Art Licensing

The Future of Art Licensing in a Changing Market

by Lance J. Klass
President, Porterfield's Fine Art Licensing

    Only five short years into the new millennium, the United States is undergoing a massive realignment in overall market forces that has already had dramatic implications for art licensing.

    Right now licensors, and I include here artists, designers and licensing agencies, are providing art to companies that are attempting to cope with significant new stresses brought about by factors beyond their control, and which have made their industries far more competitive in ways they probably couldnít have imagined a dozen years ago.

    These companies, all traditional producers of fine consumer products, are experiencing tighter margins, faster production schedules, and a shrinking roster of individual retail clients who now account for a greatly diminished percentage of their overall wholesale sales.

    Many producers have had to shut down their domestic manufacturing facilities and cut off their traditional American suppliers in order to take advantage of minimal labor costs in other countries. Their product development teams now travel to Shanghai and not to Peoria so they can meet the price requirements of a handful of big box chains that demand deep discounts in order to sell products to consumers at "everyday low prices."

    Big box chains now occupy a commanding presence on the balance sheets of most traditional suppliers of home goods, giftware and paper products and are in a position to dictate the prices at which theyíll purchase goods. If you donít like the pittance theyíre offering for your products, the buyers for the big box chains will just purchase similar product from one of your competitors.

    If youíre a traditional American company that wants to stay in the game, keep afloat, and make a living, youíd best play ball. Those companies that wonít play ball and instead decide to focus their energies on selling to boutique specialty stores, may gain a higher margin on individual sales, even considering the cost of rep fees, but face the prospect of fighting what may eventually be a losing battle.

    Iíve heard it said that the way things are going weíll wind up with one big store that sells everything. If you want to buy clothing, groceries, electronics, cars, lumber, youíll get it all down the road at "All-Mart." Thatís a depressing scenario and may never come to pass, but itís still a sobering thought.

    The growth of big box sales has forced a two-tiered royalty system for art licensors. While the average royalty for home goods sold to individual retailers may once have ranged from 5% to 7%, the deep-discount demands of the big boxes have squeezed those royalties down to anywhere from 2-1/2% to 3-1/2%. Thatís not the fault of the licensee; theyíre just trying to make that big sale to the nationwide chain by squeezing some of the margin out of their production costs. As a result, the licensor is in a position of deciding whether to accept half the royalty but potentially far greater unit sales and with it, potentially higher gross income than they might have gained with a higher royalty on sales to boutique stores, small chains and independent single-store retailers.

    Another factor making life even more difficult for traditional American producers is that the desire of the big discounters to cut production costs has led many of them to develop their own in-house art, design and product development teams. In this way they can source from China without having to go through any of their traditional American suppliers.

    A key product development manager at one of these traditional suppliers told me not long ago that he became extremely depressed on his last trip to China when he ran into his clients who were there to purchase product directly from the same factories used by his own company. Whatís going to happen a few years from now, he said, when my clients do it all themselves and donít need us any more?

    Another of our licensees, in fact one of our biggest, went out of business not long ago because it had unwisely decided to invest a substantial amount of money in developing production and warehousing facilities in the United States. As a result, besides being cash poor they just couldnít compete with companies sourcing in China and offering product to their clients at significantly lower prices than those made in America.

    Yet another licensee told me a few days ago that he just received an email from a friend who used to work at the factory of their main Chinese supplier. She told him that his biggest customer had just done a walk-through at the factory preparatory to directly sourcing product, and while doing so were able to see the products that our licensee was developing to sell to those same buyers!

    That same licensee told me that some of the big box stores that are beginning to source directly from China have established turn-key shipping and warehousing facilities in China. Now, instead of the Chinese factories shipping to American warehousing facilities that break up the shipments and send them out to individual stores, each individual order is tagged separately in China. Then when the container hits the U.S. port, shipping bypasses the chainís central warehousing facility and heads directly to the local outlet.

    I can read the writing on the wall as well as the next person, and itís clear to me that my art licensing agency will one day be licensing art directly to the major big box chains,  should those big box stores decide to go beyond direct licensing of hot character and movie brands to bringing in beautiful licensed art as well.

    My hope is that eventually theyíll all realize that they need to bring in licensed art to elevate the sales potential of their products.

    Several creative and marketing directors at our licensees have told me that thereís no way a giant mass marketer would be willing to take the creative risk in developing new products that may set trends, push out the envelope, or be the next edge that will lead an industry in a new direction. Big companies, they say, will have conservative staff more interested in staying with the tried and true than with experimentation. As one associate expressed it, "creativity comes from the least likely sources. Artists and designers have new ideas and some guy in a garage will make a product that is revolutionary. The big companies no longer create, they just purchase little companies or infringe on their patents. They just canít do what we do."

    Creativity and the future of consumables and home goods may well reside more in the small independents than with the mass merchandisers, but right now the big boxes own the playing field and set their own rules.

    As an art licensing agent, I know that thereís a good chance my licensee of the future Ė say, five years from now Ė might more likely be a big-box chain that will offer me a diminishing royalty percentage than a traditional American producer selling lots of product to thousands of retail accounts at a reasonable profit, and giving me what used to be standard royalty rates on those sales. If thatís the way itís going, then Iíll have to adjust to it. But I hope that should that occur, enough Americans will still be employed and will be able to scrape together enough income to purchase goods at "everyday low prices."

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Lance J. Klass studied international economics at the University of Chicago and the University of California, Davis. He is the founder and President of Porterfieldís Fine Art Licensing, in Sarasota, Florida.  This article first appeared as a special feature in the Licensing 2005 edition of Licensing Today Worldwide.  If you're interested in having Porterfield's review your portfolio of art, be sure to email us first.

This article and its contents are copyrighted by Porterfield's, and reproduction of this article in whole or in part is strictly forbidden without express written permission of the author and copyright holder. 

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