Can a Pro Team Be Profitable?

Tuesday, 14 December 2010

Laurent Fignon’s autobiography recounts how he set up the Système U team with Cyrille Guimard. They created a private cycling team and sold space on the jerseys and naming rights to Système U, a French retail co-op. Income from the sponsor in excess of the wage bill and expenses meant the pair made a small profit from owning the team. At the time this was radical, today this model is the norm.

Which makes me wonder if it’s possible to set up a substantially profitable pro team? Take the Luxembourg outfit funded by a sugar-daddy in the form of Flavio Becca. But what if the money sunk in the team actually generated a return? Andy Schleck has the potential to win the Tour de France and other riders are also very valuable. The naming rights and images of the team are very valuable. So it’s interesting to see the team forgo the naming rights for the time being and even to read that the team could race in plain colours.

Kop you eyes on that, George Gillett

Similarly it seems sports entrepreneur George Gillett was the name behind Team Pegasus. Gillett is an investor whose career seems based on using debt to acquire a variety of assets, whether in media, tourism or sports teams. The one-time owner of the NHL Montreal Canadiens ice hockey team, he’s been in the news following a disastrous forced exit from Liverpool FC. But he tends to invest in sport for money and exit with a profit.

In addition the Quick Step team, more precisely the structure behind it, was recently bought by two businessmen, Czech Zdenek Bakala and Prague-based Dutchman Bessel Kok.

Clearly some see cycling as a sport where putting money into a team can be a business proposition. Here it helps to distinguish ownership from the branding of the team. I’m talking about owning the structure, the legal entity behind the team. By owning the team you then sell space on the jersey and get other sponsorship revenues.

But for a long time cycling hasn’t seen this sort of business approach. Indeed the sport has been a way to sink money rather than earn it. Indeed the more you look, the more you find rich businessmen pumping their cash into a team rather than making independent marketing decisions. For all its professionalism, whisper it, Team Sky is really a plaything for keen cyclist, and son of Rupert, James Murdoch. The same can be said of Astana, a publicity vehicle for the incumbent Kazakh government and ditto for Katusha. Plus Team Radioshack is really a way for a US electronics retailer to get Lance Armstrong onboard.

But the arrival of private money in the sport is interesting. It’s not new, we’ve seen Bernard Tapie (pictured) in the 1980s and more recently both Highroad and Slipstream were funded by benefactors before sponsors came on board. The same goes for Team BMC where I suspect the annual budget requires an injection of cash from team owner Andy Rihs.

But can the opposite of Rihs funding a team happen? Can a team compete at a high level and attract enough sponsorship and income to exceed its wage bill and costs? Can this gap be big enough to entice investors to bankroll a team?

For me it’ll never work. As we’ve seen in soccer, sport is a “winner takes all” environment where the spoils go to the winners and only crumbs are left for the rest. The moment a soccer team is funded sustainably is the moment it gets overtaken by a club backed by a sugar-daddy investor with big dreams. They will always be someone willing to spend excess money on a team to buy victory ahead of a “team of accountants” where finances are prudently managed.

And why not? Sport is fun and often about fantasy, if millionaires want to spend their money on a team then I’m not too worried. The concern is greater when investors turn up with debt and flaky business models because this puts a team at risk. Zero-risk doesn’t exist, a team sponsor could go bankrupt tomorrow. But the arrival of “sports investors” seeking to make money from the sport only adds to the risk that a team can vanish at the click of a spreadsheet.

Beyond the horizon
How come so much money is coming in now? What do these investors see in the sport that we don’t? The shrewdest investors often move first and perhaps some see opportunities on the horizon that I cannot. It’s certainly possible to envisage a move towards team licences and franchises and with these in place the game changes. Plus it could also be possible for teams to join up with the likes of ASO to carve up the sport for themselves and freeze out the UCI. But this is wild thinking, not cool-headed finance.

Summary
I don’t think owning cycling team is the easiest way to make money. Sponsors are attracted to the best teams but even then it is proving difficult for the likes of Bob Stapleton to find partners for his High Road squad. The idea of a team generating a substantial surplus is probably fantasy, especially as in cycling their are no assets to borrow against. Sadly this could be concept that George Gillett realised too late into the Pegasus project.

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{ 3 comments }

benDE December 14, 2010 at 4:01 pm

Greetings, Great post. Any business that attracts capital with no need to generate return makes that business that much harder for anyone else needing to make a profit. These ultra wealthy individuals push up costs for all in wages, travel, equipement, ect. Take Saxo for example. Ok, maybe he is a jerk but Riis lost his whole stable when on of your 'sugar daddies' comes around to snatch up all the talent.

One exception to my observation is Wiggins. In this case a for profit team (Garmin) gets a buy out from one of the sugar daddies. If anymore examples exist where the 'rich' help the 'poor' in cycling please share.

Michael December 14, 2010 at 4:07 pm

Quick fact update – Mr. Gilette sold the Montreal Canadians several months ago in order to help re-structure the debt used to acquire Liverpool FC.

As owner of the Canadians he was world class. As owner of Liverpool he made a poor choice of business partner in Texan Tom Hicks who was overly combative. The two are now locked in litigation between themselves as well as with the board of Liverpool FC.

Mr Gillett's attentions are concentrated elsewhere to say the least. When you look at the timeline of events concerning Liverpool FC's forced sale in October you can quickly connect the dots as to the why's and how's Pegasus never secured or provided to the UCI their funding source.

Due diligence on the part of Pegasus would have seen that this was a potentially doomed source of funding from the get-go.

The agent's who recommended that their riders sign with Pegasus should never work again either.

As for the riders, I feel a modicum of sympathy for them, however considering many a rider turns to pro cycling as a career path to escape a lifetime of hard manual labour it is safe to say they are not necessarily the sharpest knives in the drawer and are easily convinced by these "agents" (term used very loosely)

TheInnerRing December 14, 2010 at 4:19 pm

BenDe: exactly. A new entrant simply sucks up the talent and if the wage inflation is good for the riders, it relies on new funding essentially from people willing to pour money into a team.

Michael: thanks, I'll edit the point about the NHL team. I'm with you on the points you raise indeed I said a couple of days ago ("Show Me The Money") that agents have a role to play in vetting a new team. It's the riders who lose out here.

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