Wednesday, 9 July 2014

Sneakernomics: What Happened To The Big NBA Rookie Shoe Contracts?

Remember about eight months ago, when the Internet was on fire with stories like these from pundits convinced that Andrew Wiggins, before he had even stepped onto a college basketball court, was going to get $18 million a year from a shoe company.  Wiggins was “the next kid coming into the NBA that’s going to demand, on talent alone, a significant amount from a brand.”

So what happened?

History

When Lebron James came into the league, Nike signed him to a $19 million shoe contract.  When Kevin Durant turned pro, he got a $17 million shoe deal.  John Wall got a $15 million rookie deal from Reebok.  Notice a trend line?

Since Wall, no rookie has received a rookie shoe contract in excess of $10 million.

Most have settled for deals in the $1-2 million range.

“One and Done”

The NBA rule allowing college players to turn pro after their freshman year has hurt the marketplace for rookie contracts.   Brands (and teams) are betting on potential rather than performance. Giant rookie shoe contracts are just too risky.

By the way, here is a fascinating study by fivethirtyeight.com on the advantages for recruiting sophomores.  Brands should take a lesson.

Economics

One of the key reasons I think we have not seen huge rookie shoe contracts is because the cost cannot be justified.  I’ve developed a simple thumbnail to help us understand the economics of shoe deals

Most athletic shoe brands spend 12-13% of sales on marketing (or as Nike cutely calls it, “demand creation”).  If we use a 13% standard to gauge endorsement costs vs. wholesale sales, we can get a quick snapshot on profitability.

So Lebron earns $19 million a year from his Nike shoe deal.  Dividing that by 13% equals $146 million.  This means in order for LeBron’s endorsement contract to be offset profitably, he’d have to sell $146 million worth of shoes each year.  According to my analysis of the data from SportsOneSource, in 2013 and 2012, wholesale sales of LeBron’s shoes were about $155 million. He did not offset in the years before that.  Prior to 2012, sales of LeBron’s shoes were well below $146 million, meaning Nike “lost money” on his deal.

Kevin Durant’s signature shoes had phenomenal growth in 2013, but at $17 million per year, he needs $130 million in sales.  Unfortunately KD’s shoes only generated about $85 million at wholesale.  Again Nike “lost money” on the deal.

Now—I recognize this is a simple analysis.  It does not include apparel sales (which are tiny compared to shoes), international sales (10-15% of the U.S. market) or any other “goodwill” from being associated with the brand.  But reality says these mega deals just have not paid for themselves.

Nike opts out
This analysis can help explain why Nike has chosen to let elite athletes go from endorsement contracts.  Recently, Dwayne Wade signed with Li Ning and Steph Curry signed with Under Armour. Clearly Nike could have paid these athletes, but I’m sure they ran a P&L on the sales generated by player endorsed shoes and decided to opt out of these expensive, non-productive contracts.

Since Nike/Jordan controls 95% of the U.S. basketball shoe business, these brands essentially set the market for endorsements.

Chinese Brands

The Chinese sneaker brands have jumped into the endorsement market recently.  Most notably Dwayne Wade left Nike to wear Li Ning and Rajon Rondo to Anta. I do not expect these brands to make a run at the U.S. market. I think these signings are more about the Chinese brands being authentic to the Chinese consumer.

That said, the Chinese brands might make a run at a rookie contract.

Conclusion

Given the realities of the lack of return on major endorsement investments, I do not expect any rookie will receive a huge endorsement contract this year.  If a brand chooses to spend millions to have a rookie wear their shoes, I do not expect that brand to make back their investment in shoe sales. That investment will be a huge waste of marketing dollars.
http://www.forbes.com/sites/mattpowell/2014/07/08/sneakernomics-what-happened-to-the-big-nba-rookie-shoe-contracts/2/

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