Licensing has always been a strong channel of distribution especially for the fact that it takes very little upfront investment (Refer: Outsourcing and SCMluxe). However we have seen from recent developments that "true luxury" firms prefer to keep control of distribution due to reasons of control and quality ....and preventing counterfeits (Refer: Licensing and Counterfeits). But taking back distribution or licensing agreements involves capital investment to set up distribution channels or buy out licensing agreements. The benefits of taking back distribution or buying out licenses are manifold:
But these benefits are impeded by high investments which require shareholder buy in which is typically not forthcoming since higher returns/profits are not totally apparent when volumes (very visible to shareholders) are compromised. But controlled volumes and scarcity is a key luxury strategy and such capital investments must be seen from a long term perspective.
Typically reducing (buying out) total distribution by licenses by X% will increase net profits by 2 X% over a 5 year period. This is of course assuming everything is executed perfectly since the ball can roll either ways. For example Ralph Lauren decided on taking back distribution by buying out its licensees in Japan and France from the years 2002 onwards. The net profits increased from $172million in 2002 to $845 million in 2011 with Ralph Lauren boutiques almost completely taking over distribution from licensees. YSL on the other hand launching a similar strategy is still struggling to get its figures into fashionable black rather than gauche red!
- Better control of quality and brand messaging
- Control over volumes in the market and less fear of market flooding and dilution of "desirability" of brand
- No fear of counterfeiting and non-authorised sale of products in less desirable point of sale (retail locations)
- Better client relationships and keep direct link with customer.
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| Balance Investment with Expected Returns |
Typically reducing (buying out) total distribution by licenses by X% will increase net profits by 2 X% over a 5 year period. This is of course assuming everything is executed perfectly since the ball can roll either ways. For example Ralph Lauren decided on taking back distribution by buying out its licensees in Japan and France from the years 2002 onwards. The net profits increased from $172million in 2002 to $845 million in 2011 with Ralph Lauren boutiques almost completely taking over distribution from licensees. YSL on the other hand launching a similar strategy is still struggling to get its figures into fashionable black rather than gauche red!
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