Archive for the ‘Trademarks’ Category
Trademarks Reduce Business Risk
An element of value associated with well established trademarks involves risk reduction.
A major risk of new product introduction involves consumer acceptance. This risk is very real when introducing a new product category into a market that is not well established but it’s also true when the new product is entertaining into an established market. Consumers want to feel comfortable that they are spending their money wisely and that they will obtain a good value. A well recognized and trusted trademark helps consumers to obtain the comfort they desire. Anyone desiring to offer a new product is well served to do it under the comforting umbrella of a well respected trademark.
The restaurant industry is a great example. There is great risk in starting a new restaurant. The restaurant business is very competitive. Numerous competitors, serving many different price points can be found within blocks of each other in all major cities. Start-up costs can run in many millions of dollars and the failure rate of new restaurants is high. Some studies suggest there is a 25% chance of failure in the first year. Add low profit margins to the failure risk and anything that can reduce risk is very valuable. For these reasons several well known restaurants are able to license their trademarks for very healthy royalty rates to those starting a new restaurant.
Ruth’s Chris Steakhouse has franchise agreements requiring franchisees to pay a 5% royalty on gross revenues plus a 1% advertising fee applied to national advertising expenditures. The owner of Capital Grille Steakhouses requires franchisees to pay 4% of gross sales plus the franchisee must also spend at least 1.5% of gross receipts on local advertising. Royalty rates for a Benihana restaurant run between 3% and 6% of gross revenue.
Considering the low profitability of the restaurant industry these rates may seem high but the value provided can greatly offset the first year failure rate of 25%. Would you rather spend your money at The Capital Grille or Bob’s Great Steaks? The answer from most consumers favors the royalties charged by famous restaurants for use of their trademarks.
By Russell L. Parr, CFA, ASA
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