For Adidas and rivals, sponsorships are good business

Multi-million dollar sponsorship deals of the kind between Adidas and the University of Louisville — in focus after a scandal over alleged bribes paid to high school athletes — are not just an effort to burnish the image of sports gear makers.

They can be a cost-efficient way to boost sales against tough competition, marketing experts say.

Whether in U.S. college sports or European soccer, Adidas and its major rivals Nike and Under Armour reach potential customers more effectively by getting their brands used in the biggest events, say marketing experts.

Criminal charges brought last week against an Adidas marketing executive and 9 others drew renewed public attention to the perfectly legal practice of paying university sports programs to wear branded goods. Gatto and others are accused of funneling $100,000 to the family of a high school athlete to gain his commitment to play at Louisville and to sign with Adidas once he became a professional.

Louisville and Adidas announced at 10-year, $160 million extension of their sponsorship deal over the summer.

That deal is just one among increasingly expensive arrangements. The top recipients this academic year are UCLA with $16.5 million from Baltimore-based Under Armour, followed by University of Texas with almost $12 million and University of Michigan with $9.8 million, both from Nike, according to the Center for Research in Intercollegiate Athletics at the University of North Carolina at Chapel Hill.

Payments have risen as the big three competitors bid for exposure that, marketing experts say, can often be more effective and targeted than expensive television advertising.

Universities in the top five leagues, or "conferences" in U.S. sports speak, are in line to get over $200 million this school year, up from around $100 million just five years ago, according to the center's figures.

"Increased investment by Under Armour starting in the 2014-15 academic year, along with continued investment by Adidas, have led to a re-investment by Nike in the intercollegiate athletics space to retain national powers such as Ohio State and Texas, and bring Michigan back into the fold from Adidas," the center noted in its latest report.

George Belch, chair of the marketing department at San Diego State University's College of Business Administration, put it this way: "It's expensive, but if you want to sit at the table and play the game, you have to ante up."

How much is too much to spend on endorsements? Academics have been trying to figure out what the returns on investment are and marketing experts say the companies surely have their own internal metrics. But "only they know exactly what the return is," said Belch.

Jonathan Jensen, assistant professor in the sports administration program at North Carolina, notes that the value of sponsorship deals measure the truckloads of equipment given to the schools at retail price, which is far more than the cost to the company to have them produced.

"When you see $250 million, it's not actually $250 million, it's more like $75 million," he said. And based on what a 30-second commercial costs, having a team wear the company's gear can far outweighs the investment in terms of valuable exposure.

That can be money well spent in an era where people can use digital technology to skim past television commercials. "They don't need to buy airtime," Jensen said, "because they are literally part of the event."

On top of that, favorable licensing deals on merchandise mean that the company can earn back much of its sponsorship money solely from fans buying the jerseys. "The schools themselves are really just in the past two, three or four years getting smart about negotiating and forcing the brands, especially Nike and Under Armour, to pay what they should be," said Jensen.

Similar calculation applies to sponsorship deals outside the United States. Gerd Nufer, director of the German Institute for Sports Marketing in Reutlingen, attempted to figure out how many jerseys companies would have to sell to repay their endorsement deals with national sports teams at the soccer World Cup. He says Adidas needed to see sales of 1.9 million German national team jerseys retailing for around 80 euros in order to make back its 28 million euros-per year sponsorship deal; when Germany won the cup for the fourth time in 2014, 2 million had been sold even before the final match.

By contrast, it is unlikely Nike recouped its full $40 million sponsorship with France through direct sales. But it's unlikely that Nike minded much, as its exposure helped its image building more broadly.

"The fact is that building the image of the overall brand and positive halo effects on all branded products of the company is the most important thing," Nufer wrote in an analysis.

That logic was reflected by Nike in its annual financial reports, which indicate it had contractual obligations to pay $1.1 billion in endorsement contracts in 2017.

The company, based in Beaverton, Oregon, noted that the costs of sponsorships had risen as competition from rivals had grown. By losing key partnership deals, it said, "we could lose the on-field authenticity associated with our products, and we may be required to modify and substantially increase our marketing investments."

"As a result, our brands, net revenues, expenses and profitability could be harmed. "

Adidas says it spent 1.98 billion euros in 2016 on marketing investments, about half of which went for partnerships. That includes events like the World Cup, UEFA's Euro soccer tournament, and the French Open in tennis. And also sponsorships of national federations including Germany, Spain and Argentina plus deals with high profile individuals: soccer stars Lionel Messi, Paul Pogba, and Gareth Bale; basketball stars James Harden and Derrick Rose; U.S. football players Aaron Rodgers and Von Miller, and tennis players Angelique Kerber and Simona Halep.

Adidas, based in Herzogenaurach, German, said it was unaware of misconduct in the Gatto case and vowed to fully cooperate with authorities. The company immediately didn't respond to an email inquiry about its sponsorship spending.

The company had a good second quarter, with sales beating predictions and growing 27 percent in North America.

"Adidas has been going gangbusters," said San Diego State professor Belch. "They are gaining market share on Nike, they have taken away market share from Under Armour in the U.S. market, and particularly in North America they made a tremendous turnaround."

"So they didn't need this," he said, referring to the Louisville scandal. "That's what's really amazing about this."