Brand Licensing in Emerging Markets: Top 10 Mistakes to Avoid

To capitalise on the forces of globalisation, companies increasingly license their brands in emerging markets. Before developing a multinational licensing strategy, licensors should be mindful of the cultural, linguistic, legal, and financial differences that operate in different territories. A successful multinational licensing strategy requires an understanding of the nuances of global consumer and market behaviour, and the capabilities of licensees in the various markets. We highlight common mistakes that licensors often make when licensing to emerging markets, and offer tips on how to tackle some of the challenges that come with venturing upon these new grounds.

Mistake 1. Not taking account of the local market

The most common mistake is assuming that a formula for the licensing or franchising of a brand in one market will work equally well un-adapted in another market. This is no secret to marketers: a Forbes Insights and World Federation of Advertisers survey revealed that 63% of non-Chinese marketers indicated they believe they need to change their brand attributes for Chinese consumers, yet mistakes still happen.

Examples: Take KFC in China. KFC is twice as large as McDonald’s in China, whereas the reverse is true elsewhere. After initial failure in Hong Kong, KFC hired local management, who understood that KFC had an immediate advantage over McDonald’s because Chinese consumers prefer pork and chicken over beef. Additionally, menus were customised to appeal to local tastes. KFC’s predominately-red colour range is also culturally advantageous in China, symbolizing good fortune and joy.

Similarly, when Burger King entered Vietnam with its standard menu it found it could not compete with local street food (cheaper and faster). It was forced to develop a new range of hamburgers and re-brand as more of an experience destination. Pizza Hut similarly has grasped that a visit to one of their restaurants in an emerging market is a high-end experience so they provide a Maître D’ to welcome and seat guests

Some brands do better than others – US HOME DEPOT closed in China in February 2011, whereas Britain’s B&Q has flourished there by consistently reading the market better.

When IKEA tried to enter the US, it found Americans wanted bigger beds and closets. In China, the Swedish company struggled on many levels- its low price marketing did not work because western products are seen as aspirational in Asian markets, and its catalogue was used by competitors to copy products. It also struggled to implement its traditional large suburb-based stores and had to adapt to the Chinese consumers, who mainly use public transportation.

Tips 

Think outside the box:

• There are vast opportunities available in second-tier cities. For example, in China, growth may be more likely beyond Beijing, Shanghai, and Tianjin.
• Don’t shoot straight for BRIC. BRIC countries (Brazil, Russia, India and China) have traditionally been the main emerging markets to target, but economists are now looking towards MINT countries (Mexico, Indonesia, Nigeria and Turkey). The same sort of challenges apply: for example, Indonesia is made up of thousands of islands and it is easy not to appreciate how diverse each one is. Africa is a complex market, not just due to its size and political instability. Brands have not had the best success in the past. For example, Woolworths South Africa pulled out of the country in 2013, while British Gas closed its operations in 2011. However, Cadbury and Hello! magazine have launched new products on the continent. Hello! is published monthly and distributed in four English-speaking West African countries. Brands are beginning to take advantage of the emerging middle class and a large, wealthy population in Nigeria. Turkish consumers like to pay in instalments where possible and are interested in bonus points when shopping with credit cards, something that should be considered if approaching the Turkish market.

Use the local market to help adapt your product:

• Diageo have done this well. In Shanghai it launched a flagship outlet for brand Johnnie Walker called “House of Walker”, which offers exclusive purchases and ties its brand identity with the idea of progress and the Chinese appreciation of status symbols. It has also worked with local celebrities such as film maker Jia Zhang Ke and video blogger Han Han. In Africa, it launched an advertising campaign with Ethiopian Olympic marathon runner Haile Gebrselassie on the theme of “Keep Walking”, and in South Africa Red Label has now been made available in 200ml bottles, to cater for those who cannot afford the full size.
• But don’t try to be too clever once a product is selling successfully in an emerging market. A well-known toilet cleaning product with an angled neck designed specifically to reach under the rim of western toilet bowls was originally launched in India with no modifications to the bottle design, despite the fact that toilets in India are predominantly of the ‘squat’ type. When later executives considered ‘improving’ the product shape for that market, the feedback they received was that this functional feature had become an important indicator that their product was a toiler cleaner, and consumers would be confused if it were altered now. In other words a functional feature had become a non-functional part of the branding!

Invest time: 

• Brands need to spend a significant portion of their marketing efforts on educating customers and raising awareness. For example, Lindt enters a new market at a slow pace at first, through a local distributor, making product available in department and speciality stores. Then, only when this presence and relationship with the consumer is established does it look to mass distribution and establishing subsidiaries.

Mistake 2. Assuming your brand is as celebrated in the local market as it is at home.

Senior executives in “Western” corporations are often misguided about how well-known their brands are in other markets. When negotiating with the licensee, brand owners need to articulate their value proposition, not simply assume that it “speaks for itself”. Actions for cancellation or revocation of a prior registration of the same or a similar trademark, often filed in bad faith, regularly fail simply because an insufficiently convincing case was made that the mark was “well-known” enough in the particular territory. Building up a brand takes patience and persistence; a licensor should offer licensees marketing and funding support to do so.

By way of example, when Coca-Cola re-entered Myanmar after 60 years, it discovered that although people recognised the drink and some of its other brands most people had never tasted them. Coca Cola turned back the clock and, inspired by an 1886 marketing campaign in Atlanta, used the words ‘delicious’ and ‘refreshing’ and offered free samples at numerous events across Myanmar to re-familiarise the country with the brand.

Mistake 3. Assuming licensees in emerging markets have the same attitude as licensees in mature markets.

Brand owners must educate local licensees in emerging markets on operating and managing a successful licence, not simply negotiate a deal and wait for royalties. In Asian markets, licensees traditionally believe that a licence relationship with initial term of 3-5 years is unlikely to be renewed. They therefore push to maximise short-term profits, to the detriment of the brand’s long-term interests. You should invest much effort in selecting licensors and educating them on the long-term development of the brand, and support these words with actions.

Mistake 4. Assuming you can quickly find the right partner and tie up a successful deal

The importance of investigating the track record, background and bona fides of licensees cannot be over-emphasised. The foreign brands who succeed are often the ones with strong local partners or distributors.

Much can be learned from Carrefour’s experiences in Indonesia. In 2008, Carrefour was struggling to adapt its large stores to the Indonesian market, which traditionally had smaller “hypermarket” stores. Carrefour decided to buy a 75% stake of its local partner in Indonesia, PT Alfa Retailindo Tbk (parent company of Alfamart). However, the locals trusted the local brand “Alfa” and the takeover threatened this image. Unfortunately, with little local support for the takeover and increased local political pressure, the acquisition became a PR and legal sandstorm.

Carrefour is not the only brand to struggle in Indonesia, Wal Mart and J C Penney tried but failed in the late 1990s, most likely due to their attempts to transfer existing business models and product lines, including a high proportion of imported products and store locations that were less than optimal.

However, Carrefour did learn its lesson – it has adapted its style to address local needs and customs, which make it a survivor in the Indonesian market. It now offers a great number of local Indonesian brands, multinational brands made in Indonesia (such as Nestlé and Arnott’s) and fewer imported lines. Carrefour also displays a large selection of durian fruit (a famous Indonesian delicacy) and spices (including local favourite large red chillies). It also sells items usually sold at street stalls, prepared in a large open area so customers can buy their favourite food in hygienic conditions, which is a grave concern of many Indonesian consumers.

Tips:

• Take your time and find the right partner rather than close a deal with any partner.
• Plan for multiple visits.
• Be willing to give local managers decision-making power
• Consider hiring a communications partner with local knowledge (Unilever did this in Myanmar, Laos, Cambodia, Vietnam and Mongolia.)

Mistake 5. Not thinking about exit

If a deal has to be done quickly, a licensor must ensure it can terminate the licence arrangement quickly, easily and cleanly if things are not working out. We know of a 10 year licence agreement entered into for a key territory, which was only terminable on breach of contract or insolvency. In a later acquisition of the licensor’s business, the purchaser walked away from the deal when it discovered the licence’s onerous terms. On the other hand, one needs to give the licensee a reasonable “run in” period (at least 3 years) to establish the brand and generate revenue.

Mistake 6. Not prioritising IP protection

Protection is essential, especially in markets liable to infringement. In China, your brand will be known by a local Chinese name, whether you choose it or not. Pfizer chose to ignore the local name for its Viagra product, which was “Wei Ge”, meaning “Mighty Brother”, instead preferring a different Chinese transliteration, which in practice nobody used. Inevitably, someone else registered WEI GE as a trade mark and started selling similar products in China, giving Pfizer a headache. Brands should cover all names by which the product will be known, and register the name, all logos, and domain names. The more official registrations you have, the stronger your position will be when problems arise.

Mistake 7. Failing to register your licence

In some countries, notably in Asia, recording a trade mark licence agreement with the respective government authorities remains important. This secures the rights of the actual trade mark owner on “use” of the trade mark, countering any vulnerability to cancellation for non-use, and will enable the trade mark owner to take direct enforcement action. It can be also be very important to ensure royalties can be remitted from the country to the brand owner.

Mistake 8. Failing to carry out checks on your supply chain

This can be disastrous for brand owners. Appointing shoddy sub-contractors has historically resulted in a poorly-policed production processes, leading to overproduction and counterfeits flooding the market. Some brands, such as Gap, have also struggled to recover their public image after clothes were found being made in “sweat shops”. You should exercise a great deal of vigilance over the supply chain and vet sub-contractors.

A consumer products company recently was in advanced negotiations with a potential Indian supplier of an electronic component. Detailed questions as to production capacity, experience of the workforce, quality control systems etc. were all met with positive assurances. It was not long before the deal was due to be signed that a representative of the company happened to be in India and met with the Indian supplier. He asked to see the factory facility. Oh, it did not actually exist yet, he was told. When the deal was done, the Indian gentleman then could raise the money to build the factory and recruit the workforce.

Tip:  

• check whether reality measures up to representation. It is rather cheaper to fly someone over to check reality on the ground, than contract with a mere aspiration!

Mistake 9. Not exercising royalty audit rights

In our experience, over 95% of audit exercises reveal underpayments of some kind; often due not to malicious intent, but incompetence or over-narrow interpretations of what is covered under the licence terms. Many licensors are reluctant to enforce audit rights, due to potential “licensee hostility”. Best practice is to automatically audit all licensees on a rotation basis, so that licensees do not feel that they are being “singled out”.

Mistake 10. Not taking action against counterfeiters

Some brand owners ignore the problems of counterfeit goods in distant emerging markets. Unless you “stop the rot” early, it will grow and grow. The counterfeits will flood the emerging markets first, but then begin to start damaging sales in your “home” market. Dealing with counterfeits should be budgeted for, and swift and aggressive action taken. It is crucial to ensure that the goods are destroyed (not merely impounded, because they may be surreptitiously sold once the brand owner has disappeared…) and to publicise actions in the local press to warn counterfeiters, who then often switch to “softer” targets.
The process of licensing your brands in emerging markets requires consideration of multiple issues: legal, cultural and commercial. It is advisable to seek expert advice. Our team has many years’ experience in this area and would be delighted to help further.