A visit to the Hendrick facility on the outskirts of Charlotte, North Carolina, reveals just how capital-intensive stock-car racing has become. A software programmer tests a powerful engine while sitting behind protective bulletproof glass. New paint schemes are applied to Jeff Gordon’s and Jimmie Johnson’s cars in cubicles that resemble clean rooms. Everywhere, well-educated, well-paid employees test, retest, and calibrate.
According to estimates, top teams spend anywhere from $150,000 to $175,000 to build a single race car, including the engine (which, repeatedly rebuilt, has a lifespan of about 15 races). Overall, the tab for running a top-tier racing team looks to be north of $20 million (see “Sticker Shock” at the end of this article). “It’s getting very expensive to race,” says Lampe, a former auditor who did Hendrick’s taxes before joining the company in 1999.
In the past, the rising costs of racing were more than offset by sizable increases in sponsorship cash, licensing fees, and prize money. Indeed, over the past 10 years, annual revenues at Hendrick have jumped from $50 million to $200 million. One published account pegs its 2006 earnings before interest, taxes, depreciation, and amortization at around $39 million. But a bad racing year, with reduced prize winnings, would substantially lower Hendrick’s profit.
That’s not going to happen this year — Hendrick drivers have won 10 of the first 19 races in the Nextel Cup, Nascar’s premier racing circuit. Nevertheless, a nearly double-digit increase in expenses, including racing costs, R&D, facility costs, and SG&A, is starting to eat into the company’s margins. For CFOs at other businesses, the typical response to rising costs amid a market slowdown would be to limit budget increases. But for many teams, winning is the only KPI that matters.
“There are two ways to budget in this business,” notes Lampe. “Figure out what you need to win, and that’s your budget — that’s how we do it. Or, figure out what your sponsors are paying, and that’s your budget.”
The number of corporations willing to pay big money to sponsor stock-car racing teams appears to be dwindling, thanks in part to troubled business sectors. In March, for example, besieged mortgage lender Ameriquest withdrew its sponsorship of Roush Fenway’s No. 16 car, driven by Greg Biffle, two years before the contract was up.
While the powerful Roush Fenway team will no doubt find a sponsor for Biffle’s ride, corporate boosters appear to be holding the line on their investments. This is understandable. Primary sponsorships are getting pricey, now between $15 million and $20 million. Even lower-profile sponsors, so-called major associates, pay anywhere from $2 million to $4 million to put a decal on the rear deck lid of a stock car.
Until recently, backing a Nascar team was one of the best buys in marketing. A corporate logo emblazoned on the hood and trunk of a race car is perfect product placement — “Tivo-proof” is how one racing executive puts it. In fact, sports-marketing specialist Joyce Julius & Associates reckons all sponsors involved in Nascar’s top series, the Nextel Cup, received $5.2 billion in TV exposure last year. That’s up 353 percent from 1997.