Negotiating new kit sponsorship deals: Nike & Chelsea “Just Do It”
Published 11 January 2017 By: Charles Maurice
As we move into the new year, like many readers the author has had a chance to look back at the football season so far. Aside from the natural rollercoaster of being a Palace fan (an unusual affliction, shared with some high profile names), one of the stories that stood out most from a professional perspective was the reports of the new kit sponsorship deal signed by Chelsea with Nike for the 2017/18 season and beyond.
“So what”, you might say, “These sorts of deals seem to happen all the time”. Well, yes they do, but there are several points that arise out of this one that are worth picking up on, most notably:
- can you just pay your way out of an existing unwanted sponsorship deal (as Chelsea appear to have done with Adidas)? And
- what are a club’s requirements when negotiating a new sponsorship deal?
It is fair to say that Nike’s presence in the Premier League has ebbed and flowed over time, and it may surprise readers to know that, as it currently stands, Manchester City are the only team that wears Nike kit. There are several possible reasons for this, but it appears that recent strategy for the brand has been to focus on a smaller number of core club partnerships, coupled with a greater spend on deals with individual athletes. This is a departure from the past, where several teams (Manchester United and Arsenal, as well as the mighty Palace) have had kit arrangements with Nike of varying durations (and success).
The new Chelsea deal appears to be a deliberate way of addressing this, and the comments put out by both sides make it clear that the focus is very much on a partnership between the club and the brand. Whether this involves similar joint venture merchandising arrangements to those Nike had in place with Manchester United (for example) will remain to be seen, but nonetheless it is clear that, once again, Nike means business in the Premier League, which is a fillip for the brand after publicly losing the Manchester United sponsorship to Adidas. One expects that a Manchester City renewal deal may also be around the corner, although legitimate options open to top clubs have now expanded with the emergence into the football market of so-called “challenger” brands such as Under Armour.
Can you just pay your way out of an unwanted deal?
The salient legal point in all of this is that Chelsea appears to have paid a sum of money to exit its existing deal with Adidas. Without seeing the terms of that contract it is only possible to speak in general terms, but assuming that no express right to terminate existed, Chelsea would have been left with the usual contractual conundrum that applies to any other party locked into an undesirable contract for a length of time – how to bring the contract to an end without incurring liability.
Advice to clients is often, respectfully, that this might not be possible, and one of the first tasks for the lawyer in these scenarios is to manage expectations. Without an express right to terminate, it is highly likely that there will be some financial cost in exiting the arrangement, whether this is through agreement of a sum of money with the other side, or ultimately a sum payable as damages awarded by a court.
The obvious option, of course, is to agree a deal to drop the contractual arrangement, and it seems that Chelsea and Adidas have done this in this instance. The challenge for the party wanting to exit the deal is that negotiations are likely to start against them, and with contractual damages principles as they are, it is entirely reasonable for the counterparty to start by insisting that they are put into the position in which they would have been had the contract been performed in full. This may also be used as a persuasive argument to continue with the agreement.
Challenges arise in this process though, particularly where the party seeking to break the deal is the net financial recipient under the contract. In this example, Chelsea would have been paid a sum of money by Adidas, due over the course of the contract. The deal would also have included various other benefits with a monetary value to them (e.g. manufacture and provision of the kit itself). The question then for Adidas is whether it is accurately able to place a value on the benefit it is likely to receive under the contract for the remainder of the term.
Parts of this calculation are easier than others. The contract payments will have been calculated across the term as a whole, so terminating the deal early necessarily means a reduction in total sums paid out, and a refund of the difference from the club. Equally, sums due from replica kit sales might be predictable, particularly if the club and the brand have been working together for several seasons as was the case here. But there will also be a value to the brand that is less easy to calculate, and elements such as increased brand awareness and indirect sales are often subjective. So too is the value of a lump sum payment to exit the deal rather than a pay out over time as the contract is performed, and in many such negotiations this will also play its part – the total price to exit the deal may be reduced by a sum to reflect the cash-flow upside of a one-off payment. A bird in the hand etc.
But one thing is clear, in arrangements of this value a deal must be done, as the alternative is unlikely to give any measure of certainty. I am often asked by my clients as to what will happen if they simply just walk away from a deal? Case law (and common sense) points to some severe examples of how much of a challenge it can be to avoid committing a repudiatory breach of contract in the process. This is particularly the case where the sums of money involved are large. A lesson that Denny Solomona and Sale Sharks might be about to learn.
Like any football club, Chelsea FC’s value as a proposition for sponsors is likely to fluctuate with its successes on and off the pitch. This season has seen a welcome stability off the pitch and good results on it – success coupled with a premium location is a heady mix and has presumably created a platform which Nike considers to have considerable leverage, perhaps in a different way to its previous arrangements in the capital.
But what does a club like Chelsea really look for in a deal like this one? One need only take a look at Chelsea’s current list of official partners (see here) as opposed to those for Manchester United (see here) or Liverpool (see here) to understand that Chelsea takes a more selective approach to its sponsor arrangements. This approach goes hand in hand with a measure of exclusivity, and it is easy to see the appeal of a deal with a kit supplier with relatively few other competing arrangements in the same league and certainly not in the same city. Although it does not always pan out as such, this approach also lends itself to greater collaboration between club and brand, with each party having a greater opportunity to reach a wider audience as a result.
It has been reported that one of the key drivers behind the switch to Nike has been a frustration amongst the Chelsea commercial hierarchy that Adidas has proven unwilling to make the same financial commitment to Chelsea as it is to other European sides, including in the UK.
There may well be a ring of truth to this, but there is also a sense that in respect of its deal with Nike, Chelsea may just have timed its run extremely well. The club has several natural limitations (e.g. the seating capacity at Stamford Bridge) which, coupled with a period of relative instability off the pitch and an unsuccessful campaign in 2015/2016 mean that it has certainly done well to position itself for the change to the new deal – it would have been easy to wind down the next few years of its Adidas deal and hope to leverage a change in fortune on the pitch over time. But, as explored above, paying one’s way out of a long term contractual commitment is a bold move in any industry, and the money and status on offer from Nike obviously appealed to a club that considers itself one of the more unique propositions in European football. The deal will have done no harm for Chelsea’s roster of Nike-sponsored players either.
And in many ways Chelsea is a unique offering, and whilst the deal certainly has financial impact, it is the status that comes with signing such a large deal that is almost as important for a club as aspirational as Chelsea has proven to be in the Abramovich era.
The new arrangement puts Chelsea second only to Manchester United in the UK in terms of size of kit sponsor deal (£60m p.a. vs £75m p.a.), and certainly places it on the map from a European perspective. Crucially it also sends a message about the club and its value to other potential partners, which is further enhanced by the club’s apparent reluctance to lend its brand to anyone willing to pay the price. The size of the deal, this increased status and the Nike brand all combine to offer Chelsea exposure to new markets, although whether the Nike brand opens more doors than its Adidas counterpart is one of the great sports marketing debates, and from the club’s perspective, the success of the new deal in this respect may be more likely to rest on a greater willingness for Nike to justify its investment than it is from Nike’s greater market penetration. Success for Nike may, of course, simply lie in the disruptive effect that the deal may have on its competitors.
Either way, it certainly assists Chelsea to have a partner that is not spread thinly amongst several other clubs in the domestic market, and the structure of the deal may well have been simpler to put together due to less concern over the terms of the contract overlapping with contractual arrangements between Nike and other clubs, particularly in terms of bespoke KPIs, sales targets or measures of the club’s own achievements. It may be possible for a club to restrict the sponsor’s ability to contract with competing clubs, however any such clause will need to be carefully worded in order to avoid competition law concerns.
The sports retail market is still every bit as competitive as it always has been, and whilst brands like Nike have their followers, from a product perspective a number of the larger brands produce technical clothing that would satisfy the needs of most clubs. That said, a premium brand association carries its own value, and I have had at least one client that has looked to prematurely exit a long-term deal with a smaller manufacturer with limited success.
In many of these deals there are no rights for the club to walk away without cause, and if such a right does exist then this is likely only to be exercisable at the end of a relevant season.
Paying one’s way out of such a contract may become the only option, with all the attendant risk noted above. Which is why the better arrangements of this type become true partnerships with some measure of future-proofing to address the evolving business requirements of both parties.
This can be achieved in a number of ways, but a contract which lasts as long as the Chelsea/Nike deal is reported to last, will only do so in practical terms if the drafting provides the parties with an opportunity to refresh their relationship from time to time, whether that is through regular review, change control or an active and collaborative marketing process.
This is a key concept and one which will be familiar to any lawyer drafting a long-term contractual arrangement. The challenge in the first place though is to select a partner with whom this is possible, and Chelsea will be hoping that they have done just this.
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Charlie is a senior associate at Stevens & Bolton LLP and specialises in the sports, media and entertainment sectors. Charlie advises on a wide range of sporting issues and has particular experience in the motor racing and football industries.