The game has changed
Intangible assets and intellectual property are claiming the crown in the retail sector, says Esther Jolley.
Over the past couple of years, we’ve seen a raft of big names go into administration, both here in the UK and across the pond. Having faced mounting challenges for some time, including unsustainable rents and changes in consumer behaviour, struggling retail businesses have been dealt a killer blow by COVID-19.
Some have been restructured (Cath Kidston, Mothercare), and some have been bought by other retailers (Early Learning Centre, Jaeger). Yet in other cases, only the intangible assets (IA) and intellectual property (IP) have been bought, and physical stores have been shunned (Topshop, Topman, Debenhams, Laura Ashley). Purchasing just the IA and IP is becoming more prevalent as companies look to snap up the revenue-generating aspects of a business – the websites, licensing and franchise contracts, and customer databases – while leaving the liabilities behind.
These buyers may take a mixture of different approaches to future growth, but what is clear is that the value of IA is being recognised.
Madness or savviness?
When Boohoo bought the Arcadia Group brands Dorothy Perkins, Burton and Wallis for £25.2m in February 2021, the BBC released an article entitled “Dorothy Perkins? Why would Boohoo want that?”, which seemed to reflect the views of many. There was similar head-scratching when Boohoo then went on to buy the Debenhams brand for £55m.
There was less consternation when it was announced that ASOS, another pure-play online retailer, had acquired the Topshop, Topman and Miss Selfridge brands, broadly considered to be the jewels in the Arcadia crown. Perhaps these were a more obvious fit for an online clothing retailer, but with a higher perceived brand value came a much heftier £330m price tag.
Boohoo is a pure-play online retailer selling fast fashion to a young, fashion-forward, price-conscious consumer. What on earth would it want with a tired, failing department-store brand and three clothing brands that have seen better days? To many, it might seem like madness. But the purchasers know that the value is not in the unprofitable stores, but in the IA, which includes the IP, goodwill and access to customers.
So, where’s the value?
Boohoo’s purchase was not opportunistic. It already had a plan to buy up other brands, having previously acquired Oasis, Coast and Karen Millen. And contrary to received opinion, Dorothy Perkins, Burton and Wallis are still relatively popular, with around two million active customers in 2020, who collectively spent £180m. Not bad in the middle of a global pandemic. In gaining access to that many new, active customers for £25.2m, I imagine Boohoo felt that it got a very good deal.
With Debenhams, Boohoo not only acquired the trade marks, but a household name with an online customer base of around six million, supporting a wide range of product categories and a high-traffic website (until recently in the UK’s top 10). Fifty per cent of Boohoo’s sales are currently outside of the UK, whereas Debenhams predominantly operates in the UK. Perhaps Boohoo sees an opportunity for Debenhams to become a global online marketplace.
Importantly, there is a great deal of value in the IA/IP, which goes beyond just the brand name.
Lessons from Laura Ashley
When Laura Ashley went into administration in April 2020, it was rescued by Gordon Brothers, a global advisory, restructuring and investment firm, which bought up assets including the global brand, its archives and related IP, as well as the online store. The sale included no physical stores. As a result, many, if not all, of the stand-alone Laura Ashley stores in the UK may soon disappear. However, since many of the brand’s stores overseas were already operating under franchise agreements, those can remain, because they serve as a revenue stream rather than a revenue drain.
Around 70 licensees globally are selling Laura Ashley licensed products, and Gordon Brothers has indicated that part of its ongoing strategy will be to keep expanding this portfolio. Licensing and franchising are great examples of how brands can use their IP to grow their business and their company value. If the right partners are chosen and the executions are managed well, there is actually little risk to the brand owner.
Laura Ashley has already announced a partnership (likely a license agreement) with Next to sell its homeware products and develop new stores. That means that Laura Ashely products will shortly appear in more than 500 Next stores in the UK and on the website, which operates in more than 70 countries.
Again, it’s a massive win for Laura Ashley, which will have no physical stores to pay for, no inventory to hold or products to manufacture, but will continue to receive the royalties for the use of the brand. Meanwhile, Next gains access to a 67-year-old British brand with strong brand equity, wonderful print archives, a good reputation in the homeware category and existing loyal customers. Win-win.
A profitable model
Authentic Brands Group (ABG) is a US-based brand development company that recently acquired Brooks Brothers, Forever 21, Barneys New York and Lucky Brand. It already manages a large portfolio of more than 50 consumer brands, including Juicy Couture, Nine West and Frye.
The company’s primary business model involves purchasing retail brands that have run into trouble and licensing the IP out via either store franchising or category licensees. Licensees who are experts in their own markets and categories take advantage of adding a known brand to their portfolio, while ABG builds the brand and collects the royalties, knowing that someone else is taking all the financial and operational risk. Of course, there is a lot more strategic brand planning required, but essentially it’s a very straightforward model and, by all accounts, very lucrative.
In fact, ABG appeared at number three in the 2020 Top 150 Global Licensors Report, with sales of $12.3bn, up from a 2016 ranking of 21st and $3bn. As royalty revenue is essentially profit, it’s a very nice business model indeed.
Value drivers
So, IA and IP are key value drivers for businesses in an increasingly digital world, with brand purchases determined to be more or less attractive and valuable because of the equity, awareness, existing consumer base and so on. The other important part is the quality of the trade mark portfolio, as this will underpin any brand extension and licensing strategy. That portfolio should be maintained with a view to securing and enforcing key strategic rights across the whole range of products and services, as well as all countries where the brand is successfully operating, with an eye on future expansion opportunities.
I expect that what we have seen over the past few years will continue, with the consolidation of physical stores, a bigger push towards digital and more use of licensing and franchising to enable brands to rebuild or grow more quickly, but ultimately more sustainably, over the long term. The retail game has changed, and there’s no going back.
Esther Jolley is IA Director, Brand Extension at Stobbs IP
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