COVID-19: Short- and Long-Term Considerations for the Licensing Business
March 16, 2020: News about the global spread of COVID-19 seems to change hourly. Some observers are predicting dire long-term effects on business, the economy, and human behavior, while others continue to feel the whole thing is largely a made-up crisis. But there is no question that the virus is already having an impact on consumers’ daily lives, worldwide, and on businesses’ daily operations and future prospects.
We cannot add much to the conversation at this point, given the already-ubiquitous coverage, the difficulty of accurately predicting the future, and the fact that the situation is continuously evolving. Our take, therefore, is meant as a framework for thinking about the challenges ahead, to help guide licensing executives as they figure out how to move forward.
It goes without saying that the primary concern for businesses now is the safety of company employees and their families, as well as the customers and communities they serve. That said, following are some of the key topics to keep in mind from a business perspective:
Impact on Retail and Consumer Sales
During the peak of the virus’ spread in China in February, key global brands and retailers, such as Nike and Benetton, closed 50% to two-thirds of their stores across mainland China, which has grown to represent a significant market for these and other marketers. In the meantime, traffic at stores that remained open was significantly down—up to 80% in some cases, with accompanying plunges in sales—as customers preferred to stay safe at home.
The sportwear market and the luxury tier are two sectors that were hard-hit in China. In the latter, Chinese consumers account for 40% of the global business (per investment bank Jefferies). Adidas said it expected to take a $1 billion hit in sales due to coronavirus impacts in China; Capri, which owns Michael Kors, Versace, and Jimmy Choo, reduced its quarterly sales outlook by $100 million; and Ralph Lauren expected an impact of $55 million to $70 million. Many licensing programs beyond these segments are affected; properties from Disney and Garfield to the NBA to Westinghouse count China as a key market.
A similar pattern has emerged in other countries that have followed China into crisis. Armani and many others closed their stores in Northern Italy, even before the government required businesses nationwide to do so. France has shut down all retail stores, restaurants, bars, theaters, and other public gathering places across the country. Apple temporarily closed all of its locations worldwide, outside of now-recovering Greater China, C&A did the same in the U.K., and chains from Patagonia to Glossier, among more and more examples, are joining them.
Others have reduced hours (Walmart) or discontinued beauty services (Ulta) or food sampling (Target). Those that have remained open for normal business—as of this writing—have seen traffic and sales drop significantly. Exceptions include purveyors of essentials such as hand sanitizer, disinfecting wipes, rubbing alcohol, toilet paper, and frozen, canned, and shelf-stable foods, all of which are quickly disappearing from shelves across retail channels in the U.S. and elsewhere, despite frequent replenishment.
Even as sales overall are falling, retailers are incurring higher costs for everything from paid sick leave for employees with the virus, to wages for symptomless employees sent home to prevent the spread, to bulked-up cleaning protocols that require additional time and supplies.
Not surprisingly, marketers of licensed products are reporting that retailers are holding back on purchases, especially of newer or more niche products, due to cost-cutting, falling customer counts, and/or a general sense of uncertainty. That said, there are pockets that are doing well in the short-term. E-commerce and streaming entertainment are two examples where pundits expect to see strong sales as consumers look for products and services that allow them to stay home comfortably.
What to do? In the short term, retailers and the brands that work with them are trying to boost their online presence, cut costs, and keep inventories low, in line with weak near-term demand. They are also catering to customers’ needs by offering more delivery and curbside pickup services, and issuing coupons and special offers, especially for items that will help their customers get through the crisis.
Concerns About Inventory Levels and Material/Component Supplies
One of the first impacts of the coronavirus on the global licensing industry was the threat to supplies of raw materials and processed components (e.g., semiconductors, zippers, shoe soles, fabrics, plastics) used in manufacturing, not to mention finished products. This has been a concern since January, since China is a key manufacturing center for many industries. The closing of factories there has caused immediate shortages for companies such as Apple. It has also created concerns for fashion designers about their ability to meet demand in the fall/winter season and for toy companies about fourth-quarter toy availability.
After almost two months, manufacturing in China is starting to move back to normal, although not to full capacity yet in many cases. The lags in getting products to store shelves and online are likely to continue for a time, however, due to the logistics of bringing the ports, trucking, and ships back to full capacity. Securing space for air freight, some of which travels on now-cancelled commercial flights, will also be challenging.
Supply issues are not limited to China, of course. Estimates put 60% of Italian textile production, including for brands such as Versace, Gucci, and Armani, in the area surrounding Milan, an epicenter of the virus that has been completely shut down as of this writing. And many workplaces around the world, including in the U.S., are sending employees home, where possible, to prevent the spread of the virus. Most are trying to remain up-and-running, but the transition to a working-from-home model to prevent the disease is bound to have an effect, as is the growing number of people who are sick and cannot work at all.
The National Retail Federation, in its latest survey of U.S. port activity, found that 40% of U.S. businesses were seeing supply disruptions, as of early March, with 26% more expecting to see disruptions in the months ahead. The most optimistic predictions (to date) expect the challenges to continue through at least April, but the potential timeframe seems to lengthen daily and the impacts are felt worldwide.
It should be noted that the concerns about supplies and inventories, top-of-mind at the beginning of the crisis, have taken a backseat to the more profound issue of what will happen to consumer demand if the global pandemic lasts for a while.
What to do? In the early days many companies sought alternative sources of parts and materials in countries such as India, Malaysia, or Vietnam, although the global spread of the coronavirus means few countries will be immune from some disruption. Companies are also being creative about how they get products to their customers by considering new shipping and freight options. Meanwhile, they are trying to manage inventories so they can survive lower demand in the near future while being ready for a potential spike later in the year. Long-term, businesses are thinking about diversifying their manufacturing and sourcing to more locations to reduce the impact of future crises.
Changes to Day-to-Day Business Operations
Almost all trade shows through April, a large number in May, and even some in June, have now been canceled or postponed, or are going virtual. These include some of the biggest gatherings for the licensing business, including the Inspired Home Show, MipTV, and E3, among many more. Licensing-specific events are no exception, from the cancellation of Licensing China and the Bologna Licensing Fair to the postponement of Licensing Expo until August. Fashion weeks all around the world have been canceled as well.
Meanwhile, businesses are instituting travel bans on a global basis and “non-essential” employees are working from home. The U.S. government has shut its doors to non-Americans flying in from Europe, while the airlines have voluntarily stopped flying in and out of certain affected regions. And a general reduction of flights due to lack of demand—Delta alone has reduced its schedule by 40% to date—has followed, limiting travel for those who still need to fly on business (albeit against health organization recommendations).
To meet this challenge, some companies have invested significant funds in improving their platforms for holding virtual meetings. Many have incurred significant costs related to changing their travel plans and are racking up sunk costs spent on trade shows that will now not bring in any business. New properties and product lines have lost an invaluable launch window and are scrambling to change their plans and find alternatives that will be as effective. The trade shows themselves are also facing big financial consequences.
What to do? The first step has been to transfer individual and some group meetings online. Companies that have lost their primary opportunity to launch a new product or property are trying to find new ways to make a splash, whether through virtual presentations to the trade, boosting social media campaigns to the public, or rescheduling launch dates. Long-term, some observers see the crisis as a death knell for at least a percentage of business travel and trade shows, as digital alternatives are often less expensive and as effective. On the other hand, there will likely always be some need for face-to-face gatherings.
Disruptions to Marketing and Fan Engagement
It’s not just trade shows that have been canceled, but big consumer events as well. Music festivals scheduled for the next couple of months, such as South by Southwest and Coachella, have almost all been canceled, as have concert tours by everyone from Santana to Pearl Jam. Disney and other theme parks around the world are not welcoming visitors at the moment. Sports events and seasons are virtually all on hold or canceled completely until the crisis passes. Movie premieres have been delayed and TV productions shut down. Live theaters have stopped performances and some movie houses and restaurants are closing for now.
These decisions have an immediate financial impact, of course, with ticket sales and on-site purchases of food, beverages, and merchandise no longer occurring. Indirectly, they also have a big effect on licensing. A hiatus in sports events means less awareness and engagement, and likely less product sales. The stoppage of arena concerts means no merch sales on-site and less exposure to drive sales online and in-store. A significant drop in restaurant traffic could mean more sales of a chain’s frozen restaurant meals in the short-term; over the long haul, less engagement is likely to lead to lower sales for licensed goods at retail.
Licensed products tied specifically to an event such as a Formula 1 race, a concert tour, or a Broadway play face particular challenges, but concerns extend to any licensed merchandise that benefits from the awareness generated by either a big happening or regular exposure. Furthermore, events such as SWSX and March Madness serve as key launch windows for new consumer products initiatives, which are now on hold.
What to do? Brands are offering streaming entertainment (Disney’s early release of Frozen 2) and educational platforms (Scholastic), often for free, to help consumers manage the crisis and generate goodwill. They are working to keep in touch with their consumers online and through social media while their other marketing ventures are on hold. Some are creating new content to keep their fans engaged, such as musicians offering a streamed concert from their living room or releasing a surprise drop of a new song. From a long-term perspective, the crisis reinforces the need to reach consumers through multiple touchpoints so the conversation continues despite interruptions on some fronts.
Looking Ahead: Business Survival and Economic Uncertainty
Toy company Basic Fun recently announced that it had let go 10% of its employees, citing coronavirus-driven production delays. U.K. menswear brand Kilgour closed its high street showroom permanently, saying the coronavirus was the last straw in a difficult environment in general; the brand itself remains in business.
Even if this crisis passes relatively quickly, some of the ramifications will continue to be felt down the road. The toy industry and others could see a reduction in fourth-quarter sales due to a lack of inventory resulting from production delays this spring, for example, which could lead to more consolidation and closings for an industry still recovering from the demise of Toys ‘R’ Us and other challenges.
One big issue facing everyone is the difficulty of predicting and preparing for the future. No one knows how long the spread of the virus will continue or how severe it will be. In some cases, temporary closures could become permanent. New properties and products, as well as companies of all sizes that are already hovering on the edge, are likely to be most affected. Can fast-fashion retail chains or mid-tier department stores that are always in the bankruptcy conversation survive a long period of self-distancing? Will a new property recover if it spent significantly on its introduction before losing its planned launch window? Would a trade show without insurance be able to continue in future years after canceling in 2020?
Finally, the spread of COVID-19 is already having significant effects on the global economy and, while forecasts differ, more analysts everyday are starting to predict longer and deeper impacts than first expected. If the economy goes into recession, that will obviously be a profound long-term challenge for the licensing business as a whole, as the last recession in 2007-2009 and its aftereffects clearly showed.
What to do? There are no definitive answers here. But the licensing community can take several steps to move through this situation and position themselves to survive future challenges, some of which they are already doing in response to ongoing licensing and retail trends. These could include making more of an effort to ensure they have cash reserves for future emergencies such as this; diversifying their businesses to encompass more suppliers, transportation options, marketing channels, and retail outlets, online and off; and implement business practices that give them the flexibility to react to sudden changes in their fortunes.