Optimizing Inventory in Licensed Partnerships
The Licensing Expo is the annual gathering point for a global industry valued at over a quarter of a trillion dollars. Most of the energy and excitement at the show surrounds the “matchmaking” between brand owners and licensees as they negotiate rights and royalties over beloved characters, entertainment properties, and sports icons. After the glow of the Expo fades, the negotiations are complete and the deals are signed, the focus turns to the reality that the license has to make money… for both parties.
In order to maximize the return on investment, both licensees and licensors concentrate on sales revenue, and rightfully so. But profitability hinges on managing not only sales, but a host of other issues, including the quality of the R&D and product development; the costs of production and distribution; the accuracy of forecasting; and the marketing and merchandising at retail. If there is a flaw anywhere in the cycle from contract negotiation through sales, an unfortunate byproduct is often inventory – and potentially warehouses filled with underperforming toys, apparel, and merchandise.
The traditional strategy that applies to unsold merchandise is liquidation. Liquidation can be difficult for a number of reasons: first, discounted price points put both royalties and profits at risk; second, liquidation often requires non-traditional sales channels. Fortunately, there is a non-traditional asset recovery strategy that every licensor and licensee should be aware of to avoid this unattractive cost of doing business.
The alternative strategy was developed using Trade Finance techniques. More specifically, it is an application of trade finance that is customized to boost the value of underperforming inventory and other assets. The model is pioneered by Sherwood Integrated Solutions and their unique Asset Purchase Program. Let’s talk a little bit more about that.
Companies make a gargantuan investment in their inventory in the United States, where it’s estimated that up to $1.1 trillion of capital is tied up. Somewhat surprisingly, the ratio of inventory to sales crept up in recent years (over 1.4 at the beginning of 20015). In spite of technological innovation in the the supply chain, excess supply abounds. And where there is excess supply, asset devaluation can occur quickly.
A key benefit of Sherwood’s Asset Purchase Program (APP) is that the seller can lock in price points at or above cost before the asset value begins to deteriorate. This is an extremely valuable financial hedge, and one that will relieve the pressure on associated functions such as forecasting and production planning. Through APP, you won’t have to dispose of your inventory at a fraction of its wholesale cost. Instead, Sherwood guarantees to acquire inventory, real estate, equipment, and other assets at its full wholesale price. In fact, Sherwood pre-buys the asset based on anticipated surplus, and the sales are squared up periodically based on the actual assets that are acquired. In exchange for the sale, Sherwood will provide a menu of marketing and business services that includes media buying, social media, website development and development, freight & logistics, and e-commerce.
In a licensing relationship, consider that this protects the value of inventory against not only poor sales, but against other pitfalls that can occur which lead to inventory challenges: overaggressive sales projections or promises during contract negotiation; unrealistic expectations of brand strength or product popularity based on faulty consumer research; issues that arise over the licensor’s brand guidelines or approval processes that can bog down development; and the mis-timing of delivery and missed seasonal or annual sales cycles that can occur when things go wrong.
And when things go wrong, the Asset Purchase Program can be structured to troubleshoot a periodic problem that results in on-hand inventory issues. So regardless of whether you are optimizing an entire year’s schedule, or managing an unexpected flop, shelves of licensed misfit toys will no longer be staring back at you.
In summary, how can Sherwood’s Asset Purchase Program help to optimize inventory in a licensed partnership? Here are four general benefits. And keep in mind that the benefits below are not only available for the licensee who may be reading this article. Licensors can also offer this program as a value-added benefit when working with a licensee in the matchmaking process.
- Risk Mitigation: The Asset Purchase Program relationship creates a dedicated, guaranteed sales outlet with locked-in pricing for any slow moving licensed merchandise or other undervalued assets. This is a safety valve that measurably reduces the risk that the partners in a licensing deal typically face, such as poor sell through; retail closures or bankruptcies; and soft demand driven by fickle consumers who don’t respond to product research and marketing campaigns as predicted.
- Cost Containment: In addition to risk reduction, when you use trade finance strategy in lieu of traditional liquidation, you will contain the costs that normally arise when assets stagnate. Sherwood’s Asset Purchase Program is a double-barreled solution that will reduce or eliminate the costs of both price discounting, as well as the carrying costs of obsolete inventory and assets.
- Process Improvement: Third, when you solve inventory issues, your supply chain processes are more smooth and optimized. Not only will it help to flatten the hills and valleys in the distribution system, but it will avoid the hassle of dealing with retailer returns and other issues with your channel partners. Moreover, one of the services offered by Sherwood is its best-of-breed freight and logistics capability. This can be an unexpected, additional benefit.
- Performance Improvement: A final contribution from the APP will be the contribution to the bottom line. The opportunity for asset optimization to improve earnings is significant on both the topline and cost efficiencies. And while EBITDA enhancement is an obvious opportunity, the opportunity also exists to re-invest the revenue and efficiencies from a Sherwood solution into other priorities – marketing initiatives, unfunded projects, even philanthropy. A final advantage from structuring an annualized program is that the insurance arising from a dedicated sales outlet will give you the opportunity to plan and produce more aggressively against potential demand from an unexpected, overnight sensation.
A final point: this post has focused on the benefits of optimizing asset value by avoiding traditional liquidation. There is another side to this coin, and that is the quality and value that come from the services that Sherwood provides in a trade-financed purchase. For example, Sherwood has superior investments in traditional, social and mobile media that are available through the Purchasing Agreement. So you can fund more mobile and social media to take advantage of those 48% of consumers who are using search engines on their mobile phones.
To learn more about trade financed asset purchasing, reach out to an expert at Sherwood Integrated Solutions.