Yesterday’s announcement that Adidas would terminate its contract with Chelsea six years early came as a bolt from the blue.
Officially the decision was described as “mutual” and it probably was once Chelsea agreed to pay a penalty clause rumoured to be nearly £40m (€50m). The original 10-year deal, signed in 2013, was for £30m per year. So if you take the penalty clause into account, Adidas will have paid £80m for 4 seasons — £20m per season is a pretty good gig if you can get it – especially as Chelsea won the Premier League in one of them.
But why would Chelsea be willing to give back nearly one-third of the kit sponsorship money they had already banked? Quite simply, because they think they will more than make up for it over the next six years. Ironically, it is Adidas themselves, who have established the market with their mega deals with Manchester United and Real Madrid. Adidas pay £75m per year to Manchester United and a whopping £104m per year to Real Madrid. Chelsea think they can get over £50m per season, which seems reasonable and would justify the penalty fee less than 2 years into their new deal.
It’s not just about the cash either. Chelsea are clearly a little way down Adidas’ football marketing pecking order – behind not only Real Madrid and Manchester United but also the German National Team, the Fifa World Cup and the European Championships. Why wouldn’t Chelsea prefer to partner with a brand who focused on them a bit more?
Clearly, Chelsea already have a replacement lined up but that could be any one of the remaining big five —Nike, Puma, Under Armour and New Balance — who have all shown themselves to be willing and able to make aggressive moves like this as they recognise the true value of kit deals (which have historically been undervalued).
But the obvious answer is Nike. Being replaced by Adidas at Manchester United and Puma at Arsenal must have hurt and it has probably shown them exactly what they are missing. They need another Premier League team – especially one in London – and Chelsea might actually be a better medium term prospect.
So we could have a genuine win-win-win situation. Adidas is happy because they get a healthy refund (which has boosted their share price) and a more focused marketing portfolio (which fits their overall strategy). Chelsea is happy because they get more money and more activation focus over the long run. And Nike is happy because, well, there are lots of brands gunning for them and they need to strike back.