We have been getting many questions about the athletic apparel negotiations with UCLA. In response, we wrote this based on what we are hearing. (Updated: 5/7/2016.)
It seems that almost every month a university is announcing a new mega-deal with shoe/apparel companies. It is now UCLA’s turn with the current Adidas contract coming to an end. UCLA’s current contract with Adidas had an exclusive renewal negotiating period that ended April 2. When terms could not be agreed upon, the contract was opened up for bidding from other companies.
Some Of The Notable Recent Collegiate Deals*
Notre Dame signed with Under Armour in 2014 in a contract worth $90 million over 10 years. This was the largest collegiate apparel contract in history at the time.
California announced a new deal with Under Armour on April 22, 2016, marking a split with longtime supplier Nike. At $86 million over 10 years, this is the richest known apparel contract in the PAC-12 and Cal became the second PAC-12 team to sign with Under Armour. The other being Utah. Note that this new Cal contract is very close to the two year old record breaking Notre Dame contract.
In July 2015, Michigan switched from Adidas to Nike with a new contract of $169 over 15 years. This is currently the third biggest apparel contract in the country.
In October, 2015, Texas re-signed with Nike for a new contract of $250 million over 15 years. This is currently the second biggest apparel contract in the country.
In January, 2016, Ohio State re-signed with Nike with a 15 year contract extension worth a whopping $252 million. This is currently the biggest apparel contract in the country and dwarfs the Notre Dame contract of only two years ago.
UCLA is currently making about 7.5 million per year with the current Adidas contract which expires in 2017.
*There are numerous reports about the dollar size of these contracts, and they vary in estimating the value. Most likely it is due to how the contracts are structured (incentives, bonuses, and extensions) and then interpreted, or misinterpreted.
A look At The Companies
Adidas – In spite of being the world leader in sports apparel, Adidas has been slowly losing ground in the USA. Under Armour passed Adidas in the USA in 2014 in apparel sales, and Adidas now admits it made some mistakes in the US market. They have clearly been slipping in the new collegiate bidding wars causing Adidas CEO Herbert Hainer to say:
“We are everywhere else in the world much more successful. In the U.S., we have not invested enough. I think in hindsight, we have not been as present in American football and in baseball as we should be. These are big sports in America. And I think we need closer contact to the consumer in America.”
Perhaps in an effort to fix that, Adidas outbid Under Armour and Nike in July, 2015 to be the official (and exclusive) apparel and footwear provider of the PAC-12 conference and all PAC-12 events. While this has no effect on individual schools, it does signify that Adidas may be looking at PAC-12 properties as a key in their new collegiate investments. Also, Adidas has made an effort to again be a player in schools by signing ASU in 2014 (8 years, $33.8 million), and Miami in 2015. All of these bode well for UCLA, which some consider to be the Adidas flagship collegiate client.
Under Armour – UA has been coming on like gang busters on the college scene in the past five years. It seems like they are a player in just about every major contract recently. Getting the Notre Dame and Wisconsin contracts put Nike and Adidas on notice that UA was determined to be a major force for years to come. And not just with colleges, UA has become a very successful company with its global sales increasing a whopping 30% in 2014. The brand has definitely cut a path into the high school and college student culture. We are hearing that UA feels that taking UCLA from Adidas would be another coup for them, in the same manner that Notre Dame was. They are aggressively coming after the UCLA contract.
Nike – Nike has been the big gorilla in the collegiate marketplace for a long time. In the past, they tended to bid lower, knowing they would still get the contracts. They felt their name recognition and product line were worth millions, and in some cases it was true. Times have changed, and with the recent mega-contracts Nike has signed with Texas, Ohio State and Michigan, it is clear they understand that they need to be willing to open the bank to stay in the game and fend off Under Armour.
It Is Not Just About The Money
While the total monetary value of the contract is of course, a major factor in any negotiation, it is not the only factor. There are a number of factors, some intangible, that can affect a decision. For instance, the terms of the contract can be creative, the length of the contract is important, the split between cash and apparel value, and the amount of the signing bonus are taken into consideration. Things like charitable partnerships, scholarships for non-athletes, support for the club and intramural sports, royalties, and facility naming rights are also considered.
Also, the apparel companies have shown that they are willing to pay more per year to lock in a longer contract.
Another factor, not in UCLA’s favor, is that in the next few months there are multiple premium collegiate contracts expiring. Should UCLA get a huge contract, that will be the new starting point for future mega-contracts. The apparel companies may want or need to contain the escalation of contract amounts starting with UCLA. It should be assumed that each of those schools will take the position that whoever signs last will get the best deal.
Under Armour in being creative, is offering stock options in their contracts, and jobs and internships for their college clients. UA is also developing a brand name on the high school football scene with events such as the Under Armour All-American Football Game, and several football camps. These can help in recruiting, although it is unknown how much weight the UCLA Athletic Department will give it in terms of the value that UA brings. We suspect it is a factor, but not a big one.
Nike is offering its Jordan Brand, high school AAU connections, football camps and possibly the most complete line of equipment, apparel, and shoes to equip an athletic department. They also offer many incentive bonuses based on conference and national championships. This seems to be an effective pitch since Nike reportedly made lower bids than Adidas and Under Armour, yet still got both the Texas and Michigan contracts.
Adidas brings state of the art equipment, shoes, and gear in multiple sports, including their popular “Boost” technology. They have a 30% share of American football cleats and their Adizero 5-Star 4.0 is the best selling football cleat in the world. Another example is that their soccer cleats are considered the most innovative and lightest on the market.
What’s In It For The Companies?
Why are these companies going crazy with each new deal? For one, it is great advertising. Every time UCLA plays on TV, in any sport, the apparel brand will get recognition. College sports and in particular because of the popularity, college football, provide extensive exposure to the brand. Averaged out, it becomes fairly cheap advertising compared to the entire marketing budgets of these companies.
Also, apparel companies are willing to pay extra in order to lock in schools for longer contracts. They understand that the costs will continue to rise, so if they can lock UCLA in for say $12 million a year for 15 years, it will be a deal if similar contracts are $20 million a year half way through the UCLA contract. That is why the last two mega-contracts with Texas and Michigan were for 15 years. We would not be surprised to see contracts for 20 years in the near future.
Surprisingly, or not, these big contracts get a lot of publicity for the apparel companies as well. When UA announced the Notre Dame deal, their stock rose 3% the same day.
What’s It Mean For UCLA?
On one hand, these mega-contracts have positioned UCLA well for the negotiations. Under Armour and Adidas both have good reasons to aggressively go after UCLA. In fact, both may regard UCLA as a “must have” client.
UCLA brings the Southern California/West Coast market, has possibly the strongest brand recognition internationally of any American university, has very strong apparel sales internationally, has an excellent reputation for both athletics and academics, is still considered one of the historic blue bloods of college basketball, and has a football program on the rise. Not to mention that with UCLA leading all institutions in national NCAA team championships, the school has strong name recognition in MANY sports outside of the big two.
Adidas has been hurting in recent years, and they have to stop the bleeding, especially with their current clients like UCLA. Reports are that UA wanted to lock up the Bay Area with Cal, and Jon Wilner of the Mercury News reported that Adidas actually walked away from that negotiation in order to focus on UCLA.
UA has made a recent priority of going after the blue bloods of college athletics, and with Texas, Ohio State, and Michigan all signing with Nike in the past year, UA has to feel pressure to bring in a brand name. UCLA is their next opportunity.
Nike has expended so much cash in their recent mega-deals that we don’t see them being nearly as aggressive with UCLA.
Even though UCLA would be a valuable addition to their portfolios, these companies know they can’t pay hundreds of millions to every school in the country with a D-1 program. Ohio State said they waited for the Michigan and Texas contracts to be finalized before they would enter into negotiations with Nike just to make sure they got everything they could get. The apparel companies know this will be the norm in the future, and that any future negotiations will be looking at the results of the UCLA contract for the next benchmark. At some point in time, we would expect that these contracts will start stabilizing. The good news is we don’t see that happening yet, with UCLA.
As noted before, UCLA is in a perfect position at a perfect time for a new contract. We have heard that UCLA has brought in a consultant to help with the negotiations. UCLA would like to follow Cal’s steps and avoid a long term contract of 15 years. Especially with the rapidly escalating deals being made these days. However, if the total value starts exceeding $200 million over 15 years, we think they would almost have to accept. If UCLA can successfully leverage UA and Adidas against each other, this could be an epic boost to the UCLA Athletic Department’s financial fortunes.
UCLA, like many if not most college campuses these days has increased in student activism. We know that UCLA students are watching this issue, and their interest lies in the working conditions of the overseas employees of these companies. It is likely they have positions on which companies are acceptable, or at least more acceptable. Most likely they would favor UA over Nike or Adidas, as long as UA will allow some form of monitoring of working environments for UCLA made merchandise. We doubt UA would allow this, and we really have no idea how galvanized UCLA students will be regarding this issue. The UCLA administration has been a mixed bag on how it deals with student protests. On some occasions, they have held their ground, and on others they have caved in to demands. This issue will definitely come up in the UCLA administration’s confidential discussions on the contracts.