Bull Vs. Bear: Olympic Advertising Is A Waste Of Shareholders' Money

By Stephen D. Simpson, CFA | July 24, 2012 AAA

Question: Are the Olympics worth the money spent on marketing by corporate sponsors?

Bear's Response
Commercial sponsorship is a huge part of the "Olympic experience." Not only do corporate sponsors go a long way toward defraying the cost of an Olympics, but "in kind" payment of services and products can make the games run more smoothly. The question, though, is whether these companies get an adequate return on their money. I believe they do not.

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When Branding Backfires
The whole point of Olympic sponsorship is to get more people to buy your product or service. It doesn't really matter if that inducement comes in the form of strong word of mouth, based on whether the product or service looks appealing or that customers respect the fact that your company sponsors the Olympics. The fact is that the Olympic sponsorship means millions and millions of eyeballs on your product/service over a period of two weeks.

However, what happens when it goes wrong? Many viewers seem to feel that the Olympics has become "over-commercialized" and they are more likely to blame the corporate sponsors whose logos are everywhere than they are to blame the Olympic Committee.

Along similar lines, increasing reports of "brand bullying" aren't going to help. If people are denied access to Olympic venues or otherwise harassed because they wear the logos of non-sponsoring companies, word is going to spread quickly on social media and those Olympic sponsors may face an unexpected backlash.

SEE: The Pros And Cons Of Sports Investing

Exposure Is Often Moot
There's a curious catch-22 in Olympic sponsorship. Clearly, such sponsorship offers an amazing opportunity to get a company out in front of millions of eyeballs, but the companies that can afford such sponsorship already have very well-known brands and products. Is there anybody who is going to hear about Coca-Cola (NYSE:KO), McDonald's (NYSE:MCD) or UPS (NYSE:UPS) for the first time just because they're watching the Olympics? Likewise, is there anybody who doesn't already know or use ArcelorMittal (NYSE:MT) steel who is going to just because they're an official sponsor?

I won't say that Olympics exposure is universally pointless. I have to think that a company like Adidas could get some benefit from showcasing new athletic performance products, but what happens if the athletes atop the podium are rocking the Nike (NYSE:NKE) swoosh instead?

Likewise, few people watch the Olympics 24/7 and they will be deluged by ample non-Olympic advertising and promotional campaigns, some of which will mention or reference the Olympics in such a way to create confusion as to whether they're "official sponsors."

SEE: How Salary Caps Changed Sports

Customers Say They Don't Care
A recent Harris poll found that over 70% of respondents felt that Olympic sponsorship made no difference when it came to making buying decisions. That suggests that this is money wasted. I'm always cautious about these surveys, as consumers often underestimate the influence that advertising has on them and are loathe to admit to being easily swayed. Nevertheless, if the customer you hope to reach says, "I don't care if you sponsor the Olympics," you cannot completely ignore that.

The Pain Is Certain, the Gain Is Not
Companies, particularly consumer product and service companies, spend billions on advertising and millions trying to figure out how well that advertising works. Although some consultancies boast of being able to assess ad efficacy, the reality is that no company knows exactly how much economic benefit it derives from sponsoring the Olympics. In fact, a recent study by The Economist suggests no real correlation in pre- and post-sponsorship performance.

Maybe Olympic sponsorship matters, and maybe it doesn't. But what I do know is that this sponsorship costs $15 million to $100 million. That's a lot of money to invest in a one-time event with not only no guaranteed return, but a likely immeasurable return to boot. I daresay that if one of these companies announced that they were spending $100 million on a one-time R&D project "just to see what happens," shareholders would be howling in protest.

SEE: Obscure Sports That Pay Big Slideshow

The Bottom Line
By no means am I hater of the Olympics, and I recognize the economic reality that it takes money to put on a good show. If companies weren't willing to pony up substantial funds, there would be a lot less spectacle to the events (which may or may not be a bad thing based on your point of view). However, that doesn't make it a good use of shareholder capital.

There is little proof that Olympic sponsorship really establishes any sort of long-term product/brand recognition, nor that it gives the sponsor a durable advantage over a non-sponsor.

At the end of the day, no company can say with certainty whether its Olympic sponsorship earned a positive return (nor how much), and to me that's reason enough to reconsider spending the millions upon millions that such sponsorship demands.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Don't forget to read the Bull Side of this debate and weigh in with your opinion below.

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