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Match report: Sport 1 – Investors 0

Investors haven’t always found it easy to generate returns from the sports market, but this is a long game and there remain plenty of opportunities for growth
June 27, 2018

This was meant to be a match of equal footing, a game in which sport and investors could both emerge victorious. In the opening stages, that seemed to be the case. Media and sponsorship (the two pioneers of ‘Team Investor’) ploughed money into the game, opening a platform for sport to begin its drive for financial glory. As football, athletics, rugby and golf (stalwarts of ‘Team Sport’) gained commercial ground, those early movers from Team Investor also grew in confidence, throwing more money at sport and reaping the rewards that came with increased publicity.

Team Investor has since gained more members as the retail, broadcasting, nutrition and gambling industries all hope to reel in the same commercial benefits as media and sponsorship have done. The opportunities are there for the taking. 'Sport' vs 'Investor' is a match with no limits on time, pitch size or number of players and its global growth continues to outpace many industries.

But sport plays with dirty tactics, and opportunities are often snatched away. Halfords (HFD), for example, enjoyed some retail success off the back of British cycling’s winning streak in the 2012 Olympics, but that was quickly extinguished by alleged drug use and poor publicity. Pub groups and broadcasters also enjoy trading surges with every international sporting event, but these tend to vanish during subsequent off years. Even gambling companies have been tripped up: Leicester’s odds-defying football Premiership victory in 2015 left the bookies in the dust.

But this is a long game with plenty left on the clock, so there's time for investors yet. Suffice to say, managers will have to make sure they pick the right team.

 

The Player Rater

Sponsors: highly experienced, versatile

In the past, companies have paid extraordinary amounts of money to get their name associated with a major sports team, player or event and it’s a trend that looks unlikely to let up. According to PwC’s 2017 Sports Outlook report, money spent on sponsorships in the North American sports market is projected to reach $20bn (£15bn) by 2021, representing a 4 per cent compound annual growth rate (CAGR) from 2017.

Today, with the reach of global sports greater than ever been before, sports sponsorship can be an incredibly powerful marketing tool. Sports clothing chain Under Armour, for example, witnessed massive growth in the UK after it made the kit for Tottenham Football Club and tennis player Andy Murray, while RedBull has credited recent growth to its ownership of two successful Formula One teams and sponsorship of extreme sporting events.

In the UK, Fevertree (FEVR) recently waded into the industry with its sponsorship of the annual grass tennis tournament at Queens. Chief executive Tim Warrilow said, the partnership “perfectly reflects our values as a premium brand, celebrating a great summer of sport”. Perhaps a similar strategy in the US sports market could help the group with its plans for stateside expansion.

For investors who believe in the power of sponsorship, there now exists an exchange traded fund (ETF) dedicated to companies that sponsor the four major US sports leagues. The Pro-Sports Fund Tracker (FANZ) launched in July 2017 and holds stocks including Under Armour, Foot Locker and General Motors because its founders think "companies that invest in pro sports partnerships grow faster than the broader economy”.  FANZ has certainly made a good start to its trading life, with net asset value (NAV) growth of 13 per cent since inception.

 

Marketing: ageing, but fresh legs wait on the bench

From Brazil’s Nike-clad national football team tricking their way through an airport in 1998 to Carlsberg’s 2006 ‘best pub team in the world’, advertising campaigns for the World Cup are some of the finest around. And with good reason. With a peak audience of 18.3m tuning in to watch England beat Tunisia in Russia, World-Cup-inspired ad campaigns appear to be worth the investment. For the marketing agencies responsible for creating those campaigns, major sports events offer a big opportunity.

But it’s a hugely competitive market and in the UK there's certainly no shortage of companies offering sports marketing services. Recent changes in the way we consume sporting events – including the rise of digital streaming and social media platforms – are also making it harder for the marketing companies to compete, a problem shown up in results from listed players such as TLA Worldwide (TLA), M&C Saatchi (SAA) and WPP (WPP).

But amid the changes threatening to unseat the titans of the industry lie opportunities for digitally-focused, forward-thinking companies. Google, for example, has added statistics to its search results for each World Cup game, while Twitter and Snapchat are offering football-focused sponsored ad slots. According to Deloitte’s 2018 sports market report, “winning the hearts and wallets of millennials” via social media campaigns is crucial for the long-term success of the sports advertising market. 

 

Broadcasting: quick to capitalise, hugely popular

In 2019, for the first time, UK-based football fans will be able to watch Premier League games via their Amazon (US:AMZN) Prime subscription. True, the US retail giant only won the rights to a small number of games after Sky (SKY) and BT (BT.A) – which have shared the rights to the world’s most valuable football league since 2002 – chose not to bid for all of them, but the shift marks a big moment in the evolution of sports broadcasting.

Amazon is not the first tech platform to dip its toe in the world of sports broadcasting. Facebook, Twitter and YouTube have streamed many high-profile events in the past few years and even offer a platform for less commercial sports such as table tennis.

And with these deep-pocketed US companies showing increasing interest in sports rights, the value of television content has risen enormously in the past few years. For example, the England and Wales Cricket board nearly trebled its deal for England’s 2018 cricket matches; Amazon forked out £2m more for global rights to the current ATP world tennis tour than Sky had previously paid and in the US; and the NFL has cost Fox, NBC, CBS and ESPN 60 per cent more than it did last time around. That’s great news for the original content owners, but troubling for global pay-TV companies which rely on rights to major sporting events to maintain subscribers.

 

Retail: plenty of ambition, poor judgement

In 2015, a video mocking women who dress in 'active-wear' captured the attention of the internet. The video was popular because it resonated: leggings have become the go-to choice for women in the supermarket, on the school run – even at the cinema.

The demand for so-called ‘athleisure’ clothing is one of the reasons the sportswear market grew 5 per cent in 2017, according to Euromonitor International. It’s a trend that has benefited many retailers, including JD Sports (JD.) and Sports Direct (SPD), and individual brands such as Nike and Adidas, and even high-street names such as Gap and Superdry (SDRY).

But sports retail isn’t all plain sailing. Like much of the wider industry, its growth has been hampered by the meteoric rise of Amazon. In the US, Sports Authority, Sports Chalet, Eastern Outfitters and Gander Mountain have all succumbed to bankruptcy in the past few years after failing to compete online. In the UK, Halfords has been undone by the vulnerability of its margins and poor customer service. After the post-Olympics surge for bikes died out, it quickly became clear that most of the chain's selection was also available on Amazon.

 

Gambling: questionable character, works best in predictable periods of play

Sports betting is big business and it’s become a popular investment choice because the house always wins – or so the saying goes. But tighter regulation in some of the sector's key markets has caused a sense of unease.

The solution for many of the listed players is heading to the US, which recently overturned a 25-year-old law banning sports betting. Now each individual state will be allowed to set its own sports betting laws, and analysts think legalisation is more than likely in most states. The market opportunity is huge: around $150bn is gambled illegally every year in the US, according to the American Gambling Association – good news for William Hill (WMH), GVC (GVC) and Paddy Power Betfair (PPB), which all have sports betting divisions in the US already.

 

Nutrition: agile and hungry for glory

Protein powders, carbohydrate gels and isotonic drinks have been consumed by athletes for many years. Science is still unsure whether these supplements actually make any difference in elite competition, but many athletes still swear by them.

More recently, a wider sports nutrition market has emerged as amateur athletes seek to replicate the diet of champions, opening up a larger commercial opportunity. Maxi Nutrition (which pharma giant GlaxoSmithKline (GSK) has put up for sale), MyProtein (owned by private equity group The Hut), Science in Sport (SIS) and High5 (recently bought by Associated British Foods (ABF)) are all fighting for the attention of gym bunnies, park runners and weekend cyclists with their growing product ranges.

Advertising is a major expense for these companies, but so is product development as getting the thumbs up from elite athletes can prove to be a big boost. But the question remains as to whether the market can accommodate so many rivals.