RACER.com's new racing industry analyst, George Tamayo, explores the complicated dynamics of making a modern racing sponsorship work for all the parties involved.
The vendor partner-based sponsorship model employed by Target Chip Ganassi Racing has often been replicated, but never duplicated in longevity and success. This rock-solid partnership, spanning across Ganassi's racing stable that includes IndyCar, NASCAR and Grand-Am, has been chugging along to the envy of those who have sought to fund their respective efforts with similar tactics.
Steve Lauletta, president of Chip Ganassi Racing Teams, Inc., sums it up this way: “It's never been more important in our sport's history to have sponsorship, and our relationship with Target over the past 20 years has defined the word partnership at the highest level. Target has long been committed to running championship-caliber race teams with us in both NASCAR and IndyCar.”
Indeed. Yet, just what is a vendor partner-based sponsorship, and how does it work?
To fully understand this model and, more importantly, to make it work, the whole of the retailing landscape, along with the mindset of consumer packaged goods makers would have to be dissected. That requires more space than this article allows, so what follows is an attempt to distill it down to the fundamentals.
Before we get to the sponsorship and the racing side of it, let's begin with a basic premise. Retailers and consumer packaged goods companies – CPGs in the marketer's parlance – enjoy a symbiotic relationship. That is to say, they need each other. When was the last time you purchased a soda or detergent directly from the manufacturer?
The fact that CPGs and retailers need each other creates a push-pull dynamic between them where each one in various circumstances has leverage on the other. CPGs have two advantages in this game, however. First, they make the products that we as consumers want. Secondly, they can sell their products, in most cases, through multiple retailers. Retailers combat these advantages by differentiating themselves from their competition via better pricing, selection and service. Since they are the first point of contact with the consumer, the CPGs have incentive to work with the retailers that best move their goods.
Thus, the goal for both the CPGs and the retailers is to create alliances that work in perfect harmony to exploit the sale opportunity. So, we arrive at the fundamental idea of what makes a vendor partner.
It's important to understand this relationship, because it is at the core of the sponsorship model. Even more important is understanding that the sponsorship, or even the property in receipt of said sponsorship, is not the end-all-be-all, but merely one tool among many that the retailer can use in building solid vendor partner relationships. In the case of a racing sponsorship, the budget allocated to the program likely represents less than a few percentage points of the overall marketing spend. That said, in order for the sponsorship to have teeth, the retailer must be fully committed to utilizing this particular tool, and the race team must be fully committed to servicing the sponsorship in every way it can.
To illustrate how the sponsorship works in practice, here's a hypothetical situation. A national retail chain with more than 2,500 stores in excess of 30,000sqft of retail space, let's call them Big Box 1, is a leading vendor of a global soft drink brand, which we'll call Fizz. Now, Big Box 1 has an annual media and marketing budget topping $100 million spread roughly among paid placed media (TV, radio, print, online and outdoor), direct mail, circulars, coupons and prizing, public relations, sponsorships and in-store activation. Big Box 1 sells everything from soda to apparel to electronics and is looking for a tool (or tools) that provides content platforms, incentive programs and relationship marketing opportunities. Enter the race team. Let's call them Speed Racing.
Speed Racing is a first-class operation with a history of success, and offers Big Box 1 a bit of everything they're looking for in content: rights to images and likeness of the team that could be used in TV spots or as content to run on the in-store TV displays, point-of purchase displays, etc.; incentives: race tickets, sweepstakes, employee rewards, etc.; and relationship marketing: corporate hospitality. In return for these rights, Speed Racing wants a fee of $12 million per year for a two-car team.
Big Box 1 likes the idea of the title sponsorship on the race team, and the hospitality and content benefits. But ideally, they'd like a way to lessen their pain, while having another tool to offer added value to their vendors. Speed Racing must get the full commitment of the rights fee from Big Box 1 upfront so that in the event that Big Box 1 doesn't get vendor partner buy-in, the team isn't left holding the bag. Moreover, the fact that Big Box 1 doesn't want to be on the hook for the full rights fee offers incentive to fully utilize the partnership. Many a vendor-partner deal has failed because of this exact scenario not being written in stone prior to consummating the deal.
Fizz has a new product line they are introducing. They are number one in sales and in top-of-mind brand recognition, but are facing savage competition from other soft drink makers that are outspending them in paid media. Big Box 1 sells a lot of soft drinks, so they have the power to help Fizz move their new product line.
Big Box 1 will offer Fizz exclusive placement at the checkout line coolers, and a walk-in display in all of their stores, plus the cover of their national Sunday newspaper circular over a four-week period. Let's say this is valued at $2 million, of which half will go to cover the hard costs of the promotion and the other half will fall straight to the beverage division's bottom line. With the race team, Big Box 1 can sweeten the deal. They will also pass through a quantity of the tickets and hospitality space that they have with Speed Racing, while the team will re-brand the racing cars in the new Fizz livery for a pair of races.
For all of this, Fizz will pay Big Box 1 a “co-op advertising fee” of $3.5 million. We've already accounted for $2 million of the co-op fee. The additional $1.5 million will see an additional $500,000 go to the beverage division and the balance allocated to the race team sponsorship.
Ideally, this is a win-win for all three parties. Big Box 1 is leveraging the sponsorship to improve their margins. Speed Racing is providing value add to Big Box 1. Fizz is getting additional promotional muscle to help move their new product. Moreover, if the Fizz product is a hit with consumers, Big Box 1 and Fizz benefit from added sales.
The race team's challenge comes if the Big Box 1 beverage division buyer doesn't see the value, or if the sponsorship is perceived as adding work. The buyer won't leverage the race team as an asset, particularly if Fizz balks at the co-op fee. In the negotiation between the Big Box 1 beverage buyer and Fizz, the first deliverable to be dropped will be Speed Racing. Instantly the fee comes down to $2 million, which Fizz might like better, and the beverage buyer hasn't taken a hit to the bottom line. The additional $500,000 in revenue would have been nice, but not make or break. Fizz could also not see value in the Speed Racing benefits, and that, too, would stymie the deal.
“There are many differing types of cooperative marketing programs retailers can engage in, and everyone is looking to save costs. So, teams have to work the sponsorship from every angle to ensure they don't become an expendable link," says Brendan McManus of Tower3 Marketing, who knows well the effort required to maintain this type of partnership. He worked with Chip Ganassi for five years on the Target relationship. His agency currently services KV Racing, and has worked in the past with a multitude of vendor-partner based sponsorships, including Gigante and CDW.
Of course, this hypothetical is a very simple one and, in practice, they rarely are. In reality, retailers and CPGs are engaged in a daily dance to leverage each other through a number of strategies. Each has its own set of macro and micro agendas that complicate the basic idea.
Retailers will work with the hundreds of vendors they deal with to find a dozen or more vendors that will agree to similar programs, and their motorsports sponsorship is paid for. But, for this model to work, retailers must believe that the motorsports sponsorship has intrinsic value. Race teams have to deliver the value that drives the program. If not, retailers can run the same program, and they do, without needing the racing sponsorship at all.
George Tamayo is a principal at Manifest, a creative services and brand positioning agency focusing on motorsports. Manifest's clients include teams, marketing partners, events and organizations active within NASCAR, IndyCar, ALMS, Grand-Am and Formula 1 and others. Details at manifestgroup.com.