An Olympic Return

The Olympics are an incredible event that is hosted once every four years and it brings together nations from all over the World in friendly competition to measure human achievement. These Olympics in Beijing, China have seen some of the most impressive feats capable by all of mankind. Take for instance, Usain Bolt, who ran the 100 meter dash in 9.69 seconds blowing away the rest of the field and establishing a new World Record. How can you talk about the Olympics without mentioning Michael Phelps and his 8 gold medals in swimming? How about the impressive performances by US gymnasts Nastia Luikin and Shawn Johnson in the women's all-around competition.

After just 11 days of competition, I've been truly impressed by the Olympics and think that this one in particular will have significant long-term impact on the World and I feel like it is already changing it in just a short time.

Anyway, aside from the remarkable performances by the athletes and the most amazing opening ceremony probably in the history of the Olympics and perhaps the history of mankind, I wanted to delve into the financial impact that the Olympics has on the World. A huge reason why the Olympics have become the show that it has is due to large investments for big multi-national corporations around the World.

Take for instance the Olympic logo. In order to become an "official sponsor" of the Olympic games and therefore be able to market your company as such, it will cost approximately $50 Million. If companies don't want to spend this enormous amount of money over a 17 day span, they can also become a "partner" of the games in which they can display the logo of the Olympics in their marketing campaigns, but they will need to also put the "USA" or any other country along with it. This typically will cost companies around $25 Million.

As you can see there is a significant investment that companies who decide to involve themselves in the Olympic games undertake. However, it really wouldn't make much sense for these companies to spend exorbitant amounts of money if there weren't any payoff involved.

Intuitively, it makes good sense to sponsor an event like the Olympic games. For example, sponsors get an enormous amount of global reach in their advertising campaigns during the course of the games. This is true of television commercials, internet advertising, as well as, advertising at the Games themselves. This gives companies a great deal of exposure to a World market.

Additionally, the advertising campaign makes sense if you believe that advertising actually works. What I mean by this is that the Olympic games are a fun event that people have positive connotations connected with it. By linking those positive connotations of the Olympic games with the corporation that decides to sponsor the games, people become more likely then to associate positive images with a particular corporation. Ultimately, this is intended to drive revenues and eventually increase profits.

Increasing profits is the name of the game and Olympic sponsorships are a huge investment and it would thus only make good sense for companies to back this event if it ends up benefiting the company.

Therefore, I did an analysis of the 2004 Summer Olympics held in Athens, Greece and looked at 9 companies in particular that sponsored the games. Each company were primary "official sponsors" in varying categories. I looked at various financial indicators since 2004 through 2008 including their revenues, EBITDA, stock price, current ratio, and leverage ratio. I wanted to evaluate whether an Olympic sponsorship effort had any significant return or increase in growth over subsequent years.

In order to do so, I compared my 9 companies that sponsored the 2004 Summer Olympic games in Athens, Greece with 48 of the top 50 Fortune 500 companies in 2008. I consider these companies to be a sufficient benchmark on which to gauge economic progress.

• Methods

The first thing I decided was which Summer Olympics to look at in particular. I chose the 2004 Athens, Greece games, because I think that the sizable investment that companies have to make in sponsoring the games ought to have quick returns, defined as those that significantly impact financial data of a company within 4 years.

Next, I found the companies that sponsored the Summer Olympics in Athens, Greece. I found a website called, INVGR.com (Invest in Greece), which itemizes the companies that sponsored the Olympic games in Athens. According to the website, the sponsors invested over $600 million in the games.

Based on this list, I then picked companies that were publicly traded and had readily available financial data. This ended with our current list of 9 companies and their category which include:

1. Hellenic Telecom (Telecommunications)
2. Heineken (Brewery)
   
3. Coca-Cola (Non-alcoholic beverages)
4. Kodak (Film/photography and imaging)
   
5. McDonalds (Retail Food Services)
   
6. Samsung (Wireless Communications)
7. Time Warner (Periodicals/Newspapers/Magazines)
   
8. Xerox (Document Publishing, Processing, Supplies)
   
9. Shell (Petroleum Products)

After determining these companies, I then looked up their financial data since 2004. All financial data is courtesy of Google Finance and all stock quote information is courtesy of Yahoo! Finance. Samsung's financial data was taken directly from their Annual Reports for 2004 through 2007.

The financial data includes measures for the current ratio of each company and leverage ratio for each company. The current ratio is found by dividing the current assets by the current liabilities and is a measure of a company's ability to pay its short term liabilities and its capacity to turn products to cash. The leverage ratio is a measure of the financial leverage of a company and gauges its ability to meet financial obligations. This ratio is found by dividing total assets by equity.

After performing the initial analysis of Olympic Sponsor companies, I then needed to benchmark my results against an average. I decided to use the top companies in the Fortune 500 List as my benchmark because of its inherent diversity of companies. In addition, the companies on the Fortune 500 list typically perform well and if I wanted to see if companies perform unusually well this would be a good group to compare it against.

I took the top 50 companies of the Fortune 500 List in 2008 and compared their revenues and stock prices since 2004. My sample included only 48 of the top 50 companies due to mergers and acqusitions that had occurred since 2004. I decided to leave these two companies out, because the merge may have inflated or slowed growth.

• Results

• Compound Annual Growth Rate (CAGR) Revenue

Since 2004, the 9 companies that sponsored the 2004 Athens Summer Olympic games had an average CAGR of 5.4%. The company with the highest CAGR was Samsung. Their CAGR was 17.7% and went from revenues of $55.2 billion in 2004 to $106.0 billion in 2007. The company with the lowest CAGR was Kodak. Their CAGR was -6.6% and went from revenues of $13.5 billion to $10.3 billion.

Compared to our benchmark of the top 48 of 50 companies in the Fortune 500, these results are dissapointing. The Fortune 500 companies had an average CAGR of 11.0% since 2004. The company that had the highest Revenue CAGR since 2004 was The Goldman Sachs Group, 30.1% and went from revenues of $23.6 billion to $88.0 billion. The company with the lowest Revenue CAGR since 2004 was General Motors, -1.4% and went from revenues of $195.6 billion to $182.3 billion.

Additionally, if we evaluate each sample's standard deviation we can determine a range in which we would most likely find 68% of the companies in each sample by looking at +/-1 standard deviation.

The Olympic sample had a standard deviation of 6.3%, which determines a range for Revenue CAGR for companies sponsoring the Olympic games as between -1.0% and 11.6%. The Fortune 500 sample had a standard deviation of 7.5%, which determines a range for their sample of 3.5% to 18.5%.

• CAGR Stock Price

Since 2004, the 9 companies that sponsored the 2004 Summer Olympic Games in Athens had an average CAGR for their Stock Price of 7.5%. The best performing stock was McDonald's which had a CAGR of 17.9% and the worst performing stock was Kodak who had a CAGR of -5.4% for their Stock Price.

The top 48 of 50 Fortune 500 companies had an average CAGR for their Stock Price of 7.1%. The best performing stock was Valero Energy which had a CAGR of 35.6% and the worst performing stock was The Ford Motor Company who had a CAGR of -12.9%.

To determine a range in which we would most likely find 68% of our sampled companies we take a look at standard deviations. The standard deviation for the sponsoring companies was 8.2%, which defines a range of -0.7% to 15.7% CAGR for stock price. The standard deviation for the Fortune 500 companies was 10.1%, which defines a range of -3.0% to 17.2%.

For further comparison, we can look towards three widely used indeces in the United States Stock Exchange, the Dow Jones Industrial Average (.DJI), NASDAQ (.IXIC), and S&P 500 (.INX). Since 2004, the Dow Jones Industrial Average has had a CAGR of 3.8%, the NASDAQ has had a CAGR of 3.0%, and the S&P 500 has had a CAGR of 4.0%.

• CAGR EBITDA

CAGR for EBITDA was only evaluated for the sponsoring companies. On average, the group's EBITDA had a CAGR of 2.9%. The highest performing company in terms of EBITDA was Time Warner, who achieved a 12.0% CAGR for EBITDA. Time Warner went from an EBITDA of $6.1 billion in 2004 to $9.6 billion in 2007. The worst performing company in terms of EBITDA was Kodak at -22.0%. Kodak went from an EBITDA of -106 million to -235 million.

• Revenue Percentage Growth and Year over Year

The 9 sponsoring companies of the 2004 Summer Olympic Games grew on average by 7.5% from 2004 to 2005, 5.7% from 2005 to 2006, and 8.7% from 2006 to 2007. Between 2004 and 2006, Samsung grew the most each year. In 2006 to 2007, Coca-Cola had the highest percentage growth in revenues. Kodak was consistently the company that performed the worst from 2004 to 2007. Aside for a -0.1% growth by Xerox between 2004 and 2005, Kodak was the only company that had negative growth over this period.

By keeping the 2004 revenue of each company constant, it can give an idea as to how much the company grew over the four year period. On average for the group, revenues increased by 7.5% in the first year, by 14.4% by the second year, and by 25.2% by the third year.

• Current and Leverage Ratios

In order to evaluate current and leverage ratios it is best to take a look at them as they deviate over the four sampled years. Overall, the average for the group's current ratio deviated by 0.146. The largest deviation in Current ratio was 0.491 by McDonalds. The smallest deviation was by Shell which was 0.079. The average current ratio for the 9 sampled sponsor companies over the four year period was 1.20.


The average deviation for leverage ratios was 0.515. The largest deviation was by Kodak, 2.912, and the smallest deviation was by McDonalds, 0.046. The average leverage ratio for the 9 sampled sponsor companies over the four year period was 2.83.

• Conclusion

Companies will pay a tremendous amount of money in order to sponsor the Olympic games. Marketing campaigns and rights to the Olympic rings can cost in excess of $50 million. With such a large investment, it would seem strange for companies to not profit from it.

Based on the financial research of 9 sampled companies that sponsored the 2004 Summer Olympic games held in Athens, Greece, there is no significant benefit to sponsoring the Olympic games.

In terms of revenues, it appears as though those companies that sponsored the Olympic games actually lagged behind. Olympic sponsors had a CAGR of 5.3% since 2004, whereas the benchmark for this research (48 of the top 50 Fortune 500 companies) had a CAGR of 11.0%. This would suggest that the investment in the Olympics is unfounded.

However, when comparing stock price CAGR, Olympic sponsors outperform the benchmark slightly, 7.5% versus 7.1%. This, however, is very close and shouldn't be seen as a significant difference. EBITDA gains for sponsoring companies, 2.9% CAGR, further indicates the lack of impact that the Olympics has on the profitability of a company.

Current and Leverage ratios practically stay in line and there is no significant jump in these financial categories.

However, it is interesting to note that companies that invest in the Olympics typically have a strong stock return. As of January 1, 2008 the 9 sampled companies were up 50.8% on average, with the highest returners, McDonalds and Hellenic Telecom, up 127.5% and 117.4% respectively. It is also important to point out how companies who sponsor the Olympics have strong revenue growth. Although our sampled group didn't outpace our benchmark, the revenue growth after four years (without Kodak) is on average 31.3% with the highest growth coming from Samsung, 91.9%, Coca-Cola, 32.7%, and Shell, 33.6%. These are extremely strong numbers and 6 out of 9 companies had in excess of 20% revenue growth.

It's important to remember the larger picture and purpose of the Olympics in general. It's a momentous occasion that brings together the finest athletes in the World to compete together and promote good-will. Companies have the opportunity to benefit from the immense audience that is drawn to the Olympics, but there is certainly no proven formula.