On Value in NASCAR…

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[NOTE: Some great people contributed to this essay. Thank you for the help, Christopher Burk, Phil Clark, and Fred Smith. This research will lead to more thought-provoking projects on RACINGnomics.com in the future.]

Business periodical Forbes publishes annual valuations of NASCAR’s top teams. Since 2006, this reputable source estimates cost, revenue, and value for teams that compete in stock-car racing’s top series. In this essay, I use their assessments to analyze the well-being of NASCAR’s major teams and to identify financial trends in the industry. Although the sanctioning body’s decisions affect teams, my research examines the worth of Cup Series organizations – not NASCAR itself. I conclude that the overall value of teams has declined by almost 40% since 2006 and has yet to flatten. After years of consolidation and uneven growth, fewer teams are fighting over a shrinking value in NASCAR.

Forbes defines team value as a function of financial and competitive successes and NASCAR’s overall health. Specifically, sponsorship revenue dictates roughly three-quarters of a team’s worth. Prize money, merchandise licenses, scope and size of the program, and manufacturer subsidies all contribute to a company’s value, too. NASCAR’s “reach” — as determined by media contracts, attendance, and television ratings — plays a role. Finally, the governing body’s rules impact the financial worth of owners. Forbes’ coverage includes, but is not limited to 98% of the top 25 in owner points since the exercise commenced (195 of 200 entries).

Cleaning and understanding the valuation data are necessary for research. I adjust for inflation all figures such that they compare to 2014 U.S. dollars. Robby Gordon Motorsports was evaluated in 2008 only, so I exclude it from my time-dependent analysis. Finally, I tweak valuations from 2006. Forbes notes that it did not have access to several revenue streams from that year. In 2007, researchers incorporated those avenues and noted that revenue increased by 49% while the financial landscape had “flattened.” Since the previous year’s coverage included 17% fewer entries among major teams, I increase 2006 valuations by 83% of the 49% change in revenue, or by 41% total. Overall, 22 owners’ worth are calculated across 101 total observations.

To illustrate how team value within the industry has changed, I add the estimated worth of each major team from 2006 through 2014. The following graph plots the total annual value of examined organizations in green:

The overall worth of NASCAR’s top teams peaked at $1.98 billion before the 2007 season. Total value of these organizations then declined significantly and is currently at its lowest level on record — $1.26 billion. Forbes outlines several reasons for the diminished value of these teams. A financially back-loaded television agreement with FOX, ABC, ESPN, and Turner lowered teams’ media revenue from 2006; as scheduled, television revenue for teams did not recover until 2012. Along with a struggling economy, fewer race attendees, and a significantly smaller household audience; the estimated total worth of teams declined by 38% from 2007 through 2014.

Forbes also theorizes that the governing body’s competitive mandates hampered financial growth as well. NASCAR’s “Chase” mechanism undermined special weekly performances by traditionally noncompetitive teams and shifted focus toward annual title contenders. Ongoing tweaks to the new “Car of Tomorrow” introduced unintended costs. Testing and entry limits binded the growth of large teams, but did not address problems of smaller, struggling groups. More recently, the periodical notes that NASCAR’s hunting for official sponsors has caused some businesses to partner with the series rather than directly with teams. In summary, Forbes encouraged the governing body to “[q]uit legislating competition from the boardroom and let NASCAR’s free-styling free market work.”

The publication suggests that many smaller teams disappeared through consolidation to adapt to the changing motor sport climate. Pooling resources to gain efficiency and success is paramount for survival — especially for struggling organizations. The following table of mergers and acquisitions presents these circumstances. Only teams analyzed by Forbes are listed below:

As larger teams filled a greater portion of the weekly Cup Series field, financially weaker teams desired consolidation in the late noughties. The table above demonstrates how four organizations eventually formed Richard Petty Motorsports, for example. Additionally, many teams welcomed outside investors to remedy short-term financial difficulties caused by lower revenues, the economic crisis, and increased costs. Investment companies like the Fenway Group and Medallion Financial bought into stock-car racing and managed the financial standing of historic organizations.

Of course, the economic downturn, struggle for fruitful sponsorship agreements, and dismal television ratings affected NASCAR teams’ worth to varying degrees. The following chart plots the value of each team in the sample. Each bar represents the estimated worth of that particular team while the lime line tracks the team’s share of the overall industry value:

While a bar illustrates a team’s absolute value as estimated by Forbes, the share depicts how well the team performs financially compared to other organizations. Hendrick Motorsports’ share of Cup Series team value, for example, increased steadily from 2009 through 2013 despite its own worth deteriorating. This is because the worth of other teams declined more severely.

Other trends are apparent from the figure above. Hendrick Motorsports is over twice as valuable as any other organization (Joe Gibbs Racing — the second most valuable — is worth just 49% of that). The team enlists 4 drivers with a combined 10 championships and 11 most popular driver awards. Its Chevrolet ally, Stewart Haas Racing, has steadily grown into the fourth most valuable organization. Tony Stewart’s buying into the mid-pack group improved the team’s value for 2009, while broadly appealing Danica Patrick’s joining has sustained the uptick.

Perhaps most relevant, Roush Fenway Racing’s value and share on the market has depreciated drastically. Its absolute value has dropped by 55% from its peak in 2007. More indicative of its decline within NASCAR’s landscape, the team commands just 12% of the entire industry value as estimated by Forbes. Just 8 seasons ago, the organization controlled over 20% — the greatest share for 2006. With its star driver Carl Edwards rumored to leave, the organization’s value may continue its downward trend on the market.

Value inequality has become an issue in recent seasons. As some richer teams have gained value, smaller organizations have stagnated or lost market share. While the 4 most valuable teams comprised 52% of the total value in the industry in 2006, the richest 4 now control over 66%. Together with an industry value that has shrunk every season since 2007, the gap is widening between the affluent and destitute.

After a period of consolidation and outside investment, the current landscape of NASCAR teams starkly contrasts value distribution from 2006. The following pie charts document the vast change that the industry has undergone from 2006 to 2014:

Clearly, the market has morphed into a relative oligopoly — a few organizations dominate the industry, while others are subject to more valuable teams’ movements in the sponsorship market. In addition to numerous consolidation efforts and a small number of active teams, other examples reinforce oligopoly.

Hendrick Motorsports, for instance, has been very deliberate in selling sponsorship for NASCAR’s most popular driver, Dale Earnhardt, Jr. In the current environment, the owner acts as a “price leader.” The group knows that price deductions they make for a sponsor will likely be followed by other teams and, thus, not benefit their search for a sponsor. The owner is protecting the sponsorship ecosystem for owners by setting rigid prices. As in many oligopolies, the most valuable programs tend to set prices, not take them.

Furthermore, the barrier to entry in oligopoly is extremely high. Tremendous subsidies from Toyota allowed Michael Waltrip Racing to become a viable operation. Business owner Gene Haas collaborated with NASCAR champion Tony Stewart to grow Stewart Haas Racing. Unlike previous decades, it takes remarkable effort and help to grow and compete in the Cup Series — a league with high-dollar equipment, heavy-hitting financiers, and regulations that may favor existing programs.

I know that this was a long entry, so I appreciate your reading and invite you to chip-in. What are some points that stick-out to you? Do you think that more consolidations among teams are on the way? How will The Home Depot’s leaving NASCAR affect the value of Joe Gibbs Racing? Will Roush Fenway’s worth continue to drop? From an empirical perspective, what are some savvy ways to account for smaller organizations not researched by Forbes? Are there any teams that have a chance to grow into a larger, more valuable organization? I’m interested in your thoughts — feel free to tweet them to me at @RACINGnomics or via electronic mail at andrew@racingnomics.com. Thanks!

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