Analysis: Is a pro cycling sponsorship worth the cost?

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A casual Tour de France viewer might assume that a team contending for an overall victory in the sport’s biggest race would have multiple brands lining up to have their logos plastered across their jerseys, across the team bus and on the tip of every TV commenter’s tongue.

However, that is often far from the reality.

On the eve of the final time trial of the 2017 Tour de France, Cannondale-Drapac announced a new partnership with Verizon media subsidiary Oath Inc. It came as a relief for the team, which had been struggling to secure a stable title sponsorship and has slipped down the budget ladder hierarchy over the past few seasons.

Companies interested in title sponsorships have traditionally been the lifeblood of the sport, but in recent years many have been driven away by the rapidly rising costs of sponsoring a WorldTour team. This is largely due to a small group of independently wealthy individuals and oil-rich countries funding teams with budgets up to three times the amount of sponsor-financed teams.

While obviously not good for the sporting value to have a wide disparity  between team budgets, this trend is also a threat to the foundation and future of professional cycling.

Rising salaries and budgets aren’t inherently a negative trend when supported by a viable business structure. Mainstream sports like basketball and soccer have seen massive spikes in athlete salaries in recent years, but these increases are supported by rising revenue from lucrative television broadcast deals, merchandising, and ticket sales.

In cycling’s case, rather pedestrian viewership numbers, the high production costs associated with broadcasting a moving, outdoor event, and no gate revenue, means that there is very little money to go around.

Despite the lack of a viable revenue stream, record salaries and budgets are being doled out by extremely rich individuals and governments with no intention of receiving a comparable return on investment. Hundred of millions of dollars have been sunk into cycling teams in the past five years, with minimal return coming back.

The danger in this practice is that while companies may move in and out of the sport, if a sponsorship outlay is within reach for a large pool of potential corporations, teams will having a higher probability of surviving the exit of a title sponsor. When large budgets are being propped up by a very small number of donors, once they feel their experience with the team has run its course, teams have a very slim chance of finding another entity willing to come in at a similar level to keep the team afloat.

Salary and budget inflation is a very real issue and is a process that is incredibly difficult to reverse. When a well-funded team arrives on the scene and offers top talent $5-$6 million per year, lesser stars begin to estimate their own value at a $2-$3 million per year, and on and on down the talent ladder.

These salaries are often multiples higher than the previous pay scale. If a team with a constricted budget feels pressure to deliver results, they either have to shell out a large percentage of their overall budget to hire a single star, or be relegated to the margins.

This upward pressure on salaries means that a potential sponsor would have to lay out more in costs than they would receive back in terms of marketing exposure. This transforms a cycling team from a relatively inexpensive route to international exposure during the Tour de France to an impossible business proposition.

When entities that have inflated the market inevitability vacate, teams scramble to search for new sponsors but often find the pool of companies looking to support them at their current level has emptied. More often than not, teams will fold instead of continuing on at a diminished level.

Case study: Cannondale-Drapac

The Cannondale-Drapac team has been front and center — and vocal — in its struggle to secure funding. Mainstream publications have taken notice as well, with recent articles in the Wall Street Journal and Business Insider highlighting these financial difficulties.

These articles, one penned by team boss Jonathan Vaughters, chronicle the trials and tribulations the team has gone through over the past few seasons to keep up with the proverbial Joneses. Their $15 million budget, once a king’s ransom in professional cycling, is simply no longer competitive amongst the big-budget teams. Since they are not funded by publicly traded companies, these super teams aren’t beholden to traditional return on investment models and are free to spend seemingly outrageous amounts of cash on their teams. The sudden rise in pay grade for the sport’s stars has created a substantive gulf between the haves and have nots.

Vaughters is attempting to bridge this funding gap through a traditional commercial sponsorship model. Over the past decade, his Cannondale team has survived on a hybrid model of sponsorship revenue and substantial cash infusions from private investor Doug Ellis.

Five years ago, the team won a Grand Tour with Ryder Hesjedal at the Giro d’Italia. It now sits near the bottom of the funding table. Highlighting this struggle was the two-year win drought at the WorldTour level the team recently ended.

In a VeloNews podcast earlier this year, Vaughters expressed exasperation at the current disparities in cycling team sponsorship: “The bifurcation of budget levels in cycling is much more extreme than it was in 2010. It’s just tiresome at this point in time. It was fun when you were a $10 million team beating a $20 million team, that was cool. Now it’s like $40 million, let’s just concentrate on a different race. It’s overwhelming.”

An issue with this ambition is that the return on investment for the money a sponsor lays out for a title sponsorship is incredibly uncompetitive at the high levels needed to compete with the wealthiest teams.

Vaughters said it best to CyclingTips in 2015: “For a publicly-owned company, investing 10 million US dollars makes sense, but investing 40 does not. The return on investment isn’t high enough at 40 million. For a publicly-traded international company that is looking at this strictly from a business standpoint, and not from an enthusiasm standpoint, they are unable to invest as high a dollar figure as the teams who have private backers.”

Multiple companies pooling funds to create a team with a higher budget isn’t an options since the value of sponsorship goes down as the number of brands sharing title space increases.

Exact budget numbers for cycling teams can be difficult to nail down, but during the 2016 Tour de France, L’Equipe published estimates on the budgets of every team at the race.

The teams at the top of this list have budgets ranging from €20-€35 million per year (roughly $22 to $39 million at current exchange rates). The inflationary figures appear even more staggering when comparing budget numbers from a decade ago.

Pro cycling vs. other pro sports

In a 2007 interview, Vaughters stated the budget for the Slipstream team that season was $2.5 million, and that a large budget for a team competing in the Tour de France was in the $10 million range.

When compared against competing sports marketing opportunities that a major corporation could afford, this outlay makes little, if any, financial sense.

Software company Oracle currently owns the naming rights to the arena where NBA champions Golden State Warriors play. The name Oracle has become so ubiquitous with the Warriors that it becomes difficult to separate the two. According to several sources, this brand saturation with one of the most viewer-rich teams and television events on the planet is costing the company just under $3 million per year.

This puts Oracle in the position to choose between spending $3 million per year to be part of one of the most famous sports teams in the history of sport, or $30 million to fund a cycling team.

Even the deal Chase Bank has inked to be the naming rights sponsor for the Warriors new San Francisco arena is less than what a big company would shell out to have their name on the jersey of a well-funded cycling team. The deal is being touted as one of the “richest arena naming rights deal ever in the U.S” and is reportedly costing the bank $15 million per year.

The marketing exposure Chase will receive for this sponsorship is likely to dwarf even what the most successful American cycling team would yield, and they are getting it at price of sponsoring a modestly funded cycling team. This exposure, of course, is largely limited to the United States, and professional cycling is a global sport.

In his Business Insider article, Vaughters expanded on the unique marketing opportunities provided by cycling. “Investing in a team is far more effective than a standard TV ad buy, which is what’s available in nearly all the major sports. A business can buy an advertisement in proximity to competition — that is, in commercial breaks during football games — but not inside the competition, as is the case with bike racing.”

And while this is true about cycling, jersey naming rights for top-flight soccer jerseys provide the exact same upside, an ad buy in direct proximity to competition.

Deutsche Telekom pays Bayern Munich €30 million per year to place its logo front and center on their jerseys. This investment is nearly identical to the one they would commit to if they were interested in coming back into cycling as a sponsor of a top-level team; the Germany company left cycling in 2006 after sponsoring a top team for 16 years.

A €30 million cycling sponsorship commitment is not inline with a reasonable corporation marketing ROI calculation, but a smaller commitment in the €15 million range would be. Unfortunately, this mid-level funding brings an undesired side effect of being associated with a middling team.

A source within a blue-chip company communicated to CyclingTips that they would would not be interested in being the title sponsor of a mid-level team. A team of anything but the best wouldn’t be consistent with the brand image of a global company.

Most large companies looking for exposure to European markets choose to bypass the title sponsorship of a team and buy ad space directly at the Tour de France. Carrefour, Skoda and LCL, large European-based companies, would be ideal candidates for a team sponsorship. Instead, they shell out a fraction of the cost of a team sponsorship and get a massive marketing presence at the most valuable race on the cycling calendar.

Case study: Tinkoff

The team that came to epitomize the sudden explosion in rider salaries and team budgets was Tinkoff, owned by Russian entrepreneur Oleg Tinkov.

Tinkov initially came on as co-sponsor for Bjarne Riis’ Saxo Bank team in 2012. Tinkov purchased the team outright from Riis prior to the 2013 season, and began to spend lavishly on contracts to raise the team’s profile and match the brand consistent with the team owner’s company, Tinkoff Credit Systems. This entry into cycling and increase in the team profile coincided with the Tinkoff Credit Systems going public on the London Stock Exchange.

At the end of the 2016 season, after hiring two of the sport’s biggest names, Peter Sagan and Alberto Contador, Tinkov announced he was leaving the sport.

“First of all, Tinkoff Bank has sponsored the team for five years and from a marketing point of view that’s enough,” he told Cyclingnews. “We’re not a global bank, the economical situation in Russia is not great and my marketing people tell me that we’ve reached all the investors we can via cycling and sports sponsorship. We’ve decided we have to switch our advertising budget to direct TV advertising in 2017.”

After the Tinkoff team folded in 2016, Tour de France jersey winners Peter Sagan and Rafal Majka moved to the German-based Bora-hansgrohe outfit. Photo: BrakeThrough Media

The Inner Ring website posted a breakdown of the Tinkoff team budget from 2011-2015. Adding in the L’Equipe estimation of the 2016 budget, Tinkov’s total spend would have been between €60-70 million (roughly $68-$79 million) from the time he came on as a co-sponsor to his ending of the team.

Tinkoff Credit System’s marketing team was correct in its decision to steer their chairman away from this marketing expenditure after a few seasons. The short-term marketing blitz that the team provided bought the company valuable credibility before going public, but this level of investment quickly ceases to make financial sense.

The problem with super teams

A cursory glance at the top teams by budget in the Tour de France — Katusha, BMC Racing, Astana, and Team Sky — reveals only one recognizable corporate name. Katusha and Astana are funded by their respective national governments, Russia and Kazakhstan, while BMC is the passion project of Swiss tycoon Andy Rihs.

While Tinkov was criticized for driving up rider salaries, Rihs’ BMC team was the first modern team to shower multiple stars with extremely generous salaries.

In anticipation of the 2012 season, BMC signed stars Philippe Gilbert and Thor Hushovd to contracts that sent shockwaves through the cycling transfer market. This spending period was a watershed moment in cycling finance and ushered in the modern spending age. The lasting legacy of this period is a small number of big budget teams, supported by the personal wealth, driving up the costs for top-level riders.

These inflated salaries haven’t always led to success for BMC. The team won the Tour de France in 2011 with Cadel Evans, but since then the team had not won a Grand Tour or Monument until Greg Van Avarmaet’s sublime run of form during his 2017 spring classics campaign resulted in a Paris-Roubaix victory.

BMC Racing traditionally has one the largest budgets in the pro peloton, but that hasn’t always translated into success.

Even Team Sky, which is exactly the type of multinational corporation that is the perfect target for a cycling sponsorship, has a financial commitment that is not particularly replicable. Sky and the British Cycling Federation have a unique relationship that was forged when the company backed the British Track Cycling team in advance of the 2008 Olympic games.

This opportunity was created due to a unique confluence of events, mainly that Great Britain was searching for Olympic sports that could yield a maximum amount of medals per pound spent. The British cycling federation was able to convince British Sky Broadcasting that a resurgent British Olympic presence — projecting outward British sporting strength — would be beneficial for Britain’s leading media company.

This type of integrated marketing front with the Olympic federation and trade team is incredibly unique to Great Britain and not applicable to teams in most countries.

If a professional cycling team is not funded by private wealth and does not have the luxury of a national federation securing a massive multi-national sponsor, the sweet spot for a potential title sponsor is a company with a revenue between $1-10 billion per year. Prime examples are companies like Segafredo, Orica, and Dimension Data. The three teams sponsored by these respective companies fall right into the middle of the sponsorship table, between $12-$15 million, and and tend to yield a substantial amount of media coverage.

These mid-sized companies are less likely to be scared off by having their team perceived as an underdog. Dimension Data has also been able to integrate their product into racing by providing data solutions at the Tour de France, an ideal cycling sponsorship; Dimension Data is not just using a race as a moving billboard for its logo, they are using the intricacies of the sport to showcase a unique product.

The aforementioned Wall Street Journal piece highlighting the Cannondale team mentioned that they were in search of a new title sponsor willing to contribute at a level that would allow them to compete financially with the galacticos of the sport.

Vaughters estimates that a sponsor willing to contribute 70% of Sky’s budget would allow them to go head to head with the British squad. The issue with this ambition is that 70% of Sky’s budget would be roughly $27 million. Comparing this hypothetical $27 million sponsorship to existing sports sponsorship outlays illustrates that for a publicly traded American company, even one with European marketing ambitions, this sum is simply out of reach.

While Oath is a large media company, it has shareholders to consider and any sponsorship has to be backed up by positive rate of return numbers. Exact terms of the sponsorship agreement have not been released, but due to the team’s muted behavior in the recent transfer market, it appears as though contribution level is measured and modest. If Cannondale-Drapc wants to be consistently competitive at the biggest events on the calendar, they are most likely going to have to do it at above their current sponsorship level.

Orica-Scott has one of the best returns on investment of all WorldTour teams.

Other teams with modest budgets, like Lotto-Soudal, have been incredibly smart about acquiring young, cheap talent, picking off small wins regularly and then carrying that confidence and momentum to challenge the biggest teams at the world’s biggest races.

Orica was named by Vaughters back in 2015 as a team that benefits from a wealthy backer — Gerry Ryan, owner and founder of Jayco Australia — but if L’Equipe’s budget estimates are accurate, their funding level and structure is similar to the Cannondale team. (Vaughters says the L’Equipe estimates are not accurate, putting Orica’s budget closer to $25 million per year, with his team at about 60% of that.)

Vaughters has invested in young, promising talent, but has also used significant resources to acquire expensive stars in the midst of career crises. These expensive gambles can drain valuable team resources and suppress opportunities for up-and-coming riders. Vaughters has defended these choices, saying that this swing-for-the-fences approach is needed to attempt to net major wins that will appeal to a U.S. based company. And to his credit, one of these moves was acquiring Rigoberto Uran, who won nothing in 2016 but recently netted the team its first ever Tour de France podium.

Should pro cycling implement financial fair play rules?

The current situation of a handful of wealthy teams funded by billionaires and governments driving up salaries for top riders at the top of the sport, with teams relying on traditional corporate sponsorship fighting to survive, is not sustainable, nor does it foster a healthy sporting value. It has had the undesired effect of raising the bar for corporate sponsors to a point that they simply cannot justify the expense of coming in at the top, and the stigma of having their name associated with a mid-to-low level team is a major barrier to entry.

The world has a limited population of individuals wealthy enough to “invest” a hundred million dollars into a cycling team. Rihs, owner and patron of the BMC Racing team, is reportedly backing off his sponsorship of the team, and the drastic fall in global oil prices may have the financiers behind Katusha and Astana reconsidering their investment in the near future.

In addition to this potential loss of big money patrons, many of the largest contracts in cycling are currently held by aging superstars. As they retire, it is possible that the contract frenzy cools down to sustainable levels and a top team budget will fall back into a more sponsor friendly framework.

The mere possibility of a natural depression of costs isn’t enough to ensure the future security of cycling’s sporting value. The UCI, the sport’s governing body, may ultimately need to step in and set up a variation of the financial fair play rules or a soft-salary cap with a corresponding luxury tax that have been introduced into UEFA soccer competitions and the NBA respectively.

Introducing a salary cap in professional cycling presents unique challenges, as the sport lacks the revenue and structure of popular stadium-based sports. And, as Chris Froome said when asked about it at the Tour de France, budgetary caps can disincentivize success.

“Obviously I think my teammates have shown that they are the strongest team in the race. It’s been an amazing race for us this year. If that’s all due to budget — I can’t say,” Froome said. “I personally think that is how professional sport works. If a team is successful it is able to reinvest its funds and develop the sport further. If you put a budgetary cap maybe it doesn’t quite incentivize successes the way it is at the moment.”

While difficult, setting team budget caps is not impossible. A viable solution would be a soft-cap on all teams competing at the Pro-Continental or World Tour level, with a steep luxury tax for offenders exceeding the cap, with the resulting revenue being distributed to the remaining World Tour teams under the tax threshold.

For every potential excess dollar spent over the threshold, they would pay an ever-increasing tax rate. This would allow the biggest sponsors and teams to continue to infuse money into the sport, while using these massive amounts of money to subsidize the payrolls of the smaller-budget teams. As teams like Sky and BMC spend more and more money and go over the cap and go deeper into the tax, they would be inadvertently assisting rival teams to close the wage gap.

This tax would help on two fronts. It would incentivize team backers to scale back wage inflation, but if the billionaire backers are still inclined to spend exorbitant amounts on rider salaries, they would be putting money straight into their rivals’ coffers to sign away their top riders.

This would assist in breaking up teams that cluster the top talent and rob the viewers of exciting, dynamic races. It would also create a clear delineation between the Pro Continental and WorldTour levels.

Currently, several French teams are not incentivized to ride at the WorldTour level, confident of a yearly Tour de France selection without having to shoulder the burden of the added costs of their WorldTour rivals.

With the proposed cap and tax, they would be still be able to sit at the Pro Continental level, but doing so would mean they would miss out on substantial luxury tax kickback payments. This would create tangible benefits and a consistent demand for WorldTour membership, something the UCI has struggled to create since the inception of the current tier-structure.

This would also allow a traditional sponsorship model supporting teams in the $10-$20 million range. They would have an opportunity to increase their competitiveness and foster a structure that features promising return numbers for potential sponsors. It would also reward teams that are able to practice disciplined rider signings and live within their means.

Until this happens, professional cycling teams will continue with their hand-to-mouth existence, and the sport will mimic a house of cards, ready to fall at the slightest hint of changing winds.

About the author

Spencer Martin is an elite road racer, and evangelist for the sport of professional cycling. When he isn’t creating content for cycling brands in his day job, or breaking down European classics for his own amusement, he is busy enjoying the riding from his base in Boulder, Colorado.

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