A recent development in the sporting fraternity is a classic example of tremors that shake the business world when brand ambassadors falter
Novak Djokovic, the world’s number one tennis player has created what is being called a ‘Djokovic Dilemma’ in the world of sports celebrity sponsorships by super-brands. With assets of over US$220 million, Djokovic’s earnings from sponsorships are several times more than his court winnings. And this is at risk now, after his refusal to get vaccinated that resulted in him being disqualified from playing in the Australian Open tournament. He’s not the only one who’s at risk, his sponsors too with millions riding on him, face a rub-off, that might not be entirely desirable.
Lacoste weighs the impact
Djokovic’s lead sponsor Lacoste has said it wants to discuss events leading up to the player’s visa battle, which led to him being detained by Australia’s Border Force at the airport and subsequently in a hotel for asylum seekers before he was freed to contest the issue in court. Lacoste is thought to be Djokovic’s biggest sponsor with an annual contract worth a reported US$9m. The deal runs until 2025. Lacoste has an entire product line built around him, which could prove challenging to transition if they went their separate ways.
Sponsorship is huge business; most are seen as a partnership that is mutually beneficial for both sponsor and endorser. When entering such an arrangement having a carefully considered sponsorship strategy is key to protecting both brands. This is not the first time that athletes have pulled out of tournaments causing financial losses to their sponsors. However, some sponsors have also turned this obstacle into an opportunity with some deft marketing messaging.
Brands wait-n-watch Kohli
Closer home, Indian cricket star like Virat Kohli is generating a fair amount of controversy that is making sponsors watch carefully how things pan out. A straw poll conducted by the Indian Institute of Human Brands (IIHB) just after he lost his captaincy, shows that he is losing popularity. Kohli is among one of the highest-paid endorsers of the country and holds the top position in the Duff & Phelps’ Celebrity Brand Valuation Report 2020 with a brand value of US$237.7 million. He endorses over 40 brands including MRF Tyres, Mobile Premier League (MPL), Myntra, Puma, among others.
Turning a problem into a prospect
Research by the University of Connecticut and Free University of Berlin found that even crisis situations would generate positive returns when handled properly. The researchers studied the speed of the response by the company, the nature of its reaction, and how it impacted returns. They found that a faster response in the form of an announcement or statement from the company increases firm value by 2.10% over the next four trading weeks. Further, they learned that when companies issue statements about suspending or maintaining the celebrity endorser it is more likely to contribute to positive returns, than if there were no response at all. They had analysed 128 events of negative endorser publicity which affected the sponsors in 230 actual cases.
Nike’s ‘Woke’ messaging
A few years ago, a celebrity athlete dropping out of a major tennis tournament over mental health issues might have been seen as a sign of weakness. Today, at least for the world’s number one women tennis player Naomi Osaka’s corporate sponsors, it is being hailed as refreshingly honest. Her sponsors seized the opportunity to stick with her and come out with ‘woke’ messaging after she dropped out of the French Open.
Osaka, who also acknowledged suffering “long bouts of depression,” received criticism by some who say that it came with the job. But global footwear maker Nike, and Sweetgreen, an American casual restaurant chain serving salads, besides other sponsors put out statements in support of the 23-year-old star after she revealed her struggles.“Our thoughts are with Naomi,” Nike said in a statement. “We support her and recognize her courage in sharing her own mental health experience.” Sweetgreen tweeted that its partnership with Osaka “is rooted in wellness in all its forms.” And Mastercard tweeted: “Naomi Osaka’s decision reminds us all how important it is to prioritize personal health and well-being.”
Like most business relationships, there’s a natural, normal evolution as brands shift focus, athletes become more or less relevant, and the value and impact of the relationships are evaluated over time. Hitching the brand wagon to a celebrity can be risky. Humans are human, and it’s inevitable that at some point, celebrity and star athletes will misstep.
The Nuclear Option
When celebrities falter, the brand damage can range from minor to catastrophic. In October 2012, Lance Armstrong lost eight significant sponsors in a single day after the news of his doping and related cover-ups reached an inflection point. It is called the ‘nuclear option’ in brands terminating sponsorships in the event of a calamitous event, like what happened to golf superstar Tiger Woods.
In the wake of Tiger Wood’s late 2009 car accident and following his admission of marital infidelity, some sponsors cut ties with the golfer in 2009 and 2010. The first of Woods’ big-time sponsors to break its deal was Gatorade. Through 2010, several other of Woods’ sponsors dropped Tiger, and those were all certainly (although not publicly acknowledged as such) the result of his scandals. AT&T and Accenture both announced in December 2009 they were dropping their sponsorship deals with him. Late in 2010, Gillette (owned by Proctor & Gamble) said it would not renew its sponsorship agreement with Woods.
The dilemma – To act or wait
One of the dilemmas companies often face is concern whether an over-reaction could draw unnecessary attention to a negative event, exacerbating a negative reaction on the part of investors. There can be a tendency for companies to want to wait before responding or not responding at all.
If the firm decides to remain quiet when a celebrity endorser is at the centre of controversy, investors do not receive any signal whether the firm is aware of the event and motivated to counteract the negative spill over effects. Ongoing uncertainty will lead to doubt among investors and as a consequence, stock returns will trend downward in the following days.
On the contrary, a firm that responds to the event reduces uncertainty because it discloses its intentions to the stock market, relieving investor concerns about the firm’s commitment to managing the event effectively. This makes investors more confident about the company, and returns are less affected.