Most of us remember the days when Michael Jordan was the one steering the rudder of endorsements on the big ship that is Nike (NYSE:NKE). Yet, many stars today have paired up with companies that most would not associate with basketball.

While Jordan-branded sneakers are still pulling in upwards of $2.5 billion in annual sales, Steph Curry is hitting nothing but net as he enjoys his major deal with the upstart, Under Armour (NYSE:UAA).

But let's not forget about LeBron James, who makes far more money off the court than on it. The Motley Fool discusses the return on investment for endorsement deals on this edition of Industry Focus.

A full transcript follows the video.

 

Sean O'Reilly: Do sports endorsements pay off? In this consumer goods edition of Industry Focus.

[INTRO]

Greetings, Fools! I am Sean O'Reilly, joining you here form beautiful Alexandria, Virginia at Fool headquarters. And to my left is the incomparable Vincent Shen. How are you today, sir?

Vincent Shen: I'm glad that you went with incomparable today.

O'Reilly: You are incomparable. So I always had this age-old question: Do these sports endorsements actually pay off? Because Nike spends $100 million a year -- probably more than that on this stuff. So that's what led us to the show here today.

Shen: Yes.

O'Reilly: At the Stanford Sports Innovation Conference last year -- I'm totally butchering this, and I apologize -- Vivek Ranadive...

Shen: Ranadive.

O'Reilly: Ranadive. There we go, see? He's the owner of the Sacramento Kings, and he mentioned something that pretty much sums up why sports, apparel, sponsorships -- they're such a huge business and why they keep doing it. The simple question he poses: What is the difference between a customer and a fan? That's very poignant.

Shen: Yeah. I think the really big thing here is how often do you have customers setting up entire parties around your product? Tailgating, waiting out in the cold for hours...

O'Reilly: Painting their faces.

Shen: Painting their faces -- other than in something like sports. Maybe some of the few like we were talking about earlier, Sean, like Apple, where you have people waiting in line for the newest iPhone.

O'Reilly: That's pretty much it.

Shen: People recognize that as an anomaly. It's pretty incredible because these apparel companies, and the sports teams themselves, are able to enjoy this relationship where it's like, "We have these rabid fans, it's an extremely receptive audience, this extremely receptive target base for you guys to find new customers, to sell your products."

And that's why sponsorships themselves have become a multi-billion-dollar business every year.

O'Reilly: So obviously you've got the Nikes and the Under Armours of the world paying for this; but really, it's almost every major consumer brand.

Shen: Yeah. Every consumer brand, like you said. Any household thing...

O'Reilly: We've got Muscle Milk here.

Shen: In the next few minutes here, we're going to talk a lot about NBA stars. This is for a reason, because basketball has just grown to become one of those more lucrative leagues where the players are signing deals there that are far greater than what the stars will get in the NFL, and NHL, and MLB.

O'Reilly: Right. This is, of course, started by Michael Jordan.

Shen: Yeah. I really do believe that having grown up with that craze of the Chicago Bulls...

O'Reilly: When I was in the third grade, kids on their homework would draw the Nike swoosh just because it was so ingrained -- you see what I'm talking about?

Shen: Yeah.

O'Reilly: And we grew up in different states.

Shen: So, I really do think -- and we'll actually get to Jordan, though he's been retired for quite some time now.

He's still making quite a bit of money through some of the old deals that he signed with companies like Nike. So, we'll get to that. I really just want to talk about, for example, right now, NBA finals are on, and it's pitting two MVPs -- most marketable stars right now. You got LeBron James against Steph Curry.

O'Reilly: You know, I grew up 20 minutes from LeBron James' Akron mansion.

Shen: Really?

O'Reilly: Yeah.

Shen: Oh, I forgot. Yeah. Ohio native.

O'Reilly: I swung by. I happened to be out, but I swung by after the decision when he went to the Miami Heat. There were squad cars on the street protecting his house.

Shen: Oh, really? I'm surprised you could even get into the neighborhood, to be honest.

O'Reilly: Truth.

Shen: So, even now some of these guys, the amount money they're making -- LeBron James earned $44 million off the court this season.

O'Reilly: How is that legal?

Shen: So it's more than he actually makes playing for the Cavs.

O'Reilly: Right. I don't know why he bothers negotiating with them.

Shen: This is probably the most of any athlete in a team sport, at least. And his sponsor, like you said, here are some of the names that are on his punch list: Nike, Kia, McDonald's, Coca-Cola, Beats by Dre, Tencent, Audemars Piguet -- the watch company.

So that's just a sampling. Steph Curry, he's kind of got this underdog story where people told him, "You're not going to play professionally." He's not as big as other players, but the guy does magic on the court, and I think that's one of the reasons why Under Armour pursued him, to have that underdog image, to see somebody rising through challenges to succeed.

So that was a big sign for them a year or two ago. But he's also enjoying sponsorships from Unilever, Express, Muscle Milk -- like you mentioned. He probably gets more offers every week. Then a really, really big deal recently, Kevin Durant signed a 10-year deal with Nike. Just to give you an idea here of how much a company like Nike spends on sponsorships, he signed a 10-year deal with Nike last year, and there's estimates that value it at $300 million.

O'Reilly: That's just bananas.

Shen: It's probably one of the biggest endorsement deals in sport's history. Keep in mind that was signed after Under Armour had pursued Durant with a similarly sized deal.

O'Reilly: Oh, there was a...

Shen: So there was probably some...

O'Reilly: There was a big thing about that. Yeah.

Shen: A war between the two companies for this. So why this matters? I want to talk about what the return on investment is here for these companies. It's kind of murky. Some people argue that this is worth it just for the brand awareness. How popular these stars are, seeing that label, and the exposure is basically incomparable. At the same time people have tried to get down into a more quantitative analysis to determine what the actual impact is here.

So there's a paper written in 2011 by a professor at Harvard Business School, and an analyst at Barclays that addresses this exact issue. They wanted to know, are companies getting a good return on investment? All this money they spend, first of all, with contracts, free merchandise that they give out. So they looked at 178 athletes and 95 sponsor companies and they concluded that -- across the board -- endorsement generally can pump up sales by $10 million, boost short-term return on equity, and if an athlete wins a title, or championship -- like Nike, or Under Armour will probably enjoy...

O'Reilly: Huge payoff.

Shen: In the next couple weeks -- right. There is an additional impact from that, as well. There's another report from the Marketing Science Institute that concluded that Nike -- all right. This one was actually really interesting for me. Nike was able to generate an additional $100 million in profits due to increased sales and the price premiums on their products. And this is just from, like, their golf ball sales. As a result of their endorsement deal with Tiger Woods -- which, by the way, was also nine figures. So in the hundreds of millions.

O'Reilly: Good Lord.

Shen: So here's two reports that basically, admittedly, with some really strong athletes like the biggest names -- so it works out for them. Does it work out in every instance? Probably not, but companies now are really cognizant of making sure the spending's not out of line, that they are getting a good return on the money they spend.

O'Reilly: Did the Harvard study talk about Wheaties at all?

Shen: Wheaties?

O'Reilly: So tell me about -- I mentioned how, in third grade, all the kids were drawing the Nike swooshes and stuff. I went to school in the '90s and that's what -- geez. If you go to [...] in Chicago, and they've got all these banners from the '90s. They're still like "Oh, yeah. We were that good in the '90s."

Shen: Yeah. Of course.

O'Reilly: So how much -- because Air Jordans are not cheap -- how much has Nike got just off of Air Jordans?

Shen: This is another thing that really surprised me doing the research for the show, because I would think -- these days -- the big players with sneakers are, off the top of my head, LeBron, I think Durant, Curry's got his shoes, Kobe's got his shoes. So LeBron is the big seller for Nike. His signature sneakers logged more than $300 million of sales.

O'Reilly: Did I tell you about the cardboard cutout of the LeBron in McDonald's I saw in Beijing when I was in China five years ago?

Shen: Oh, really?

O'Reilly: Yeah. I was like: "Yep... it feels just like an American McDonald's. No problem."

Shen: Incidentally, China is actually a huge market that the NBA -- and the basketball world generally, is targeting. They say -- this is a pretty cool number -- that China has about 300 million people playing basketball regularly. Pretty much everyone in America.

O'Reilly: I was about to say, that's just short of the United States' population.

Shen: So for companies like Nike that have this huge presence in -- especially in basketball shoes, apparel, and that entire world -- that's a huge growth opportunity for them. So again, you can see how LeBron at the McDonald's like you said -- right? It's exactly where these endorsement deals take them.

O'Reilly: Yeah.

Shen: And people in China know Kobe. They know LeBron. Those are huge names. I was in New York during the huge Linsanity craze.

O'Reilly: Oh, no.

Shen: That put basketball on the map for a lot of people in Asian countries.

O'Reilly: Yeah.

Shen: So LeBron sold $300 million of his sneakers for Nike last year. Durant sold $175 million. So these are pretty big numbers; but for the company overall, probably a drop in the bucket, to be honest.

O'Reilly: Right.

Shen: But then you look at the Jordan sneaker line. The guy's been retired for some time now. But the Jordan sneaker line still logs more than $2.5 billion of revenue every year for Nike. So that name...

O'Reilly: Staggering.

Shen: ...has carried on for so long with such a legacy.

O'Reilly: Where would Nike be had Michael Jordan never existed? Where would that -- I almost...

Shen: I really don't know.

O'Reilly: That's crazy.

Shen: He really set the tone for the potential...

O'Reilly: For $200 sneakers.

Shen: Yeah. There, and also some of these gigantic endorsement deals.

O'Reilly: Right. So obviously, Nike benefited since the '90s with Air Jordans and everything. But the up and comer -- Under Armour -- essentially built their business form the ground up using sneaking up and comer endorsements.

Shen: Yeah. There was a really interesting piece -- also from the Harvard Business Review.

O'Reilly: Boy, Harvard really likes sports.

Shen: They basically talked to the founder of Under Armour, and he talks about how he focused on having a really good product at first, right? I have used Under Armour, I enjoy it, I think it's a good product. But he obviously needed to get the name out there.

He used a lot of his connections and friends from when he used to play football in high school -- who turned pro, went on to establish themselves in the football world. It was kind of this grass roots thing, word of mouth, and before he knew it, he was getting orders from the Giants -- from the Dolphins -- and that really helped propel his company to be -- it started in 1996.

O'Reilly: He did a very organic, word of mouth thing with some players.

Shen: Yes. So we're talking about a company that started in '96, I think, with maybe thousands of dollars of sales. Now they're in the billions. And now, they're trying to beat Nike at its best game, which is shoes.

O'Reilly: Shoes. Yeah. They just started that.

Shen: So Steph Curry's their huge sign there for the NBA. There was that big commercial that came out with Jamie Foxx...

O'Reilly: Yeah. Oh, gosh. I forgot about that.

Shen: Which has a ton of views on YouTube, and they've done a really good job with their marketing. So ESPN had a story about how Steph Curry went -- he appeared at an Under Armour store in Manhattan to do press, to do autographs, and stuff like that. They say that, in that single day, during his appearance, they logged more sales in that one day than in the 116 days -- nearly four months -- beforehand that the store was opened, combined.

O'Reilly: Oh my...

Shen: That was how powerful his presence was.

O'Reilly: Gosh!

Shen: And how much people love their favorite sports stars.

O'Reilly: What is the difference between a fan, and a customer?

Shen: Exactly. Even now, it's different. When I was growing up -- when you were growing up with Jordan it was like, you'd see him on TV commercials, you'd see him in the games, of course, wearing his sneakers, you'd see him on a Wheaties box. But now it's like these athletes themselves have their own image because they have Twitter, Facebook, and all these social networks and other mediums where they can get their voice out there, get this image out there.

O'Reilly: Make themselves more of a brand.

Shen: Exactly. And that probably helps them, not only with the deals they can get -- how much they can get for those deals -- but also the companies see "I really like the image that LeBron has, 'King James'. So, Kia, for example, has signed LeBron to help them get into the luxury car market. Their new luxury car.

O'Reilly: Yeah. They've got that $70 thousand, four door sedan.

Shen: Good enough for a King. King James, right?

O'Reilly: Yeah.

Shen: So it's really interesting how these worlds have combined and meshed. Especially with all the new social networks and the new media out there that are available for them to get these products -- sell these products, essentially.

O'Reilly: So the moral of the story is: if you want to start a sports brand -- athletic wear -- get a couple of endorsements out there. You'll be good to go.

Shen: Raise a couple hundred million dollars, sign some huge athletes...

O'Reilly: Oh, is that all of it? Is that all?

Shen: So one last thing that I also wanted to touch on that has to do with finals again. Again, you've got LeBron facing off against Curry, and how big this is that these finals -- they're saying right now -- is the best ratings that ABC has ever experienced.

O'Reilly: Wow.

Shen: Since it started airing them in 2003.

O'Reilly: Which sounds -- yeah. Go ahead.

Shen: So, they're ecstatic about this, and once again, I think a big part of it is these two teams, their fan followings, and this matchup of two biggest stars...

O'Reilly: Biggest stars in the world.

Shen: The biggest stars in the NBA, and how powerful it is for these companies to be able to leverage their celebrities, essentially.

O'Reilly: Very cool. Well, thanks for your thoughts, Vince, as always.

Shen: Cool. Thank you, Sean.

O'Reilly: That is it for us, Fools. But before we go, I want to make our listeners aware of a very special offer for all Industry Focus listeners. If you found this discussion informative and you're looking for more Foolish stock ideas, Stock Advisor may be the service for you. It is our flagship newsletter started more than 10 years ago by Motley Fool co-founders Tom and David Gardner. We're offering the lowest price out there for our Industry Focus listeners. That is $98 for two a two year subscription to Stock Advisor.

You will get two stock recommendations every month with insight from our team of analysts. Just go to focus.fool.com to take advantage of that deal. Once again that is focus.fool.com. As always, people on this program may have interests in the stocks that they talk about, and the Motley Fool may have formal recommendations for or against those stocks. So don't buy or sell anything based solely on what you hear on this program. That's it for us, Fools. For Vincent Shen, I'm Sean O'Reilly. Thanks for listening, and Fool on!

Sean O'Reilly has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool recommends Apple, Barclays, Coca-Cola, Facebook, Nike, Twitter, Under Armour, and Unilever. The Motley Fool owns shares of Apple, Facebook, Nike, Twitter, and Under Armour and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. 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.