Presentation on theme: "Sport Management Financial Principles. Financial Health of Sports Serious Financial Challenges Face Managers of Sport Organizations! 1. Increasing Costs."— Presentation transcript:
Sport Management Financial Principles
Financial Health of Sports Serious Financial Challenges Face Managers of Sport Organizations! 1. Increasing Costs 2. Stable/Declining Revenue Revenue – Costs = Profit $100M - $70M = $30M $100M - $80M = $20M (increased costs) $90M - $80M = $10M (increased costs & reduced revenue)
Increasing Costs - Professional Equipment Debt of financing new venues Player Salaries
Increasing Costs - College Equipment Increasing Coaches Salaries Tuition Costs (for athletic scholarships) Title IX Compliance Statute aimed at eliminating gender discrimination in educational institutions that receive federal funding.
Increasing Costs – High School Equipment Title IX Compliance
Stable/Declining Revenue While rising costs are a concern, sport managers also face declining revenue as a result of increased competition. 1. Fan Support Competition for fans is intense. With more variety of sporting options, consumers have never had so many options for spending their entertainment dollars. 2. Corporate Sponsorship Competition for sponsorship dollars is intense. Corporations have limited sponsorship budgets, and an increasing number of sporting options for spending it.
Addressing the Double Whammy… The Double Whammy! Increasing costs coupled with stable/declining revenue! How are sport managers handling it? 1. High School Sports Booster Clubs; Participation Fees; Soliciting Corporate Sponsors (like PHS and Coca Cola) 2. College Sports Institutional Support; Soliciting Corporate Sponsors 3. Professional Sports Successful sport managers recognize that future financial success will depend on their ability to aggressively secure new sources of revenue.
Traditional Sources of Revenue These income generating options have provided the financial foundation for sport organizations for many decades. 1. Ticket Sales 2. Concessions
Traditional Sources of Revenue 1. Ticket Sales The most prominent revenue source for professional sport franchises (except NFL) Revenue is based upon two factors: 1. Number of tickets sold 2. Price of each ticket Teams have increased prices over the years to increase profit.
Traditional Revenue Sources 1. Ticket Sales (continued) Future Challenge Determining optimal ticket prices! Increasing prices discourage fan from attending There exists a price threshold; the price beyond which fans will resist payment We identify customers expected price threshold by conducting market research.
Traditional Sources of Revenue 2. Concessions Professional Sports Concessions play a BIG Role Food service and souvenir merchandise account for a large share of revenue. Minor Leagues Concessions play a BIGGER Role Since ticket sales are low, concession sales are very important – they may actually determine a teams profitability
Traditional Sources of Revenue 2. Concessions (continued) Amateur Sports Concessions play a LITTLE Role Less of a financial role because of the lack of beer sales. In professional sports, beer account for approximately 35% to 55% of total concessions. Most colleges and high schools do not allow beer sales
Traditional Sources of Revenue 2. Concessions (continued) Alcohol is a serious concern From a revenue perspective, sales of alcohol make sense, however… Heightened awareness of the negative consequences of drinking, including traffic deaths, underage drinking, and unruly fan behavior, have led sport organizations to re-evaluate their policies surrounding alcohol. Policies include: 1.Designated family sections where alcohol is prohibited 2.Stop Selling practices Alcohol will continue to be a serious concern in the future!
Traditional Sources of Revenue 2. Concessions (continued) Latest Trend in Concessions Offering diverse and higher quality food and beverage options. Based on the idea that fans will spend more if offered appealing choices like: 1.Expanded menus 2.Upscale menus 3.Food courts 4.Wait staff Has it worked? Yes, spending has increased!
New Sources of Revenue Ticket Sales and Concessions will continue to provide a foundation of revenue for sport teams, however, increasing costs and competition force managers to seek out new sources of revenue to maintain profits. 1. Luxury Seating 2. Permanent Seat Licenses 3. Naming Rights 4. Corporate Sponsorship 5. Licensing
New Sources of Revenue 1. Luxury Seating Fastest growing source of income for professional teams. Luxury Suites Wet bar, carpeting, TV, catered food, private bath, VIP parking pass, seating for 12 to 24 Purchased or leased by corporations for entertaining clients or rewarding employees. Tax laws allow businesses to deduct 50% of the cost as a business entertainment expense. This has encouraged thousands of corporations to invest.
New Sources of Revenue 1. Luxury Seating (continued) Club Seats Wide bottom, cushioned seats with chair backs, in-seat wait service, enclosed lounge area, wide screen TV Less extravagant option for individual fans seeking premium seating.
New Sources of Revenue 1. Luxury Seating (continued) Income potential is huge! Income potential was fully demonstrated when the Palace at Auburn Hills was built in 1988. Realization of income potential associated with luxury seating has prompted many teams to threaten relocation to a newer venue with more suites. To deter relocation, teams are often granted favorable lease agreements allowing them to retain the majority of luxury seating revenue.
New Sources of Revenue 1. Luxury Seating (continued) Future Challenge It is possible that suite construction has exceeded demand. Will there be enough corporations to support all the suites being built? In every market there is a finite number of businesses with the financial capability and willingness to spend money on suites.
New Sources of Revenue 2. Permanent Seat Licenses (PSLs) Give fans the right to purchase season tickets, often for the life of the venue, in return for an up-front payment. Prices vary based upon seat location Colleges have begun to adopt the concept Eagles PSL program at the Link Offered 29,000 seat licenses Prices ranged from $1,760 to $3,617 Raised $60 million
New Sources of Revenue 2. Permanent Seat Licenses (PSLs) (cont.) 3 Features of Successful PSL Program 1. Must be sold on a permanent basis (for the life of the stadium) 2. Owners must have the right to sell or transfer the license to any other family member 3. Money back guarantee – team agrees to buy back the license for current market value or no less than 70% to 85% of its original price.
New Sources of Revenue 3. Naming Rights A corporation purchases the right to put its name on a stadium or arena. Started in the 1990s, but halted a bit in early 2000 due to economic slowdown and technology industry stock crash, which forced many companies to prematurely end their naming rights deals (Enron; Adelphia). Facility owners are now careful about attracting naming rights partners that are stable and reputable. The naming rights market seems to have begun to reemerge since late 2002.
New Sources of Revenue 3. Naming Rights (continued) Going rate at a major venue is $2 to $6 million per year Colleges have begun to use naming rights sponsors as a way to raise money to build new facilities. Overall, corporations see naming rights as a cost-effective way for their company to receive extensive public exposure.
New Sources of Revenue 4. Corporate Sponsorship The acquisition of rights to affiliate or directly associate with a product or event for the purpose of deriving benefits related to that affiliation. (remember this?) Benefits for the Corporation 1. Heightened Visibility 2. Image Enhancement 3. Product Trial or Sale Opportunities 4. Hospitality Opportunities
New Sources of Revenue 4. Corporate Sponsorship ( continued) Corporate sponsorship is a great way to achieve extensive public exposure. Future Challenge Large corporations will receive thousands of sponsorship proposals a year. Marketing approach to solicit sponsors; proposals must be tailored to the needs of the business. Key to identify what a company is willing to pay, and what they will want in return for investing as a sponsor.
New Sources of Revenue 5. Licensing Sale of licensed sport merchandise The more fans buy, the more revenue! Revenue comes from Royalty Fees Paid by the manufacturer for the right to sell merchandise with a team name or logo % of the wholesale price of the product Standard royalty fee is 8.5% for the 4 professional leagues. In each league, royalty fee proceeds are pooled and divided equally among all teams in the league.
New Sources of Revenue 5. Licensing (continued) Also used in minor leagues and at the college level Not yet used with amateur and high school sport programs Great way to protect and promote a team name and logo while generating substantial revenues.
Conclusion Sport entities are facing a Double Whammy; stable/declining revenue resulting from increased competition, and increasing costs. Traditional revenue sources, like ticket sales and concessions are not enough to maintain profits. To maintain profits, successful sport managers will continue to create and expand opportunities for their organizations to secure new sources of revenue.