Paul Frank Industries Restructures Business Model, Poised for Growth Through Licensing

Costa Mesa, Calif.–based Paul Frank Industries has granted exclusive global licensing rights for its brand to Creata, an Australian brand-management company that counts megabrands, including McDonald’s, Coca-Cola, Kellogg’s and Nestle, among its clients.

The 10-year-old company, which got its start selling quirky, handmade items and later developed a devoted cult following for its modern, off-the-wall aesthetic, has seen many changes over the last three years.

In 2005, founder Paul Frank Sunich left the company, setting off a slew of lawsuits, the last of which was finally resolved last year. The privately held company, valued at some $40 million, saw its first-ever layoffs in late 2007, due to unexpectedly low sales, and shelved its Julius & Friends line of character-driven apparel. In January, Mossimo Giannulli—founder of the Mossimo line, which now sells exclusively at Target, and owner of Modern Amusement, a men’s and women’s contemporary brand—officially joined the company as a co-owner.

This latest move will change PFI’s entire business model by the end of 2008. “What the deal means, in essence, is that Paul Frank Industries will move to a traditional license-based business model as of the end of this year. At that time, [PFI] will become a strictly design and marketing company,” said Ryan Heuser, one of the company’s two remaining co-founders. Creata will act as the brand’s marketing agent and “be responsible for handling all the daily minutiae and daily responsibilities of what is going to become a licensed brand,” Heuser added, including sales and distribution through its licensing partnerships.

“From humble and entrepreneurial beginnings, Paul Frank Industries has reached a level of status and opportunity that far exceeds its current operations,” Giannulli said in a statement. “Creata has a proven track record in licensing and promotions that is unmatched in brand development. I’m excited about growing and fully maximizing the potential of our emerging brand.”

PFI, which already has a handful of licenses for categories such as eyewear, children’s furniture and watches, will retain those licensing deals. All products and categories that are currently produced in-house will be the first to be licensed by Creata. PFI declined to name new licensees, but Heuser hinted that some would be manufacturers well-known to many retailers. “There are going to be plenty of familiar faces,” he said.

As part of the new business model, PFI has begun a series of layoffs to cull its workforce. Heuser declined to give exact numbers of how many total employees will be let go, though some reports in the press put the number as topping 50 individuals. “Employees are going to be laid-off. We’re no longer going to be an operating manufacturer, so we will have a small number of employees,” said Nancy Carlson, a spokesperson for PFI. The company, she said, is working with its new licensees to absorb departing Paul Frank employees on all fronts.

With the addition of Giannulli to PFI’s executive ranks, industry observers have been speculating that PFI would focus on licensing and march out an army of Julius The Monkey products. Heuser said that will not be the case. “People are waiting for the ’Target’ word to drop—but it is not,” he said. “If we execute this new strategy right, we will appear seamless at the retail and consumer level. The customer will be getting a better and more diverse product range from us.” Heuser added that PFI will expand into new product categories and distribution channels—such as footwear—that make sense for the brand and that complement its current offerings. “We are really going to concentrate on growing within our existing distribution channels first.”

Heuser stressed that PFI retailers wouldn’t see their business interrupted by the changes at the company. “We’re sampled up through Holiday, and we’ll be shipping and servicing them as usual. Our retailers will be taken care of,” he said.

Come November 2008, PFI will leave its much-loved headquarters in Costa Mesa for an as-yet-undetermined location in Orange County that it will share with Creata staff, Heuser said. Creata operates 17 offices in 11 countries.