News | Albrecht Stahmer, HIlliard Lyons, Insight, KEMI

Albrecht Stahmer: An NBA win for Louisville doesn't have to be a loss for U of L

by Albrecht Stahmer

Whenever the suggestion of an National Basketball Association franchise sharing the KFC Yum! Center with the University of Louisville is brought up, a common reaction is that an NBA franchise would cannibalize U of L corporate support.

A pro team would cause irreparable financial damage to the University of Louisville Athletic Association by stealing the dollars that U of L basketball currently generates, goes the conventional thinking.

While there is no denying some cannibalization would take place, U of L and a potential NBA team would offer companies distinctly different marketing vehicles.

U of L’s trade area in terms of fans and corporate support is primarily Metro Louisville (Jefferson County) with some bleeding into the surrounding counties that make up the Louisville metropolitan statistical area (Bullitt, Henry, Meade, Nelson, Oldham, Shelby, Spencer and Trimble counties in Kentucky plus Clark, Floyd, Harrison and Scott counties in Indiana). For all intents and purposes, most U of L fans reside in or around Jefferson County.

This clearly manifests itself when analyzing the corporate partners of the KFC Yum! Center. Obviously, the arena naming rights sponsor is hometown Fortune 500 Yum! Brands’ subsidiary KFC.

As mentioned in Wednesday’s post about the KFC Yum! Center, Yum! Brands CEO David Novak explained his company’s logic back in 2010 for shelling out $13.5 million over 10 years to name the downtown arena to the Courier-Journal thusly: “The big thing for us is, we wanted to demonstrate that we’re an even bigger part of this community and the KFC Yum! Center does that.”

In essence, the naming sponsorship is part marketing, part social responsibility and gives the company a flagship presence in its corporate hometown.

In addition to the arena naming rights, the Louisville Arena Authority – ostensible owners of the building – also sold eight cornerstone partnerships. These partnerships give the companies prominent signage inside the arena and, depending on the contract, other avenues for promoting themselves.

According to the KFC Yum! Center homepage, the eight cornerstone partners, in alphabetical order, are:

• Galt House — The local landmark hotel and part of Louisville-based Al J. Schneider Co., which also owns the Crown Plaza Louisville Airport Hotel. The original Galt House opened in 1837 and the current incarnation on Fourth Street is connected to the KFC Yum! Center via pedway.

• Hilliard Lyons — The Louisville-based wealth management firm, co-owned by its own employees and Bowling Green-based Houchens Industries. Though an old school, blue blood Louisville firm with origins dating back to 1854, it has offices in 11 other Southeastern and Midwestern states. Hilliard Lyons was instrumental in financing the KFC Yum! Center by placing a third tranche of higher risk, higher yield bonds that Goldman Sachs was unable to place.

• Insight — The Louisville-based integrated telecommunications company and multi-system cable television operator and wholly-owned subsidiary of New York-based Time Warner Cable, the fourth-largest cable company in the U.S. with over 12 million subscribers. Insight has almost 800,000 subscribers in Kentucky, Indiana and Ohio and serves the metropolitan markets of Louisville, Lexington, Cincinnati and Columbus.

• Kentucky Employers’ Mutual Insurance (KEMI) — The Lexington-based worker’s compensation insurance provider, the largest in Kentucky though only founded in 1995.

• LG&E — The Louisville-based gas and electric utility, owned by Allentown, Penn.-based PPL, and headquartered across the street from the KFC Yum! Center. Its local roots trace back to 1838.

• Norton Healthcare — The Louisville-based Healthcare service provider, the largest in Kentucky, and founded in 1886. It now operates five acute care hospitals in Metro Louisville and an Immediate Care Center inside the KFC Yum! Center with direct access off Main Street.

• OfficeWare — The Bowling Green, Ky.-based business equipment dealer and document solutions specialist, originally founded in Evansville, Ind. in 1957. In 2011, it was acquired by Ramsey, N.J.-based Konica Minolta Business Solutions U.S.A., Inc., which is in turn a subsidiary of Tokyo-based Konica Minolta. In August of this year, the company’s name was officially changed to OfficeWare, A Konica Minolta Company. The company serves customers primarily in Kentucky, Indiana, Illinois and Ohio.

• Stock Yards Bank & Trust Co. — The Louisville-based bank with 31 branches in Kentucky, Indiana and Ohio and operator of the ATM machines at the KFC Yum! Center. Founded in Louisville in 1904.

Clearly, the corporate sponsorships at the KFC Yum! Center are almost exclusively Louisville-based companies with mostly local operations, which makes perfect sense given that they can market themselves directly to U of L fans, who generally reside in the same basic trade area served by these local companies.

This holds true for the other two companies, as well. While not headquartered in Louisville, KEMI and OfficeWare are Kentucky-based companies that do significant business in Louisville.

In 2001, KFC offered up a $100 million, 20-year naming rights deal if an arena were built in downtown Louisville to house either the Vancouver Grizzlies or Charlotte Hornets when both of those teams were searching for a new home.

After both of those deals fell through, KFC stepped up and sponsored the now-named KFC Yum! Center at approximately a quarter of the annual investment.

The extra investment offered for an NBA partnership, which is now being spent elsewhere for global marketing purposes, represented what KFC viewed to be the added value of the national and international marketing reach that the NBA would have offered the brand.

In addition to the aforementioned civic motivation for naming a Louisville arena, having the building mentioned on NBA broadcasts across the country and world would have aligned very nicely for a company with outlets in all 50 states and 109 foreign countries and territories.

As Oklahoma City Mayor Mick Cornett explained about the global exposure the city and its local business community gained during the Thunder’s 2012 run to the NBA Finals, “It’s astronomical. I suspect it will lead to things we can’t imagine today, whether that’s a business, a job or an opportunity in the future that somehow got its spark from Oklahoma City’s increased recognition.”

More specifically, he was referring to the fact that the NBA Finals were broadcast into 215 countries and in 47 different languages.

Whereas Mayor Cornett cannot clearly quantify that kind of global exposure, Yum Brands! decided back in 2001 the potential for such exposure would be worth about $100 million over 20 years.

KFC’s support for U of L would not cease were an NBA team to come to Louisville.

The concept of the on-campus U of L basketball practice facility, another KFC-named facility, came up during multi-party discussions between U of L Athletic Association, KFC and the Grizzlies pursuit team in early 2001.

At that time, U of L Athletic Director Tom Jurich presented a wish list of things that U of L wanted in exchange for sharing an arena with an NBA team, and a new on campus basketball practice facility was on the list. Though the NBA deal fell through, KFC still ponied up money for permanent naming rights to the $15.2 million practice facility that opened in 2007.

KFC has been and will continue to be a strong supporter of U of L basketball.

As for the other cornerstone partners, all have deep roots in the community — or in KEMI’s case , trying to establish them — and would doubtfully abandon U of L.

In addition to Yum! and the eight cornerstone partners, the arena lists an additional 56 partners. Of those, over two-thirds would be considered local companies and the remainder local branches or operations of national companies.

Many of these partners would choose to ignore a professional team as they do not need the expanded marketing reach that the NBA brand.

And some companies would have the resources and desire to support both.

Back to the NBA’s global reach. While Major League Baseball, the National Football Association and the National Hockey League struggle to develop markets outside the U.S., the NBA has become arguably the second-most popular sports league in the world behind the English Premier League, the world’s top soccer league.

As the NBA continues to stretch its brand globally, multinational companies see more value in associating themselves with the league. To meet this global interest in the NBA, the league already has eight localized home pages for Africa, Brazil, China, France, Germany, Greece, India and Spain.

From this list, Brazil, China, France and Germany all rank among Kentucky’s top ten export markets and sources of foreign direct investment. Number one on the list is Canada, already a member country of the NBA.

In addition to KFC, this type of marketing vehicle would draw the interests of other local multinational companies, as well.

UPS, with operations spread across the globe and major overseas hubs in Singapore, Taiwan, Hong Kong, China, the Philippines and Germany — the latter three major NBA fan markets — might be interested, especially with arch-rival Federal Express already having an NBA affiliation via its naming rights deal with the Memphis Grizzlies.

Would its Louisville-based subsidiary, UPS Airlines, view this as not only a global marketing opportunity, but also as a form of civic investment as Yum! has? After all, UPS is now the single largest private employer in Louisville with over 20,000 full-time and full-time equivalent workers.

How about Toyota? They already have a naming rights deal for the Houston Rockets’ home arena, but Erlanger-based Toyota Motor Engineering & Manufacturing North America, along with the Toyota Motor Manufacturing plant in Georgetown, might have interest in additional sponsorship with an NBA team in its home state.

It’s no coincidence that Toyota chose the Rockets as its NBA sponsor. While the U.S. may be the company’s biggest market in terms of sales, China, the home country of former Rockets star Yao Ming, is the company’s biggest growth market. Given all the diplomatic tension between Japan and China, surely Toyota would be happy with some additional marketing exposure in China from a non-Japanese image.

Cincinnati-based Proctor & Gamble could have interest given its global scale and efforts to expand into Asia. NBA sponsorship could also serve as a tool and differentiator to combat its two biggest global rivals, London/Rotterdam-based Unilever and Vevey, Switzerland-based Nestle.

On a smaller scale, as insiders explained earlier this month, companies from all corners of the state would have interest in this marketing vehicle as NBA team in Louisville would have marketing reach across the state and not just Jefferson County. A Lexington-based bank like Central Bank, for example, might be interested in such a partnership whereas a U of L partnership does not fit their geographical target market.

Just as the Cincinnati Reds and Tennessee Titans dip into Kentucky for corporate sponsorships and fans, a Louisville-based NBA franchise would have to take a similar regional approach.

U of L has faced competition before.

In 1997, the city has a total inventory of 24 luxury suites, all at Freedom Hall. Since that time, Papa John’s Cardinal Stadium opened in 1998 with 29 luxury suites, and added 33 more during the expansion finished in 2010.

Louisville Slugger Field’s opening in 2000 added an additional 32 luxury suites to the market. Churchill Downs renovation added an astounding 79 more in 2007. And the 2010 opening of the KFC Yum! Center added yet 71 more.

Down the road in Lexington, UK’s renovation of Commonwealth Stadium in 1999 introduced another 40 luxury suites to the regional market. All told, from 24 to 268 (plus 40 in Lexington) luxury suites in about a dozen years. Despite concerns at the time that too much high-priced, premium seating was being introduced, the local market was able and willing to absorb the influx.

U of L had to compete against the Louisville Bats and Churchill Downs for these corporate dollars and acquitted itself rather well.

Since 1997, U of L’s athletic budget increased from just over $17 million per year to almost $70 million per year. During that time, the Louisville Bats have thrived and Churchill Downs has stayed competitive, despite the absence of expanded gambling that other race tracks can offer. U of L has faced competition for marketing dollars and survived, even thrived.

Further, the onus would be on the NBA team to come up with partners. Acquisition marketing is a much more difficult proposition than retention marketing, especially when the extant competition is as deeply entrenched in the local market as U of L is.

Oklahoma City provides a good example. Since the Thunder arrived in 2007, they have thrived. At the same time, the local universities, Oklahoma University and Oklahoma State University have thrived, as well.

From 2010 to 2012, OU’s annual athletic budget climbed from $80.5 million to $90.5 million while OSU’s annual athletic budget climbed from $49.6 million to $57.8 million, increases of 12.4- and 16.5-percent, respectively. Clearly, the corporate community of Oklahoma City has not abandoned either university.

While these universities are more football schools than basketball schools, the corporate dollars still come from the same pool of available marketing budgets.

During this same time period, UK’s annual athletic budget increased from $72.7 million to $83.6 million and U of L’s athletic budget increased from $52.4 million to $68.8 million, increases of 15-percent and 31.3-percent, respectively.

Based on this data, the outlier is U of L, whose extraordinary leap in revenue can be attributed to capturing almost 90-percent of the revenue generated by the KFC Yum! Center since they moved into the facility in late 2010. In fact, U of L is the most profitable basketball program in the nation with an astounding 65-percent profit margin on just under $26 million in revenues while paying no taxes as the University of Louisville Athletic Association is technically a non-profit entity.

This begs the question whether U of L is “entitled” to their financial windfall when the municipally-owned building that generates this profit struggles to pay off its debt?

An indisputable argument can be made that there would be no arena downtown had U of L agreed not to move from Freedom Hall.

Current Gov. Steve Beshear and current Metro Mayor Greg Fischer are facing the reality of the situation and have a municipal arena with a failing business model on their hands. They are not the back end of a bait and switch but rather are trying to figure out how to make the arena work. They have determined that bringing in an NBA team to share the arena is a viable solution.

It’s a broken record, but a fact: If the arena bonds are to stay out of default, revenues within the tax increment financing district (TIF) that is the primary revenue source for paying down the arena bonds must increase. This is very simple math.

Ultimately, when it comes to an NBA team in Louisville, it would not be a zero sum proposition, but rather a variable sum one. Instead of thinking of a lose-win scenario, the debate should be centered on the potential for a win-win relationship? What synergies and areas of cooperation exist between U of L and a potential NBA franchise?

On a scale bigger than just U of L basketball, the university understands the global marketplace. As such, the school has a campus in Panama City and offers an MBA program in Singapore, Hong Kong and elsewhere in Asia. Surely there must be some synergy between the school’s global ambitions and ability to promote itself to a global audience through NBA telecasts.

Similarly, the University’s Medical School Health Sciences Campus is at center of the city’s efforts to establish a medical research park, dubbed Nucleus. Local healthcare companies are partnering with Nucleus to establish a pioneering center for aged care excellence.

With countries in Europe aging faster than the U.S., this could be a vehicle to reach those markets. And lest not forget China, with the granddaddy of all baby boomer generations and their newfound affluence steaming towards retirement age. If Bangkok can establish itself as a center for medical tourism, why couldn’t Louisville do so specializing in aged care?

I do not know exactly what a financial deal between an NBA team and U of L to share the KFC Yum! Center would look like. However, over at the Business School on the Belknap Campus, U of L has an Entrepreneurial MBA program that is ranked as one of the Top 10 in the U.S. Surely some enterprising professor could incorporate this question into a group project competition and brainstorm ideas on how to make this work.

What I do know is that protectionism and maintenance of the status quo are not the solutions.

And I further know that this has worked in other cities.

Why not in Louisville?