NASCAR's money game

The news out of the Chip Ganassi NASCAR camp on Tuesday, that he was shutting down Dario Franchitti's race team, may have come as a surprise to some, but to insiders it was merely a sign of the times.

Racing in America's premier series has become so expensive, even established teams such as Ganassi's are having trouble attracting enough sponsorship to remain financially viable.

Ganassi had essentially been running his third Cup team out of his own pocket since the start of the season and continuing on with that model was putting his other two teams in jeopardy.

"In this tough business environment, continuing to run the car without proper funding has become increasingly difficult," Ganassi explained.

Just how much money are we talking about?

These days, properly funding a single NASCAR team often means finding a corporate sponsor willing to shell out $20-25 million or more for a primary sponsorship – a price tag that puts NASCAR on the same sponsorship level as a Formula One team.

NASCAR as expensive as Formula One?

"Certainly, the budgets of the higher end teams of NASCAR's Sprint Cup series match up financially with the lower to midrange teams in Formula One," said Chris Lencheski, whose sports marketing agency SKI & Company works in both worlds – Formula One and NASCAR.

"There are still the Ferraris and McLarens of the world, whose budgets (estimated at $400 million per year) are just astronomical," he added, "just like there are the Hendricks and the Roushes whose budgets, while not as high, aren't comparable to others in NASCAR."

Not your father's NASCAR

There's no question that NASCAR today is big business – one that has attracted participation by over 130 Fortune 500 companies. Many of these companies have been involved with the sport for decades, but recently have seen the cost of their involvement rise dramatically, from a $12-15 million investment less than five years ago to an asking price that's nearly double that today.

And these prices don't include the cost of "activating the sponsorship" – meaning dollars spent on commercials and/or billboards – which usually requires an expenditure of equal dollars, thus doubling the cost.

While NASCAR has made efforts to control costs on the competitive side, even to the extent of mandating a new race car designed to bring down operating expenses, teams have found new ways to spend the money meant to be saved.

Research and development costs, which are necessary to keep pace with the competition, have skyrocketed, with many teams using the very same computer programs, simulators and other mechanisms used by Formula One teams.

The modern-day NASCAR Sprint Cup team is essentially a research, manufacturing and marketing company.

Larger organizations such as Hendrick Motorsports, Roush Fenway Racing, Richard Childress Racing and Joe Gibbs Racing, have manufacturing capacities that would make any major machine shop blush.

High tech machinery with the ability to design and produce nearly every part on a race car – from engines, chassis components and bodies down to seemingly minor parts such as screws, washers and fasteners – are commonplace.

Approximately 65-70% of the cost of this infrastructure, along with a team's other operating expenses, is funded using sponsorship dollars. The rest comes from purse money and endorsements.

Teams also have in-house marketing divisions whose sole job is to find corporate sponsors and woo them into becoming business partners, thus feeding the beast that has become today's NASCAR racing.

Their assignment is equally as important as the driver's is winning on the race track.

"NASCAR offers the best platform, dollar-for-dollar, for a company to reach their marketing goals in motorsports," said Lencheski.

Until recently, the marketer's job has been a comparatively easy one.

Now, with gasoline at $4 a gallon, a soft American economy and a changing political climate, times are tough for those responsible for finding the partners who are willing to commit the kind of resources necessary for such a successful partnership.

"Corporate America doesn't have the appetite for a $15-20 million sponsorship," said Andrew Campagnone, Vice President of Motorsports for the Wunderman Agency, one of the world's largest marketing agencies. "They still understand the sport; they still want to be involved. (But) with lowered stock prices, higher oil prices, and disposable income that isn't there, corporate executives have to see a definite return on investment."

Though NASCAR has produced better-than-expected returns in the past, it's become tougher to justify making that investment.

This has forced people such as Campagnone, who has a successful track record in attracting millions of dollars in sponsorship, to work longer hours and take their unique skills to a new level.

"We have to be creative to bring in new business as well as to keep what is already there," said Campagnone.

Big vs. small

In the pursuit of sponsorship dollars in racing, larger and more successful teams naturally have an advantage. Everyone wants to be associated with a winner, and corporate America is no exception.

But winning doesn't guarantee the dollars will flow your way.

"Winning helps, but as long as you can help them (sponsors) in their marketing strategy – if you can help them in any way (away from) the track – that's going to help," said Richard Childress. "There are teams that are not winning races that sponsors are happy with because they're getting a lot of return on their investment from the sport."

NASCAR is also littered with the debris of sponsors who, despite being associated with winning programs, left the sport due to their disappointment in their relationships with their team partners.

"When you have a sponsor, the key thing when you do get it is servicing it," said Childress.

A product of the increased costs of operating a NASCAR team is the emergence of multiple primary sponsorships over the past five years. For example, DuPont is no longer the only sponsor you'll see on Jeff Gordon's hood. Nicorette and Pepsi have bought in, too, offsetting some of the cost for DuPont.

"The sport has changed," said Campagnone. "Instead of co-primaries (sponsors), we'll see (in the future) three and four primaries rotating races throughout the season.

"(Team) marketing guys need to connect the dots now," Campagnone continued. "If we're doing our job and the teams are doing theirs, then these sponsors won't come in for three years and then leave."

The trend of sponsors leaving smaller, one- and two-car teams in favor of partnerships with larger three- and four-car teams has forced single-car teams such as Hall of Fame Racing to resort to other avenues to attract high-dollar sponsors.

Hall of Fame's situation is typical of the sport's smaller teams. Their on-track performance has suffered while other, larger teams, dominate the sport.

"There's a reason why everyone has gone to four cars," said Childress. "When you can share your resources and your knowledge, it benefits everyone."

Larger teams can offer more than enhanced performance. They also offer a sponsor exposure on more than just their primary car, placing decals on other cars in their stable.

"Certainly there are advantages to being a bigger team," said Tom Garfinkel, co-owner of Hall of Fame Racing. "However, the teams that are the most successful in the sport employ an awful lot of management discipline."

He and partner Jeff Moorad believe that utilizing a business model similar to the one that helped turn around their other sports property, the Arizona Diamondbacks, will work in NASCAR.

Simply put, the plan substitutes performance with an increased emphasis on a team's strength in leadership and its attention to delivering marketing strategies for its partners.

"We want to be a trusted partner that operates with transparency so that they can see where their money is going," said Garfinkel, "a partner that can create and drive results through a thorough understanding of what our partner's business objectives are."

That being said, Garfinkel admits that his team's goal is to expand to two cars in the immediate future in order to better their ability to compete on the track.

Ups and downs

The current sponsorship environment is unique. While some teams like Ganassi's, are shrinking, others like Childress' are expanding. This is a direct result of the individual strength of each team and not necessarily indicative of the health of the sport itself, says Steve Phelps, Vice President of Marketing for NASCAR.

"We're in a little bit of a downturn," said Phelps. "You see these things cycle up and down. Just a year ago, we were seeing fields of over 50 cars (trying to qualify)."

In contrast, only 45 cars will attempt to qualify for the 43 spots in Saturday night's Coke Zero 400 at Daytona, one of the more visible races of the season.

The sport faced a similar situation five years ago, as the country pulled itself out of the financial doldrums following the 9/11 attacks. The rhetoric about tight money, high costs and sponsors pulling back on spending was nearly identical to what's being said today.

"I think there are some similarities, but it's not worse," said Phelps. "As more sponsorship has come into the sport the impact has been less. The level of interest has continued to stay high. The number of sponsors and the dollars being spent (by sponsors) today is much, much higher."

Not content with the status quo, sponsors are spending more time figuring out the best place to put their money, which means long-standing relationships between teams and sponsors are ending.

Just in the last few months, Childress has landed heavyweight sponsors General Mills and Caterpillar – companies that held long relationships with other NASCAR teams. General Mills, for example, had been with Petty Enterprises for the last eight years.

"These companies go out and do their due diligence," said Childress, whose organization recently signed deals with General Mills and Caterpillar after those companies made the decision to sever their associations with other NASCAR teams.

"Sponsors can see that the future of a one- and two-car team isn't as bright. They understand it takes a lot of resources to be competitive and win. So they go to companies that have those resources or feel that they can take what they give them with the resources they've got and step up to the next level."

Campagnone says despite the current tough climate, things will turn around.

"Within 18-19 months, it will come back," he said.

He notes that companies have scaled their investment by shifting marketing dollars into media, considered to be a safe haven. Most of these dollars are headed to television, where ratings have spiked as a tight economy has forced fans to stay at home and watch races from their couches.

"Companies are saying, 'We love the sport, we support the sport, but let's do it with a media buy,' " said Campagnone. "Let's keep the dialog open with the marketing companies and the teams and the assets in the sport. Once the economy breaks, we'll jump back in."

11 and four

Childress' vision of the sport's future tells him that within five years, consolidation in the sport will result in a Cup series comprised of 11 team owners, with four cars each, the maximum that will be allowed by NASCAR beginning in 2010.

While his view is shared among the larger team owners in the Cup garage, it has not been embraced by NASCAR.

"We love having single-car owners and two-car team owners," said NASCAR spokesperson Ramsey Poston. "It's great to have them as underdogs. They are part of our heritage and history. We would like to see that heritage continue."

NASCAR would like to see it continue, but it's not realistic.

Over the past few years, there's been a remarkable transformation in NASCAR team ownership. More and more, strictly racing guys are having trouble meeting the financial demands of today's competitive market. To keep up, they're being forced to turn to outside investors.

Less than a month ago, Richard Petty sold majority ownership of Petty Enterprises to a private equity firm in Boston. These days, the guy running NASCAR's most legendary team doesn't wear a cowboy hat and wraparound sunglasses, but rather sports a suit and tie and carries a business degree from Harvard.

Despite the hefty price tag, the sport remains an attractive option for major financiers who see profit in the business model of motorsports. The difference now is it's no longer good enough to just put a moving billboard on the track and go. Owners have to show sponsors other ways their dollars are working for them.

No, NASCAR is not going anywhere. The biggest question is, what will it look like in the future and will traditional owners such as Chip Ganassi still be in the picture?