Iconix: Licensed to Build Brands
By Tom Ryan
Iconix Brand Group Inc., which last week reached an agreement to acquire the Rocawear urban label for $204 million, is turning the apparel-branding model on its head.
Formerly called Candies Inc., the Manhattan-based company had a nice run during the disco era as a trendy juniors footwear brand. By the nineties, the brand had fallen out of favor and became best known for a controversial ad featuring former MTV star Jenny McCarthy sitting on a toilet.
In 2004, Iconix switched from a manufacturing to a licensing model. The move included licensing the Candie’s brand to Kohl’s as an exclusive and launching an aggressive acquisition spree to acquire a stable of labels to license. It bought Badgley Mischka in 2004; Joe Boxer, London Fog, Mossimo, Mudd and Rampage in 2005; and Ocean Pacific in 2006. In February 2007, it reached an agreement to acquire Danskin for $70 million.
CEO Neil Cole–brother of shoe designer Kenneth Cole–calls his approach to fashion “a 21st Century business model.”
The strategy has some advantages. As a pure licensing company, Iconix is spared the cost of operating factories or arranging sourcing as well as owning inventory, helping to make its margins among the highest in the apparel industry. The company itself has to only cover advertising and promotional support for its brands.
“It’s the prototypical MBA model–high margins, no working capital, no inventory risk,” Eric Beder of Brean Murray Carret & Co. told the New York Post.
For 2006, revenues (representing royalties from the licensing deals) catapulted to $87.7 million from $30.2 million in 2005. Earnings doubled to $32.5 million from $15.9 million.
The move to a licensing model appears well timed since many department stores and discounters are looking for exclusive labels in order to differentiate their stores from competitors. Private labels also tend to provide fatter margins for retailers.
So far, four of Iconix’s brands have licensing deals with retailers: Mossimo (Target), Joe Boxer (Sears Holdings), Danskin (Wal-Mart) and Candie’s (Kohl’s). The biggest is Mossimo, which has become a core apparel brand for Target and is largely credited for showing others how to succeed at the mass level.
However, most of Iconix’s brands are licensed across categories–mainly apparel, footwear and accessories–for the wholesale trade. For instance, its luxury brand Badgley Mischka has 12 different licenses alone selling 15 different categories.
With the close of the Danskin and Rocawear deals, Iconix will have 11 brands generating about $5 billion in retail sales off of 143 licenses. They include some turnaround situations (London Fog, Ocean Pacific) as well as strong brands looking for the next stage for growth, particularly Rocawear, which will continue to be run by rap mogul Jay-Z.
Mr. Cole said Iconix’s stable of brands provides diversity, as will future acquisitions.
“We truly believe we are only just beginning to realize the potential of our unique opportunities,” Mr. Cole told analysts on a conference call. “I am confident that in a short period of time, Iconix will have the largest market share of any company in the fashion business and that we will continue to have a highly leverageable platform that can deliver strong and sustained organic growth for our portfolio of brands and that we can continue to add powerful new brands that can further diversify our holdings.”
Discussion Questions: What do you think of Iconix’s business model? What do you see as some of the opportunities and challenges in pursuing a pure licensing model for fashion brands?
The most daunting challenge of this licensing-only business model is branding and quality control across the product assortment. Responsibility for a wide diversity of brands may sound appealing at first blush; however, in practice, the management challenge can be quite formidable: with each licensee using their own designers, sourcing, factories and marketers there is no guarantee that a customer will have the same qualitative experience with a brand’s socks as they do with the same brand’s jeans. On a positive note, selling in the licensed brand to a retailer as a “private label” does involve another vested party in the overall brand management, likely helping to keep quality and marketing in check.
There are hundreds of stories of great brands with superb equity being run into the ground through inattention, over-attention, and other problems. The reasons are nearly as legion as the failures.
The brands purchased and now under the control of Iconix are worth what they paid for them because they have intrinsic value built over a number of years with great products and great marketing. Iconix will improve the equity of a few of them, will maintain (hopefully) the equity of half or more, and will preside over the loss of various amounts of brand equity among the rest.
My partner and I used to own licenses for food products (Mrs. Fields among others) or intended for food products (Gumby among others). Our intentions were much like those of Iconix, but we eventually tired of explaining our business model. Clearly we were ahead of our time and probably just not as skilled and well-funded as Iconix. Our biggest struggle was figuring out a way to offer exclusivity and still make money from the thin margins inherent in the business. President’s Choice obviously figured it out, because they had control over production. But our model, and Iconix’s, haven’t that control. They are counting so much on their retailers to manage design and quality, that they are not completely in control of the fate of their brands.
My concern with the business model lies within the arena of branding itself. Who is responsible for establishing, maintaining, invigorating…etc…the brand itself? Is it the retailer who has licensed the brand? Is it the stable of individual licensees? Is it Iconix?
And the answer really does matter. Target has taken ownership of Mossimo. Is the success of Mossimo related to the Iconix business model or to the Target business model? My experience as a licensee, in both entertainment and lifestyle, is that individual licensees seldom have the same understanding of the brand, seldom develop product in support and enhancement of each other, and seldom spend any money at all to promote the brand. It’s expected that the licensor creates a mutual understanding, polices and enforces product development standards and practices, and spends to promote the brand.
Is 2% sufficient to maintain the organization needed to make the above happen? Is it sufficient to deliver critical mass promotion?
This business model is open to considerable concern.
Iconix’s average license fee appears to be less than 2%. At that price, the brand names are worthwhile to them, the manufacturers and the retailers. The great license fee controversy is often related to the price. Movie and TV tie-in license prices can be ten times Iconix’s average. Furthermore, Iconix licenses have longer lives than entertainment licenses.
Just licensing an apparel name has risks. Who controls the designs? Who controls the quality? Who controls the returns disposition? Unless there are real controls, this is an end of brand/life cycle solution. This looks more like a branded Private Label option. We have yet to see any brand arise from the dead and last over time.
I did some IT strategy work for a retail company that was founded as a division of a large entertainment company. The retailer’s mandate was to commercialize the entertainment company’s properties in a retail environment. The first retail concept out of the gate leveraged the media company’s children’s properties.
The retail concept was beautiful–it would have put Disney stores to shame, and really did pioneer “retail as entertainment.” But alas, the retail enterprise returned about 3-6% on an enormous capital investment, when the division that owned the properties in question could license them for some pretty hefty percentages and have the checks roll in with little effort on their part. With that kind of disparity, the retail concept didn’t stand a chance.
You can’t license everything–you’ve got to have a brand that has some value to it–but it sure seems like a very 21st century way to spread risk and gain some critical product differentiation for the retailer. Leave the design to the people who know the customer and the constraints and opportunities of the brand, and leave the manufacturing to the people who know how to do that fast and efficiently.
We’ve been following Iconix closely for a while now and see their model as the future of brand marketing/building (and not just in apparel). Robert Margolis actually started this trend when he honed his licensing prowess with a little brand called Cherokee then went on to leverage the experience into an easily-replicated, low-overhead business model (although Cherokee has been much less aggressive in terms of brand acquisition). Check out Cherokee’s volume vs. overhead for a preview of possibilities. Another brand marketing firm to watch is NexCen. I won’t take up space here to enumerate the many ways these three firms are connected but it makes for a fascinating story about where retail and brand-building is going!
These brand marketing houses are the natural compliment to companies such as Li & Fung, which provide extensive sourcing and manufacturing options for retailers and manufacturers alike (the heavy-lifting part if you will). It only figures that Li & Fung is also acquiring brands selectively in order to market them directly to retailers. The upshot is that these firms are making money hand over fist by offering retailers what they crave and can no longer count on traditional vendors to provide; an irresistible combination of control and exclusivity.