Beware the backswing ‑ The highs and lows of celebrity endorsements

By Ben Valdimarsson

I don’t play or follow golf and, as I suspect is the case with many others, my knowledge of the game and its star players is based on the sometimes too frequent daily news and sports reports.

Nonetheless, I was intrigued by recent reports when a missed putt on a golf course in Scotland apparently knocked $140 million off the value of a company 3,000 miles away in New York. According to these reports, just moments after Jordan Spieth narrowly missed on the final hole of The Open Championship at St Andrews, shares of Under Armour - his sole clothing sponsor - fell in value. 

Under Armour is an American sports clothing and accessories company which has grown very rapidly in recent years. A key feature of its brand strategy has been sponsoring young, up-and-coming stars, in the hope they’ll ultimately make it big. They describe it as having players on their books that are “young”, “underdog” and “next.”

The Spieth episode has triggered some discussion on whether investors can expect the share prices of companies such as Nike and Under Armour to rise if a Jordan Spieth or Rory McIlroy (who holds a lucrative sponsorship deal with Nike) scores a major win on the golf course. 

Forbes recently did an exercise where it tallied the gains or losses from Nike and Under Armour stocks over five trading days following a title win. They also looked at how Nike’s stock fared in the wake of each of Tiger Woods’ 14 major championships. According to Forbes, the results proved inconclusive - so you’re probably better of sticking to the bookies if you want to make a few bob on a Spieth or McIlroy win. 

On the flip side there is now a growing body of research which suggests that the reputation damage inflicted on sponsors by the actions of their marquee stars can indeed negatively impact market valuation. 

Associating your brand with an international superstar is a powerful marketing tool that over time should drive company values and performance through greater brand affinity and increased sales to consumers, young and old. But celebrity endorsements are not without their risks and with them goes a reputation health warning. As we know, some celebrities have a nasty habit of getting themselves into globally publicised ‘spots of bother’ - when this happens it’s not just their own reputation that suffers. 

One study (Knittel and Stango: Celebrity Endorsements, Firm Value and Reputation Risk) highlights that in the 10-15 trading days after the onset of the Tiger Woods scandal, the full portfolio of sponsors lost more than 2% of their market value, with losses being concentrated among the core three sponsors: Electronic Arts, Nike and PepsiCo. Considering the companies involved, this equates to billions of dollars. In fact, the study suggests that this particular scandal prompted a change in approach into how equity markets viewed and priced reputation risk. 

Lead sponsors, who have so much equity invested in their association with the celebrity, increasingly have to ride the reputation rollercoaster. All of a sudden that lucrative sponsorship deal has become a little bit less fun and that the old mantra that “any publicity is good publicity”, which is regularly applied to celebrities, is found to be nonsense. 

If we simply stick to athletes the examples are many. Lance Armstrong, Tiger Woods, John Terry, and OJ Simpson are but a few examples of athletes that have been dropped by top brands when their personal or professional lives have made international headlines. 

International brands won’t stop sponsoring celebrities any time soon. These deals can be tremendously successful and will remain a critical element of the brand strategy of many international companies and brands. 

At the same time, these brands will increasingly try harder to determine the value of their connections with celebrities, have a clear reputation plan in place to minimise the potential of a highly damaging reputation episode and, in the same vein, have a clear strategy in place to respond and deal with the fallout when, unavoidably, one of their investments goes rogue. 

Jordan Spieth has now replaced Rory McIlroy as world number one after finishing second in the US PGA Championship and the team at Under Armour are no doubt contemplating the positive impact this will have on their brand. But whilst Spieth seems to be a wholesome, level-headed, mature for his years individual, and probably a safe bet, the team at Under Armour wouldn’t be doing their job if they didn’t have a plan in place for the possibility that, at some stage, they might land in the rough.

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