Friday, May 6, 2011

Why companies do the things that they do -- sports sponsorship edition

Do the people running companies act to optimize profits? Or are they trying to push up stock price? Or could they just be trying to advance their own careers, reputations and social standings? Usually these things are pretty well correlated, making it difficult to separate out the drivers -- a company introduces a successful new product, the stock price goes up and the CEO gets his or her picture on the cover of Fortune.

Sometimes, though, these interests diverge and in these cases, it's always interesting to see how things break.

Take Yum! Brands' sponsorship of the Kentucky Derby.

Sometimes it's fairly easy to justify a sponsorship in terms of a business's bottom line. You can, for example, see why Frito-Lay would want viewers to associate Tostitos with the Fiesta Bowl. Other times the case is more difficult to make, as with AT&T and the Cotton Bowl. And then for some sponsorships, there is simply no case at all.

Yum owns KFC, Taco Bell and (for the moment) a number of smaller chains. There could certainly be a case for Yum sponsoring the "KFC Kentucky Derby" or even the "KFC/Taco Bell Kentucky Derby," but not the "Yum Kentucky Derby." Yum is not the relevant brand here. No one has ever said "Honey, you've had a hard day. Instead of cooking, let's load up the kids and head out to one of the many fine restaurants in the Yum! family."

You might possibly argue that sponsoring the Derby raises the profile of the company and therefore helps the stock, but there's a simpler and more logical explanation. Yum is based in Louisville, a town where much of the social season is based around the Derby. I suspect that the sponsorship has less to do with the company's stock price and more to do with its executives' social standing.

William Goldman once observed that one reason studio executives prefer to greenlight big-budget movies over smaller projects is that major films with big name casts give the executives something to talk about at parties.

You may not hear much about this in business and econ courses, but you certainly encounter it in real life.

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