July 3, 2020
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Under Armour (UA) recently issued a statement announcing its plan to terminate sponsorship relationships with UCLA and California–Berkeley. The Maryland-based performance footwear and apparel supplier maintains that the schools’ failure to deliver the marketing benefits they paid for, over an “extended period of time,” is cause to walk away. While it remains to be seen if UA will be legally permitted to terminate the long-term deals (Sportico’s Michael McCann and Eben Novy-Williams say it may depend on a force majeure clause in UCLA’s agreement), companies across the industry are struggling (see: Nike lost $790 million in Q2, Adidas earnings fell nearly -100% in Q1), and it’s reasonable wonder if any other schools will face the renegotiation or termination of their footwear and apparel deals in the coming months.
Our Take: In terms of total contract value, UCLA is Under Armour’s largest commitment within the collegiate space. Simeon Siegel (Managing Director, BMO Capital Markets) explained that Nike’s omnipresence in the market may have driven UA to overpay for the rights to outfit the 2 Pac-12 schools. “Any deal that Nike wants is theirs to lose (because of the size of their marketing budget), so for an emerging brand to win a deal it must be an extremely impressive offer.” Nick Carparelli (formerly the Senior Director of College Sports at Under Armour) agreed, adding, “the incumbent always has the advantage [in these negotiations].
The timing of the negotiations also played into UCLA and Cal’s strikingly lucrative footwear and apparel sponsorship agreements. Under Armour’s share price began to fade in early Q4 2015, and Siegel said that as the company’s market cap waned—it was just shy of $22 billion when the decline started—then CEO Kevin Plank and Co. aimed even higher. “The pressure to swing big [increased] and led to [the company signing] some incredibly large deals”—none bigger than the record-setting, 15-year, $280 million pact awarded to UCLA, as UA looked to establish its presence on the West Coast. Remember, prior to signing a deal with the Southern California school the company had been locked out of the state (USC and Stanford are long-established Nike programs and UCLA and Cal were tied up with long-term deals).
Inking a regrettable sponsorship pact is nothing new for competitors within the footwear and apparel industry. Since 1984, when Nike introduced the Air Jordan line, companies looking to “grab the spotlight, expand their audience and eventually play in the bigger leagues” have overextended themselves financially to sign deals with top teams and star players. That’s because, as Siegel explained, the rabid competition amongst brands created this “reality where spending 10% to 12% of sales on marketing is the accepted price of entry—no matter how large [the company’s] revenue base is.” While Under Armour was able to fit the costly UCLA and Cal deals into their marketing budget when business was booming, those contractual obligations have turned into an albatross with the business struggling (UA has said revenues could decline by 60% in Q2).
Under Armour’s market cap has steadily declined over the last 5 years (it’s now ‘just’ $4.14 billion), so it is reasonable to believe the company has wanted to cut ties with the California schools (and the significant marketing expenses associated with them) for some time and that the COVID-19 pandemic has simply provided them with the opportunity to finally do so. With the current economic environment hurting companies across the footwear and apparel sector Siegel believes that other schools may find themselves in a similar predicament in the not too distant future. Legalities aside, the equity analyst said: “Companies of all sizes (i.e. that would include Nike and Adidas) would be wise to use this time to optimize their business and refashion it for the future—especially if it means acknowledging prior mistakes.”
Howe Burch (President, TBC Advertising) wasn’t convinced Under Armour’s stance would spark a greater trend. “Nobody else [within the sector] has these types of agreements, except Nike and Adidas, and I don’t see those companies walking away from their existing partnerships. I think Under Armour’s [troublesome] financial position is driving the move to terminate the two collegiate deals.”
To be clear, Siegel is not advocating for a broad distancing from team endorsement deals. While pulling back on marketing spend is certainly the easiest way for a company to save money (because it’s the most variable), “it’s not necessarily the wisest and may hurt the brand’s future.” That’s because more well-capitalized companies will take the opportunity to grab even more market share. Burch agreed, saying that every brand in the category goes through struggles. “It happened to Reebok, it happened to Adidas, and it happened to Fila when I was there,” he said.
While Nike and Adidas may not let high-profile schools like UCLA or Cal sit on the market long (no one seems to believe either one would struggle to find a willing supplier if UA does end up walking), it’s certainly possible that a sponsorship market correction is on the horizon. In fact, Siegel said it’s all but certain there will be fewer marketing dollars available post-COVID. What is less clear is “whether those dollars will be consolidated and paid to a few high-profile clubs (which would presumably keep the value of these deals growing) or if brands will continue to sprinkle them wide” (which would likely mean haircuts are coming).
Carparelli suggested it would be the former. “There is a real premium being paid for the Top 10 collegiate sports brands nationally at the expense of many other Power 5 schools.” In fact, the Executive Director of the Football Bowl Association said it’s a trend that began several years ago, when Nike let some smaller properties go in order to sign Texas, Ohio State and Michigan to lucrative extensions. For what it’s worth, neither Siegel nor Burch believe UCLA or Cal could command a deal of comparable value if their existing pacts are voided (though the former Fila SVP does expect UA would be forced to pay some sort of settlement fee if it did happen)
It needs to be noted that Under Armour’s attempt to terminate its relationships with UCLA and Cal does not mean the company is going to stop marketing their products—they’re just going to have to be much more efficient in doing so since they’re working with a smaller budget. Siegel said he would expect UA to “become more targeted [in their approach]. There’s going to be an increased scrutiny around what these [footwear and apparel] contracts actually drive and [UA] will—like any company in a mature industry—try to tie expenses to sales performance [moving forward].” Of course, it may not be easy to convince future schools to sign on (and certainly not with a performance-based package). As Burch said, “if you’re an athletic director and saw what they just did [to UCLA and Cal], would you [trust they would honor a long-term agreement]?”