16/12/2013
NEWS STORY
Mat Coch writes:
At the end of 2013 McLaren not only waved goodbye to Sergio Perez, but also to title sponsor Vodafone.
Perez had a patchy season at best, failing to convince the team's top brass that he was worth another chance. But while Perez's loss and speculation over replacement Kevin Magnussen's was rampant, Vodafone quietly exited stage right.
Of the two, the loss of Vodafone is of greater importance. As title sponsor the telecoms giant pumped in around £45million a year, a sizeable component of McLaren's annual budget. It's the sort of money a team notices when it comes to finalising its budget.
"A Formula One team's budget is set in much the same way as any budget for any professionally run business is set," explains Ekrem Sami, Managing Director of McLaren Marketing. "In other words, planned expenditure shouldn't exceed projected income.
"In the case of McLaren, once the relatively fixed costs have been factored in - such as the running of the factory, the salaries, travel and so on - objectives can be set in terms of car R&D, and the total expenditure then matched to the total income.
"That total income derives principally from a combination of commercial sponsorship and our share of the FOM revenues," adds Sami. "In theory, therefore, the more total income a team has, the more R&D it can carry out, the more performance upgrades it can produce, and the more speed it can dial into its car on a continuous, ongoing season-long basis. In practice, however, there's always an element of trial and error in any R&D programme, and unfortunately not every performance upgrade proves successful."
For McLaren, the loss of Vodafone will not bring the team to its knees. While a fair proportion of its annual budget, McLaren has other revenue streams as Sami explains. What's more, McLaren knew Vodafone's decision ahead of time.
Vodafone's decision to end its relationship with the team was announced in March, ahead of the opening race of the 2013 season in Australia. It followed a global trend for Vodafone, which has been withdrawing from sports such as football, cricket and motor racing. According to the company it is part of a strategy that will see the money previous pumped in to high profile sponsorships spent on raising brand awareness in other means.
However, what does raise eyebrows is the fact that it is now December and the team has made no announcement regarding a replacement. It suggests that it has simply not found one, which is a concern for a team which prides itself on long term partnerships with household names. "Hugo Boss has been with us for more than 30 years, Tag Heuer has been with us for more than 25 years, SAP and Mobil 1 have been with us for around 20 years," Sami declares. "More recently, we've added equally important blue-chip partners such as Santander, GSK, Johnnie Walker, Gillette, Hilton, Aon and so on."
How great an impact the loss of Vodafone will be is debatable. Some see it as a severe blow to the team, but if one looks longer term there are potential positives on the near horizon. The full impact of Vodafone's withdrawal will not be felt immediately. Fully aware of Vodafone's intention not to continue, McLaren would have been wise to spread the last of Vodafone's investment over both 2013 and 2014, softening the final blow. Ironically, a poor 2013 season was a blessing in disguise. As explained by Sami, any spare money is typically invested in R&D to improve performance, but as it was so far off the pace it provided an ideal opportunity to divert funds instead to 2014.
It's a pessimistic attitude, but a realistic one in the harsh economic environment Formula One now finds itself. But for McLaren it's not all doom and gloom, as while 2014 may be a struggle there are some strong positives come 2015.
The loss of income can be offset by a reduction in costs, with McLaren poised to eliminate one particularly large fixed cost from the ledger in 2015. Where once it had been a factory-backed team, McLaren is now a simple customer to Mercedes-Benz, paying the company tens of millions of pounds for engines each year. Just what an engine supply contract is worth varies from team to team, though Sauber's deal with Ferrari gives some idea at £15million a year. From 2015 that is an expense McLaren simply won't have.
Eliminating that cost has the benefit of reducing expenditure, allowing that money to instead be invested back into the R&D side of the budget. From 2015 for any new sponsor to match Vodafone's £45million, it need only contribute around £30million.
But there is more positive news as another revenue stream is expected to grow. As Sami explained, teams derive income from sponsorship as well as FOM prize money, which is linked to the sports profits. Between 2003 and 2011 FOM's revenue rose from £446million to £932million, while a study by UBS in 2012 predicted that trend should continue at 9.2 percent a year until 2016. Based on those figures alone the sport could earn around £1.11billion in 2013, and £1.21billion next year.
For McLaren that growth directly translates to increased prize money courtesy of the fact 47.5 percent of Formula One's profits is paid out to teams through two equally valued columns (as they're referred to in the Concorde Agreement).
Column A pays a simple 10 percent figure to teams which have finished in the top ten for two years in three. Using the UBS forecasted figures, which predicted Formula One would generate £1.11billion in 2013, that figure comes to around £25million per team.
Column B pays out based on championship position, with a sliding scale favouring the winners. In fifth place McLaren is entitled to 10 percent of the pot, another £25million according to UBS, making a total of £50million in prize money for the year just gone. Even if McLaren fails to improve on its 2013 performance next season, UBS predicts the Woking squad could receive an extra £5million as the sports revenue grows.
Vodafone's £45million loss, after Honda's factory supply and increased prize money is considered, now only equates to £25million in lost income.
Of course that doesn't change the fact McLaren does not have a title sponsor. For 2014 it is potentially £45million worse off, and even with the various changes to its income and expenditure that figure is still £25million. It begs the question; who could fill the void?
The likes of Hugo Boss and Tag Heuer are niche brands, the return on a £25million increase in investment would mean selling a lot more suits and watches for no greater brand awareness and risks diluting brands which have been built on exclusivity. Similarly Mobil 1, like several other petroleum companies, is already heavily invested in the sport and has no apparent need to increase that.
And then there is pharmaceutical company GlaxoSmithKline (GSK). Along with Lucozade, which emblazons McLaren's rear wing, it owns a number of household brands including Sensodyne, Nicorette and Panadol. In 2012 it had an income of £4.7billion and is currently headed by Sir Christopher Gent, who joined as chairman in 2004 after stepping down as CEO of Vodafone. Since 2006, Gent has also sat on the board of Ferrari as a non-executive director.
The relationship between GSK and McLaren already extends beyond just stickers on race cars. At the McLaren Technology Centre it has developed the "McLaren-GSK Centre for Applied Performance," which looks at things from consumer healthcare to manufacturing and R&D. Together, McLaren has helped develop ways for GSK to better manage stock levels, inventory management and more.
"So McLaren's and GSK's technical collaboration goes both ways," explains Sami.
"There's a marketing relationship, which sees our cars carrying various GSK brands in keeping with the company's overall global marketing objectives for those brands - so far, in different grands prix in appropriate territories our cars have carried the logos of GSK's energy drinks brand Lucozade, its sports nutrition brand Maximuscle and its health food and drink brand Boost - and the results in terms of increased awareness have been very impressive indeed," claims Sami.
"And in the area of sports nutrition science, GSK's R&D technicians have developed two bespoke formulations of Lucozade and Maxinutrition for our drivers' unique needs: a hydration formulation for pre-race hydration, and a race formulation to enhance endurance during a race," he adds. "There's real lap-time benefit to be had in those formulations, because a Formula 1 driver is an athlete and he can only ever be as quick as his body allows him to perform.
Of its existing partners, GSK appears the one most able to increase its involvement. The two companies already have a strong relationship, while GSK has both the means and the brands. There is a degree of logic in expanding the current deal, and the sort of money McLaren needs to adequately replace Vodafone is comparatively small for such an immense company.
Of course we've not even spoken of Honda. While it will contribute free engines for 2015 who is to say it won't contribute financially too? During its hey-day with Mercedes, McLaren received £25million a year in sponsorship from the German marque and while it's likely that investment has been rolled back, it suggests McLaren's new engine partner may join the team as a commercial partner too. Should the Japanese firm simply equal the money Mercedes was spending on the team in 2010 the budgetary hole the team current faces disappears. Anything Sami and his team could find from other sources would actually put the team ahead of the game.
Of course, if McLaren improves on fifth place in the championship in 2014 its share of the prize money also grows. And if sponsors can be found for some of the empty bodywork, a feat McLaren has traditionally excelled at, the team stands a good opportunity of starting 2015 financially well ahead of even where it ended 2012.