Inflation for Fans, Maybe, but Not Yet for Team Owners
Inflation fears may be gripping the headline writers, but it’s casting only a faint shadow over sports.
“You’re still seeing borrowing costs that are historically low—historically low floating rates plus spreads. And the spreads for longer-term financing are at historic lows as well,” Steve Vogel, managing director of the sports finance group at U.S. Bank, said in a phone call. “You have some inflation affecting certain areas. However, there hasn’t been a shortage of capital to support projects, and a lot of that has to do with the underlying strength of sports more broadly.”
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While screaming chyrons tout the specter of the highest inflation rates in four decades, the impact isn’t being seen. “Could it impact capital expenditures? I will say right now my experience to that is no,” KPMG national sports industry leader Shawn Quill said in a phone call. “I have had a dozen conversations over the past two weeks on new practice facilities, stadiums, ballparks—there are a ton of owners looking at that. A lot of that is attributable to the ownership…. When you’re a billionaire or collection of billionaires, you’re not as concerned with that.”
In fact, the financial market’s favorite measure of long-term inflation—Treasury bond yields—continue to point to rock-bottom costs for everything, from new stadiums to buying franchises. The 10-year Treasury bond yield, a benchmark influencing rates throughout finance, was 1.41% in mid-December. Before the pandemic hit, there was just one month ever that rates were lower, in 2016. A decade ago, Treasury yields were 2%; 20 years ago, they were 5%. Seen over decades, back to the early 1980s when government yields hit 15%, the bond market isn’t signaling inflation. “There are always risks no one can see, but from a finance, capital-raising perspective, we’re not about to run back to the 1970s, 1980s,” said Vogel. “You’re going to continue to see favorable borrowing costs, even as interest rates potentially rise.”
Still, in the near-term, teams do have to grapple with rising costs to fans, as determined by the Consumer Price Index, a monthly survey of more than 200 goods and services consumers buy, from eggs to sporting goods to funeral services. Even there, recent inflation coverage of CPI has been somewhat disingenuous. While headlines call out November’s 6.8% CPI year-over-year rise as the worst since 1982, inflation discussions on Wall Street normally focus on “core” CPI—that is, with energy and food costs stripped out. That’s done because oil and crops tend to have wild month-to-month price swings that can distort the longer trend—plus those prices end up reflected in other goods and services anyway. Core CPI in November was up 4.9%—still a 13-year peak, but perhaps not as worrisome.
Higher food and energy costs are “one of the key variables they’re looking at, and it could impact costs moving forward,” Quill said. “But moreover for sports team CFOs, it’s a confluence of financial factors they’re focusing on: mainly, the labor shortage, potential decrease in attendance with COVID, supply chain issues. Then I would say, maybe fourth, inflation.” While labor and supply costs could be inflationary if it caused higher costs, it’s simply the lack of availability at any cost that’s worrying team executives.
Ordinarily, teams would have pricing power to pass along higher gameday costs, like concessions. But it’s a calculation made complicated by the disruption of the pandemic, said Lee Igel, a clinical professor at the NYU Tisch Institute for Global Sport. “I don’t really think we can view sports as an entirely safe harbor, like it was in the past, where it didn’t really feel the effects of what was going on in the broader economy,” he said in a phone call.
Fans’ desire—or lack thereof—to attend games in person means teams may not have pricing power in the near-term. “The pandemic mindset really throws a wrinkle into the whole discussion. The ways people are regarding their money and their time has never been so different,” added Igel. “How much of this really is going to affect sports consumers? Are they really going to care?”
There are some signs that teams may feel the pinch in the near term. In recent years, teams have been raising season-ticket prices on average between 5% and 7%, according to Steve Hank, chief commercial officer of SSB, which helps sports organizations maximize customer revenue. “For the last five years, annual inflation in the U.S. has averaged 1.9%. Therefore, ticket prices have been outpacing inflation on average from 3% to 5% annually. Given COVID, I do not see that outpacing continuing at the same level,” Hank, previously the longtime chief revenue officer for the University of Texas athletic department, wrote in an email. “Teams will look to capture as much of the inflationary increase as reasonable in their market, based upon their individual circumstance, but [will] absorb some of the hit to cushion the impact on their season-ticket holders for the short term.”
Other potentially inflationary factors that could affect sports—things like rising cable bills and higher prices for fan gear—will take longer to appear in consumers’ bank accounts. For now, the new wave of COVID cases makes concerns like inflation a bit more abstract. “It’s being talked about. But from the perspective of a sports team CFO, inflation is not a major concern for them right now,” said KPMG’s Quill.
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