SBJ/October 24 - 30, 2005/Marketingsponsorship

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  • Bad estimate on Nextel account costs firm

    Three days before the 2004 Daytona 500, Johnny Capels knew he had a problem. His marketing company, National Tour Inc., had three months earlier landed the Nextel account and was set to begin the relationship by providing mobile marketing support and services at each Nextel Cup race for a one-of-a-kind, 6,400-square-foot “Glass House” that would display the company’s technology and attract thousands of fans with racing simulators and gaming kiosks.

    After the first year, National Tour had lost
    $1.2 million from its Nextel account.

    Problem was, the five haulers that were carrying the glass and the rest of the equipment that would combine to create this iconic mobile marketing unit were filling up. And they were filling up quickly.

    “My estimations were way off,” said Capels, National Tour’s founder and CEO. “We estimated that it was a five-truck deal with 16 people. It became 10 trucks with 25 people.”

    Today, Nextel’s at-track experience requires 14 haulers and between 25 and 28 people to operate.

    Because Capels underestimated the required resources, his low bid of $250,000 a month was enough to win the account for five years, through 2008. But his miscalculation had another effect: It cost him and Concord, N.C.-based National Tour, a full mobile marketing provider, hundreds of thousands of dollars, ultimately landing the company in Chapter 11 reorganization.

    “I had to put in $100,000 to $125,000 of my own money every month just to keep it going,” Capels said.

    Even that wasn’t enough. After the first year, National Tour had lost $1.2 million from the Nextel account, one the company had projected would net close to $1 million in profit per year.

    National Tour’s financial problems, spearheaded by the severe underbidding of that account, came to a head earlier this month when the company filed for bankruptcy protection in Southern California, where it was based until November 2004. According to a cash collateral document filed Oct. 7 in that state’s Central District Bankruptcy Court, National Tour “sustained significant losses and fell behind in payments to its creditors.”

    National Tour filed less than two weeks before a more stringent bankruptcy law went into effect, but Capels said the IRS freezing the company’s bank account had a much larger bearing on the timing of the filing than the new law did.

    Jim Bastian Jr., the company’s attorney, said National Tour’s total debt “is just a hair under $5 million,” with a large chunk — $4.2 million — being owed to California Bank & Trust and the IRS.

    National Tour, whose client list also includes Anheuser-Busch, BMW, DeWalt, Irwin, Nike and Pioneer, is starting to realize some cost savings from its relocation to North Carolina that should help in the reorganization process.

    Capels said the company, which has 85 employees, pays $49,000 a month in rent for 60,000 square feet of office and warehouse space in Concord. In California, Capels said he wrote a check every month for $55,000 for 22,000 square feet.

    In addition to rent, Capels said the move decreased operating, utility, insurance and labor costs. In fact, because of its move to North Carolina, Bastian said National Tour is saving about $1 million a year from worker’s compensation, medical insurance and liability insurance.

    Even though National Tour has started to realize some of the financial benefits of the move, the major improvement in the company’s cash flow comes not from increased savings, but rather from increased revenue. Most notably from Nextel, its most high-profile account.

    “It ended up costing way more than we had budgeted,” Capels said, “but I had written the contract and I wanted to keep my word.”

    So National Tour stuck it out, showing up at the track each week. Toward the end of the year, though, Capels knew he couldn’t continue without more money from Nextel.

    After auditing National Tour’s books, at Capels’ request, and realizing what Capels had realized three days before the Daytona 500, Nextel agreed earlier this year to increase its monthly payments and keep the “House” afloat. By doubling its payments to what Bastian said is “north of $500,000 per month,” or $6 million a year, Nextel kept National Tour afloat as well.

    “The basic terms are still the same, it’s just that they offered more money on a monthly basis to help ease the pain,” Bastian said.

    Michael Robichaud, vice president of marketing for Sprint/Nextel, could not be reached for comment. Michael Mooney, a company spokesman, said National Tour “is a valued vendor of ours and they’ve been very up-front about their financial situation. We’ve been in regular communication with [National Tour], and we’re looking for them to work through this.”

    According to the bankruptcy filing, National Tour “is party to several long-term contracts with DeWalt, Irwin, Sprint/Nextel, BMW and others which provide monthly revenue in excess of $800,000,” and Capels said all of the accounts, except Nextel, are profitable.

    Capels said National Tour also has recently added GE, DLP, Trex and the NASCAR Members Club to its list of clients. Capels said he has talked to every client and informed them where the company stands and its plans for sustaining itself.

    “During November, December and January, the overhead expenses of the business go down dramatically, but the revenues stay the same because Nextel pays on a 12-month calendar and not a nine-month calendar,” Bastian said. “What we intend to do is boost the cash during that end-of-the-year period, and we’re looking to emerge from the bankruptcy proceeding in February.”

    Asked how one account could have such a monumental effect on the company’s books, Capels almost laughed and said: “It’s like the Rolling Stones. You’re setting up every day and you tear down every night, but the Stones have three sets across the country, piggy-backing each other. We have one set that has to go from Sonoma [Calif.] to Daytona [Beach, Fla.] in two days, from Fontana [Calif.] to Richmond [Va.] in one and a half days. It’s a huge undertaking.”

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  • Enterprise picks up NCAA corporate partnership

    Category leader Enterprise Rent-A-Car has signed on as the NCAA’s latest corporate partner in a multiyear deal that sources said was in the low seven figures per annum. While the rental-car category has been dormant for some time as far as sports sponsorships, the NCAA deal marks the second major sports hookup for Enterprise in recent months.

    St. Louis-based Enterprise has leveraged a NASCAR sponsorship with a “Racepoints” frequency/loyalty program. Enterprise has long been a heavy buyer of sports media, but lately is augmenting with sponsorship rights.

    Driving the hoop: Enterprise Rent-A-Car
    has supplied cars at previous championships.

    “They understand consumer loyalty and behavior,” said Brian Corcoran, NASCAR’s director of corporate marketing. In sports, he said, “Enterprise sees a tremendous opportunity to complement traditional television advertising with sponsor loyalty programs.”

    Enterprise has been a sponsor of the Pro Bull Riders since late 2003.

    Greg Shaheen, NCAA vice president of Division I basketball and championship strategies, noted that Enterprise has provided cars at championships in a supplier-type deal for several years.

    “We think there’s a good match of brands here,” Shaheen said. “Enterprise is family-owned and a big believer in our mission of education.”

    VIDEO POWER: NBA video-game licensees will be flexing some marketing muscle this season. Sony’s NBA06 is presenting sponsor of the league’s Premiere Week. Ads combining video-game footage with NBA game footage will run on TNT NBA games and NBA06 and on the gamers section of NBA.com.

    Xbox and Take 2 will join T-Mobile in sponsoring NBA All-Star balloting. Xbox will be a sponsor of in-arena balloting, while Take 2 will leverage its NBA 2K6 title by underwriting an “All-Star Life” sweeps offering two trips for two to the NBA All-Star Weekend in Houston, where the winners will be paired with NBA players to compete in the game.

    CAP ON THE BIG APPLE: New Era Cap, the exclusive on-field headwear of MLB, will open a brand-focused store in New York (likely Greenwich Village) early next year as it continues to enlarge its marketing profile.

    Plans for what will be New Era’s first retail venture are incomplete, but the company hopes to combine its 85-year history with its newer entry into the fashion/hip-hop arena.

    “We’d like a franchise store to host events and activate our brand,” said New Era CEO Chris Koch.

    COMINGS & GOINGS: Mark Tatum, instrumental in adding the elusive automobile deal to the NBA’s portfolio with Toyota, has been elevated from vice president to senior vice president, marketing partnerships. Tatum came to the NBA from MLB in 1999. Roundball marketer Emilio Collins gets bumped from director to vice president of marketing partnerships. … Mark Woolsey has come full circle. The former Nike marketer, who was director of marketing at And 1 2000-03, has returned as the basketball apparel and sneaker brand’s GM and CMO of American Sporting Goods, which bought the And 1 brand earlier this year. Woolsey will be based at ASG’s California headquarters. His last gig was vice president of marketing at DC Shoes.

    Terry Lefton can be reached at tlefton@sportsbusinessjournal.com.

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  • Here’s the trick on how to treat 3 scary marketing characters

    Most executives in the sports sponsorship and marketing industry are no different from those in other business fields. They are sincere, qualified, hard-working folks who honestly desire to advance their careers by doing a good job for their employers.

    But the industry also has its tiny share of people who serve as impediments to good sports marketing.

    So, in the spirit of the Halloween season, let’s see who’s knocking on our door and shouting, “Trick or Treat!”

    Advertising, Public Relations and Promotional Agencies Disguised as Sponsorship Experts:

    Many companies rely on their agencies as sources for marketing expertise, including sports sponsorships. The problem is that some agencies pretend to have sponsorship expertise they don’t have.

    All agencies are wired to say “yes” to the client, regardless of whether the skills the client needs are present. That’s because an agency’s worst nightmare is that the client will look elsewhere for a specific skill, develop trust in the new agency and then move its business. Also, many advertising, PR and promotional agencies don’t know how to make money from sponsorships.

    The result is that when clients ask these agencies to evaluate a sponsorship proposal, the agencies cannot do it, and they see the sponsorship as a competitor for billing dollars. So the agencies kill the sponsorship.

    When a property is pitching a sponsor, and the sponsor asks the property to make a careful and critical examination of it through the sponsor’s agency, an alarm bell should sound. In response, properties should have in place additional, non-intrusive pathways of communication with the sponsorship decision-maker, aside from their communication with the sponsor’s agency.

    Autocrats Wearing the Masks of Competent Sponsorship Managers:

    This costume usually involves a sponsor company executive disguising himself as a take-charge leader with the best interests of his company in mind. In reality, the sponsorship milieu is the autocrat’s personal fiefdom.

    He’s not such a big shot in the office, but he’s the company executive in charge of sponsorships. And when he’s on the road with the sponsorship, he’s The Man.

    For him, the hotel, hospitality suite, catered food, merchandise and apparel, event signage, wine, restaurants, weather and limo are never good enough. He berates his agency account executive when that exec takes an entire hour to scrounge up 12 more hotel rooms for next week’s Daytona 500.

    When the sponsorship is popular, he’s eager to take credit for it. But when the sponsorship’s effectiveness is questioned, it becomes clear that he hasn’t done the work to understand and measure it. He’ll be the first to ditch it.

    Sports properties dealing with autocrats would do well to create broader relationships in the sponsor company by making sure executives at different levels understand the value of the sponsorship.

    They also should spread a wide paper trail of successes linked to the sponsorship. Because the day will come when the autocrat is held to accounts, and he’ll get the boot. When he does, he’ll make a beeline for an agency job as a sponsorship expert (see above).

    The Accountant Masquerading as a Marketer:

    He spouts an understanding of the importance of building brands and creating loyal and frequent customers by reaching them through sports sponsorship. But he really doesn’t get it.

    In his heart, he’s a green-eyeshaded, sleeve-gartered Scrooge, pinching marketing pennies and carping about wasting money on sponsorship. He believes that carpet-bombing the public through multimedia price promotions is the best marketing tool, and that shoddy advertising is more powerful than sponsorship.

    This isn’t true, of course. According to International Events Group, a Chicago-based sponsorship think tank, advertising is good at communicating product attributes and pricing. But it also can clutter consumers’ lives and be intrusive.

    Sponsorship does a better job of building brand imagery and creating brand awareness, leading to consumer loyalty. And sponsors are invited into consumers’ lives because sponsorships complement customers’ interests.

    The problem is that somehow our masked accountant came through business school hearing nary a word about sponsorship, so he doesn’t understand it.

    People like him rarely stay in the same job more than two years. Properties dealing with him should keep records of their successes, try to survive his tenure and hope his successor is more enlightened.

    Unfortunately, he’ll probably be recruited as the sponsorship manager of a bigger company (see above).

    When these three costumed characters approach, it’s best to look behind the mask to know who you’re dealing with.n

    Mel Poole (mpoole@sportsbusinessjournal.com) is president of the consulting and marketing firm SponsorLogic.

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  • MLB cachet, fashion flash gives New Era big sales gains

    New Era’s 59Fifty, MLB’s exclusive cap since 1994, has won over fans of baseball and fashion.
    While a cutting machine trims the bills for New Era’s signature 59Fifty fitted baseball caps, CEO Chris Koch is explaining the 20 or so steps that will transform unidentifiable scraps of fabric into headwear that will fill the diamond during this week’s World Series.

    Part of the fourth generation of his family to run this cap business, which started 85 years ago in Buffalo and now resides in Derby, N.Y., Koch knows the production line intimately. Still, his explanation of the “22 sets of hands” that will touch the caps before they are boxed isn’t easy to understand; the cutting machine makes too much noise. While the New Era assembly line isn’t as cacophonous a production facility as, say, the nearby GM plant, the privately held company has nonetheless been making a lot of noise lately. The humming at the plant is merely theme music for a business now barely able to keep pace with burgeoning demand.

    After last year’s World Series victory by the Boston Red Sox, many MLB licensees, including New Era, wondered whether the Red Sox windfall would last through the holiday shopping season. A year later, and well beyond the Red Sox dividend, mushrooming sales of the 59Fifty, which has been MLB’s exclusive cap since 1994, have pushed New Era into uncharted waters.

    Koch said overall sales are up 60 percent for the year. MLB’s numbers, which include the Red Sox bump since they track a fiscal year that begins in November, has New Era sales up close to 150 percent. While total company revenue for the privately held New Era is not available, best estimates run at $250 million to $300 million a year.

    The domino effect has produced a number of firsts, according to MLB. Hat World is now the biggest retailer of MLB licensed apparel. Sales of MLB headwear have exploded to the point where caps outsell the rest of MLB licensed apparel for the first time. MLB apparel (including headwear) is outselling the rest of MLB’s licensed goods. And, among baseball’s business partners, only MLB’s national media partners are contributing more to the bottom line than New Era — an astounding fact as it stands.

    MLB licensees will sell more than 30 million caps this year, with New Era accounting for most of that, an estimated 70-80 percent of sales.

    John Farallo moves some St. Louis Cardinals Authentic Collection caps at the New Era plant.
    “I’d be lying to you if I said we forecast this,” said Koch, who is dealing with growth by opening a new distribution center in Harrisburg, Pa. He’s also looking at additional distribution sites in the Midwest, West Coast and Hong Kong within the next year or so, and there’s a search for a new corporate headquarters.

    “We’ve got some high stress, and a lot going on, but we’re still throwing logs on the fire,’’ Koch said, “and the last guy that suggested to me we should slow down isn’t working here anymore.”

    Certainly, there are on-field reasons for New Era’s success. After Boston’s World Series win, the rate at which Red Sox caps sold doubtless convinced retailers to buy more. MLB as a whole is sound economically. For the second consecutive year, and with the help of a franchise move from Montreal to Washington, the league set an attendance record, as did the New York Yankees, MLB’s top attraction.

    “Baseball is arguably healthier than it ever has been economically,” said former MLB Properties President Rick White, who signed New Era to its first exclusive license, and is now CEO of Phoenix Footwear Group. “Under those circumstances, an exclusive [on-field] headwear deal should outsell anything. No other sport has caps on the field of play.”

    New Era has been growing steadily for five years. Authenticity is at the root of every successful sportswear brand. New Era never had to pretend to be authentic because it was on-the-field; and its reputation for quality manufacturing has long been established. However, its recent growth was a triumph of form and function. New Era the manufacturer has become New Era the marketer. While fan-driven sales are still important, they are automatic for any licensee with exclusive rights. It’s the ability of this company to attract the fashion-driven consumer that is turning heads. New Era is now a company with enough fashion savvy that the urban market accounts for between 40 and 50 percent of sales. Fashion caps also command a premium beyond what the headwear seen on MLB fields costs.

    For at least half of their customers, the New Era trademark on the side of the cap is as important as the MLB team logo on the front. Allen Iverson may be a top NBA endorser for Reebok, but look carefully the next time you see him out of uniform — the cap he’s wearing usually is from New Era.

    New Era entered the fashion arena somewhat reluctantly in 1994 when movie director and cultural influencer Spike Lee asked if the company would manufacture red Yankees caps for him. Koch now acknowledges that initially he didn’t think he would sell any of the caps, nor did he think the design would be approved by a sport as wrapped up in tradition as MLB. The success of the cap veered the company into the fashion world, where it has become adept.

    “It’s the only hat the hip-hop crowd will wear,” said Glenn Campbell, co-founder, executive vice president and general merchandise manager of Hat World, which has seen a 25 percent spike in MLB sales at its 600-plus stores this year, pushing its baseball business to an unprecedented high — more than 33 percent of sales. “New Era has become as generic a brand as Kleenex or Xerox.’’

    Brand building was not exactly part of New Era’s DNA. Founded in 1920 by Koch’s great-grandfather, who made “Gatsby” caps out of wool to match men’s wool suits, the emphasis was always on manufacturing. In the mid-90s, Chris Koch saw a need for a branding effort. “Even baseball fans didn’t know who we were,” he said.

    His late father (and then boss), David, was by no means convinced. He thought that if you made a good product and delivered on time, that was enough. The younger Koch saw how marketing had elevated brands such as Nike and forged ahead with a new identity, acquiring field-level signage in every park and additional signage in 21 dugouts.

    It wasn’t that his father agreed to it, Koch said. “I just did it,” he laughs.

     

    Those branding efforts, combined with the authenticity provided by an exclusive MLB on-field deal and a reputation for quality gave New Era a platform on which to build itself as a fashion brand.

    “It’s like a Brooks Brothers button-down shirt or any other staple. Everyone knows it’s well made, so if it can catch some fashionability, you’ve got lightning in a bottle,’’ said Sal LaRocca, senior vice president of global merchandising at the NBA, which counts New Era among its headwear licensees. “New Era recognized that authenticity could translate into fashion and they were able to harness and grow that side of their business without losing any authenticity.”

    Koch said one piece of advice he did take from his father was to hire experts and get out of their way. So New Era now has marketers from Motorola, Schering-Plough and Sony, and designers from across the fashion and music world.

    “They’ve been able to keep pace with growth because [Koch] has surrounded himself with bright people and they’ve invested a ton in design and logistics,” said Mitchell Modell, CEO of the 127-store sporting-goods chain that bears his family name. “Because of New Era, baseball caps are now a 12-month business. We sell a ton for the holidays.”

    For example, if you need a cap to wear on Halloween next week, there are black and orange 59Fiftys for every major league team. New Era also does special MLB hats for Christmas and St. Patrick’s Day. Hat World’s site sells more than 160 styles of New Era Yankees caps, including green on green, seersucker, and plaid. The subtle tweaks New Era will add when requested, such as a contrasting fabric patch under the bill, add more variety.

    “The biggest driver (to growth) is that we’ve gotten good at constantly bringing new looks to market,” said John DeWaal, New Era’s vice president of global marketing. “On a monthly basis, or even more often, there’s a reason for our consumer to go back and shop.”

    Domestic manufacturing facilities in New York and Alabama help New Era serve the churning market. The company also manufactures in China.

    A portion of any success is timing, and New Era’s achievements are no exception. Two marketing trends that helped Starbucks grow to more than 9,500 locations have also helped New Era flourish. Like the $4 cup of coffee, the $25-$35 New Era cap is an affordable luxury, and one that’s considerably cheaper than buying the best suit or shirt. The mass customization pioneered by Starbucks is also an integral part of the company’s growth story. With heavy users keeping as many as 15 caps in their closet rotation, New Era has found a way to fill a need quickly and creatively.

    “It’s become like women and shoes,” said Hat World’s Campbell. “Customers now expect to get a different look from New Era every month. And they’ll do things with fabrications other vendors can’t or won’t.”

    An assembly line stitches up a variation of the Atlanta Braves cap at the Derby, N.Y., plant.
    The people within New Era maintain that they’re just reacting to fashion, not setting style. Even 85 years ago, selling hats was all about hooking up with the rest of the outfit. That hasn’t changed.

    “We never considered ourselves cool enough that we could figure out fashion,” said New Era President Peter Augustine, who has been with the company for 16 years. “We just work hard to stay in sync.”

    Some caps bear testimony to New Era’s willingness to experiment with trends — and in lots as small as 30 caps. There’s a few dozen Washington Nationals hats that incorporate two recent fashion trends: they’re pink and they carry a faux Burberry plaid. And a Philadelphia-area retailer wanted four dozen Phillies 59Fiftys in the distinct Philadelphia Eagles midnight green.

    “We didn’t really chase after the fashion market, it came to us organically,” said Matthew Pantoja, who became manager of New Era’s urban business unit after consulting for urban fashion brands such as Sean John and K-Swiss. “One of the things we have to keep in mind every day is to keep that fine line.”

    New Era is loathe to be known as a trend-setter, reminiscent of the days at Nike when fashion was known as “the F word,” even though then, as now, eight of every 10 athletic shoes purchased weren’t used for athletics. MLB licensing chief Howard Smith, a former Reebok marketer, says Nike and New Era have a lot in common: “Nike never sits still, and New Era is the same. They both continue to reinvent themselves, and the competition can never close the gap because New Era and Nike are already the category leaders.”

    Certainly, no one expects the rapid growth to continue unabated. The fashion tide will inevitably ebb. Koch’s forecast for next year sees business “slowing” to 30 percent growth, though company principals expect continued growth overseas, where 20 percent of revenue now originates. The kids’, women’s and college market are also seen as important future revenue sources. DeWaal calls the plans for additional market segmentation “niching the niche.” However, while business is rocketing, no one inside the Derby, N.Y., headquarters has time to figure out the reasons behind this year’s growth, much less answer related questions, such as how New Era can have its best year in Canada with virtually no NHL business because of the lockout.

    Another intriguing question is whether New Era will remain independent or be bought by one of the footwear brands it competes with in the licensed cap market. Koch is loathe to address those questions. Insiders say that a few companies have made a run at New Era but that, for now, Koch wants to remain independent.

    “Within sportswear brands, we own the head and Nike owns the feet,” said Augustine. “That’s pretty good turf for us to defend.”

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  • When handing out licenses, MLB plays small ball

    While the NBA, NFL and NHL contracted with Reebok when it comes to licensing, MLB has aligned itself with smaller companies that have domestic production specializing in the quick-turn, fluctuating demands that are normal in the licensed apparel market.

    MLB passed on offers from footwear companies for an omnibus license like the kind that has put Reebok’s logo on NFL and NHL jerseys. When MLB bid out its on-field apparel rights last season, smaller firms such as New Era continued as the exclusive on-field headwear, and Majestic grew its jersey rights from half to all MLB teams.

    Nike ended up with compression wear, along with limited apparel and cap rights. Reebok originally lost out, but subsequently came back and landed a small footwear license. For MLB, smaller is beautiful.

    Annual revenue for New Era and Majestic are less than the marketing budgets for Nike and Reebok. “We went with the industry specialists who are best at what they do,” said Tim Brosnan, MLB executive vice president of business. “We thought we could grow the business with them and really serve those markets.”

    The scenario is even more intriguing when you consider that the point man for MLB licensing is Howard Smith, a former Reebok marketer. “Companies like New Era and Majestic are Boston Whalers, zipping around a harbor of giant cruise ships,” said Smith, MLB’s senior vice president of licensing. “If Adidas or Reebok doesn’t ship a cap, no one knows it. If New Era isn’t shipping, someone in Derby, N.Y., isn’t eating.”

    When the game is healthy, marketing provided by footwear brands isn’t missed as much. The surge in retro jerseys last year and caps this year proved MLB’s primary apparel licensees — Majestic and New Era — can handle exponential volume shifts.

    “The MLB model is clearly more of a long-term play, and they’ve done a good job dividing by channels of distribution,” said Scott Dickey, an MLB licensee as K2’s president of licensing and promotions. “They’ve got their bases covered.”

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