This week the global sports community witnessed one of the biggest events in modern history, when on May 27th the United States Department of Justice opened an indictment of 14 individuals for various corruption charges in world soccer, 9 of whom were high-ranking FIFA executives. This scandal is without a doubt the largest in FIFA’s and soccer’s history, and some would say this is the biggest scandal and investigation in all of sports history. In the wake of these unprecedented events the outcries from the public have been directed not only at FIFA and the other confederations and organizations implicated in the investigation, but also at FIFA’s sponsors, calling for them to sever ties with the global soccer governing body and not associate themselves with such actions, similar to what happened with Tiger Woods and Lance Armstrong during their respective ordeals recently.
The situation that FIFA’s partners and sponsors (Visa, Adidas, Coca Cola, Gazprom, Hyundai/Kia, Budweiser, & McDonald’s) find themselves in is very tricky, and definitely not as simple as many might think it to be. On the one hand you do not want to associate your company and brand equity with an organization that is the focus of the largest sports scandal in modern history – this is obvious. The scrutiny from the media and general public for remaining tied to FIFA will be seen in the eyes of some as guilt by association and as a result some consumers may boycott to show their displeasure, leading to potentially poor financial results for the sponsor. If this is the case, then why have we not seen a mass exodus from FIFA’s sponsors after this week’s news broke?
The situation for these companies is very unique in that FIFA holds the marketing keys to the largest sporting event in the globe, the World Cup. These sponsors enjoy a rather large amount of revenue and exposure generated from their activations around the FIFA World Cup and other FIFA events – again, this is no secret. If they sever ties with FIFA they will obviously lose out on this source of income and brand exposure. Many that are calling for these companies to do just that think that FIFA would miss out on the money associated with the World Cup as well if its sponsors left them after this scandal. But the thing people need to consider is that there are many other companies out there that would gladly deal with the temporary public relations nightmare that Visa, Adidas, Coca Cola and the rest are dealing with right now if it meant that they got to plaster their name all over the advertising boards at the next World Cup.
So in truth, the cost of cutting ties with FIFA is much greater for these companies, especially for an organization like Adidas who has its largest competitors in the soccer industry waiting in the wings to come in and replace the Adidas logo with their own on all things FIFA. Adidas would not only lose the revenue associated with the World Cup and other sponsored events, but if FIFA survives this ordeal – and at this point based on what we know today, it would be a bit of surprise if it didn’t – they would also lose a substantial amount of market share to one of its biggest competitors. Imagine Adidas decides to walk away from FIFA, and when 2018 and 2022 rolls around “FIFA” is still in front of the words “World Cup” and the organization survives its current ordeal, and instead of the Adidas logo on the match balls in Russia and Qatar we see the Nike Swoosh – how do you think the folks at Adidas would swallow that pill? In almost every business in consumer manufactured goods, and other industries to be sure, some of the most common business objectives at the top of the list for the organization every year is to increase revenue and grow market share. If Adidas were to cut ties with FIFA, and the global governing body survives the scandal and World Cups continue on as we know them today, it would effectively ensure that both of these crucial business goals would not be met.
As cynical as it may seem, it all comes down to money. ‘Cash is King’ as they say, and it is no different in this scenario. FIFA’s partners and sponsors need to evaluate what the partnership is worth to them, and at what point they are willing to not only walk away from it, but serve it up to one of their competitors on a silver platter all in one move. They might be able to regain some of the losses in soccer event-related income through partnerships that they might secure outside of FIFA, for example within La Liga, or the English Premier League, but it won’t be nearly enough to offset the losses felt from the hole that the World Cup will dig if they walk away. These FIFA sponsors have a financial responsibility to their shareholders to consider and a social responsibility to all of their stakeholders that they must balance in making that decision, which is not an easy thing to do.
It’s not as though these companies only have two options, however. There is one more move available to them in this game, and that is to renegotiate their contracts with FIFA, if possible, to somehow benefit more from the partnership, for example a lower price paid to FIFA. Visa was the only sponsor to come out and say something to this effect in their statements thus far:
Our disappointment and concern with FIFA in light of today’s developments is profound. As a sponsor, we expect FIFA to take swift and immediate steps to address these issues within its organization…Our sponsorship has always focused on supporting the teams, enabling a great fan experience, and inspiring communities to come together and celebrate the spirit of competition and personal achievement – and it is important that FIFA makes changes now, so that the focus remain on these going forward. Should FIFA fail to do so, we have informed them that we will reassess our sponsorship.
A renegotiation would be seen in the public eye as holding FIFA accountable, and it would still allow the sponsors to maintain their position within the marketplace and enjoy all that comes with being a sponsor of the World Cup and other FIFA events. Just another option to consider.
To better highlight what kind of influence these sponsors have over FIFA, let’s take a look at their latest financials and source of revenue from the 4 year period ending 2014:
Marketing revenue, which includes the sponsorship revenue FIFA generates from their partnerships with companies like Adidas, accounted for about 29% ($1.629 bn) of its total income over the last four years. Of that money, 92%, or $1.58 bn, is tied to the FIFA World Cup in Brazil, and FIFA’s partners and sponsors account for a serious slice of that revenue. So, one could argue that FIFA’s sponsors do indeed carry with them a fairly large stick to wield at the negotiations table with FIFA and should do so in light of recent events. This is where we come to an iteration of sorts of the old adage, “the one who cares the least in a relationship carries the most power”. Whoever means more to the other partner in terms of contribution to overall revenue will carry more influence and weight in this scenario. If we apply the 11% growth rate Adidas saw overall 2014 vs. 2013 in sales we can estimate it to have earned roughly $2.7 bn in all soccer-related income in 2014 (reported $2.4 bn 2013), which would include the revenue generated from its endeavors with FIFA. In 2014, Adidas in total raked in over $15.8 bn in revenue, meaning that even if the FIFA partnership accounted for all of Adidas’ soccer-related income (which obviously it doesn’t) it would only account for about 17% of Adidas’ total revenue.
One sponsor leaving wouldn’t be the end of FIFA’s marketing revenue bucket, but if somehow they all collectively boycotted the global soccer governing body, the hit would be crucial to FIFA (if no other companies replaced the ones they lost, which again is unlikely based on where we’re at today). The choices on the table for FIFA’s partners seem fairly simple at first glance. But the costs and opportunity costs associated with this highly complex predicament would make any analyst’s head spin. At the end of the day, all parties involved need to look out for the best interests of their stakeholders (inclusive of shareholders) for long-term success and stability. And who knows? Their answer today could be different than from a week or a month from now as news continues to unfold and the investigation reveals new developments down the road. At least for now, better to wait for all the facts to come out and then make a decision, rather than make a quick and rash choice that you could severely regret for years to come.