Business in racing: NASCAR's period of excess might be over

Analyzing NASCAR’s health these days requires as much knowledge of Adam Smith as it does Regan Smith.

And Dale Earnhardt Jr., among others, frets over what any free-market economist can see all too clearly: a painful realignment in the works.

Which explains why Earnhardt Jr. spent a news conference this season tossing out the history lessons supplied by Alan Kulwicki in favor of those learned (or not) by Alan Greenspan.

“I read somewhere that this was a correction more so than a recession, that we were all kind of living beyond our means,” Earnhardt Jr. said, describing both the national economy and NASCAR at once. “We definitely were. … I feel like a lot of us in the sport lived in excess as far as that goes.”

Indeed, Earnhardt Jr. knows the economic perils from a personal perspective. His JR Motorsports routinely lost $2 million per year running one Nationswide Series team. This year, with Earnhardt Jr.’s move to Hendrick Motorsports, he added a second Nationwide car to the JR Motorsports stable. Now faced with greater financial losses and fewer sponsors, JR Motorsports is cutting staff and greatly reducing the number of races it plans to enter next year.

Look around the NASCAR Sprint Cup garage and similar troubles abound. What began with Ginn Racing’s merger with Dale Earnhardt Inc. (DEI) last year has metastasized in recent months. Now DEI is involved in another merger, this one with Chip Ganassi Racing, which has eliminated a team from the organization.

Welcome to the new NASCAR, where even multimillion-dollar owners, top-shelf drivers and the rest of the hierarchy wonder how they can keep money-guzzling race teams fueled with cash. With corporate sponsors providing the bulk of any race team’s budget, the country’s larger economic tremors have triggered dread at speedways, in race shops and in NASCAR’s executive suites. The result: Layoffs, scrapped teams, bargain-shopping corporate sponsors and fears of an even bloodier 2009.

Such concerns become even more worrisome with many economists predicting further economic hits well into next year – and perhaps even into 2010. And, oh by the way, the automotive industry serving as the lynchpin of the racing world lies in tatters, saddled with debt, plummeting sales and a longshot gambit to win a federal bailout.

None of the major auto companies has left the sport, but cutbacks have already arrived. With shares of Chevy parent General Motors Corp. recently trading at their lowest levels in 50 years, it seems all but certain the company will be forced into additional motorsports reductions next year. Chevy reduced its track commitments earlier this year. Rival Ford Motor Co. slashed its spending on Nationwide and truck series racing for next season. And with Dodge parent Chrysler in merger talks with GM, still greater cuts could be in the offing.

With Wall Street cratering, it’s become harder than ever for teams to win over corporate sponsors. And, as teams seek $15 million and up for primary sponsors on the hood, a painful correction, to use Earnhardt Jr.’s words, could be in the offing.

“Will teams cut more aggressive deals to get sponsors? Absolutely,” says Steve Lauletta, president at Chip Ganassi Racing. “It’s been happening for the last 12 months. There are some deals that are being cut way below market value just to get a sponsor exposed to the sport or exposed to a team.”

Lauletta, like Earnhardt Jr., looks at this with more than an abstract viewpoint. His Ganassi race team signed former Indy 500 champ Dario Franchitti in the fall of 2007 and then failed to land anything beyond patchwork sponsorship. In July, Ganassi shut down Franchitti’s team and eliminated 70 jobs.

Across NASCAR and all sports, executives say it takes longer to close a deal than ever before. Negotiations drag on and on as companies work to extract the best deal – and avoid marketing missteps at a time when every dime matters more than ever.

In other words, even if a team manages to sell a sponsor on NASCAR, it’s going to be costlier in two ways to the team: it’s likely to sell for less and it’s going to take more man hours from team staffers to close the sales and take care of the sponsor once it is aboard.

David Jessey, who heads sponsorship sales at Gillett Evernham Motorsports, illustrated his point while analyzing the sport’s business climate. Speaking by cell phone, Jessey noted that he was on his way to catch a flight to Minnesota, headquarters for Best Buy, the electronics retailer and a Gillett Evernham race-team sponsor. Why go there? To host Best Buy executives at a Minnesota Wild hockey game. In the owners’ suite, no less. The connection? Gillett Evernham owner George Gillett owns the NHL’s Montreal Canadiens, who just happened to be playing in St. Paul the same night Jessey called on Best Buy.

Sure, entertaining clients has long been part of NASCAR and every other sport. What’s interesting is that the wooing process extends well after the sale has been completed. And, not only that, teams such as Gillett’s now bank as much on other relationships to keep NASCAR backers as they do on access to races and driver appearances.

Another case in point: Roush Fenway Racing, part of the Fenway Sports Group that serves as a sister operation to baseball’s Boston Red Sox. Roush Fenway execs entertain current and prospective clients with much-coveted Red Sox tickets and other VIP perks. In fact, rivals in the NASCAR garage sighed with relief when the Red Sox missed the World Series this year, negating a potential ripe opportunity for impressing sponsors with prospecting trips to the Fall Classic.

“You’re going to have to work a lot harder and use every asset you have,” Jessey says of the pressures created by the economic crunch. With Gillett, for example, the race team’s Stanley Tools sponsor now receives advertising and promotional rights with the Canadiens. For other sponsors with a global or European interest, Gillett’s Liverpool soccer club offers additional opportunities.

Other companies work with Gillett’s chain of ski resorts to help with charity drives, auctioning off complimentary ski trips for thousands of dollars to boost a philanthropic cause. All of these extras are no longer extras. They’re the currency for getting and keeping a sponsor. Outside investors flooding the sport – Boston Ventures with Petty Enterprises, Gillett and Roush Fenway, among them – have made this the new reality.

That puts even greater pressure on race teams, especially the smaller ones. The average race team is worth $119 million, according to Forbes. But that number is skewed, as two teams – Hendrick Motorsports and Roush Fenway – are valued at $335 million and $313 million, respectively. Every other team fell below $200 million.

Once-proud organizations such as Petty Enterprises and others lag far behind, which explains why those teams and several others are rumored to be in merger talks. Michael Waltrip Racing and Yates Racing are among the other prominent names caught in the potential death throes of dire financial straits.

Along with the economy and heightened scrutiny from sponsors, some longtime observers say the recent addition of venture capitalists and other outside investors has sullied the waters further.

“I don’t think that’s healthy for our sport,” says Darrell Waltrip, the former NASCAR champion and team owner who now works as a Fox TV analyst. “Those people have one thing in mind and that’s the bottom line. They’re looking for a return on investment. And you don’t always get a return on your investment every year [in racing] like other businesses.”

Those outside investors arrived, in part, because of what NASCAR teams did to themselves. Costs skyrocketed during the past 15 years as the sport boomed, creating more sponsorship investment which, in turn, fueled more expensive equipment, larger crews and so on. Top teams began hiring engineers by the dozens, testing at unprecedented levels, investing more and more in fitness and nutrition programs and expanding in any way possible.

Even without the economy falling apart, many NASCAR teams needed more money to stay in the game. Rick Hendrick had an auto dealership empire to help fund his championship pursuits. Likewise, Roger Penske built a slew of thriving businesses that afforded him the ability to chase glory on the open-wheel and stock-car circuits. But for people with names like Petty, Earnhardt and Childress, keeping up requires new investment. Childress, the first NASCAR owner to seek significant outside investment, has used that head start to maintain a healthy position in the sport. It’s little surprise, then, with those financial realities in mind that Childress, Hendrick, Roush Fenway and Joe Gibbs Racing accounted for all 12 of the Chase for the Cup drivers in NASCAR’s playoff system.

Waltrip, for one, sees no problem with dominant teams. Twenty-five years ago, he says, six cars dominated NASCAR. Now it’s four team owners. “Parity is the worst thing that ever happened to any sport, in my mind,” he says.

Fan interest remains fairly strong, with TV ratings rebounding this season after back-to-back years of decline. Most analysts blame noticeably smaller crowds and plummeting merchandise sales on economic conditions. Foreclosures, higher grocery bills and roller-coaster gas prices, as well as soaring job cuts across all sectors, have left NASCAR fans feeling the economic pinch.

NASCAR Chairman Brian France trumpets fan interest and the sport’s resilience, but also concedes the reality of today’s uncertain economy.

“We are nervous like everybody else,” he says.

Adds Waltrip, “We had a big bubble. We rode it to the top. Sometimes you have to bottom out and start all over again.”