Contributions from readers of The Indy Idea are both welcomed and encouraged. In particular, I appreciate well-reasoned arguments that do not mirror my own.The following example is from VirtualBalboa. My comments follow. I invite you to add yours.
VirtualBalboa
"Can't agree that the IRL was ever a good idea. Should have taken a seat on the board and run a team with Americans in order to try and divert the direction instead of shooting the whole thing in the head to save it from itself. It's tough to say, after all, that he was a success in saving the 500 if there isn't one, or if it becomes a classics race. Road to hell paved in good intentions and all that."
Roggespierre
You'll get no argument from me about the IRL failing to save the 500. However, I suspect that a seat on the board would not have mattered all that much. He wasn't going to stop the leveraging and rent-seeking that destroyed the economics of the sport. He wasn't going to have enough influence to change the direction.
Hindsight being what it is, I would suggest that he did not go far enough with the IRL. The product required greater differentiation. He probably focused too much on the tracks (the all-oval rigidity) and too little on the cars. He also failed to sufficiently address the underlying economic problems in the supply chain. Yes, a cottage industry began to take root, but it did not include the base chassis. The engine economics were pretty good initially, but he blew them up to attract Toyota and Honda.
VirtualBalboa
"I've seen a couple arguments about trying to do redistribution of sponsorship. A lofty goal perhaps but I don't see this as being realistic. Nor do I necessarily see ridding Penske and Ganassi as being a way to solve the problem. Indy without Penske is like F1 without Ferrari at this stage. It was devastating to the legitimacy of the race when they weren't around, even if the US 500 itself was a failure..."
Roggespierre
Allow me to clarify my position. Redistribution of sponsorship is not something that I support. And I do not want to get rid of the Penske and Ganassi teams. What I do want is more IndyCar teams that have legitimate, value-based financing that they sell in the competitive market for auto racing sponsorship. Penske will keep his sponsor because he operates in a non-competitive advertising market. That will change only with the law.
Ganassi is a different story. Recall the rumors about Lifelock sponsoring Buddy Rice in 2009. We don't know why, but we do know that Lifelock landed at Ganassi. Remember Robby McGehee's Energizer car? That went away when Ganassi came to the IRL. Ganassi's ability to land consumer products sponsors is limited only by the number of product categories in stock at Target. He can offer something that is of much greater value than sponsorship of an IndyCar team.
I want all IndyCar teams to have an opportunity to sell value that is correlated with their cost of operating. That requires slashing operating expenses. If that were to occur, then Ganassi would have to compete for sponsors. What might happen then? Who knows? Perhaps he would keep them all; good for him if he does. However, having observed the distribution of consumer products sponsors in NASCAR Cup, I suspect that Ganassi might have some difficulty.
My point is that Ganassi is fully incentivized to maintain a status quo in which the cost of operating an IndyCar team is greater than the promotional value that the team generates. For as long as that remains the case, Ganassi can continue to add Fortune 500 associate sponsors without having to compete with other teams.
VirtualBalboa
"No one buys that the Americans in the IRL are the best US drivers. Americans don't care if they win because no one believes they're racing world class opposition anymore. No one thinks they're in the toughest series in the world, or that they are better than their peers. This is because they are right: Kyle Busch, Tony Stewart, Jeff Gordon, and Jimmie Johnson are likely the 4 best drivers currently birthed in this country, and none drives Indy cars. Fans recognize that and don't want to support a second rate series. Until they shake that (and is there any other way than to bring in NASCAR talent?), there's nothing they can do. It's an image problem that started with the media ridiculing the "stars of the short track" and only built steam when Juan Pablo Montoya denigrated the 500 en route to dominating it."
Roggespierre
Again, I do not disagree. However - and this might raise some objections - I will argue that it does not matter whether or not Americans think that the IRL has the best American drivers. My position rests on the quantifiable demand that has been demonstrated for the NASCAR Grand National Series. It, too, does not include the best American drivers - not always, anyway. That said, is there anyone at the IRL offices who would not like to have Grand National's attendance and television ratings right about now? They look pretty attractive to me.
Furthermore, I admit that I do not care whether or not anyone believes that IndyCar attracts the best drivers in the world. The entire "best" argument, in my view, is one for the bar stool. I want an IndyCar Series that is a competitive product. A strong base of drivers from the United States is critical to establishing market competitiveness. We need only look at Indy Lights and Atlantics for evidence to suggest that the combination of spec formula cars and road courses is not likely to generate the desired product attributes for IndyCar.
In my view, VirtualBalboa is right about Montoya. But I would argue that it was the Indy 500 of the following year that led to IRL capitulation and economic ruin. Montoya might have been written off as a singular talent. But all credibility was lost in 2001, when Eliseo Salazar, the top IRL finisher, crossed the bricks a lap down in 7th place.
VirtualBalboa
"One thing rarely discussed in lieu of all this is that open wheel dirt racing is in decline. There's far fewer cars than there were 5-10 years ago and dirt tracks are closing down rather than appearing. The World of Outlaws is trucking along with its sprints and late models, but one look at the number of available entries for midget, sprint, and Silver Crown in 2009 is well down. The entire ladder is broken, not just the top rung."
Roggespierre
This is undeniably true. That is why I do not believe that dirt track drivers in large numbers are essential in order to achieve market acceptance. It is much more important that the IRL establish a strong base of competitive drivers from the United States. It would be nice if two or three were established dirt racers. There should be room enough in the IRL for both A.J. Foyt and Peter Revson.
Roggespierre
VirtualBalboa: "Can't agree that the IRL was ever a good idea..."
ReplyDeleteThe initial idea was not the worst, nor the seed of its current state. The mistake was in allowing the IRL to co-opt the 500 as an event. The real grease was added to the skids when the US500 went farce – and the American public was faced with the 500 and a largely anonymous field and a victorious Buddy Lazier. OTOH, CART brought it with the stars and the crash – and both series were suddenly second rate. Both had chances to succeed, and neither seized any opportunity…and here we are.
Roggespierre: "You'll get no argument from me about the IRL failing to save the 500..."
You have it reversed, the 500 failed to save the IRL. In fact, if the house of cards collapses, the primary reason will be the identification of the 500 with the IRL brand. No more International Sweepstakes, just another IRL event chock full of fourth tier drivers and annual questions of whether 33 starters could be scraped together. CART lost its 500 connection and slowly turned into club racing for big money, even with such established stars as Little Al, Michael, Bobby Rahal, Emmo, among others, and running at established series stops. All the other stuff is immaterial, IMHO.
VirtualBalboa: "I've seen a couple arguments about trying to do redistribution of sponsorship..."
I’m of mixed thinking. If it’s a “league” it strikes me there ought to be revenue sharing among franchise holders, and bonuses paid for success. Frankly, as a league, it would make sense then to assign cars with engines for each event by lot – letting set-up ability, driving talent and pit talent largely determine the race. I dunno…if it’s not a “league”, open the 500 specs and let them run. The series will follow, as it historically has.
VirtualBalboa
"No one buys that the Americans in the IRL are the best US drivers..."
Roggespierre
"...I will argue that it does not matter whether or not Americans think that the IRL has the best American drivers..."
A.J. Foyt once said drivers go with the money – and the money, especially endorsements, is in NASCAR. It will likely remain that way for years. And, still, if IRL reclaims the National Championship moniker for its champions, it will go a long way to attracting “good enough” talent to build and sustain an interesting series, and a legitimate 500.
VirtualBalboa
The entire ladder is broken, not just the top rung."
Roggespierre
"It would be nice if two or three were established dirt racers. There should be room enough in the IRL for both A.J. Foyt and Peter Revson."
There’s an opportunity here – create two series, an “IRL-National Championship”, and an “IRL-International Championship.” Former series is oval weighted within USA, latter with road/street emphasis outside USA. Consider running heat and split races to create novelty and eliminate “dead” laps. Even go back to shorter races on mile ovals, like MKE – 125 miles.
Then consider this: The 500 as the joint appearance/greatest spectacle – top 15 from each are auto qualifiers, and next two from each Series qualify against one another – odd driver out. Grid is set as per current rules, except top six from each series are required to attempt to qualify on pole day, as well as anyone else wanting to go. Next day top six remaining from each series are required to run…and so on until Bump Day. AND DO NOT BRAND WITH IRL. It is the “Indianapolis 500-Mile International Sweepstakes.”
You'll get no argument from me about the IRL failing to save the 500. However, I suspect that a seat on the board would not have mattered all that much. He wasn't going to stop the leveraging and rent-seeking that destroyed the economics of the sport. He wasn't going to have enough influence to change the direction.
ReplyDeleteWell, it doesn't look like he ultimately had that anyways, as he easily acquieced to that style of business and ultimately to the product on display today.
In all seriousness, the costs of this form of motorsport are going to be high unless you do something drastic. That I suppose brings us to:
Hindsight being what it is, I would suggest that he did not go far enough with the IRL.
I'm not sure the problem wasn't that he didn't try hard enough. I think he'd have similar problems attracting fans to whatever he ended up putting out there, whether the Indy 500 featured tube frame pseudo-prototypes or flatulence powered carbon nanotube constructed hovercraft. I will agree that departing entirely from the rear engined formula cars would have differentiated themselves in the market, but I don't see that separation as necessarily leading to success anymore than I see keeping the familiar style of car at Indy as being a guaranteed failure.
What I do want is more IndyCar teams that have legitimate, value-based financing that they sell in the competitive market for auto racing sponsorship.
This is a lofty goal and I can't say that I find it morally incorrect. I would like everyone to be on an even playing field as well in the respect of getting sponsorship. However, if you manage to reduce costs in the IRL, Ganassi still has advantages that, say, KV Racing or Greg Beck or Minardi USA will never have for reasons you point out. There's no really easy way to end that disparity, particularly with spec racing.
Again, I do not disagree. However - and this might raise some objections - I will argue that it does not matter whether or not Americans think that the IRL has the best American drivers. My position rests on the quantifiable demand that has been demonstrated for the NASCAR Grand National Series.
Here I am, jumping out in front to disagree. ;)
My biggest issue is that the Nationwide series features a larger number of crossovers from the Cup series than it did, say, 10 years ago when the IRL started. In 1999, there were 2 full time Cup drivers in the top 25 of Busch points, and none in the top 20. Today? 9 in the top 25, including the top 2. Since NASCAR draws people in with the drivers first and foremost (the parasocial relationship previously discussed), this is a big boost to the Nationwide Series. It can also be argued that the boost has come as a detriment to the competitive balance in that series and to the NASCAR farm system as a whole, and is indicative of problems within NASCAR.
Furthermore, I admit that I do not care whether or not anyone believes that IndyCar attracts the best drivers in the world. The entire "best" argument, in my view, is one for the bar stool.
Perhaps. But you have to get these names to the bar stool before people start watching. Being American has, for the IRL, historically never been enough.
This is undeniably true. That is why I do not believe that dirt track drivers in large numbers are essential in order to achieve market acceptance.
The question to me then is how you get people that are on a career path towards NASCAR towards you instead? To get anywhere at all, the IRL will need to grab the next Logano.
SOME COMMENTS:
ReplyDeleteThe IRL was started because TG was ignored by the leaders of CART (Penske and Haas the leaders) at a meeting, and on the way home TG decided to "teach them a lesson".
TG wasn't worried about saving the 500---he was using it as a club. He felt that NO OPEN WHEEL SERIES COULD EXIST FOR THE LONG TERM WITHOUT THE 500.
Was it a good idea? In hind sight, "NO", but it is what it is.
The question is now WHAT WILL WORK!
No one serious about racing wants Penske or Ganassi out of the series---but what we do want is a series where OTHER TEAMS have the resources to compete.
Sponsorship is SOLD to advertisers, and it has to make good business sense.
If you sponsor Marco you get what?
If you sponsor Danica you get a talent who can be used in your ads. So the number of people seeing a race or a TV program of a race is less important with Danica--since she appears EVERYWHERE even on Super Bowl Sunday for Go Daddy!
So advertisers need to be sold on USING THE DRIVERS IN THEIR ADS. Smoke and Cousin Carl are two that sell well for NASCAR, and Michael Waltrip who hasn't won in how long---is the Danica of NASCAR without the obvious advantages!!
Arguing who are the best drivers in the world, depends on who is doing the judging--each series has a group of statistics that show their drivers are best.
I don't care who is best---I want the best drivers in the IRL to at least have an American component---to get more Americans to watch.
Armstrong when he was contending for the bike race in France (Tour de France)--viewership soared, when he fell behind so did viewership.
WE NEED AMERICAN DRIVERS!!
Dirt track racing is suffering--no doubt, but the better drivers in NASCAR all came through either dirt track or short ashphalt tracks IN THE US. (Montoya excepted).
The better drivers in IRL came from road racing backgrounds, and that is the problem--if you watch or attend midget, sprint car, Silver Crown, or Indy Light races---there are drivers there that given a chance, and EQUIPMENT could compete---but the top teams prefer foreign drivers, some for talent, some because they bring cash, some because they have road racing experience.
As long as IRL panders to the road, street, and airport tracks---this is likely to continue.
I am NOT FOR THROWING OUT FOREIGN DRIVERS, but I know that unless Americans have an American to cheer for, they will stay away in droves.
The team budget (what IMS pays to each team) that is coming hasn't been yet announced for 2010.
What happens if it is drastically reduced from $1.2 million per car???
The sisters are NOT GOING TO CONTINUE TO SEE THEIR WEALTH CONTINUE TO GO DOWN THE DRAIN---AND YOU CAN TAKE THAT AS FACT--NOT AS A "MAYBE".
osca
Hi R.
ReplyDeleteTell me, what value do you see Ganassi creating beyond the traditional value of a sponsorship (cost per thousand, whatever)? Also, in your calculations of a sponsorship being worth $1.2M, I assume that is about primary sponsorships. What about associate sponsorships? To take it a step further, have you considered what would be the total amount of sponsorship a team could generate with primary, associate and tertiary sponsorships?
Mr. Cooper,
ReplyDeleteI'll do my best to answer your questions. It's going to require two parts.
My valuation was actually $1.3 million. It is a relative valuation - aren't they all? - the utilizes the market leader (NASCAR Cup) as the benchmark. Essentially, at the time I wrote the article, "IndyCar Price and Market Value" (08/10/09), the promotional (sponsorship) value of a top IndyCar entry was equal to 6.51% of the value of a similar entry in Cup. Top Cup entries earn sponsorship revenue of approximately $18 million to $20 million annually. Using that benchmark, I derived the $1.3 million value for a comparable IndyCar team.
I will admit that I was pleased to read that Monster told Paul Tracy that IRL season sponsorship was worth $1.2 million. Granted, that was when all races were on the ESPN Family. However, four previously unmentioned factors support my conclusion:
1. I rounded up the IndyCar percentage
2. I had not included the last 4 races on Versus, which would have reduced the value
3. My benchmark was a championship caliber Cup team; Tracy's quote from Monster was not for a championship caliber IndyCar team. Ganassi and Penske create $1.3 million in relative promotional value. All other IndyCar teams produce less and are therefore worth less.
4. I did not include a discount rate to reflect the difference in bargaining power between a Cup team and an IndyCar team. Cup teams are price makers; IndyCar teams are price takers. There are reasons why you want to be Number One. This is one of them, but I did not include it in my valuation.
The diatribe above answers another of your questions. The $1.3 million (or less) valuation represents Total Promotional Value - inventory, if you will - that an IndyCar team can expect to sell to sponsors that seek promotion. That includes associate sponsors.
However, many associate sponsors do not necessarily seek promotional value. Ganassi's associates are a good example. They're getting something of far greater value in another market. McDonald's is getting Newman's Own. The 7-Eleven and Meijer deals at AGR are similar. Another AGR associate is OneAmerica, a life insurance marketer that is headquartered in Indy. I would bet you a nickel that OneAmerica (formerly AUL) has some kind of deal with the HR folks at Meijer.
Other associate sponsors provide in-kind products and services: hotels, office products - Sharp is on several cars - vehicles, uniforms, tools, data storage, software, etc.
Part II Coming Up
Roggespierre
Mr. Cooper,
ReplyDeletePart II - Ganassi
The Ganassi question is impossible to answer without looking at the contracts. The appropriate question to ask is: Creating value for whom? Arbitrage assumes a single actor. However, any economic activity requires a transactions, which assumes at least two actors.
For example, let's say that I run a hedge fund. I discover that company XYZ is selling on the NYSE for $1.00 per share. At the same time, it is selling on the Nikkei for $1.03.
I get my broker on the phone and tell him to simultaneously buy 1M shares of XYZ on the NYSE for $1.00 apiece and sell 1M shares of XYZ on the Nikkei for $1.03 apiece. I just made $30,000 risk-free. But that $30K didn't just disappear. Somebody lost it. But who?
The guy who sold me the 1M shares on the NYSE for $1.00 apiece. He could've sold it on the Nikkei for $1.03 apiece. He didn't lose any cash money; his loss was all in opportunity cost.
BTW, this example was a favorite among hedge funders until electronic trading programs came along and spoiled all the fun. The computers ironed out the market inefficiencies and, with them, much of the favored low-hanging fruit among arbitrageurs.
So, back to Ganassi: think of Chip (who has a degree in finance) as a hedge fund manager. He gets the arbitraged returns. Who bears the opportunity cost? It depends on the transaction. It might be Target, the vendor, or some combination of the two. However, we can say with certainty that one of those three permutations is paying for Ganassi's racing team. But because the currency is not cash, we can not identify who pays the opportunity cost in each transaction.
I hope I got that right because I wrote it pretty quickly. As you can probably tell, I do find it fascinating.
Best Regards,
Roggespierre
Mr. Cooper,
ReplyDeleteOkay, I thought of something else. Call it Part III.
The TCGR project value for each associate sponsor would look like this.
Sales increase $ attributable to sponsorship - Total Cost of sponsorship (including opp cost) = Project value in dollars. Rate of Return = Project value $ / TC including OC
For Target, the equation is more complicated. Each individual project (associate sponsorship) would have to be assigned a value as such.
(Sales increase $ + Purchasing savings $) - Total Cost of project including opp cost = Project value in dollars. Rate of Return = Project Value $ / TC including OC
Then, Target would add all project values to get a comprehensive TCGR Project Subtotal.
Of course, Target would then use Nielsen ratings or JJ or whomever to get a total promotional value. That would then be added to the TCGR Subtotal to arrive at the Total TCGR Project value in dollars to Target. Rate of Return = TCGR Project Value / sum of TC of all individual project including OC
I'm afraid that's the best I can do tonight.
Best Regards,
Roggespierre
Hi R.
ReplyDeleteThanks for taking the time to explain the Ganassi arrangement. However...I still don't get it. On a conceptual level, I can see that Target is acting as an aggregater for a host of businesses that through some consideration support TCGR. They are spreading costs.
However...I just don't see the rational argument (and I don't think you've addressed this yet) that effectively communicates what value Ganassi is creating to justify some kind of premium for a product that I think we all agree does not deliver the cost per thousand value of other alternatives. I appreciate that you are not privy to the details of their agreement, but even an illustrative hypothetical might help to root out how this kind of agreement might make financial sense.
What I keep coming back to is one of two scenarios. One, that there is value that you are not capturing in your analysis - therefore, the sponsoring companies, by their measures, are not relying solely on traditional marketing platform metrics. Two, that, as has been true throughout the history of motor sport, there is someone in Target that just likes racing and has the clout to push the company to support his or her "hobby."
To this later point, I would look at John Menard, who, I would suggest with confidence, "likes racing." He has a powerful platform with his retail outlets and can leverage that to extract support from business partners. Does he see value? I'm sure he does. Is he motivated to select an auto racing sponsorship property more out of personal preference than impartial business analysis? We can only assume based on past behavior...
Your discussion of arbitrage is both intriguing and instructive. But given that it is at the crux of one of your central tenants for reform, I will respectfully submit that you still need to develop your position to make it compelling.
Under what scenario is the investment that is eventually directed to an IndyCar sponsorship worth more in another market than simply doing it for exposure? What would motivate someone at Target, for example, to bother making this effort when there are other, probably simpler ways to accomplish the objective of presenting your brand in an appealing light to your target audience?
Thanks again for the effort you put forward in pealing back the onion of sponsorship structure.
Hello Mr. Cooper,
ReplyDeleteThe short answer is that Ganassi is not creating value that justifies paying a premium for the product (IndyCar sponsorship). He is providing a financial engineering mechanism that allows Target vendors to get consideration that they would otherwise secure only by chance.
For example, Target Stores offer batteries for sale at more than one location. Store location is very important to vendors who sell products at Big Box retailers like Target. Batteries don't have to be sold - they are bought; they need only be in plain sight because they are a staple that many people need.
The last time I was in Target, I noticed that all of the batteries in the front of the store near the checkout lines were Energizer. Was that because Energizer is a major associate with Ganassi? We can't know for sure, but it is plausible and consistent with the TCGR program, so we'll assume that it's true.
Energizer Holdings is not permitted to pay cash in exchange for shelf space. Target and the buyers in its employ would be in serious legal trouble if they were to accept kickbacks from vendors. Home Depot recently had a scandal of this type, although it appears to have been limited to a few rogue (former) employees who took kickbacks from ceramic tile vendors. The former employees are in federal prison.
But if our assumption is true, then Energizer absolutely can and does pay Chip Ganassi "sponsorship" dollars that allow it to occupy the prime location for batteries at my local Target. Therefore, the deal is not a promotional platform for Energizer; it is a sales platform that could not be secured without an intermediary like Ganassi.
The value equation for Energizer would look like this.
Sales w/Checkout locations - (Sales w/o Checkout locations + Payment to TCGR) = Energizer's TCGR Project Value in Dollars
Energizer's ROI = Project Value in Dollars / Cash Payment to TCGR.
Without Ganassi or some other intermediary, Energizer would have to compete with Duracell and the rest for that shelf space. In fact, Target could decide to use that same space for an entirely different product category.
In Target's view, nothing was lost. Something has to go on those shelves. Batteries are probably as good as anything, maybe better. Gross margins on batteries are a lot better than they are for chewing gum and magazines. Think of Target's value as something akin to a call option on IndyCar sponsorship. In its view there is no downside.
Therefore, it's a lot like co-op advertising on television - did you see all the JCPenney/Van Heusen co-ops during Sunday Night's NFL game on ESPN? Even Wal-Mart was doing some co-op stuff, although I forget the vendor. I've never seen that before.
Whatever value Target gets out of its sponsorship is value that it sees as having been essentially free of charge. JJ put something like a $16 million value on Target's IndyCar sponsorship last year. Does Target use JJ? I don't know. But if it does, then its internal spreadsheets are demonstrating an incredible rate of return because its vendors are paying for the deal.
Target has about 1,800 stores. If Energizer sells about 56 additional batteries per store due to having its product near the checkout lines, then it breaks even on a volume basis. Depending on margins, the number of additional batteries that must be sold is probably less on a dollar basis.
Ganassi only creates value insofar as he allows Target's vendors to lock-up valuable in-store sales levers. Target thinks it's getting a good deal because it puts up very little cash, and because somebody is going to get those levers anyway - they can't be sold.
Remember, too, that Target started this program when IndyCar sponsorship was worth far more than it is worth today.
Does Target take opportunity cost into account? There is no way to know.
Is that answer an improvement at all?
Best Regards,
Roggespierre
Thanks for your patience in delving into this. It has always been a topic I have been interested in. Forgive me, but I am still a skeptic. It still doesn't satisfy me that such an arrangement is worth all the trouble for Target. It is as if Target is so motivated to help Chip fund his team that they will leverage their distribution platform to scrounge up the funding. They don't need TCGR to place batteries at the POS. Also, why would providing funding to TCGR as consideration for preferential placement be any more legal than just paying for it in some kind of defined sales partnership program? Again, in the case of Menard, such an arrangement makes perfect sense because John has a personal interest that motivates him to concoct such a convoluted arrangement to get what he wants. He's king of his hill, so he does what he wants within legal boundaries. In the case of Target, there is some piece that's missing (or something I am missing) - unless there is some Target big shot that simply likes racing. That's not unheard of, but it has become rarer in recent years and is a poor business practice that good boards would challenge. Assuming your company is guided by a good BOD.
ReplyDeleteMr. Cooper,
ReplyDeleteWilliam Ackman of Pershing Square Capital Management does not think much of the Target BOD. That's why he tried to have members replaced with independent directors last year. He lost the proxy fight because much of his position was in the form of options. Shareholders took that to mean that he wasn't in it for the long haul. Ackman has since converted his calls into Target shares. He remains a member of the board.
Ackman's primary concerns are 1) the credit card business, and 2) real estate. He believes that Target would be worth more if it were to sell both units and simply operate as a retailer. Frankly, he's probably right. He made a killing doing the same thing at Wendy's, another firm that inexplicably chose to own its stores. Sears is a good example of a retailer that exited the credit card business when it dumped Discover. It must be very glad that it did.
Here's my question: what trouble? Target believes that it is getting free advertising. It also believes that it is getting consideration for something that it is not technically allowed to sell. Target did not invent this concept. Ralph Hansen did it with Kmart and Newman Haas. Target copied the model. NASCAR sponsors like Home Depot and Lowe's have done it, too.
The only Big Box retailer that hasn't done it is Wal-Mart. Its market share gives it such a stranglehold on its suppliers that it offers no consideration to anyone. Target doesn't have that luxury.
And it isn't just more legal; it is legal. It isn't as if Chip Ganassi is an offshore bank. He's taking advantage of a legal loophole, just as Penske is taking advantage of one in the Master Settlement Agreement.
It probably did start with somebody at Target who liked racing. But it's evolved into an institution that has endured for 20 years.
Thanks for the interesting questions and comments.
Best Regards,
Roggespierre
Thanks for the exchange on this, R. You have improved my understanding.
ReplyDeleteI think you hit on something in your response that is important to highlight. I did not know about this arrangement as a legal loophole. The vulnerability of having your racing operation hinge on a legal loophole is worth noting.
As for trouble, I keep coming back to Menard's. His motivation is obvious. For Target, your argument is that it is a way to wrangle investment out of business partners to support one of your promotional programs. But if you wouldn't invest in the platform on the merits of its promotional value alone, why would you go through any special effort to fund it at all? That's what I mean by trouble. Sure the race team gets funded, but what value does Target get out of it? That is, if we accept that IndyCar is a lousy promotional investment with less impact than other alternatives?
I mean, if there is significant incremental sales in Energizer batteries beyond putting them in the spot in the store that benefits most greatly from impulse purchases, then you are starting to see ROI on an IndyCar-related promotion. If there is no such increase, then how does Target gain other than funding a promotional platform that appears inferior to other alternatives?
Hmmm...therein may be some hidden value. Creating a platform whereby you and your business partners have a shared interest could well be a value component you have not discussed. What kinds of meetings can Target create with the racing as a backdrop? What kind of agreements have been accelerated, or, in some cases, closed in the context of these companies having a bond through the race team? Is there some metric that assesses how much "better" their supplier-vendor relationships are by being part of the same racing team? Tough to measure, and even tougher to get at the supporting data from outside the company.
That kind of stuff interests me because it speaks to unique creativity and if the models can be captured they could be replicated in other scenarios that could help sell the sport and its players.
Mr. Cooper,
ReplyDeleteI see your argument and think that it has merit.
Menard is a different animal. He likes racing, he's worth $4 billion, and he isn't afraid to strong-arm his suppliers to fund his hobby. There is a reason that Glidden is no longer on his cars and in his stores. It had enough and left.
There was a small team a few years ago that landed Indy sponsorship through a local home builder and some of his suppliers. Moen was one of them. When Menard saw Moen on a competitor's car, he was furious. I heard that he told Moen that it would either be on his car or out of his x-hundred stores. I can not confirm that this conversation actually took place.
However, I can confirm that Moen was on Menard's car the next year and that it has remained with him ever since.
Regarding Target, the relationship between retailer and supplier probably does generate some additional benefits. But I really do believe that the deal is effectively a sales arbitrage program. It certainly makes sense from the vendors' perspectives.
But what about Target?
Here's one possibility. I have no knowledge that it is true. I have not even heard rumors to this effect. But it is possible.
What if Target financed Ganassi's operations not with sponsorship, but rather with a loan? Target does have a credit unit, after all. Could Target loan TCGR its racing budget? I see no reason why not. Ganassi could then use the associates' payments to pay down the debt each year. Target would show a cash gain that is directly attributable to its racing program. Ganassi would decrease his tax bill because interest payments are tax exempt.
The possibilities are endless.
Best Regards,
Roggespierre