Conspicuous consumption

With a turnover of £2.2bn in 2007 alone, Formula 1 is among the richest sports on the planet. Even more remarkably, it’s still growing

By Christian Sylt & Caroline Reid

Formula 1 has been at the peak of motor racing for more than half a century. But what was once a sport renowned for its privateer teams and gentleman drivers is now synonymous with the world’s biggest blue-chip companies and team owners with multi-million pound budgets. Just over 20 years ago, motorhomes were more akin to caravans than today’s towering paddock palaces, there was no corporate hospitality programme, and few national television stations broadcast every round of the world championship. Now, more car manufacturers than ever own F1 teams, and nothing comes cheap.

The 22 racing cars making up the F1 grid are the world’s most expensive. Each has a material value of about £1.3m, with the 750bhp-plus V8 engines among the core costs. The chassis are crammed with 1.25km of wiring and more than 100 on-board sensors. They are the fruits of hundreds of hours of wind tunnel and track testing, which costs each team about £25m per year. Even the steering wheel is far from average, costing a crisp £13,000. With such costs, it’s perhaps no surprise that there’s only one truly privately backed outfit – Williams, which, after Ferrari and McLaren, is the longest continuously participating team in the sport.

Six major car manufacturers (Ferrari, BMW, Mercedes, Renault, Honda and Toyota) own an F1 team and spend between £30m and £150m each on the sport. The bulk of their contribution comes in the form of up to 80 engines and technical support to their teams. Few of the teams backed by car-makers are actually given cash by their parents, but the price those makers pay for the pursuit of victory is huge.

Even with engine expenses covered, a typical manufacturer-backed team has costs of about £100m. The biggest burden is paying a workforce of about 500, as well as the multi-million-pound salaries of their superstar drivers. In total, a top team’s payroll comes to about £30m, and this expense is almost equalled by their operating and marketing costs. The balance is comprised of travel, catering and R&D costs, with most teams running their huge wind tunnels 365 days per year for aerodynamic analysis. At £750 per hour, it soon adds up.

The teams’ incomes are dominated by sponsorship which, on average, yields £75m to a manufacturer-backed outfit, while trade support and tyre supply bring in another £12.5m. But despite F1’s global popularity, it has an extremely under-developed merchandising outfit, with teams getting only about £5m per year from the sale of branded goods.

However, perhaps the biggest surprise is that the champion constructor only receives £15m in prize money from the sport’s commercial rights each year, the remainder receiving reducing payments on a sliding scale. This sum varies according to the teams’ positions in the standings, but overall it equates to 47 per cent of the previous year’s F1 television revenues. Until recently, the teams received no other share of the sport’s revenues, but this has now changed.

The contract known as the Concorde Agreement, which commits the teams to race in F1, expires at the end of this year and is in the process of being renewed. However, last year the car manufacturers participating in the sport signed a Memorandum of Understanding (MOU) with F1’s new majority owners, private equity firm CVC –  and it was well worthwhile.

Under the MOU, the teams expect to share, from the end of this year, an annual payment amounting to 50 per cent of the underlying profits from all revenue sources, including around £80m from trackside  advertising, £165m from race hosting fees, and £70m from corporate hospitality.

By cutting this new deal, CVC also averted a potentially ruinous split in F1,  as for the previous five years the car manufacturers had threatened to quit the sport if their share of the spoils didn’t increase, and if didn’t become more transparent. After buying F1’s rights holder SLEC in 2005, CVC also acquired Formula 1’s trackside advertising and corporate hospitality divisions  which are both run through the Swiss company Allsport Management and previously had obscure ownership. Bringing all F1’s departments under one roof gave the car-makers peace of mind, and now all of F1’s key revenue streams flow into one company, based in Jersey, called Delta Topco.

CVC’s investment fund owns the majority of Delta Topco, with the remainder in the hands of the family trust of F1’s supremo Bernie Ecclestone and several smaller shareholders such as investment banks as well as Ecclestone himself.

Although the new company structure has also made it simpler to divide revenue to the teams, their new-found fortune has not yet started flowing into their coffers. Since payments under the MOU are due to begin at the end of this season the teams have to date rarely made a profit, and when they have it’s been a drop in the ocean. Last year’s World Championship winner Renault reported a profit of £3.6m in 2005, and although this was up 31 per cent on the previous year, it still gives a minuscule margin on turnover of £120m. This profit was largely down to performance-related bonuses as the team drove to its first drivers’ title with Spanish superstar Fernando Alonso at the wheel.

Alonso brought new sponsor signings to Renault in 2005 including Spanish insurance company Mutua Madrileña, which was believed to be spending about £1.5m in cash on the team. However, unlike many other sports, most F1 sponsors can have a real impact on the team’s success by providing products at the cutting edge of their fields.

It’s not just clever jargon that makes most F1 teams refer to ‘partners’ rather than to ‘sponsors’, because their involvement with the team can extend a long way beyond slapping a sticker on a racing car. And accordingly, the four sectors which contribute the top three of the largest sponsorship sums to the sport are financial services, technology, oil production and telecoms – all of which are absolutely crucial to the running of a modern F1 team.

As Scott Garrett, Williams’ head of marketing, explains: “F1 presents a great opportunity to test and develop new products in the ultimate torture-test environment.” With F1 being such a high-tech arena, it’s easy to see how companies directly related to it could use the sport as a proving ground. However, this unique appeal even stretches to sponsors which are far from core to the sport.

TAG Heuer, for example, which has been a partner of McLaren for more than 20 years, gives prototype watches to the team’s drivers to wear during races, thus submitting them to extreme G-forces and vibrations.

“Nobody is more demanding than a top driver for the benefit of the final consumer,” says Jean-Christophe Babin, TAG Heuer’s chief executive. It is a tried and tested theory. “Ever since we started in F1, TAG Heuer has been sourcing-in its high technologies and demanding drivers,” adds Babin. “Of course we have many privileged accesses and usages, but the foremost are the new-product development collaboration and advertising.” It is a strategy that bears fruit.

The case of TAG’s Kirium models is made from grade five titanium, which is much lighter than steel but more scratch-resistant, and shines like white gold. It is a material borrowed from F1 cars, where it is used in accelerator pedals, gearboxes and other parts of the transmission. In return, Babin says, TAG provides “timing systems for some private testings, and obviously watches and chronographs to all McLaren team members”.

Garrett explains that while this “industry fit” may bring sponsors to F1, collaboration is key to getting the greatest results once they are there. “At Williams, our commercial proposition is founded on the principle of community and the clear expectation that our partners will enjoy being with each other and working together for their mutual benefit as well as ours. Partners that embrace these principles make the best partners because they are likely to be in it for the long haul and for the same or similar reasons.”

There is no doubt that the overall draw of association with F1, and particularly a top team, is the sheer scale of the global audience. According to figures from the sport’s rights holder, the F1 Group, it is followed by 588m unique viewers, making F1 the world’s most-watched annual sporting event. Nonetheless, awareness can be erratic.

“On the right team and in the right circumstances, a client’s brand registration may far outweigh [in terms of the number of seconds his logo is on-screen] any paid-for media,” says Garrett. However, a car crashing can be the worst-case scenario for sponsors since their logos disappear from the track for the rest of that day. Exposure therefore greatly depends on the performance of the team.

Having a home superstar as the driver is also a huge draw for sponsors, as shown by Alonso’s move this year from Renault to McLaren. In the wake of his joining the team, McLaren announced a new title sponsorship with Vodafone, which it lured from arch-rival Ferrari. This deal alone is said to be worth £32.5m, and the telecoms giant was the first of many new sponsors which have headed McLaren’s way.

Alonso made McLaren a magnet for Spanish sponsors, including Santander, which is spending about £10m on the team, and Mutua Madrileña, another loss to Renault. In turn, McLaren’s strengthened financial position undoubtedly played a part in the sale earlier this year of 30 per cent of its parent McLaren Group to the Mumtalakat Holding Company, which is owned by the Kingdom of Bahrain.

It may be tough to measure, but the real returns for sponsors are often visible. “Although it is always hard to precisely define the return on the invested finance, Mutua Madrileña has exponentially increased its brand recognition in Spain,” says Jose Maria Ramirez Pomatta, president of Mutua Madrileña.

“Our alliance with Vodafone McLaren Mercedes is one of the best ways to demonstrate the changes within our company in the last four years, making us the number one Spanish insurer in profitability and reputation,” he adds. According to a recent survey of the Spanish public by market research firm Carat, Mutua Madrileña is the sixth most recognised company in F1.Indeed, F1’s global exposure is so great, it has even been used as a platform to promote rapid corporate re-brandings of more than one multi-billion-pound business.

When IT titan HP merged with Compaq in May 2002, HP was chosen to be the master brand for the combined company, but its biggest worldwide sponsorship was the F1 deal Compaq had with Williams. This was used as a platform to globally communicate the rebranding and, within 60 days of the merger, all traces of the Compaq logo on the team were replaced with HP’s brand. It was no mean feat.

Aside from the obvious items such as the cars and motorhomes, a huge number of other areas of the Williams team required adjustment, ranging from more than 2400 items of team apparel, internal websites, the team website, promotional brochures and press packs to seemingly insignificant material such as shuttle buses, reception desks and autograph cards.

This year, Santander has used F1 to similar effect. The Spanish bank acquired Abbey in 2004 and is rebranding it with its new parent’s name, to align it with its other 40 global markets. By sponsoring the leading British team, with the leading British driver in the form of rising superstar Lewis Hamilton, as well as being title sponsor of this year’s British Grand Prix, Santander has made a big impression in the UK in a short period; as it hoped to do.

There has been an added attraction to getting involved with F1 this year as the FIA recommended tobacco sponsors pull out. Having been part of F1 sponsorship since 1968, cigarette advertisers had become some of the biggest-spending sponsors. McLaren’s former title sponsor West is believed to have spent about £175m over its nine years with the team. Losing such big cash cows hasn’t sent teams spinning off-track. Quite the opposite.

Simon Points, McLaren’s head of partner management, says that several of the team’s recently-signed sponsors’ consideration of the team “was accelerated by the withdrawal of tobacco sponsorship”.

Ferrari is the only team in F1 which still receives money from tobacco sponsorship, through a massive £50m annual payment from Marlboro. However, the teams which have stubbed out cigarette advertising entirely have fared better overall, with banks and telecoms companies taking over. Biggest of the bunch is Renault’s replacement of its deal with Japan Tobacco with an estimated £32.5m annual sponsorship from Dutch bank ING.

Money talks in F1. The higher the cost, the greater the exposure. Generally, the rear wing, airbox and sidepods are prime logo positions on a car, and a sponsorship deal with a top team involving any one of these locations is likely to cost about £12.5m (see next page). At the lower end of the spectrum, small logos on the bottom of the sidepods, cockpit sides or on the nose can usually be bought for under £1.5m with a high-ranking team. But, of course, these are annual figures; the total deal cost can be much greater.

Three years is considered the minimum time-frame to make a sponsorship viable, but even then companies can’t just place their marketing money and expect the return on investment (ROI) to roll in automatically. An F1 sponsorship is effectively a vehicle for the company and the harder it drives it, the greater the return.

Leverage can be as simple as borrowing a show car (an engine-less, glassfibre F1 car shell decked out in full livery) for corporate events right through to getting the team’s driver to appear. The aim is the same – promoting awareness of the company’s involvement with F1. Renault advises sponsors to spend about 25 per cent of their sporting budget on marketing and public relations in order to maximise ROI.

Ultimately, money still talks loudest when it comes to sealing a sponsorship deal, and teams need to pitch for business as well as being approached. F1 is also full of agents who broker deals, but not many are favoured by the teams.

For example, Renault reportedly only uses one agency which represents only one of its partners and suppliers and it was inherited when the team was bought from Benetton in 2000. This may simply illustrate the inherent difficulty for an individual or agency in selling a property that is not their own, since F1 sponsorship is all about fitting and buying into an experience. This is a key part of a team’s pitch.

Insiders say sponsorship proposals generally start with an explanation of what Formula 1 is, the principal facts about its audience, and its benefits and suitability as a global marketing platform. They then focus on the competing teams and, specifically, on the target team and why it (and its owner) is involved in F1 and how it exploits the sport. This is then applied specifically to the target brand, and closes with a bespoke proposal to meet needs and expectations. It can take a long time.

Some F1 sponsorship deals have been signed in a negotiation cycle of mere weeks. At the other extreme, it can take years from the point of a first meeting to the closure of the partnership agreement. While Vodafone became McLaren’s title partner this season, the brand was reportedly speaking to the team back in 2001. With global companies behind most F1 teams, they can afford to wait. The manufacturers can write off their massive F1 investment to their marketing budget if they are successful – but, if not, it makes the expenditure tougher t0o justify.

Renault, for example, has been milking its victories for all they’re worth. Engineers from the car company rotate through the F1 team to keep their skills at the cutting edge, but the marketing department feels the biggest impact. Following its 2005 victory, Renault rolled out a series of advertisements bearing the winning car, and these have appeared in the global media as well as in the company’s 10,000 dealerships worldwide. Renault has even made a limited-edition Mégane to emphasise its F1 success. As Renault Group chief executive Carlos Ghosn has said: “Formula 1 is a cost if you don’t have good results, but an investment if you have good results.” The cost of winning remains massive, despite the increased team payments. F1 is fast becoming a playground for billionaires only. 

Data provided by Formula Money, an annual guide to F1’s financial performance, by Christian Sylt and Caroline Reid and published in partnership with CNC, a consultancy which has represented all the car manufacturers taking part in F1 (

Comment: Rising sums

How modern budgets compare to John Surtees’ F1 team of the 1970s

John Surtees knows a thing or two about the ups and downs of corporate sponsorship in motor racing; the former world champion ran his own grand prix team between 1970 and 1978.

Thirty years ago, blue-chip sponsorship deals were few and far between. Cash from the tobacco industry had arrived in the paddock but the smaller teams relied mainly on support from industry suppliers such as fuel, oil and tyre companies. Surtees recalls his first year at the highest level.

“We were never a big-budget team. We designed and built the majority of our first car, the TS7, at our factory in Edenbridge and our budget for building that first car was just £24,000.

“To go racing, we had some help from Brooke Bond Oxo, but even by 1972 our total annual budget was still only about £180,000 – and that was the year we won the European F2 championship, came second at Monza with the TS9B, and finished fifth in the Constructors’ championship,” he explains. “By 1974, teams like Lotus were probably running on over £750,000 while we were still budgeting £300,000 maximum.”

Surtees was forced to pull out just before the Ecclestone era and the influx of funds that came with that watershed in grand prix racing. “People say that budgets are excessive,” says Surtees, “and, in some ways, they may be. But Formula One is now a huge travelling circus, far, far bigger than ever it was, and sponsors demand certain standards – I mean, none of them want to sit in huts in the paddock. Also, there have been enormous improvements in driver safety, in the use of new materials and in the technology of construction. The safety has been the single greatest and most impressive improvement in Formula 1 over the years. 

“When Bernie came in, the timing was right, but we just missed out – by a year – on the benefits of that…”