The first half of February has been the most volatile period in the stock market in a couple of years, with the market falling sharply on two separate days while recovering part of its losses both in between and since. While we are technically back out of “correction” territory (defined as a 10% decrease), these were not minor swings. Hundreds of billions of dollars were erased and partially re-gained. Market analysts say the selloff was driven not by fear of weakness in the economy but by fear that continued economic strength, combined with deficits from the recent tax cuts, will finally fuel inflation, wage gains and higher interest rates--which in turn will dampen stock values and bond prices. As analysts from Charles Schwab & Co. wrote, the recent pullback in stocks was “different from every other pullback that preceded it over the past eight years, since it was likely triggered by fears of too much growth and the return of inflation, not too little growth and deflation.”
So how will these fears of growth-driven inflation impact sports and entertainment sponsorships? Several ways:
Good economic times will continue to boost the overall market for sponsorships. A positive business environment is a favorable setting for sponsorships. Despite recent declines and expectations of more volatility to come, the stock market is predicting the good times will continue to roll, at least for now.
The good times will bring cost pressures on activation costs and the best sponsorship rights. Costs are going up. The years of flat wage growth and little or no inflation are coming to a close. As long as the overall market for sponsorships remains strong, deal prices and activation costs are likely to increase. Activations with high staffing burdens will bear the brunt of the cost pressure, outstripping growing levels of inflation in the overall economy. Rights prices will also face inflationary trends, although increasing sponsorship alternatives may moderate the increases for all but the best properties and events.
Sponsors may look to longer term deals to lock in pricing. Just as banks like to lock in cheaper money through longer term CDs as rates increase, sponsors may look to lock in longer term rights deals as inflation finally resurfaces. This may provide an interesting counterbalance to the increasing risk factors in sports sponsorships that suggest shorter contract terms may be safer for brands.
Wage increases will begin to affect sponsorship staffing levels. Inflation and competition for experienced employees will fuel wage increases across the board, with agencies where staffing is heaviest potentially facing the largest impact. Look for these factors to affect retainer discussions and sponsor decisions about the work that should be done internally and the work that should be outsourced to agencies.
Efficiency will become much more important in managing and activating sponsorship assets and events. In an environment of flat wages and low inflation, it’s easy to overlook opportunities for management and staffing efficiencies. But as wages and inflation increase, efficiencies become much more relevant. Reduced staff costs can help brands offset inflationary pressures on deal prices and activation costs. They can also create competitive advantage for agencies that understand the increasing relevance of this factor to winning and retaining business. The question is how to achieve the efficiencies. In most companies, the broad answer in recent decades has been increased application and use of technology. Sports marketing is clearly ready for more technology—the spreadsheets that many sponsors and agencies still use to manage their sponsorship contracts, assets and events haven’t changed much since the eighties. Fortunately, enterprise-grade cloud-based platforms like Sponsor Locker are providing an alternative that can improve workflows, staff efficiencies and returns on sponsorship investment.