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Pro sports not immune to recession

Rob Biertempfel
| Sunday, Nov. 30, 2008

While the average sports fan is tightening his belt amid global financial turmoil, professional sports leagues still seem to be living large.

The NFL has smashed its paid attendance record in each of the past five seasons. Major League Baseball grossed more than $6 billion this year. The NHL reported a 9 percent growth in revenue last year.

Yet, many experts say the slumping American economy will eventually take a toll. Sports marketing consultant Mark Lev said the pinch will be felt throughout pro sports, from the bleachers to the boardrooms.

"History has proven that sports is, to a certain degree, recession-proof," said Lev, an executive vice-president of Boston-based Fenway Sports Group. "But I think that theory is going to be tested pretty dramatically in the next 12 months."

Economists say Pittsburgh has so far been spared the worst effects of the nation's economic slump. That's good news for the Steelers, Penguins and Pirates.

"This region certainly is in a better position to deal with a national recession than it was in the past when heavy industry was dominant," said University of Pittsburgh economist Chris Briem. "We're doing relatively well, job growth-wise and unemployment-wise.

"Sports spending is something people can give up easily, and I don't think sports in Pittsburgh will be immune. People will spend less. But I think that, for example, the folks who have Steelers season tickets are going to hang onto them, no matter what."

Corporate cash drying up

Yet, ticket sales are only part of the equation. More important to the financial health of any team or league is the revenue generated through corporate sponsorships.

In 2007, the four major pro leagues pulled in $2.07 billion in sponsorship revenue, a 15 percent increase over the previous year. The NFL got $785 million from sponsorships, MLB got $505 million, the NBA $490 million and the NHL $290 million.

At a meeting two weeks ago in New York, commissioner Bud Selig warned MLB's owners to plan ahead for the effects of a deep economic slump. Two of baseball's largest corporate benefactors - the automotive and banking industries - have been hard hit by the recession.

Pirates president Frank Coonelly went to the meeting already mulling ways to replace Chevrolet, which is among the Pirates' 10 biggest corporate sponsors.

"We're going to have to be creative in replacing significant dollars there," Coonelly said. "We expect either they won't come back at all (as a sponsor) or they'll come back with significantly less investment."

General Motors Corp., which last week ended its nine-year sponsorship with pro golfer Tiger Woods, has instructed all its regional divisions to drastically reduce spending.

Chevrolet has been a national sponsor of MLB and also has regional deals with the Philadelphia Phillies, Detroit Tigers, Chicago Cubs, New York Mets and San Diego Padres.

Coonelly declined to divulge the amount of Chevy's sponsorship. But he did say the Pirates must acquire "several different" new sponsors to recoup the loss of Chevy's dollars.

For years, the Pirates' approach to corporate sponsors was "less is more," meaning they courted a small number of big-money accounts. With those sponsorships coming up for renewal in uncertain times, the team has adjusted its strategy.

"Now, it's 'more is more,' " Pirates marketing director Lou DePaoli said. "We need to figure out how we can cobble up enough to replace what we've lost or at least get most of it back, and then go after more (smaller accounts)."

Among the other major sponsors in the Pirates' stable are Trib Total Media (which owns the Pittsburgh Tribune-Review), West Penn Allegheny Health System, Highmark and Anheuser-Busch.

Coonelly said the Pirates' relationship with PNC Bank - which includes a 20-year, $30 million deal for the ballpark naming rights - is safe.

"PNC is well-positioned to weather this recession," Coonelly said. "That bodes well for them - and for us as well."

Auto racing hit hard

In mid-October, the NBA became the first American pro league to cut staff because of the economic downturn. The NBA released about 80 employees, nine percent of its staff, and closed its office in Los Angeles. The moves came two weeks after the Charlotte Bobcats laid off 35 non-basketball operations workers.

Auto racing has been especially hard-hit, and the impact could change the landscape of the sport.

"The traditional stick-and-ball sports have multiple sources of revenue," Lev said. "Auto racing is 90 percent dependent on sponsor revenue. In NASCAR, we're seeing a lot of consolidation and merging, and I think we'll see more of that."

Cash-strapped Dale Earnhardt Inc. will lay off 115 employees as it merges with Chip Gannasi Racing. Hendrick Motorsports, Petty Enterprises and Bill Davis Racing also have made deep staff cuts.

Local pro teams, however, have not slashed their work forces. In the past few weeks, the Pirates have added scouts and will increase their full-time sales staff by 20 percent. The Steelers and Penguins also have not made cuts.

"We were pretty lean to begin with," Penguins president David Morehouse said. "One thing we do have going for us is that we came out of bankruptcy in 1999, so we know how to operate with a lean management structure. We haven't made any (layoffs) yet. We will if we have to, but it doesn't look like it."

The Penguins are better positioned than some of their NHL peers to ride out an economic storm. The team had practically sold out its regular season in June, before the economic crunch really hit.

With the Penguins coming off an appearance in the Stanley Cup Finals, fan interest has never been higher. A core group of young players - Sidney Crosby, Evgeni Malkin, Marc-Andre Fleury, Ryan Whitney and Brooks Orpik - is locked into long-term contracts.

"The economy is a big problem that's going to affect all aspects of (life)," Morehouse said. "If it worsens, we'll be affected like anyone else. But right now, we haven't seen anything - yet."

In June, the Penguins and Bank of New York Mellon Corp. agreed to a one-year extension to their naming rights contract for Mellon Arena. The original deal was worth about $1.8 million annually, and granted BNY Mellon first right of refusal for naming rights to any new facility.

BNY Mellon recently announced it will eliminate about 1,800 jobs, which is 4 percent of its global workforce. However, the ripple effects on the corporation's sports sponsorships might not be affected. BNY Mellon and the Penguins have discussed naming rights for the new arena, which is slated to open in 2010.

"We continue to consider what we believe to be appropriate marketing opportunities for advancing our global financial services organization," BNY Mellon spokesman Ron Gruendl said.

Morehouse, declining to get into specifics, said the team is in talks with several potential local and national bidders and has not lowered its target price.

Would the Penguins be willing to open their arena before the naming rights are sold?

"I don't think we're going to have to," Morehouse said.

Putting fans in the seats

Beyond just the naming rights, the new arena could be an economic slump-buster for the Penguins. Opening a venue usually rewards a team with a significant bump in attendance and revenue.

"A new building gives you more opportunities, but you have to be incredibly creative to take advantage of them," said facility development consultant Rick Horrow, CEO of Horrow Sports Ventures.

Horrow was an advisor on the Penguins' arena project and also assisted former Pirates owner Kevin McClatchy. Horrow said innovative approaches to season-ticket packages, promotions and sponsor hospitality can help a team endure tough financial times.

"You can no longer take regular revenue for granted, whether it's automatic season-ticket renewal or skybox sales or a sponsorship commitment," Horrow said. "You have to work at this constantly."

The St. Louis Blues are promoting a "fan bailout plan," in which one fan at each Saturday home game wins cash to put toward a mortgage payment. The Pirates and Texas Rangers offered gas coupons to ticket buyers. The New York Knicks partnered with Costco stores to offer discount ticket packages.

"Teams are doing a much better job getting the pulse of the average fan, because they really have no choice now," Horrow said.

Riding a string of 16 losing seasons and saddled with one of the smallest player payrolls in the majors, the Pirates could see attendance drop if the local economy tanks.

"I think the impact is going to be felt more by teams that are uncompetitive," Lev said. "In most cases, people will always pay money to see a competitive product."

Attendance at PNC Park last season was 1.6 million, an 8 percent drop from 2007 and about 200,000 lower than the team's preseason target.

In early November, the Pirates decided to freeze ticket prices for 2009, their seventh straight season without an increase. The team also has added several incentives, such as value-priced season-ticket plans, a more flexible exchange policy, special parties for season-ticket holders, and an extended, interest-free payment plan.

"Right now, the fan base is feeling pretty good that we're doing the right things with ticket prices," DePaoli said.

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