January 1, 2009

Troubled Waters

How will the PGA Tour and corporate sponsors manage in a stormy economy? Smaller parties and a big push to maintain charitable giving

About the only thing financial prognosticators speak about with reasonable confidence and virtual unanimity is that the global economy will continue to struggle at least through the first quarter of 2009. And that likely means the first three months of the season in which the PGA Tour sprints from the Mercedes-Benz Championship in Hawaii across the West Coast and through Florida -- usually a buoyant stretch -- will be dogged by persistent questions: What is the impact of the recession on this tournament? And why are struggling corporations spending their money on a golf tournament?

The most important spin, at least for the first part of the season, won't be on the golf ball but rather on the economic reality. There are 15 events the first 13 weeks of 2009, and 12 have sponsors from the most distressed areas of the economy. Forget the tournament names and think of it this way: The tour season opens: auto, electronics, auto, financial, auto. All are industries that have suffered deep and painful layoffs.

But there is a sweet kernel of good news beneath this gritty outer layer. The PGA Tour is well positioned to weather hard times because its business model is sound and well thought-out and because it has a good story to tell in these difficult times. As part of the early season effort by the tour, tournament directors and sponsors will be telling that story.

Both stockholders and the public need to be reassured that sponsoring a golf tournament and doing corporate marketing at a sporting event is not a frivolous use of money. Expect to hear the word "charity" a lot during the first three months of the season. Expect the tour to be positioned as a good citizen that contributes to local charities and stages a tournament that provides business opportunities for local vendors.

"In down times, sport still appeals [to consumers], so integrating in the right way still has huge value," says Andrew McLean, president of global clients and business development for Mediaedge:cia, which buys media exposure for companies. "There is a need to filter the public reaction, move away from high-profile, big-hospitality experiences and highlight the cause marketing/community element, as well as the fundraising that certain sports do, such as the PGA Tour. Brands are being forced to make [their dollars] work harder in these areas."

Cause marketing, which involves cooperation between a for-profit company and a non-profit organization, plays into the PGA Tour business model perfectly. The tour has given more than $1.2 billion to charity over the years, and in 2007 it donated a record $123 million, a number it hopes to exceed in 2009 despite the troubled economy. The numbers from 2008 are not yet available.

"We are going to strive to match the dollars as best we can," says Ty Votaw, the tour's executive vice president for international affairs and communications, about charitable contributions for 2009. "It all depends on how long and how deep this [recession] is. If it goes all the way through 2009, it will be a challenge."

Among the industries most challenged is automotive. Buick, in fact, recently reached a mutual termination of its deal with Tiger Woods with a year left on the contract. Still, it has two events on the 2009 PGA Tour schedule, including the Buick Invitational, the fifth event of the season.

"We still have a need -- you might even say a greater need -- to advertise and promote our product than ever before," says Larry Peck, the golf marketing manager for Buick, which is contractually obligated to the two events through 2010. "We still find a lot of value in our association with the PGA Tour." Buick is staking a lot, perhaps even its future, on the 2010 LaCrosse. One will be on display at the par-3 16th hole at Torrey Pines. "It will get a lot of TV time," says Peck. "That's part of the value we get."

For Buick Invitational organizers the selling point is how the event gives back. "The Century Club of San Diego has been a major benefactor in distributing nearly $17 million from [the Buick] to over 200 San Diego charities," says executive director Tom Wilson. "The support of the tournament from our community has been exceptional and has enabled us to generate a substantial amount of funds to numerous charities. With our current economic challenges it is even more important to be able to support so many needed causes."

Thanks to some prescient planning by commissioner Tim Finchem, the financial cloud that hangs over the PGA Tour, while far from unique, is in many ways less threatening than that covering many other sports. More than half of the tournament title-sponsor contracts run through 2012 when the TV deals with CBS and NBC end. The Golf Channel contract runs another nine years after that.

Although the Valero Texas Open moves from the fall to May to replace the AT&T Classic, the regular-season schedule that runs through the Tour Championship in September has the same number of tournaments as 2008, along with a modest increase in prize money. Two events have changed title sponsors. Transitions replaces PODS at Tampa and HP replaces EDS at the Byron Nelson.

The question left hanging is what shape the Fall Series will take in 2009. There were seven tournaments, six held after the Tour Championship, in 2008. The Valero had a date switch and the Ginn sur Mer Classic, has folded, a victim of the real estate market collapse. That leaves the Fall Series down at least two events. With more players chasing European Tour money in Asia and the Middle East at that time of the year, a trimming of the late-season events will impact the second-tier players the most severely.

The greatest financial impact on tournaments likely will come in the form of reduced corporate entertaining and pro-am participation. While the marketing will remain, it will be more low-key and, as McLean suggests, with a greater focus on giving back. It also may be reduced: Companies may choose to sponsor one pro-am foursome for $25,000 instead of two, or opt for the $15,000 hospitality tent instead of the $50,000 air-conditioned one.

"Will golf suffer some cuts? Yeah," predicts Mark Steinberg, the global managing director of IMG, the sport's largest and most diverse management company. "It is going to be tough through 2009, and I expect a tough 2010." Still, Steinberg notes that in bad times it is, in some ways, more important for companies to creatively figure out a way to continue marketing and keep their name in front of the consumer. "Our motto is: 'Out-work everyone.' " he says.

In many ways, that's what Finchem has done. Over the years he has built up an emergency war chest for the tour, suggesting to players that not every dollar that comes in should be put directly into purses, but that a portion should be set aside for a rainy day. After a furious increase in prize money through the late 1990s and early 2000s, Finchem steered the tour in a more moderate direction.

After the phenomenal increases in the first TV deal negotiated in the Tiger Woods era -- a 40-percent leap from 1998 to '99 and more than doubling by 2002 -- more modest increases came into play. The total purse jumped 13 percent in 2003, the first year of the next contract, and grew 29 percent over the length of the four-year deal.

When the current contract went into effect in 2007, the purse increase from the previous year was 5.2 percent with a 3.2 percent increase in 2008. Next year's increase also will be in low single digits.

"We have built up reserves because we anticipate difficult times," Votaw explains. "One reason [is] that when we go to negotiate [the next] TV deals, the climate might change. Tim was an economist in the Carter Administration. He knows all about recessions."

The experts also say difficult economic times can present opportunities for those wise enough to recognize the landscape and adapt. "This is a good time for players to double down on their deals," says David Carter, a business professor at the University of Southern California and founder of Sports Business Group, a marketing consulting company. "If they are doing two corporate days a year [in exchange for their endorsement dollars] and the company asks them to do four for the same money, they should offer to do a fifth. When things turn around, the companies will remember the athletes who stepped up and helped."

The tour seems to have latched onto that theme, positioning itself in 2009 as not merely a pro sport just passing through town for the week but as a partner of responsible corporate citizens sensitive to the needs of the community. Last week, Finchem issued a video plea to his members to play in more tournaments next year, especially helping the lesser events, and to work harder to cultivate sponsors.

"Though the sports business is just that -- a business -- and it rises and falls with the economy, it generates revenue, jobs and economic benefits to the community," McLean says. That will be a common message at tour stops in 2009, and it is a message that is free of hyperbole. The slogan may morph next year from "These guys are good" to "These guys do good." The sincerity of that message could well be as important as the quality of the competition in determining the success of the new season.