Licensing at Tiffany’s: Not a One-Way Street
September 16, 2013
On vacation this summer I needed to get my sunglasses repaired. While waiting, I was surprised to look in the display case and find Tiffany-branded sunglasses. At first I thought they might be knock-offs. But the store was reputable, and the robin’s egg blue of the boxes was the real thing. I decided to learn more about what Tiffany was up to in licensing.
The answer is consistent with what we now see generally: licensing is not simply a formula for generating brand extensions and royalty revenue, but also a way to develop new products with other’s capital; open new retail accounts; introduce new consumers to a luxury brand; and grow a mature business.
Tiffany & Co. as a Licensor
In 2006 and 2007 Tiffany entered into what appear to be its first two major outbound licensee agreements, for eyewear and watches.
Tiffany’s eyewear partner is Luxxotica, the world’s largest manufacturer and retailer of eyeglasses. It owns Ray-Ban and LensCrafters, and is also the world’s largest eyewear licensee of other brands, including Ralph Lauren/Polo, Chanel and Coach. Luxxotica’s Tiffany-branded sunglasses are sold by Tiffany itself as well as other retailers (including stores and e-commerce sites where Tiffany jewelry would not be sold). While it may not be revolutionizing the eyewear category, the program appears generally successful. Luxxotica, which also sells eyewear licensed by Tiffany’s global competitor Bulgari, credits the Tiffany brand (among others) for some of its recent sales growth. And for Tiffany, the category may represent an important entry-point for consumers who may later trade up to higher-priced (and higher-margin) products that Tiffany makes or sources itself.
Tiffany’s watch partner is another global giant: Switzerland’s Swatch Group , which sells nearly $8 billion in watches each year. In 2007 Swatch, which created a new subsidiary called the Tiffany Watch Co. to act as a licensee and exclusive supplier of Tiffany-branded watched to Tiffany itself.
As a result of this deal, Tiffany no longer had to source its own watches from other Swiss manufacturers, and Swatch had access to a luxury brand, which it previously lacked. Both sides had ambitious goals for this program, which they hoped might generate $300-400 million in annual sales over time.
The partnership with Swatch has not gone well, and two years ago the two companies began a nasty and protracted battle through legal arbitration. Both Swatch and Tiffany allege that the other has materially breached their agreement; both are seeking damages from each other; and both want to end the partnership.
While Tiffany sells about $40 million each year in the Swatch-made watches in its own stores, neither Swatch nor Luxxotica has generated revenue on a meaningful scale for Tiffany itself. Tiffany reports that royalty revenue is far less than 1% of its annual net sales.
While Tiffany may not be viewed as a very successful licensor if success is measured by royalty revenue alone, it is a successful company, and appears to be using licensing in a way that is increasingly familiar to us at IMC.
It’s not licensing just to extend its brand into new places, or just to generate royalties. It’s licensing in part as a low-cost way to generate supply of products for its own inventory. If Tiffany sold $40 million of watches made by the Tiffany Watch Co. (its licensee) last year, and an unknown amount of eyewear made by Luxxotica, it presumably purchased those products on favorable terms, and without having to make a capital investment in the manufacturing itself. It also offered younger consumers an unthreatening (and more affordable) doorway into the brand, one that may pay off with loyalty and bigger purchases over the years.
Tiffany & Co. as a Licensee
Tiffany’s record as a licensee is more straightforward, and over a long period has been more clearly successful in generating raw sales numbers.
In the 1970s an Italian designer named Elsa Peretti came up with some simple heart- and teardrop-shaped designs in silver and gold for Tiffany. That product line has expanded over the years and now generates about $400 million in sales (10% of its overall revenue) for Tiffany.
When the license agreement came up for renewal last year, both sides reportedly entered negotiations for Tiffany to purchase Peretti’s trademarks. Instead, they renewed their license agreement for another 20-year term that will apply to Peretti (now 73) and her heirs. This renewal included a one-time payment to Peretti of $47 million, an annual payment of $450,000 and a 5% royalty on gross sales (whether retail or wholesale).
Inbound licensing of this type has been expensive but good for Tiffany, giving it access to a distinctive style (and a lower price point for its own jewelry products) that it could not develop itself. (Tiffany has similar license agreement with designer Paloma Picasso and Frank Gehry, although neither is large enough to require any itemized disclosure by Tiffany.) While Tiffany may not like sharing its sales with Elsa Peretti, it would also be wise to be looking for other Elsa Perettis along the way.
The Tiffany of Licensing?
In its heyday, CBS was proud to call itself “the Tiffany network.” And, as reflected in Truman Capote’s “Breakfast at Tiffany’s,” the brand has represented the highest standards of aspirational luxury in the U.S. for a long time. That record makes it a highly desirable partner, for both licensors and licensees.
But the world, and its market for luxury goods, is changing, and Tiffany is changing with it. Like other companies today, it appears to be using licensing as one tool in a strategic toolbox that addresses various goals, like use of capital, entry-point pricing, brand awareness, and sales. I don’t know enough about those specific goals to know whether Tiffany considers its licensing program a success, but even if some partnerships (as with Swatch) don’t work out, Tiffany is using the licensing in all its creative variety to grow through new products and partners.