BUILDING A BRAND PORTFOLIO
Rodrick J. Enns
Enns & Archer LLP
There are many reasons for a company to make a strategic decision to pursue brand equity. Effective brands are an immensely powerful and efficient form of communication with consumers. The ability not only to achieve immediate recognition by large numbers of consumers, but to conjure an image of desirable qualities and benefits, all through the display of a single symbol, is increasingly important and valuable in these times of "information overload" and bombardment by media.
In addition to (and because of) the marketing value that brands can deliver to a business, they are recognized increasingly as important assets. A company that can build a portfolio of brands which are legally enforceable and documented by appropriate registration will bolster its balance sheet significantly.
The purest approach to the goal of building brand equity would be to place marketing and merchandising resources only behind those brands which are owned outright. In practice, however, limiting company investment only to brands which a company owns may be impractical. There are only two ways to acquire full ownership of a brand: create a new brand, or buy an existing brand from its current owner.
- Creating a new brand always requires a substantial investment, and even with maximum investment there is no guarantee of success, especially if the field is crowded with established brands.
- Buying an existing brand is frequently not a viable option, though there are exceptions. Owners of successful brands often are unwilling to sell their brand outright at any price for emotional or ego reasons, and when they are willing to consider parting with it, they may overvalue it significantly.
For the above reasons, it is often necessary to consider acquiring more limited rights to a brand than outright ownership. There are a wide range of possibilities, which are set out below. While the following spectrum is not linear, these options are listed roughly in order of decreasing control over and benefit from brand equity.
A. Create A New Brand
- Complete and perpetual control over brand development
- Full enjoyment of brand equity
- Substantial initial investment
- May take significant time to build customer recognition and equity
- Risk that brand may never be viable
- Ownership carries obligations to police and enforce trademark rights
- Brand ownership also carries potential for enhanced liability in areas of product liability, environmental, product safety and others
Creation of new brands is still a possibility in todays world, but it is becoming more and more difficult and expensive.
B. Co-Branding New Mark With Established Brand
- Allows use of establish brands goodwill to more quickly build equity in new brand
- Permits leverage of established brand during the new brands development
- If established brand is owned by another party, owner may be reluctant, or may demand unacceptable concessions
- Risk that new brand identity may never be viable independent of established brand
The idea is to create a new brand that will be used in conjunction with one or more well-known established brands, usually licensed from another party, with the new brand eventually building its own independent equity with consumers which will survive after the license agreements end. This can have significant benefits, but does not eliminate the need for advertising spending and other support to build a viable independent brand.
C. Acquisition Of Full Ownership Of Existing Brand
- Same advantages as A. above, and in addition:
- The brand will be a known quantity with (hopefully) established equity
- A mature brand will have broader legal protection, and any surprises (e.g., pre-existing unregistered uses by third parties) are more likely to have already surfaced
- Often unavailable or prohibitively expensive
- Existing brand equity may not match precisely your target market, customer profile or core product offerings
- May be encumbered by existing licenses
- Same obligations and potential liabilities of ownership as identified in A. above
Opportunity to purchase a worthwhile brand outright is likely to be rare.
D. Perpetual Exclusive Master License
- Same advantages as purchase of brand, and in addition:
- Usually lower initial capital outlay in exchange for ongoing royalty payments
- Owner usually retains risk and expense of trademark maintenance and enforcement
- Ongoing royalty payments may reduce ROI
- May require commitment to minimum guaranteed royalties, increasing downside risk
- Owner will retain rights to approve many decisions
- Existing brand equity may not match your target market, customer profile or core product offerings
- May be encumbered by existing licenses
A "master" license generally means acquisition of all rights to license or sublicense the brand as to any and all products and services. Essentially, one steps into the shoes of the brand owner for purposes of licensing and otherwise exploiting the brand. To the extent the brand has reach beyond product lines which you are interested in pursuing, third party manufacturing and distribution may be required to fully leverage the brand investment.
E. Limited Term Exclusive Master License With Renewal Options
- Allows flexibility for you to re-evaluate continued viability of program
- May give leverage to renegotiate royalty rates or other terms in light of ongoing track record
- May be more palatable to owners of established brands
- Renewal options may be triggered by performance criteria, creating risk of loss of rights
- Investment of capital and human resources required to support broad brand management obligations is more difficult to justify when the license has a limited life
Most licensors will want to have the license end eventually, precisely for the reason that it gives them the opportunity to realize the appreciated value of the brand at that time. While the licensee looking to build and benefit from brand equity will usually prefer a license of unlimited duration, realistically that will rarely be available. The focus should be on getting the licensing period (including all renewals as of right) long enough to justify long-term investment of resources in the brand, usually at least fifteen to twenty years.
F. Nonexclusive License With Competitive Restrictions
- Less need for ongoing brand management
- Lower royalties and minimums usually available
- Reduced control over brand outside of competitive channels
- Competitive channel restrictions are difficult to negotiate, and to police and enforce effectively
- Reduced control over third-party licensees
A licensee for one or a few specific product lines of a brand which will also be licensed in many other products has much less responsibility for, and much less control over, the brand as a whole. In this scenario it is much more likely that you will have to cede brand management functions to the brand owner.
G. Limited Term Nonexclusive License With No Restrictions
- Minimal or no initial investment required
- Virtually all potential liability can be shifted to brand owner/manufacturer
- No control over brand, and no opportunity to realize return on brand equity beyond limited term
This is really indistinguishable from traditional arms length purchase of branded product on an order by order basis, and may in fact be accomplished by the vendor being the licensee.
SUMMARY AND CONCLUSIONS
There is no one option which will be optimal in all situations. Each of the above may be viable approaches in different circumstances. The overall strategy should be to maximize brand equity acquired versus investment required.
- As a minimum threshold, a brand acquisition opportunity will usually be viable only if you obtain rights of sufficient breadth and duration to be able to realize an appropriate return on investment in the brand over the life of the agreement.
- Where less than full control of the brand is obtained, a critical issue will be restrictions on third party use of the brand. There are two purposes:
- to insure that sales of your products or services under the brand are not undercut by direct brand competition; and
- to protect against erosion of brand equity by undesirable third-party uses (uses on products or in channels perceived to be of lower quality, uses which do not reinforce the positioning you desire, or even intentional sabotage of the brand by competitors).
- These two purposes require different means of protection.
- requires product exclusivity for products licensed by you, or at least assurances that other licensees for those products will not be directly competitive (appealing to different customer base, at substantially higher price points, etc.).
- requires limitations on uses of the brand on products other than those licensed by you. Usually these will be some combination of (a) prohibition of any branded products in directly competitive channels, (b) company management of (or input into the management of) product quality and positioning for third-party licenses, and (c) prohibition or regulation of the brand in undesirable channels (for example, discount, mass merchandise, or e-commerce channels).
- Where full ownership of a brand is not feasible, a properly structured license agreement can secure many of the same benefits, and sometimes on more advantageous terms.