There are certain markets that are better operated via a license as opposed to distribution/franchise.
Firstly, let's define licensing. Key characteristics are:
The licensee owns the market for a set period of time (3-5 years is the minimal period for it to make sense for the licensee from an ROI perspective). Normally, a licensee would expect to have this license renewed automatically if agreed metrics are met (revenue, growth, POS numbers, royalty payments, brand strategy adherence measures)
The licensee sources and manufactures its own products normally with approval of all products by the principal
The product itself will normally be a mix of mandatory global programs and local market specific product
The licensee will develop its own go-to-market plans that incorporate global programs and entirely local campaigns
Branded stores are built to a standard & design set by the principal
Secondly, what are the factors that would lead a brand to choose licensing over the distribution/franchise model?
Sourcing challenges - the importation of product from the brand's existing sourcing network is tax inefficient. India is a market where this factor is significant. Local sourcing is the only viable or best option
The market has very specific product requirements either (a) aesthetic or (b) formulation. Japan is a good example of this. It is very hard, in reality, for a non-Japanese brand to fully understand and incorporate all the consumer insights necessary to deliver a market-right product assortment in Japan. It's not just a question of size/fit - this can be relatively easily overcome - but also of seemingly tiny details that, unless a designer is truly immersed in that consumer mind-set, it really is almost impossible to get it right most of the time
Local networks and understanding of the market's regulatory and political landscape. India is a case in point here. India is a deeply complex web of regulations at state and national level and commerce relies heavily on personal business relationships that a brand coming in will find very hard to replicate in a reasonable period of time
When it is has been decided to go with the licensing business model, partner selection is critical as the brand is to all intents and purposes ceding that market to the partner for the long run. Changing a licensee is very challenging, fraught with risk, often expensive and best avoided (the initial agreement should always contain performance covenants, iron-clad exit clauses and a buy-back option but nonetheless this remains a tough path to walk). Brands need to think of a partner as their partner for the next 20 years (or more) and conduct due diligence accordingly.
Clearly, the potential partner needs to be able to demonstrate competence via a track record of similar businesses in the market they are proposing to operate in
Financial robustness is critical. Over such a long period the going will not always be smooth
The partner and principal must share a vision for the brand - agreeing the positioning and the long term goals upfront and clearly documenting that is essential
Both partner and principal must share a common working culture - the management teams spending plenty of time prior to the agreement will clarify whether the two groups can work well together
Licensing, even more so than franchise/distribution, is a business marriage and must only be entered into very thoughtfully and without wishful thinking as a great marriage is a powerful thing but divorce is expensive, complex, stressful and almost never ends well.
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