The U.K.'s Guardian newspaper ran an online feature July 19 that detailed how much the 53 Olympic partners have paid for the privilege of being associated with one of the world's biggest sporting events. A total of $2.2 billion has been doled out to the IOC; the question is whether the association does these companies any good, especially when it comes to shareholder value. There are plenty of arguments for and against spending this money. However, at the end of the day, advertising during the Olympics attracts eyeballs that you would never get at most other events. For this reason, I believe shareholders can rest easy - it's money well spent.
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A total of 11 companies paid $100 million each for the global marketing rights in a specific product category for both the London games and the 2010 Winter Games in Vancouver. Coca-Cola (NYSE:KO) holds the rights for non-alcoholic beverages and will serve 23 million drinks over an eight-week period before, during and after the event. Coke's been a part of the Olympic movement since 1948. When you consider that the company spent $3.3 billion on advertising in 2011 and another $5.8 billion on marketing for its bottlers, it seems ludicrous to even be questioning the expense; it's a rounding error for the world's largest soda company.
Now if you wonder whether or not it's beneficial to spend the equivalent of $4 a share per year promoting a brand that's easily the most recognized in the world, that's a much better question. Coca-Cola spends more on advertising than Microsoft (Nasdaq:MSFT) and Apple (Nasdaq:AAPL) combined. Unfortunately, Coke's been the sponsor for so long that it has no alternative but to keep doling out the cash. If it didn't, Pepsico (NYSE:PEP) would surely jump into the fray. As for the other 10 companies with worldwide marketing rights, I'm sure that their situations aren't much different. It's really a drop in the bucket and if they didn't spend it on the Olympics they would spent it somewhere else.
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Investment journalists, myself included, tend to analyze most situations from a dollars and cents perspective, allowing almost no emotional arguments to enter the picture. The fact is every company associated with the Olympics - Coca-Cola included - does so for their own reasons, analyzing the return on investment in a slightly different way. Procter & Gamble (NYSE:PG) is also one of the 11 companies paying $100 million for the last two Olympics and it's doing everything it can to focus the Olympic audience on 34 of its global brands.
The 2008 Beijing Olympics saw an average of 27.7 million Americans watch sporting events on a nightly basis for 17 consecutive days, with businesses spending just less than a billion dollars on advertising. P&G expects its Olympic-themed ads to generate $500 million in sales compared to $100 million generated during the Vancouver 2010 games.
With P&G losing market share to Unilever PLC (NYSE:UL), this becomes a perfect opportunity to win some back. In recent years, P&G's advertising has become less effective at driving sales. In 2009, it generated $10.20 in sales for every dollar of advertising. In 2010 that dropped to $9.17 and $8.86 in 2011. In the span of two years, its advertising has generated 15% less revenue from the same dollar in advertising. It's clear that its traditional advertising isn't working. Therefore, Olympic advertising becomes even more important as a tool to reach moms - its core customer. In my opinion, P&G needs the Olympics far more than Coke does.
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According to Saxo Bank, the past five summer games have seen the host country's stock market outperform the MSCI global benchmark in the 12 months following the conclusion of the 17-day sporting event by an average of 16.4%. The FTSE 100 is trading at a forward P/E of nine times, which is much cheaper than its historical average and the S&P 500. The best bet for investors wishing to take advantage of the host country's increased publicity is to buy the iShares MSCI United Kingdom Index Fund (ARCA:EWU), which holds essentially the same stocks as the FTSE 100. The empirical evidence for this bet appears overwhelmingly positive.
As for the sponsors themselves, Dow Jones first created the Summer/Winter Games Index in December 2007. It represents 39 of the official partners, sponsors and suppliers of the current Olympic Games. The top three holdings are General Electric (NYSE:GE), Coca-Cola and Procter & Gamble, with four other American companies in the top 10 and another three from the U.K. The top 10 holdings account for approximately 75% of the weighting. Not surprisingly, consumer goods' companies make up 32% of the 39 holdings.
The index will be reconstituted on December 21 and then will remain in place until the third week of December, following the 2014 games in Sochi, Russia. Since its inception in 2007, the index has achieved a cumulative return of 8.4% as of July 20, compared to a loss of 9.6% for the S&P 500. With the previous paragraph making it very clear that the FTSE should outperform in the next 12 months, this index would be great to own. Unfortunately, there is no ETF that replicates its performance, but it does demonstrate that shareholders tend to win where it counts most and that's in the price of the stock.
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The Bottom Line
When it comes to determining if Olympic sponsors actually create shareholder value, you're talking about a very subjective analysis. Academic studies have tried to quantify the association but none really have hit the nail on the head. As the cost of hosting the Olympic Games has shot through the roof, organizing committees have come to rely on these sponsorships in an attempt to break even.
As a result, these committees tend to lean on the government for support, including protecting the marketing rights of those sponsors. Leading up to this year's games, the U.K. government has been especially protective, leading some to believe it's gone overboard in its efforts. Whatever the case, if Coca-Cola or any other sponsor felt that the association put its brand in a poor light, it's reasonable to assume that they'd pull their support faster than you can blink an eye. For this and other reasons mentioned above, I believe that the marketing dollars spent by Coke and the other major sponsors is still good business. Shareholders have nothing to worry about.
At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.
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