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Motorsports: Revving up revenue:
Apr 16, 2006
Revving up revenue
Investment required for fielding NASCAR team dictates disciplined approach
Charlotte Business Journal
by Erik Spanberg
So, you want to race with big boys on the NASCAR circuit? No problem. All you're going to need is $200 million to support your fleet of cars and long-distance haulers, a superstar driver or two, hundreds of support employees to build and repair cars, man pit crews and run the sprawling demands of catering to your corporate sponsors (you do have sponsors, don't you?) and, yes, 200,000 square feet or so of office and garage space to house it all.
Don't forget the private plane. Don't like that? Well, you could follow the lead of Roush Racing and buy two 727s instead. Your choice. And, of course, your money.
This is what the major race teams based in the Charlotte area invest in their operations, a far cry from a decade or two ago when makeshift garages and afterthought offices were the norm.
"In 1984, I had 5,000 square feet of rented space when I started and today I've got over 600,000 square feet on 130 acres," says Rick Hendrick, whose Hendrick Motorsports has captured five season championships and boasts stars Jeff Gordon and Jimmie Johnson in its stable of drivers. "But today, I don't really see anybody being able to come in" and start from the ground up, Hendrick says. "You're up against the odds of how big it's gotten."
NASCAR is an expensive business -- and becoming more costly as the sport gains popularity, garners expanded media coverage and, in the process, ratchets up the competition for capturing bigger race purses and skyrocketing endorsement deals for teams and drivers alike.
Geoff Smith, president at Roush Racing, which accounted for half the 10-car championship playoff field last season, compares the ever-expanding race-team operations in the region to the California gold rush.
"You've got people coming from all over the country that are in racing somehow and they want to make it a full-time job," he says. "They pack their bags and move down here. If you're working in a car dealership as a mechanic making $35,000 and you know you can make $75,000 (as a NASCAR crew member) or even hit $500,000 as a crew chief, it becomes pretty attractive."
That growing labor pool is crucial for Smith and other race-team executives -- as well as for the regional economy, which, according to a state-commissioned study released in February, reaps $4.5 billion annually from motorsports-related businesses.
Roush Racing, for example, has 10 complexes in the region, operates 15 race teams and employs 500. Between staff turnover and business expansion -- Roush Racing has five top-tier Nextel Cup teams but added to its Busch and truck series entries -- Smith hired 100 employees this past off-season.
Max Muhleman, a long-time sports marketing executive who has worked with Hendrick Motorsports and others in NASCAR, says the specialized labor force here has strengthened the industry's roots.
Owners such as Hendrick and Felix Sabates, who holds a 20% stake in a team with Chip Ganassi, say engineering Ph.D.s are becoming common in NASCAR garages. Sabates and Ganassi employ 30 Ph.D.s, Hendrick has 50.
Budgeting for the deepening, more sophisticated labor pool; the bigger, glitzier team shops; the expanded marketing staffs catering to sponsors ever eager for evidence of return on investment and the rest requires more revenue.
In NASCAR, that means winning corporate sponsorships and races. Budgeting prize money is uncertain at best, but sponsor money is guaranteed, at least for the length of the contract.
Sponsors want to tap into NASCAR's growing audience, including television viewership ranging from 8 million to 10 million for Nextel Cup races most weeks. Another 100,000 or so fans attend each race. Sponsors are increasingly savvy, which means their demands are soaring: pasting logos on a car is just the beginning. And, with the cost of a primary sponsorship -- a logo emblazoned across the hood, considered the most valuable piece of real estate on the car -- ranging between $15 million and $20 million annually, corporate America is often hedging its bets.
"The risk has never been greater because the costs have never been greater," says Mike Bartelli, senior vice president of motorsports at Millsport, a marketing firm that advises clients on sponsorships. "You have to be smart."
Bartelli counsels many clients to dip their toes with a smaller, associate sponsorship in the Nextel Cup series or by taking on a partnership with a lower-tier Busch series or truck team.
Smith and Roush Racing, among others, have made a push for such introductory deals. In many cases, a company will buy four to six races as a primary sponsor and sign up for the balance of the season as an associate, with less prominent advertising placement on a car.
Such modest sponsorships also include driver appearances, race-themed promotions and advertising.
Office Depot opted for a limited deal in 2005, and its experience convinced the retailer to be a full-time primary sponsor with Roush Racing this season.
The logistics of running a race team are daunting. It is a planning nightmare, executives at race teams say, but not because of unpredictability. Teams can, from year to year, predict with close precision how many cars will be cycled in and out. Over the course of three years, for example, most teams will retire a fleet of cars. Teams have more than just one car per driver; there are backups as well as cars built for specific tracks requiring different set-ups for peak performance.
Instead, predictability becomes the nightmare. After all, every race team knows it will have to find ways to move a large number of staffers to and from race sites at varying intervals. Employees have to eat and have a place to sleep. If a hotel hikes its rates to $150 per night from $90 for race traffic, teams can do little to fight the extra expense. Nor can they avoid rental cars or private planes in many cases -- the costs saved by flying commercial would be offset by the additional time taken from the rest of the week due to lengthened travel schedules. Roush spends $8 million annually on transportation.
NASCAR owners don't have a franchise that's valued in the same way as other professional sports. NASCAR teams are valuable as long as they flourish; should drivers and sponsors defect, the worth of an owner's assets is greatly diminished. That's a major difference from, say, the NFL, where even the lowliest franchise stands to reap an enormous windfall for the majority owner.
Even with those caveats, racing is still a very good investment -- if you know what you're doing.
"If you have a good team or organization, there is always going to be a buyer for it," Sabates says. "When I sold my 80% (share to Chip Ganassi five years ago), I solid it for a substantial amount of money. And my 20% today is worth more than my 80% was worth when I sold. So I've not had to put another nickel in it. It's a good feeling."
