MARKETING FOCUS: Race relations - Tobacco companies have long been associated with motor racing, but TV exposure and the growing popularity of the sport globally is steering Formula 1 teams towards new commercial tie-ups, reports Andy Fry

Formula 1 is in the news, and not just because of the action on the track. Renewed pressure for a European ban on tobacco sponsorship, British American Tobacco’s plan to buy a racing team and Bernie Ecclestone’s ambition to float Formula One Holdings (FOH) on the stock market have forced teams and sponsors to make a fundamental reappraisal of how much the sport is worth - and to whom.

Formula 1 is in the news, and not just because of the action on the

track. Renewed pressure for a European ban on tobacco sponsorship,

British American Tobacco’s plan to buy a racing team and Bernie

Ecclestone’s ambition to float Formula One Holdings (FOH) on the stock

market have forced teams and sponsors to make a fundamental reappraisal

of how much the sport is worth - and to whom.



Formula 1 is more popular and glamorous than ever, but, with so many

changes in the pipeline, the job of exploiting its marketing potential

is increasingly complex. It is also not an area for the financially

faint-hearted. The basic rule of thumb is this: ’How do you become a

millionaire in Formula 1? You start with pounds 100m.’



The core Formula 1 proposition is strong. Broadcast free-to-air in more

than 200 countries, the total audience has doubled since 1992 and

Formula 1 racing has become more attractive both to younger and to

female viewers.



In addition to the quantity and quality of the audience, Formula 1’s

regular exposure is an advantage over other global events such as The

FIFA World Cup and the Olympic Games. Instead of waiting for a big hit

every four years, the Formula 1 sponsor can exploit its involvement for

at least 36 weeks of the year.



For the tobacco industry, Formula 1 has proved an invaluable refuge from

the anti-smoking lobby. Every major team boasts a high-profile tobacco

sponsor, and current estimates put the industry’s investment in Formula

1 at around pounds 100m a year.



Digital resources



Although you will hear nothing but support for tobacco sponsorship from

racing bosses, they are shrewd enough to have begun the search for

alternative revenue streams.



Ecclestone, for example, has invested pounds 35m in cutting edge digital

television technology in expectation of generating massive pay-per-view

(PPV) revenues.



With digital platforms in France, Germany and Italy, viewers can already

watch a race via half-a-dozen television channels. In theory, this

allows fans to follow their own team car’s progress, flick to a race

update, watch slow-motion action, come in for a pit stop or check race

statistics.



The potential of PPV has had a dramatic effect on the perceived worth of

FOH’s proposed flotation. Although there is confusion as to the timing

and the mechanics of the float, commentators estimate that the market

value of Formula 1 could be a massive dollars 2.5bn (pounds 1.6bn). A

third of this is attributed to PPV.



The implications of digital broadcasting for sponsors are, as yet,

unclear.



Although the roll-out of the necessary technology is likely to be slow,

the ability to choose which team you want to drive with means that

sponsors of popular teams will bask in a heightened association.

Sponsors of the stragglers, however, will receive even less exposure

than they already do.



Sports Marketing Survey’s Nigel Geach says: ’When the viewer can be the

race director, the team has got to make sure it is attractive enough for

punters. Ferrari has no problem because of its fanatical support, and

there will always be human interest stories like the launch of Jackie

Stewart’s team. But there is a danger for sponsors if they don’t have an

attractive car or driver.’



There are three implications in this. First, inflation in the cost of

top talent. Recent speculation suggested that the Jordan team’s headline

sponsor Benson & Hedges would have to fork out pounds 5m to attract

Damon Hill to the team next year. In a digital environment, stars will

be at a premium.



Second, the sport will need attractive brands. For all their status

within the sport, names like Williams, Tyrrell and McClaren have to

consider how to broaden their appeal. As it is, many of the teams are

anonymous compared with the fame of the drivers and sponsors.



Third, Formula 1 will need to create a more evenly-matched field. As

long as half of the teams are incapable of securing TV exposure, there

will be pressure from sponsors and fans to restructure the race

rules.



In the short term, digital is not perceived as a major commercial threat

for sponsors. Sarah MacMahon, marketing director of Andersen Consulting,

which has a deal with Williams, believes there is still ’a big question

mark over digital. It strikes me that the flaw is that if you stick with

one car you don’t see the rest of the race. It needs a lot more

research’.



Jordan team commercial director Ian Phillips is convinced that ’digital

will revolutionise everyone’s ability to appreciate the sport. But we’re

talking about a long way in the future. Even then, I don’t think it will

affect the casual viewer, but the enthusiast will grab it with both

hands’.



By contrast with digital, the tobacco question is of immediate

concern.



With top teams costing around pounds 20m to pounds 30m a year to get on

track, it is tobacco sponsorship that pays the lion’s share. If Europe

were to impose a blanket ban, Formula 1 would have to consider a

combination of three options.



The easiest thing would be to use designs that suggest the sponsor’s

identity without overtly realigning them. This has been pioneered by

Marlboro and Benson & Hedges. To many viewers a red and white car means

Marlboro, while Benson & Hedges uses plays on words like Bitten and

Hisses to suggest its identity. A ban on tobacco sponsorship would

encourage this trend.



Easterly winds



Another option would be to switch race venues from markets where tobacco

sponsorship is under pressure. Eastern Europe, Malaysia, Korea and China

have been touted as possible future venues for Formula 1 races. And

teams seem keen to accommodate them. ’Promoters of any sport must be

alert to new commercial opportunities,’ says Phillips. ’Particularly if

it wants to be a truly world championship. We have to consider whether a

country like Malaysia offers a better proposition for our sponsors than

some of the existing venues.’



API’s Brian Sims, who negotiates sponsorship for the Benetton team,

agrees: ’Asia is a burgeoning market and Formula 1 can open doors to

business partnerships.’



Sims’s approach highlights Formula 1’s third option, which is to

encourage new categories of sponsors. So far, he has struck deals for

Benetton with Federal Express and Gillette. ’Federal Express is a

classic example of a sponsor that wants awareness and image transfer,’

says Sims. ’Formula 1’s attributes of speed, reliability, teamwork and

technology couldn’t provide a better synergy.’



Another non-traditional sponsor which has entered Formula 1 is

MasterCard.



After an ill-fated partnership with Lola, MasterCard has linked up with

Jordan in a two-year deal, with an option to renew.



Stacey Nachtaler, vice-president global promotions and sponsorships at

MasterCard International, says: ’We have 400 million cardholders

worldwide and 58% of our transactions are outside the US. We are a

global company looking to be innovative, which makes Formula 1 an ideal

partner to encourage people to migrate to MasterCard.’ Talk of expansion

into Asia is also appealing, says Nachtaler. ’For Formula 1 to go there

would enhance the opportunity for return of the sponsorship’s

value.’



According to Nachtaler, aligning with a competitive team was

essential.



’It was important for us to deal with a team in the points. We wanted a

partner which understood that we need to leverage the sponsorship

property to build our business.’



This last point is of some significance for a sport that has shown

little ability to market itself. ’Ferrari is the biggest brand in

Formula 1 and is our equivalent of Manchester United,’ says Phillips.

’But Formula 1 as a whole has let itself down. I think we are getting it

together now because we realise we have to build a brand name.’



Nachtaler diplomatically says: ’There has been a lot of great marketing

around Formula 1.’ However, MacMahon is less convinced. ’Some teams have

surprisingly little sense of their own potential. The priority has been

getting the car on the track.’ In an environment in which observers

complain of sponsorship clutter, MacMahon believes that ’more thought

could go into design and logos’.



MacMahon says the value of Formula 1 lies in the depth of the

relationship.



’We have had a very successful business partnership with Williams. When

Damon Hill became champion last year it boosted our brand awareness and

image, but we have also found it useful for relationship marketing and

staff motivation.’



Nachtaler agrees: ’MasterCard doesn’t intend to put a sign on the car

and walk away. Several marketing programmes will roll out in 1998.’

After its failure to get a Lola club concept going, MasterCard hopes

that it can help Jordan build a wider membership. ’We were on a bumpy

road with Lola and are still on a learning curve,’ admits Nachtaler.

’But Jordan has a successful club with a membership of 23,000. It is

heavily centred on Europe and we hope MasterCard can bring the team

access to its distribution network, evolving and expanding the

club.’



Innovations of all types are possible says API’s Sims. Gillette, for

example, is producing a six-part television series called A Year in the

Fast Lane, which it will distribute globally either for a licence fee or

airtime barter. ’There are also business-to-business opportunities,’ he

says. ’Hewlett-Packard has developed products and services for

Benetton.



There are no guarantees, but the perceived value of doing business with

Benetton is very high. All 37 Benetton sponsors talk to each other

regularly at workshops.’



Furthermore, Sims, who is also chairman of the Motorsports Industry

Association, says: ’Sponsors should look at what they might learn from

the way Formula 1 operates as a business. The reason it is a successful

dollars 1.5bn (pounds 950m) business in the UK is because it requires

teamwork and fast decision-making.’



No smoke without fire



While question marks have been raised over tobacco’s future in Formula

1, the two are so intimately linked that there are few observers who

seriously expect a significant change in the relationship.



An indication of this is BAT’s planned purchase of a team. It would not

be the first time BAT has made such a move. Previously, it has owned and

operated a motor rally in China through its 555 brand. Its current move

resembles the activities of clients like Nike, which are seeking both to

control their marketing communication and generate a second stream of

revenue.



The bid for ownership receives mixed reactions, however. Phillips says:

’I don’t see ownership of teams by sponsors as the way to go. Tobacco

companies have been involved with Formula 1 for years and evolved a code

of practice that suits all sides. I think anybody who owns a team who is

not in the business is asking for trouble.’ Nachtaler agrees: ’The

Jordan team wants to make its decisions and we respect that. Cars are

not our core competence.’



Yet there is a precedent in Benetton, which made a successful transition

from sponsor to owner. ’These moves depend on whether a team wants to

sell,’ says Sims. ’But I think there will be an increasing demand for

the acquisition of equity if Bernie Ecclestone’s flotation goes

through.’ And not just from sponsors. BSkyB is already rumoured to be

interested in buying a stake in a floated FOH.



Despite the uncertainty surrounding the sport, there are few who doubt

Formula 1’s capacity to provide sponsors with a return on their money if

they leverage it effectively. ’The cost of entering the sport is not

artificially high,’ says SMS’s Geach. ’The return that sponsors get from

Formula 1 is very good and that will continue unless there is a major

crisis.’



With the way that Formula 1 has bounced back from the controversial

death of Ayrton Senna, it would need an event of catastrophic

proportions to stop Formula 1 in its tracks.



WHO’S WHO ON THE GRID



Ferrari: F1’s biggest brand with a fanatical fan club. Popular in

Germany because of its association with Michael Schumacher who is by far

the circuit’s highest-paid driver. Sponsors include Marlboro, Shell and

Pioneer.



Williams: When Williams dispensed with Damon Hill last season, it had a

dramatic impact on the potential audience that ITV could achieve in the

UK. Sponsors include Rothmans, which pays pounds 15m a year, and

Andersen Consulting, which pays in kind.



Benetton: Switched from sponsor to owner in the 1980s. Currently has 37

sponsors including Mild 7, Fed Ex and Gillette. Ecclestone would like

Benetton to hire Hill for next season.



Jordan: Headline sponsor at pounds 10m a year is Benson & Hedges. B&H

unveiled a car design this year which de-emphasises the brand name where

tobacco advertising is banned. A snake head and the phrase Bitten &

Hisses are promoted in its place. Non-traditional sponsor is

MasterCard.



McClaren: One of three teams (the others are Williams and Tyrrell) that

refused to sign the so-called Concord Agreement with Formula One

Holdings which lays out the division of income between F1 parties.

Agreement is now near. Lead sponsor is West.



Prost: The Prost teams gets a Mugen Honda engine on the understanding

that it uses Japan’s Shinji Nakano as a driver. Sponsors include

Gauloises, BIC and Alcatel.



Stewart: Like Prost, this team is run by a former world champion. Main

sponsorship deal is with HSBC bank - believed to be worth pounds 25m

over four years. A Ford deal is worth a further pounds 20m.



Tyrrell: One of the most established brands in F1. Sponsors include

Ford, Pakistan Airlines and Epson.



Minardi: Uncompetitive team rumoured to be an acquisition target for

BAT. Sponsors include Mild Seven.



Arrows: High profile in its first year, due to its association with

world champion Damon Hill. Likely to lose him, and a lot of PR, next

year. Key sponsors Danka and Parmalat.



Sauber: Yet another team rumoured to be interested in signing Damon

Hill. Key backer is Malaysian group Petronas. Red Bull has more than a

sponsor’s interest (ie equity) in the car.



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