My staple timepass these days is the IPL - one heck of a tournament! Needless to say, I am having a great time. Infact, I have postponed my plans to think about what I need to do till this tournament gets over...though I must confess, there is a lot of pressure building up on me from people close to me. Anyway, that's not what this blog is all about....but yes, the IPL is the root of this particular blog. During one of the B'lore games, I heard the commentator mentioning that Dr. Mallya had just come in from Bahrain after watching his Force India team in the F1 race. That set me thinking-what's this guy got to do with F1? Is it worth the investment?
Spent sometime digging into the numbers (as you can see, I have plenty of time..:-)) and here's what I came up with...
Let's try to analyse the economics of owning a F1 team and if it makes sense for all and sundry to think that they should own one as it is a good subject for an interesting chat with that fancy guest that you have been secretly envying all year long...
We must first understand as to why this sport really exists or came into being. This is where a lot of automobile as well as ancillary industries are looking to test out some of their latest technologies in terms of performance, aerodynamics, innovation etc. That is why you have the likes of ferrari, mclaren, toyota, merc, BMW as team owners.
I am going to spare you the details and not delve deep into the numbers. Let's look at the expenses at a high level --
An F1 team annual expenses can be as high as $450m to as low as (just) $80m. Close to a $100m can go into just the engine. The other major expense is the S&B - to be very specific - the driver and the management salaries, which eat up close to half the S&B budget of a F1 team. Drivers such as Alonso and Hamilton can be as expensive as 25-30m USD a year. You have the car manufactring costs and finally the miscellaneous costs of travelling, lodging etc. Teams like Force India generally are at the lower spectrum of the expenditure budgets.
Now, where are the revenues coming from -- Main sponsor, mini-sponsors and corporate and technical sponsors. In addition to this, the F1 Administrative authority shares a large chunk of their revenues with the teams based on their wins and standings. With the FOA revenue sharing on the basis of wins/points being a siginificant source of revenue for the teams, teams like Ferrari and Mclarens are considered to be profitable ventures while some of the other may just be break-even cases.
In case of Force India - their main sponsor is Kingfisher and in addition they will be lucky to gain any points in this season. So, the revenue from FOA is hard to come by. What does a airline company get out of sponsoring a F1 team? Publicity, yes. But is this really worth this kind of an expenditure for an airline that basically is a domestic affair. It may have something (to sound extremely optomisitic) good for the company when F1 comes to India in 2010. This company, as we all know is seriously in the red at the moment. So, effectively speaking Dr. Mallya is bankrolling the F1 operations at the moment through one of his not-so-healthy companies.
Let us not forget that a company such as Honda pulled out of F1 this year citing economic downturn. A company that actually has something to gain from a sport like this is not willing to sustain such expensive operations shows how much of a pressure this can have on your margins. It is also relevant to say that, unlike the other F1 teams, Honda was footing the complete bill on it's own without accepting any main sponsors. We have heard that there has been pressure on toyota to also exit the sport owing to the same pressures (though they have a main sponsor).
We need to unclutter our thoughts and then take the right decision. Does it really make sense to be part of the something if you have absolutely zilch synergies to speak of!
Again, one needs to be clear about what one wants to step into. The question is WHY? If there are no synergies, it doesn't make sense. This is what I call "taking your eye off the ball".
We all have this inherent desire to make something of ourselves in this world. Let me rephrase that - we all have this inherent desire to "make a name" for ourselves. Nothing wrong with this. But sometimes we tend to take this desire a tad too far. We tend to make some not-so-wise decisions just to become the cynosure of an evening gathering. But does that decision really pay off eventually? If hogging a little limelight is the reason, in all probability not.
So, is a kingfisher logo on the scorcher good enough to justify Dr. Mallya owning an F1 team? How long will he keep it before he sells it off? Your guess is as good as mine.....!
3 comments:
While it does make sense to see what best suits a business type for a firm, and spend accordingly, one can not also have a confined view and limit oneself to "synergies" so as to speak.
Let's take an example,can one even think there could be an effect of Human rights adherence or something like treatment dished out to minorities on the net FDI flow in an economy like India ? At times the correlation seems direct, but there are occasions where it is not.
At the end of the day, it boils down to the way one build a brand through. Brand management is an expensive, senseless( from an outsiders perspective) and visionary(?)exercise. The fact that some of the Nakeels of the world rely on Becker to help build a brand for them to sell houses to Asian population is a reference in itself to show where and how brand management can reach and go to and works.
The airline needs money today and as I write this out, there are talk for it to get a 2000 crore + loans from an Indian bank. At times while leveraging, listing etc, pure balance sheet numbers are fair indicators but the brand itself has an effect.
I might be proved wrong and Mr M decides to sell of the stake the next morning but the notion remains.
Absolutely appreciate your comment. My point is not against brand building. It is most essential. If you were to hear a Becker or a Schumacher endorsing projects for Nakheel, I think in the 100s of projects that we hear, I would be willing to see whats it got. That's project differentiation.
But in the case mentioned in the blog, I feel that it is not really helping the brand as much as it is supposed to satisfy a personal ego.
I agree with you when you say we need to do certain out-of-the-box things to get a brand recognition but sometimes we go overboard and do not really do a cost-benefit analysis. Here, I fear, its not a good decision from Dr. Mallya. Anyway, it's an ongoing story, let's see how it unfolds.
Once again, thank you for commenting.
I would say the money poured into F1 is a step towards making UB retain and consolidate its brand position( Kingfisher as the leading brand of UB) in the profitable liquor business. You are also right, as far as branding goes you will only know if your strategy is right only if it clicks.
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