Licensing as a strategic tool for luxury brands

Lower cost and resource commitment

Licensing can be a cost-effective way to achieve business goals, requiring less investment in people and facilities.  Collaboration through licensing can make two parties more competitive than they would be individually—building luxury brand loyalty can take years and significant investment, and licensing can help mitigate these costs, especially in times of inflation.  For example, Dolce&Gabanna, Tiffany, Chanel, Prada, Versace, and Ferrari have all entered into long-term licensing agreements with Luxottica for the development, manufacture and distribution of eyewear under the respective brands.  These brands have been able to enter the eyewear segment without the huge investment that would usually be required to do so, and Luxottica is able to leverage the benefit of the luxury brands to have a broader product portfolio and customer base.

Sharing expertise and leveraging brands

As demonstrated by Luxottica’s strategy, licensing can facilitate the sharing of expertise or knowledge in areas such as market understanding, design, manufacturing, distribution, marketing, or customer acquisition.  It can also allow one party to leverage another's brand in a specific market or segment.  For instance, Gucci's partnership with Roblox to sell luxury items within the gaming platform is an example of innovative tech partnerships that can help brands stay competitive and reach different segments. Another example is the L’Oreal and Prada licensing agreements for the development, manufacture and distribution of beauty products under the Prada and Miu Miu brands. 

Pathway to acquisition

Licensing can serve as a preliminary step towards acquisition, particularly for companies operating in different markets. It allows both parties to understand each other's business and personnel. In some cases, licensing is pursued because one party is unwilling to buy or sell outright. Existing licensing partners may be wellpositioned to take advantage of distressed M&A opportunities. For example, Estée Lauder had a licence agreement with Tom Ford for Tom Ford beauty products and then subsequently acquired the brand in its entirety in 2023. 

While licensing offers many benefits to luxury brands, it also comes with risks:

Brand damage

Allowing another party to use a brand can pose a risk to the brand's reputation if not managed carefully. For example, Adidas terminated its nine-year collaboration with Ye (formerly known as Kanye West) after he publicly made a series of antisemitic comments. Adidas was left with Yeezy stock worth around USD1.2 billion, which it sold in batch and donated the resulting profits to NGOs. To mitigate the risk of reputational damage, it is important to complete effective due diligence on potential counterparties and ensure your licensing agreements contain strong quality control provisions. 

Loss of control over IP

Sharing intellectual property, such as customer or supplier relationships or specific technologies, can lead to a loss of control. To mitigate the risk of loss of control over IP, a luxury brand owner should scope its licence grant accordingly and ensure appropriate controls on access to and disclosure of IP and confidential information.

Furthermore, licensing arrangements often result in existing IP being used in a different way. For example, where the licence branches into a new market segment for the brand, additional registered classes may be required to protect the use of the brand as contemplated by the licence. There may also be co-branding of two existing trade marks, such as Manolo Blahnik for BIRKENSTOCK. Any such new uses, and any arising IP, need to be factored into the licensing agreements. 

Long-term commitments and risks

Some complex licensing deals can resemble M&A transactions, especially if the licensee funds For more information, please contact: a significant portion of the luxury brand owner’s costs or if the agreement includes exclusivity clauses or options for broader rights in the future. In such cases, the risks for both parties may be similar to those in an M&A deal with deferred consideration.

There are also significant risks where there is reliance on individual licensing arrangements.  For example, when it was announced that the 23year long licence between Safilo Group (an eyewear company) and Christian Dior for Dior eyewear would expire in December 2020, Safilo’s share price fell over 8% as the licence accounted for more than 10% of Safilo’s revenue.  To mitigate the risk of reliance, it is important to have robust provisions on transition post-expiry and termination.

Luxury licensing can bring enormous benefits to luxury brands, provided that the risks are managed appropriately—this requires both contractual protection and procedural safeguards, such as effective diligence and access/disclosure controls.