To Be or Not to Be, That Used to Be the Question.
Back in the late eighties, I signed up for what seemed to be a terrific promotion and relocated to the West Coast. My new role had me managing multi-million-dollar businesses with what were considered the country’s premier department stores at the time. Remember Buffum’s, Emporium Capwell, Robinson’s, and Liberty House? The massive consolidation that soon followed my move might explain any memory lapses. All vanished without a trace through complete liquidation or acquisition. None of the banners were seen as having intrinsic value and, at the time, any private brands in their stables were private labels in the literal sense – they were interchangeable. Real brand equity came from national and licensed brands.
Back then, a retailer or brand was either in business, soldiering on under the same general business model, or it wasn’t. A lot has changed over the past decade.
Companies now have the potential to live on (and on) through deconstruction. The “parts” (intellectual property in the form of brands or technology, real estate holdings) are becoming more significant than the whole (the banner as it has traditionally operated). This past week offered a couple of field days for the media’s Monday morning quarterbacks as Kodak’s bankruptcy announcement and heated speculation that Sears will go private hit. Pundits wasted no time hyping their hindsight -- Kodak missed the boat on digital, Sears (a retailer!) has forgotten about its stores, yada, yada, yada. Leaving aside the fact that there are valid counter-arguments against both opinions, something far more interesting is at work.
Over the past several years, Kodak has dutifully launched marketing campaigns and incrementally-improved products, even as it lived a double life as a highly litigious patent troll. Seemingly undistracted by its imminent bankruptcy announcement, as recently as last week the company filed a patent infringement suit against Samsung over various image distribution capabilities and the week prior, similar suits were launched against HTC, Apple, and Fujifilm.
Kodak has long relied on its intellectual property as a source of cash. Although its licensing revenue has dwindled from the $3 billion it achieved between 2003 and 2010 to only $98 million last year, with its IP portfolio recently valued at as much as $2.6 billion and its 11,000 patents valued at $1 billion, it’s easy to understand the company’s ongoing vigilance.
Part and Parcel
The upshot is that Kodak’s future may see it selling off its camera unit and perhaps some of its patents in order to generate revenue that could be invested, not necessarily in its manufacturing capabilities or getting its products placed on shelves, but in further patent litigation and licensing development. Another scenario might have Kodak selling off its intellectual property piece by piece, over a period of years. It may not look anything like the Kodak of the past, but will that make it less relevant or just different?
Hedge fund manager Eddie Lampert bought 53% of Kmart while it was in bankruptcy and, in 2004, helped engineer Kmart’s purchase of Sears. The merger was completed the following year.Since that time, Mr. Lampert has embarked on a series of quite un-merchant-like but influential initiatives, including the 2009 launch of an online marketplace that would open up its platform to third-party sellers. Walmart’s far more limited marketplace launch happened more or less simultaneously and since that time, many more have joined the party.
His asset monetization moves would seem to be predictable, given Mr. Lampert’s background, but the manifestations have nonetheless surprised many. Through its real estate arm’s website, Sears has listed nearly 4,000 of its Kmart and namesake stores that have space available for other merchants or retailers to lease. Retailers as disparate as Forever 21, Whole Foods, Gonzales Grocery Store, and Western Athletic Clubs Inc. have signed on for space and, leaving no asphalt asset unturned, the company is even offering parking lot space to auto repair shops.
But perhaps no maneuver has made more waves than Sears’ ongoing decisions to distribute, or license, its high-equity private brands to wholesalers and other retailers. Back in 2007, Sears created a $1.8 billion entity to house its top three brands, DieHard, Craftsman, and Kenmore, which at the time was heralded as the biggest “securitization” of intellectual property in history, although few took much notice of the long-term implications. It grabbed my attention because to me, it portended Sears taking its brands into new venues (something that Sears has since referred to as “externalizing” its brands). Since that time, Sears has inked highly-publicized deals with Ace Hardware and Costco for Craftsman tools and with Meijer for DieHard batteries (wholesale deals have also been struck for the Craftsman brand).
IP in Perpetuity
Considering that even middling brands can spawn hundreds of fine-sliced brand licensing agreements, as well as hundreds more when category extensions are explored, Sears’ current deals should be seen as the tip of the brand asset monetization iceberg. Should Mr. Lampert take Sears private, he will be able to pursue any number of far-flung brand ventures and property parcel-offs without worrying about Wall Street’s scrutiny.This could go on for quite some time, regardless of the physical condition of its stores.
In the meantime, other retailers such as Office Max have jumped on the brand externalizing bandwagon (and, take it from me, many others are actively discussing the possibility).
A recent article about Sears’ current situation ended by speculating that the company may cease to be a retailer within five years. To be or not to be?
Planning your 2012 direct-to-retail strategy? Pulling together your 2012 sales, marketing or licensing summit? Contact Carol directly to discuss how she can bring these and other insights to your teams.