Johnny Manziel is one of the most talked-about players in the sports world, but his popularity comes with a price. The NFL quarterback recently used an offensive gesture on national television, just the latest in a string of controversies during his football career. Manziel's antics don't just create media fodder, though, they tarnish his public image. A recent ESPN SportsNation poll reveals the number of fans who "don't like him" outnumbers those who do two-to-one.
Nike (NYSE:NKE), who signed Manziel to a multiyear endorsement deal in March, the terms of which weren't disclosed, can't be very happy about this development. Sources told ESPN the contract is the largest among this year's NFL draft class. But should Nike investors be worried? Let's take a look.
How Nike is marketing Manziel
As I detailed a few months ago, Nike's marketing of Manziel started with his Pro Day Collection in March, which featured everything from $150 cleats to a $25 compression sleeve -- his trademark. In the time since, the company has added "Johnny Football," "Johnny Knows," and "Money Manziel" branded t-shirts to its online store, along with game jerseys that cost $100 each.
More visibly, Nike has used Manziel in a number of ads, including one that focuses on his unique skill set, another that touts his elusiveness, and a commercial with Champs Sports that praises his "heart."
Although it's still early, Nike appears to be promoting Manziel's role as a small-statured underdog rather than a player who will win you over with his personality. The issue with this strategy is whether Nike customers will not want to be associated with someone who, quite literally, has more critics than fans.
A calculated risk
Of course, Nike knew Manziel was a hazard before it signed him. As Chris Brantley explained for The Motley Fool back in March, it was a "calculated risk," much like the company's original Tiger Woods deal in the mid-1990s. That arrangement, which began with the infamous "Hello, World" commercial, went better than anyone likely expected, creating a generation of Tiger fans while padding Woods' wallet with tens of millions of dollars.
From a dollars-and-cents standpoint, Nike's sponsorship of Woods also generated millions in new business. A recent study from Timothy Derdenger and Kannan Srinivasan of Carnegie Mellon University and Kevin Chung of the University of Wisconsin analyzed what they call the golfer's "endorsement effect."
The trio estimates that, between 2000 and 2010, Nike's golf ball division made an additional profit of $103 million due to Woods' positive impact on customers. Derdenger, Srinivasan, and Chung report that accounted for nearly 60% of Nike's sponsorship investment in Woods during the 11-year period. It's possible sales of clubs, clothes, and shoes closed the gap even further.
Just a drop in the bucket
Manziel is no Woods, though he probably isn't getting paid like the golfer, either. Let's assume Manziel's deal is worth $5 million annually, which is about twice what peers Robert Griffin III and Cam Newton are thought to make from endorsements. Under that scenario, Nike would need to boost Men's Training sales (which includes NFL apparel) by two-tenths of a percentage point to account for the extra expenditure. Of Nike's $25.3 billion in revenue during the 2013 fiscal year, $2.3 billion came from the Men's Training segment.
The quarterback's endorsement contract is also a drop in the bucket compared to Nike's overall "demand creation" expenses, which totaled $2.7 billion last fiscal year. A major contributor to those costs are athletic sponsorships ranging from Cristiano Ronaldo cleats to LeBron James sneakers. Nike endorses 278 NBA players, Forbes says. When other major sports leagues are included, that number is much larger.
Manziel could easily become the starter for the Cleveland Browns this year, and if he plays well, he can boost his public perception in the process. Even a worst-case scenario, though, where Manziel's brand flops, shouldn't have a material effect on Nike's finances.
And a complete failure might have already been avoided. Last month, the NFL reported his jersey led all players in sales, ahead of Russell Wilson, Colin Kaepernick and Peyton Manning. Manziel's preseason debut also set ratings records on NFL Network. His latest middle finger scandal and $12,000 fine from the NFL notwithstanding, there's obvious demand for Manziel-branded gear.
So, should investors be worried?
The drama surrounding Manziel is much ado about nothing for Nike investors. The company usually spends about 10% of its revenue on "demand creation," Bloomberg estimates, and that ratio hasn't changed this year.
Whether it's Tiger Woods' effect on golf ball sales, or another product entirely, it is clear this strategy works. Nike generates billions more in revenue each year than its nearest competitors, and it has a market-leading 17% share of the global sportswear industry.
Income seekers have also been rewarded handsomely time and time again. The company has paid regular dividends since 1987, and it has increased its payout every year since 2003. Even if you can't stand "Johnny Football," don't take it out on Nike.
Jake Mann has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.