Even at £750m Adidas' Manchester United kit deal could prove to be a bargain for the sportswear giant

 
Carsten Thode
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Manchester United
Adidas were prepared to give Manchester United the biggest kit deal in football history (Source: Manchester United)

£75m per year. That’s how much Adidas is paying Manchester United to make their kit. To put that into context, that’s about 2.5 times more than the next biggest Premier League deal (Arsenal and Chelsea both receive £30m per year from Puma and Adidas respectively) and over 10 times more than NFL teams receive from Nike, the NFL’s centralised kit supplier.

Read more: Man United kit launch already worth £1.5m to Adidas

Nike didn’t think a deal with Manchester United represented good value for their shareholders, which is why they pulled out of the running. So what was Adidas thinking? How do they think they can create value where Nike can’t – especially given that Manchester United’s recent on-pitch performance has failed to meet their own lofty standards?

The way to think about the value of a sponsorship is exactly the same as the way to think about the value of an acquisition: What is the net present value of the incremental cash flow associated with the sponsorship? In other words, what is the difference between the value of the business with the sponsorship and the value of the business without it?

On that basis, it’s not surprising that Nike and Adidas valued the deal differently: while they are direct competitors in the same industry, they have different products, routes to market, geographical footprints and distribution networks, which will all influence the amount of value they can create.

Read more: $1bn Manchester United top football’s brand league

The question of whether Adidas can generate more than £75m worth of incremental value per year is difficult to answer without any inside information. However, consider all these possible ways of creating value:

Product sales: Over the past five years, Manchester United sold an average of 1.5m replica kits per year. They sell for around £50 and have very healthy profit margins, even when you take out VAT and the retailers’ margin. And that doesn’t include all the training tops, polo shirts, t-shirts, hoodies, shorts, socks, jackets, hats, shin pads, goalie gloves, balls and other sports apparel and equipment that carries the Adidas and United logo. It’s not hard to see how Adidas can go a long way towards recouping that £75m from direct sales alone.

Distribution efficiencies: The Manchester United kit is one of only a handful of sports kits with genuine global appeal. Almost any sports shop in any country will stock the Manchester United replica kit. This opens up opportunities for Adidas in both directions: they can use their existing distribution network to get the kit in more places and use the kit to get Adidas products in more places. It will also improve Adidas’s bargaining power and flexibility with their thousands and thousands of stockists around the world. More stockists and a little bit more revenue from each one would quickly see an attractive return.

Brand Favourability: United claims to have 659m followers around the world while FIFA estimates that 270m people play football globally. Various industry sources value the global football market at c.£10bn with Adidas and Nike neck and neck at just over $2bn (£1.3bn) each. If Adidas can use the Manchester United deal to influence the preference of even a small percentage of United fans and football players to steal some share of the football market from Nike, the value will be substantial. And, make no mistake, sponsorship has the power to do this. Nike has only been in the football market for 20 years – look at what they managed to do with a clever use of sponsorship.

With all this in mind, perhaps £75m per year is a great deal for Adidas and the only surprise is that it has taken a major club until now to realise what their shirt is really worth.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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