to from a sourcing perspective. Of course, we can add value financially, but we are a sourcing company in our heart and in our core. We buy companies where the owner-operators are looking to potentially monetize their business but do not want to leave it. So our owner-operator sellers stay with us for extended periods of time – in excess of five years minimum. We are interested in those kinds of companies. We don’t buy companies where the owners are exiting.

Spieckerman: So you’re probably looking at companies that have strong management teams.

Darling: That’s right. Strong management teams and similar core values, and with people who would like to stay. The companies that we’ve acquired in the US and around the world are, for the most part, businesses where the owners and the sellers have reached the stage that they’re ready to monetize and take some of their investment off the table but they’re not ready to retire and they are enjoying the business. They want to stay in the business and keep building it. They want to build it under a larger corporate umbrella and a larger canopy, so to speak. That’s a very important part of our filter system.

All eighteen acquisitions that LF USA has made since 2005 have been in New York, and there is a purpose behind that. We believe in co-locating our businesses and letting people feed off of each other, the energy, the creativity, and the corporate culture. It’s important for us to be able to keep people close so that we can actually communicate in real time and not to try to look like a conglomerate with businesses all over the country. That said, we certainly might someday make a move to the west coast, but we haven’t done that yet. So that’s been another important part of our filter system.

Spieckerman: In closing, are there any retailers that are emerging on the global scene that you think are particularly exciting or who are setting a new standard?

Darling: I don’t think that there’s any question that probably the most exciting and innovative format that’s still being rolled out is the Apple stores. We hold them up as really a fantastic addition to the retail community and a really transformative model that I think other retailers look at too. I also look at companies like Uniqlo as being incredibly innovative in what they are attempting to do. It’s interesting that what’s happening right now is that the real innovation in retail is coming out of other countries. Zara was very innovative a number of years ago. Maybe you could consider it less innovative today because they’ve been around for a while but the model continues to evolve. H & M has been a very innovative retailer in terms of how they manage their supply chain and how they position their stores.

So the innovation is actually starting to come out of other parts of the world, just as the market is developing in other parts of the world. You’re starting to see very interesting formats come out. In the US, the small formats that Walmart and Target and Tesco and Aldi are launching are pretty innovative. They may not bring product innovations, necessarily, but they are certainly bringing supply innovations.

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