How Do You Stop a NASCAR Monopoly?

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A look at the financials of NASCAR's top teams

A look at the financials of NASCAR's top teams

by Tom Bowles

After five years of skydiving downward in both ratings and relevance, 2011 appeared to be the season NASCAR pulled out the parachute. A white-knuckle championship battle, ending in a tie between Carl Edwards and Tony Stewart, led to a double-digit audience increase in the Chase. Five new first-time winners showcased the parity of competition, while the upcoming car models for 2013 are reported to put the “stock” back in stock cars. (What do we call them again? The Car of Tomorrow, Tomorrow?) Even with a disastrous start to 2012, courtesy of Mother Nature, the rain-delayed Daytona 500 pulled an 8.0 in the Nielsens, with a total of 36.5 million people tuning in for at least some portion of the event — making it the second-most watched stock car race in history.

But as evidence mounts that NASCAR is headed in the right direction on-track, its position in company boardrooms across America remains in a precarious position. Last year’s Daytona 500 champion, Trevor Bayne — despite being charismatic, youthful (21), and trouble-free — failed to secure a primary backer to run the Cup Series full-time this year. Even now, he’s positioned to start no more than 12 races, despite being paired with the legendary Wood Brothers while watching funding for his AAA-baseball type Nationwide ride dry up completely.

Matt Kenseth, this year’s 500 champion and a top-5 finisher in last year’s Cup Series point standings, remains without funding for a whopping 41 percent of this season’s schedule. Even teammate Edwards, who fell just short of the title, lost full-time backer AFLAC and is using a potpourri of a half-dozen primary sponsors to make it through.

Why does the financial bleeding refuse to stop? All other major sports continue to rake in the dough for everything from stadiums to postseason tournaments, watching their “recession revenues” skyrocket. According to Forbes’ yearly evaluations in the four major stick-and-ball sports, the average value of a franchise went up over the past 12 months: 7 percent in MLB, 6.5 percent in the NBA, 5 percent in the NHL and 4 percent in the NFL. And NASCAR? Its average value within the top nine teams declined 3 percent, down to $141 million — a number that pales in comparison to even the $240 million average value of a hockey franchise. So if “it’s the economy, stupid,” as many NASCAR executives like to claim, why are people and advertising dollars beefing up elsewhere? Money still makes the world go round, and even in the cases where there’s a limited amount, people are choosing to spend it in other places.

It’s because fixing the sport’s business model is harder than it looks. Every organization is a private contractor, meaning the sport has no control over everything from how they spend their money to how many races they enter. During NASCAR’s “boom” years, in the 1990s, that was a good thing: any Joe Schmo off the street with a license could come in with a racecar and attempt competition at even the sport’s top level. But as the price to play increased, NASCAR’s lack of leverage bit it as a “country club” level of elite owners gathered exorbitant amounts of money and resources to compete. Opening up their own engine shops, chassis centers and hiring the Best Buy geek squad of aerodynamic specialists, their price to play became bloated compared to the $5 million it took to win in the mid-’90s. Suddenly, $25 million for a sponsor was what a small, single-car team needed to match the amount a four-car organization was paying its glutton of 400-plus employees.

That’s important, because as the sport enters 2012 a decline in both owners and revenues continue to give us one crucial exception to the rule. Take a look at how the top 5 NASCAR race teams in value have evolved over the last five years since Forbes first rated them in mid-2006:

Forbes’ Most Valuable NASCAR Teams: 2007
1) Roush Fenway Racing - $316 million
2) Hendrick Motorsports - $297 million
3) Joe Gibbs Racing - $173 million
4) Evernham Motorsports - $128 million
5) Richard Childress Racing - $124 million

Total value of the top 9 teams in the sport: $1.444 billion
No. 1 Team (Roush Fenway Racing): 21.8 percent of that total

Forbes’ Most Valuable NASCAR Teams: February 2012
1) Hendrick Motorsports - $350 million
Percentage Difference: +17.8 percent

2) Roush Fenway Racing - $185 million
Percentage Difference: -41.5 percent

3) Joe Gibbs Racing: $155 million
Percentage Difference: -10.4 percent

4) Richard Childress Racing: $147 million
Percentage Difference: +15.6 percent

5) Stewart-Haas Racing: $108 million
Percentage Difference: N/A

Total value of the top 9 teams in the sport: $1.267 billion (8.7 percent decline)
No. 1 Team (Hendrick Motorsports): 27.6 percent of that total

You’ll notice that Hendrick, which was second before Jimmie Johnson racked up the first of five straight titles, now has nearly double the value of any other Cup Series organization. That’s not unusual in sports; in baseball, for example, the Yankees’ value ($1.7 billion) is almost twice that of the second-place Boston Red Sox. But in baseball, where every team is franchised, the Yankees pay a penalty for spending too much money, a luxury tax that benefits other teams and helps keep the sport’s competitive balance intact.

In NASCAR, there is no such thing, meaning as other teams fall further behind Hendrick can still charge top dollar for everything from advertising space to engines and chassis. Its equipment has now won six straight titles; even Stewart’s win last year, with his Stewart-Haas Racing team, came through the grace of Hendrick sheet metal and horsepower slapped on the side. As revenues increase, there are no consequences for Hendrick to consider cutting spending or streamlining its business. In fact, with the SHR partnership throwing an assist to “satellite” organizations, it only increases its value. And it’s A-plus marketing department, with statistics to sell, continues to rack up worldwide deals: they’re on the verge of getting a Chinese company, Trina Solar, to back Kasey Kahne’s No. 5 for nine events.

Does that mean money buys championships? Not necessarily, but the important thing is it appears that way to the owners who matter. Kenseth is the perfect example: he already has three sponsors in Best Buy, Zest (a new company) and Valvoline that, if Roush Fenway Racing lowered its operating costs could back him in all 36 events. Their presence is a sign the Fortune 500 isn’t completely ignoring the sport, they’re just putting their foot down and saying, “We’re not giving you a blank check anymore.”

But with the top team still pushing the envelope, how could Roush lower the price tag? No wonder Edwards has more logos on the side of his uniform than that guy with the pieces of flare in Office Space. Broken apart, then sold on particular drivers’ talent, that fleet of companies could back nearly 25 percent of the 43-car grid. But the price to play, uncontrolled, remains high enough that RFR believes the strategy must be to filter funding straight to their sponsor’s dream.

The same applies to an owner looking to enter the sport from the outside. No one wants to enter racing to run second, and right now, the impression is to run first, based on stats, you need to spend at a rate that creates a $350 million NASCAR organization. Even beyond Hendrick, the value for a team like Richard Childress Racing suggests an operating cost per team approaching $50 million.

Certainly in Hendrick’s case, considering Johnson left Daytona with negative points, the actual truth to that statement – money buys championships – is far from a guarantee. But the one place where NASCAR is right about the economy is too much money scares potential owners away, from Red Bull Racing bailing back to Europe to former Cup champion Robert Yates, who chose to retire rather than fall further behind the country club crowd.

This year, Forbes stopped short of ranking the top 10 NASCAR franchises because it only found nine that stood above the fray. What’s the solution? Some say franchising — the first step towards some sort of “salary cap” or “luxury tax” model the other major sports have employed. Others say an expansion of NASCAR’s one rule it tried to use to stop uncontrolled growth: a four-team “limit” per owner. Reducing that to two, plus outlawing the sales of engines and chassis to teams you do not own could limit information sharing, although it would do little to nothing to cut costs. Others feel like putting creativity back in the hands of the mechanics, like relaxing rules for the 2013 model and reducing dependence on aerodynamics, will give underdogs the ability to compete once again at the fraction of the cost. If it’s proven they can win — consistently, to the point a single-car team is making the Chase — perhaps the economics would magically reverse themselves.

There is no perfect solution out there right now. But it’s clear there’s a problem, and the quicker NASCAR stops denying it, blaming a dragging economy and starts working towards long-term fixes, the better off it’s going to be.

Follow to Tom on Twitter: @NASCARBowles
 

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<p> Athlon Sports contributor Tom Bowles examines the economics of NASCAR, where corporate funding makes the cars go 'round.</p>
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