What Nascar Learned From the NFL

Ever since Robert "Red" Byron in 1948 drove his Ford over the sands of Daytona Beach, Fla., at 75 miles per hour for a $1,000 prize, Nascar has operated pretty much the same way. Teams showed up at the track with a car, a driver, and a crew and tried to win prize money; they had no larger stake in the enterprise. That all changed this year: When Denny Hamlin of Joe Gibbs Racing took the checkered flag at the Daytona 500 on Feb. 21, he did so as a charter member of Nascar rather than just a hopeful, tire-burning freelancer.

Under an agreement announced less than two weeks earlier, the racing circuit handed out charters–somewhat akin to a team franchise in the NFL or NBA–to 36 cars. The nine-year charters guarantee a slot in every race in Nascar's top circuit, the Sprint Cup Series, and can be bought and sold. Previously, teams held one-year contracts that laid out the conditions and prizes for racing. They had to qualify for each race. A team owner who wanted to cash out had nothing to sell but a driver contract and used auto parts. "We needed to make a contemporary, modernized business model," says Nascar Chief Operating Officer Brent Dewar, who hired McKinsey consultants to review the franchise models of other U.S. sports leagues. "We studied everything," Dewar says. "This is bespoke to us. And it's something we can build on."

With the annual cost of putting a car on the track ranging as high as $25 million, even successful teams don't win enough in prize money to cover their costs. Instead, they depend on sponsors for about 75 percent of their revenue. That worked well enough until Nascar's growth sputtered out right before the financial crisis of 2008, and ratings and attendance dipped. "You saw a number of longtime sponsors exit the sport," says Jon Flack, chief operating officer of JMI, a leading motor-sports marketing agency. Those that remained, he says, mostly backed a handful of top teams. Although the dominant owners, such as Hendrick Motorsports and Joe Gibbs Racing, could count on their primary "hood" sponsors to cover their costs, many teams lost money.

"It's a great sport but a very difficult business model," Rob Kauffman, co-owner of Michael Waltrip Racing, told reporters when he decided to shut down the team last summer. Kauffman, now a co-owner at Chip Ganassi Racing, was a leading advocate for team owners in negotiations for the charter plan. "It allows [us] to invest for the longer term rather than merely survive year-to-year," he says.

Now teams can promise sponsors their brands will be on display in every race for years. "That may not sound like a lot, but certainly, as you're out in corporate America asking for the large sponsorship dollars that we ask for, that comes up more than you would think," says Tad Geschickter, co-owner of JTG Daugherty Racing. Such talks will be easier because "sponsors don't like risk," says JMI's Flack. "Sponsors want to know they're in the show."

The benefits of this stability, Flack says, are already on display. Regan Smith, the eighth-place finisher at Daytona this year, is a new driver for Tommy Baldwin Racing. The team ponied up to hire Smith to replace a less experienced driver in January, knowing it would soon hold a charter. "I'm not sure they would've gone after him a year ago," Flack says. "The sponsors all feel good about that, because they've got an upgraded guy who gives them a better chance of more visibility."

It's still possible to get into a Nascar race without a charter. Four slots in each Sprint Cup Series race remain open to noncharter teams that do well in qualifying races. And they can compete in the Xfinity Series, Nascar's minor leagues. The charter deal does not add to racing teams' overall share of the $820 million a year Nascar gets from TV deals with NBC and Fox. Nascar keeps 10 percent while paying 65 percent to host tracks and 25 percent to teams through the prize purse. But the new setup does give guaranteed payouts to charter holders.

The cash value of a charter remains uncertain. Kaufmann, whose defunct Michael Waltrip Racing team was granted a pair of them, has already sold one each to the Joe Gibbs and Stewart-Haas Racing teams. He won't give prices but pegs a charter's value "in the low, single-digit millions." That's not NFL money, but it's a start for owners. Says Geschickter: "It gives us all a potential to have an exit strategy, which wasn't there before." Bloomberg Business

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