Manchester United have announced that they are in talks with multiple kit suppliers for a new sponsorship deal to replace their current deal with Nike, which ends after the 2014-15 season. The club has been in talks with Nike since this summer but terms for a new deal have not yet been reached, and United are making sure they shop all available options. One would think that Nike will eventually come with a proposal that meets the dollar figure United are seeking; if they do not, they would no longer supply gear to any of the biggest 4 clubs in the most popular league in the world.
At this point, Nike really needs to ask themselves if they want to find out if they will still remain competitive in this space should they lose out to another competitor, presumably either Adidas or PUMA. After having just been nudged out of a 20-year relationship with Arsenal by PUMA for the largest kit sponsorship deal in Premier League history (reportedly), the loss of one of the most globally recognized clubs would be a serious blow for Nike.
This summer, when news about the talks over a new deal first broke, it was reported that the club was seeking to close a deal with Nike in the neighborhood of £1 billion over 13 years, or £76.9 per year approximately. PUMA just signed their deal with Arsenal for a reported £30 million a year, which is the largest in the Premier League at the moment, so with that in perspective it might be understandable why Nike has not yet agreed to those terms just yet. They may just be waiting to see what kind of offers their competitors are willing to offer before they make their final proposal, as Nike have the right to match any offer made by another supplier. Why offer up the £77 per year if no one else is willing to go that high? Manchester United will be more than willing to negotiate on their asking price if no other competitor comes close to what they are looking to close. In the end, it would come to the surprise of many in the industry if Nike does not come out on top in this battle for the Manchester United real estate for their brand.
All of these recent “record” sponsorship deal announcements reveal a relationship that some might not be considering when taking the inflation and frequency of these new deals into account – financial fair play (FFP) regulations and sponsorship price tags. What do FFP regulations have to do with the price of sponsorship deals? Actually, quite a bit. Clubs hoping to compete in the UEFA Champions League (every one) must not exceed a certain threshold of net loss (€45 million over 3 seasons) in order to prune and deter unhealthy spending and financial practices by teams. However, clubs must put up more and more money these days in order to acquire top talent, as was seen this past summer with the largest ever transfer window, which held the largest single player transfer of Gareth Bale from Tottenham to Real Madrid for a nominal fee of €91 million.
With the new FFP regulations clubs now have to manage their books a lot closer and more responsibly if they want to be eligible to compete and avoid fines and other punishments. In order to offset the ever-growing costs and wages of top players in order to achieve that feat, clubs need to bring in more revenue to balance the equation, and in the case of some clubs, bring them out of a serious hole. The solution is not really that complicated: make more money.
There are obviously numerous ways to do this, but some of the more efficient and visible manners in which a club can increase revenue is by increasing ticket prices, increasing the number and price of its sponsorship deals, and increasing revenue from broadcasting rights. The latter is handled more collectively as a league than by individual teams, at least at the national level. BSkyB alone, which claims the majority of Premier League matches in Europe, gives the league approximately £77 million year for the broadcasting rights, which clubs get to see some of collectively. With regard to ticket prices, the average cost of the cheapest season tickets in the league rose +4.3% vs last year, and attendance numbers have not been severely impacted, so there will be some benefit to club’s pockets there. But perhaps the most impactful way clubs can influence their financial situation is via sponsorship deals.
This year has seen some of the largest deals ever recorded take place, and they just keep coming. Manchester United have already been involved in one of these, when they signed a deal with Chevrolet for $559 million for the club’s shirt real estate. Barcelona signed the first ever ‘inside’ shirt sponsorship deal with Intel, creating a whole new way to think about sponsorship real estate. And earlier this week, PUMA and Arsenal announced their new record deal for £30 million a year for the next 5 years. Part of the reason for these increased price tags on these deals is increased competition amongst the major players. As the sport and leagues continue to grow globally, the value of the clubs’ brand name association and kit real estate increases as well. The other factor contributing to the increase in both number and price of sponsorships is the financial pressure on clubs to generate enough revenue to compensate for increased player costs so that they will comply with the FFP regulations, mentioned earlier.
It is a very similar concept seen in the consumer goods industry, when costs of manufactured goods increase manufacturers and retailers pass those costs on to the consumer. The economics of the ebb and flow of the pricing cycle is a topic for another day, but the same ideas and concepts that can be seen in the general market are also seen in the sports industry. Manchester United will more than likely bring in another record deal to add to the list, and the standard for kit sponsorships will be changed yet again.