image: Michael Kors

image: Michael Kors

The Fall/Winter 2015 shows made it very clear that there is more to Ralph Lauren and Michael Kors than their respective Polo shirts and MICHAEL Michael Kors collection purses, the latter of which include designs (sometimes ones that look a bit too familiar) that have undeniably over-saturated the market. In fact, both brands showed very appealing collections this past February.

Of Kors’ Fall/Winter offerings, Style.com wrote: “Damn, he’s good.” Of Lauren’s western-girls turned city-chic babes, the publication noted the “sleek polish to the minimal knitwear and plenty of simple, straightforward tailoring” and the “sensational evening looks.” The same notion applies to Calvin Klein and its underwear, just as there is more to Vera Wang than her fragrances. But having said this, it rather easy to forget that these brands are luxury labels, which suggests that their mainstream collections, complete with licensed products, are thriving. (And is a good thing, after all). But what is licensing and how does it work within the fashion industry? Here is everything you need to know …

WHAT IS LICENSING? 

The fashion industry in the U.S. is relatively young compared to our international counterparts. While couturiers in Paris have been creating novel garments for centuries, and thus, boast houses that hugely pre-date our oldest brands, the U.S. (New York, in particular) is still a newbie on the scene. Our stateside versions of established design houses come in the form of St. John, which was founded in 1962, Oscar de la Renta in 1966, Ralph Lauren in 1967, Calvin Klein in 1968, DVF in 1970, Carolina Herrera in 1980, Michael Kors in 1981, and Donna Karan in 1984 – just to name a handful.

Much like the big European houses that predate them, many of the American houses have looked to licensing to pay the bills. As you may know, most of the European houses (think: Christian Dior, Louis Vuitton, Hermès, Yves Saint Laurent, etc.) started as brands in the business of making couture, luggage, and/or equestrian equipment. Since then, there has been a large shift in the industry towards more modern and more accessible goods. Hence, the advent of ready-to-wear and also of licensing.

So, what is licensing exactly? Licensing is the practice of contracting with another party to obtain and use rights intellectual property (“IP”) rights, in our case) in exchange for an agreed payment (a fee or royalty). A licensing relationship typically involves an agreement between a trademark owner (the “licensor”) and another party (the “licensee”) in which the licensor permits the licensee to use its trademark in commerce. Simply put, a license grants the licensee rights in property without transferring ownership of the property.

Take, for instance, Luxottica, the eyewear company that acquired the rights to manufacture and distribute Prada, Burberry, Tom Ford and Chanel sunglasses. Prada, Burberry, Tom Ford and Chanel still have the right to use their names (aka their trademarks) in the sunglasses/eyewear category; they have just chosen to authorize Luxottica to do it for them. Without such authorization, Luxottica would not be able to manufacture eyewear using the name “Chanel,” for example, without being on the receiving end of a trademark infringement lawsuit from Chanel. This is one benefit of a licensing agreement. It allows both parties to benefit without anyone’s IP being violated — assuming all goes well.

Licensing is also a powerful way for a brand to grow by tapping into new geographic market and new market categories they simply are not equipped to cater to. Licensing out can help a company to commercialize its IP or expand its current operations into new markets more effectively and with greater ease than on its own. By granting the licensee the right to market and distribute the product, the licensor can penetrate markets it could not otherwise hope to serve. The licensee may agree to make all the adaptations required for entering a foreign market, such as translation of labels and instructions; modification of goods so as to conform to local laws and regulations; and adjustments in marketing. Normally, the licensee will be fully responsible for local manufacture, localization, logistics and distribution.

Moreover, licensed products, such as eyewear and fragrances, which are sold at much lower price points than a designer dress, for instance, serve as a way to both profit and to court potential new customers. As of last year, about 90 percent of the $160 million a year in sales at Calvin Klein Inc. comes from licensing the designer’s name to makers of underwear, jeans and perfume. It is an especially effective tool for high fashion houses due to their high price points. The average person cannot afford a $4,000+ Chanel dress but can more easily afford a Chanel fragrance. By reaching these consumers, Chanel aims to create a sense of brand loyalty and as a result, may be able to sell these same individuals bags and even dresses in time.

In short: most of what you see on the runway never makes it to stores. Instead of selling pricey dresses, brands make most of their money from these lower priced, licensed goods … and handbags, too, of course.

THE RISE OF LICENSING

While licensing is a common industry tool, it has not always been this way. In fact, it largely commenced in the late 1940’s, when Christian Dior began marketing Dior stockings in the United States, creating a system to license hosiery. The following year the Paris-based design house began to license its neckties. According to a statement from Dior, “all accessories followed, and within three years, this system was copied by all the couture houses.”

Enter: Michael Kors, Ralph Lauren, Calvin Klein, and co. One thing which many consumers associate with the Michael Kors brand is the watch. What fewer people may know is that the $200 gold-plated watches are the product of one of Michael Kors’ more affordable collections. In addition to the Michael Kors runway collection, which shows during New York Fashion Week and commands prices of $600 for a sweater and nearly $4000 for a gown at Bergdorf Goodman, the brand launched its MICHAEL Michael Kors and KORS Michael Kors lines in 2004. These two lines contain an array of licensed products, which are sold at much more affordable prices.

Tom Ford may be an even more interesting case. In April 2005, on the heels of his departure from Gucci, he (with the help former CEO of the Gucci Group, Domenico de Sole) launched Ford’s eponymous label based solely on two licensing deals: one with Estée Lauder for perfume and cosmetics, another with Marcolin Group for eyewear. These licensing partners have allowed Ford to build a bigger business, more quickly, with a smaller investment than if he tried to do everything on his own. Whereas most luxury fashion businesses start off with very expensive in-house ready-to-wear collections, which require significant upfront investment, the Tom Ford brand would launch with products at more accessible price points, run by trusted partners and requiring little to no cash investment from Ford himself.

Deals like these come with multi-million dollar budgetary commitments by the licensee to advertise the product lines. These global campaigns, which Ford directed and oversaw himself, would give further visibility to the Tom Ford brand and help to reach a vast consumer base from day one. “I realized that [the licensing deals] would keep my name very public, [so] that if I chose to go back into fashion it would even make my name bigger,” Ford has said of the move.

Calvin Klein is another good example; albeit one that sheds light on the potential of the downsides of licensing. While the brand went from selling coats in the now-defunct New York store Bonwit Teller to having its name recognized around the world, it was not without a bitter lawsuit with the brand’s largest licensee, the Warnaco Group. (Warnaco obtained rights to the Calvin Klein brand in the 1990s). The lawsuit, which Klein filed in May 2000, accused the Warnaco Group and its CEO, Linda Wachner, of diluting the Calvin Klein brand name by producing merchandise that was not authorized or approved by Calvin Klein, and distributing Calvin Klein jeanswear through unapproved discount outlets, such as warehouse clubs, such as Costco and BJ’s. The suit was settled in 2001, and while the agreement remains confidential, some of the terms have been made public. Warnaco was able to retain its Calvin Klein licenses (it is currently authorized to use upwards of 12 Calvin Klein trademarks), but Calvin Klein was able to regain some of the creative control he had lost in the original license.

As we can see in Calvin Klein’s case, licensing casts a burden on licensors (the ones that own the IP). When the licensor, particularly if it is a luxury brand, is not involved in the manufacturing of the products, he must ensure that the licensee conforms to all conditions concerning maintenance of the quality of the product in relation to which the licensed trademark is used in order to avoid dilution of its brand image. Other disadvantages include not reaping a much potential profit as you could in utilizing other forms of manufacturing (such as manufacturing in-house) and the risk that you will come into competition with your licensee.

Regardless of the downsides, though, licensing is one trend in the fashion industry that isn’t going anywhere any time soon.

* This article was initially published in April 2015.