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SBD Global/August 15, 2013/FinancePrint All
The financial struggles of a majority of F1 teams are a sign of the global "economic uncertainty" and the teams’ "potentially outdated" business models, according to Formula Money co-author Christian Sylt. During the first half of the 2013 F1 season, the racing series’ off-track headlines have been dominated by the financial problems of teams such as Lotus and Sauber. McLaren Team Principal Martin Whitmarsh raised concerns about the financial state of F1 teams ahead of the ’13 season when he said that "seven out of 11 F1 teams are struggling." Sylt agreed with this notion. Sylt told SBD Global, "I think you would be safe to say that the teams in F1 are having probably one of the most difficult times that they have ever faced in the modern history of the sport." In comparison to other companies, F1 teams’ key-performance indicator is not bottom-line profit but on-track success. Sylt: "It’s all about success on track that is [a teams’] yardstick of the company’s performance. What that means is teams will spend literally as much money as they have got coming in from sponsorships, prize money or their owners putting money in. The teams will spend all of that money as much as they possibly can to win on track. So at the end of the year, they generally speaking do not make a profit, they either make a loss or break-even at the best." This philosophy of spending every cent on increasing the car’s performance is risky in the current economic climate and "potentially outdated," Sylt said, because "you are not putting any cash in the bank in case things go wrong."
TOUGH TIMES: The current economic uncertainty also makes it more difficult for teams to attract sponsors. F1 is one of the most expensive sports to sponsor, with an average price between $5M-$10M. In a healthy economy, the high price tag does not discourage brands from entering F1 as it is the world’s most watched annual sport. Sylt: "However, when the economy is going down as it has been in recent years, F1 becomes a bit of a sore thumb because it sticks out from quite a distance as being one of the most expensive sports in the world that sponsors don’t gravitate to as much as they would when things are going well in the economy." He added, "When the economy is in a weak state but improving, as it is at the moment, you have a situation where brands want to get involved in F1 but they don’t necessarily want to throw huge amounts of money at it without consideration, as they previously would have done." Another problem of an F1 team sponsorship is that if a team does badly, a company’s exposure decreases, and if a team’s cars crash out the sponsor gets no exposure at all. It’s a risk that not many companies are willing to take in the current economic climate. To limit their risk of uncertain exposure, companies have gotten involved in F1 through an official partnership with the series itself. Such a partnership provides companies with trackside advertising and hoardings around the track as well as the right to use the F1 brand and certain footage. Sylt said, "This is, generally speaking, guaranteed static exposure versus the teams, which is uncertain exposure. So companies such as Rolex, Emirates, and in recent years Tata Communications have gravitated toward sponsoring F1 itself, whereas in previous years they would have gone to the teams."
FINANCIAL SUCCESS: It is a trend that has helped Formula One, which has sold the commercial rights to host races, TV stations, corporate hospitality and trackside advertising, to increase its revenue from $729M in ’03 to $1.5B in ’11, according to Formula Money data. F1’s revenues are higher than ever before, and it is one of the very few companies in any business sector which is having increasing revenue and increasing profits basically for the past five to 10 years. Formula One itself does not operate in the same manner as F1 teams, it operates in a completely different method. Sylt: "The actual costs of running F1 are somewhere in the order of $300 million a year. That’s spending on staff, transporting equipment all over the world, etc., that kind of thing. The revenues are about $1.5 billion, so you essentially have an operating profit of about $1.2 billion. The teams then get $700 million in prize money so you have about $500 million left. And then there are finance costs of somewhere in the order of $100-$150 million a year, leaving a bottom-line profit in the range of $300 million."
La Liga Valencia's Administrative Council on Wednesday "exposed to the media the club's delicate economic situation," according to the EFE. The Council recognized that Valencia currently faces a net debt of €275.7M ($365.4M), but "highlighted that it does not owe anything to Spanish tax authorities, based on results of the 'Due Diligence' audit performed by accounting firm KMPG." Club President Amadeo Salvo and Valencia Foundation President Aurelio Martinez explained that since '08 the club's debt has been reduced by €66M ($87.5M) and "called the economic management in recent years 'positive but nuanced' due to treasury problems." Salvo said, "My obsession is the model, we have to change it. This year is a historic opportunity. We are going to grow in season-ticket holders and there is a breeding ground to reform Valencia. The debt can be paid, but to pay it, we have to change the model" (MARCA, 8/14). In Madrid, Javier Pérez reported "Manuel Llorente's era as president has ended and the new leadership is proposing to find out the details of the economic situation the club was in." Salvo: "Since we first arrived we wanted to make this an exercise in transparency." Salvo explained that he requested an external audit "to gather fundamental information that Valencia supporters should know about performance in the past, the present and in what will affect the club's future." In Llorente's tenure as president, Llorente "was accused of governing the club in a sovereign manner without giving explanations to collaborators." Valencia's plan for the future "is looking in-house." Salvo: "If we follow the plan laid out, in 2016 Valencia will have a positive operating picture. By then, the football school that we are developing will begin to give its fruits and we will not have to buy players from other clubs" (EL PAIS, 8/14).