When celebrity endorsements fall

First it was Marion Jones, then Tiger Woods, followed by Lance Armstrong and, most recently, Oscar Pistorius. That is, star athletes whose names hit the headlines once again, only this time it wasn’t for their latest sports coup, but for scandal. As it turns out, these athletes have more in common than world-class sporting skills and celebrity. They are all - or in all but Woods’ case, were – sponsored by Nike. Of course, Nike isn’t alone in its sponsorship of top athletes, but it certainly has a record for holding the best roster. Indeed, it’s got the money to pay for it.

In 2012, Forbes ranked Nike as the most valuable sports brand in the world, pegging the worth of its Nike-branded products at nearly $16 billion. It’s also the big spender when it comes to athlete endorsements. In 2012, its annual report showed that the company had dedicated $3.2 billion to endorsement deals over the following five years.

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It all seems to fit, doesn’t it? The sports company that dominates its industry is also the one that clothes and promotes athletes who don’t just win, but who demolish the competition, the records and even the limits of what was previously thought possible. In terms of marketing, sporting a Nike logo while doing something deemed impossible for your sport is about as good as it gets.

Unless, of course, that athlete is caught doing something a little less laudable, whether it’s the use of performance-enhancing drugs, a brush with the law or a scandal of a more personal nature. Privacy, after all, is one perk that doesn’t come with promotion.

Athlete scandals are hardly new, but the size and publicity of recent scandals has upped the ante from minor faux pas to epic fail. As a result, the view of athlete endorsement appears to have shifted, leaving many people wondering whether companies can afford the liability their multi-million dollar celebrity endorsements increasingly entail. These errant athletes are an embarrassment to the brands they represent, critics say, and they’re bad role models for consumers.

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But does any of that even matter? When it comes to a company like Nike, the answer isn’t as clear-cut as you might imagine.

Do celebrity endorsements pay?

There’s something to be said for sports fans. They’re passionate, they’re engaged and, perhaps most importantly, they’re undyingly loyal. The idea, then, is to get some of the fuzzy feelings that fans get from watching great athletes to rub off on a brand. If you’ve ever watched a Nike ad, you know it’s all about emotion. If it pushes your buttons, you might feel inspired, exhilarated, even emotional. And maybe, just maybe you’ll associate that force of inspiration with the trademark “swoosh.”

Think you’re immune? Perhaps you’re smarter than the average commercial ploy, but there’s evidence that celebrity endorsement provides a boost where it matters most: to the bottom line. A 2011 paper in the Journal of Advertising Research found that celebrity-backed endorsements generated a 4 percent increase in sales turnover and a 0.25 percent increase in stock returns. What’s more, these sales boosts can be recharged by a career triumph, like Olympic gold or winning the Tour de France. So, if a company like Nike gets a few can’t-lose athletes in its hip pocket at the right time, the result could be a bit of a cash machine; every time the athlete wins, Nike rings the register.

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Another study by research firm Ace Metrix found that celebrity endorsements actually reduced the effectiveness of advertisements. One problem: They concluded this by asking viewers what they thought of the ads. And while it was pretty clear that many of them were not Tiger Woods fans, that perception didn’t appear to affect Nike’s sales, its stock or its image. In fact, Nike bounced back from that scandal within weeks – and even retained Woods as a sponsored athlete.

Do scandals hurt?

If athlete performance and profit are linked, does that mean that scandal will slide the sales meter in the other direction? Not so much. While Tiger Woods’ 2009 scandal caused what some say might have been a short-term blip in sponsors’ stock prices, Nike’s stock price registered nothing in the days following reports of his sex scandal and related car crash. Plus, here’s what really matters: The man can still swing a golf club. Nike filmed an emotional commercial featuring Woods following the scandal, Woods went back to winning (eventually), and Nike’s cash register kept right on ringing. In fact, the company’s revenue has risen every year since that scandal broke – and that includes 2012, the year that an even bigger sports scandal finally came to a head.

We’re talking about Lance Armstrong. And while allegations about his use of performance-enhancing drugs circulated for years, Nike stuck by him as he continued to win races and promote his cancer charity, Livestrong. The reason? The company was still getting a good return on its investment. But when the U.S. Anti-Doping Agency announced that Armstrong was part of “the most sophisticated, professionalized, successful doping program that sport has ever seen” in October 2012, Nike dropped him a week later.

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He was disgraced, his fans shunned him, and he’d certainly lost the professional mojo that would propel and inspire a motivational sports commercial. That probably wasn’t it though. In fact, the decision might have been a lot more practical: His lifetime ban from competitive sports meant no more sales-boosting wins.

And Nike’s stock price? It held steady throughout the Armstrong scandals. The company’s revenue actually rose by $3.23 billion in 2012 over 2011. In fact, between 2007 and 2012, Nike’s share price rose by 65 percent, a resounding victory over the 28 percent average returned by the S&P in that time period.

Business as sport

In recent years, cell phone cameras and social media have virtually stripped star athletes – and many other celebrities - of their private lives. As a result, some companies (and many critics) have been left wondering whether big celebrity endorsements can last. In 2010, the New York Times reported that insurers were being inundated by companies seeking to protect their profits from potential celebrity scandals.

But whether recent scandals push companies to take a more careful and conservative approach to endorsements remains to be seen. In the sports world, the greatest sacrifices are often what land athletes on the podium, so maybe we shouldn’t be surprised if that very same rule applies to the companies that bank on those athletes’ achievements to sell product.

Just ask Nike. While Armstrong may be shamed and sidelined, the company’s still on a winning streak.

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