The Race For Olympic Profits
The games of the XXIIIrd Olympiad, which will open in the Los Angeles Memorial Coliseum on July 28, 1984, represent more than a test of athletic speed, skill, and strength, in a very real sense, they will also challenge the fitness of the free enterprise system. From start to finish, they are a businessman's Olympics -- the first in the 88-year history of the games to be held without reliance on public money.
Unlike Montreal, the site of the 1976 Olympics, Los Angeles was unwilling to shoulder the heavy financial burden of the games -- taxpayers in Montreal footed a $1.5 billion bill for plush new sports facilities. L.A. had actively pursued the Olympics since 1932, when it last hosted them. But it took seven months of negotiations, during which the city ran the risk of losing the games, and suspension of the International Olympic Committee's Rule 4 -- under which the host city assumes financial responsibility for the games -- before the contracts were signed.
Under the agreement, the U S. Olympic Committee and the Los Angeles Olympic Organizing Committee assume responsibility for the financial performance of the games. The LAOOC, headed by Paul Ziffren, a prominent Los Angeles attorney and Peter V. Ueberroth, a California businessman who founded First Travel Corp. and turned it into the second-largest travel company in North America ($200 million in annual sales), has vowed not only to meet the $450 million-to-$500 million cost of the games, but also to produce a profit. "The Olympics must be run like a business," Ueberroth says.
To that end, the LAOOC has decided to avoid construction of new facilities wherever possible, using existing sites instead (for example, the Los Angeles Coliseum, the Forum, Dodger Stadium, the Rose Bowl, the Long Beach Marina and Harbor). When new construction is required, builders will be responsible for cost overruns. The committee has also opted to limit the number of corporate sponsors to fewer than 40 -- compared with the 181 signed for the Lake Placid wintergames in 1980--concentrating on companies with significant resources or expertise. Among them are American Express, Anheuser-Busch, General Motors, Coca-Cola, McDonald's, and Xerox. Similarly, the number of licensees is being severely restricted -- fewer than 40, compared with more than 200 at Lake Placid.
"Generally, licensing has been profitable," explains Daniel D. Greenwood, who is vice-president of the LAOOC, "but, historically, a solid percentage of licensees -- about 30% -- hasn't made money because there was too much product out there.. We've turned some products down because we didn't think the company would make money on them, to do otherwise would be a disservice by us and a bad business deal "
Even though the LAOOC is limiting participation, Greenwood expects licensing to generate $15 million in revenues for the Olympics, $13 million more than Lake Placid produced Thus far, 11 licensecs have been signed; only 2 of them are repeaters. "What we're seeking out in each category," says Greenwood, "are local firms, small firms, medium-size firms and minority firms. Of the present group, 9 are womenor minority-owned companies." The 11, he notes, were selected from more than 2,000 applicants.
Some submitted full-blown proposals with all the facts -- the company's background, financials, distribution system, sales projections, et cetera," he says. "Others sent in a letter, or phoned, and we mailed out forms asking for basic information about the firm." A company's track record, the suitability and quality of the proposed product, and the suggested royalty arrangement were principal considerations in choosing licensees, a standard 19% royalty was required, but guarantees and payment schedules were negotiated. "In one case, a license called for a $25,000 guarantee with a $5,000 payment at the time of signing," Greenwood recalls. "ln another, one that guaranteed $5 million in royalties, $1 million was payable upon signing." In some cases, negotiations with a particular company took more than two years.
"We have no cutoff date," Greenwood points out. "If someone came in with a good suggestion in late '83, we'd still consider it. . . But our deals have to be good business deals for us and for them...
"A lot of eyes are going to be on us in '84," Greenwood notes "The Soviets, the Cubans, other communist countries -- everybody's going to be watching to see how well the first 'free enterprise' Olympics performs."
Ooh La La. Pete Peterson is a short, stocky man with windblown, reddish blond hair, and a boyish, born-salesman charm. He spent three years with Aviva Enterprises Inc., a company that made its fortune wit products bearing the likeness of Snoopy and other Peanuts cartoon characters. In 1978, he helped Eddie Chien set up Ooh La La, a jewelry company based in Monterey Park, Calif., where he is now vice-president of sales and marketing.
By 1980, Ooh La La had established itself with its Hang Ten line of novelty pins -- "World's Greatest Dad," "World's Greatest Lover," "World's Greatest Egotist" -- and was doing $3 million in sales One day, while watching television, Peterson caught Olympic fever: "When the U.S. hockey team won at Lake Placid," he recalls, "I thought, Gee, something's happening. There was a new feeling, an esprit de corps. . . Then I read in the paper that the L A. committee was looking for licensees, and I said, 'Eddie, I think maybe we ought to go for it."
When he contacted the LAOOC, Peterson discovered that some 30 other companies were pursuing the rights to do official Olympic pins. He submitted a four-page proposal -- "I'm not one to do a lot of writing," he explains with a laugh -- and showed the committee sample pins, manufactured at Ooh La La's plant in Taiwan But it was obvious that the financial package was going to be very important. "Our attorney told us, 'You're going to have to come on strong, or you're not going to get anything.' "
Peterson and the lawyer sat down with Chien and other members of Chien's family, who own the company, and set out their plan. "I thought we could do $5 million," says Peterson, "so we said, 'Okay, we'll guarantee them $500,000, with $50,000 up front.' Now I've done a lot of licensing, and no one puts up that kind of money. . Eddie told me, 'You've got to be crazy.' " Finally, though, the family consented.
Ooh La La submitted its bid, and, on December 19, 1980, the company became the third licensee for the 1984 Olympics The gamble was a real one for the company; it had laid out $50,000, and the remaining $450,000 of the guarantee was payable upon the committee's demand the Chien family put up property as security. "If you're going to shoot craps," says Peterson, "well, you shoot craps."
The company designed a series of 38 pins featuring the Olympic logo, a "Star in Motion," and the Olympic mascot, "Sam the Eagle," and began marketing them through its regular outlets -- 2,500 gift shops and card stores. "We got it out to our regular customers, and it died," Peterson admits with embarrassment. "It was just sitting there -- $40,000 in product and displays." After a few uneasy months, the collector's series -- a framed set of all 38 pins that retails for $185 -- began to move, and, a short while later, Peterson discovered one of the principal benefits of being a licensee: the Olympic network.
One of the corporate sponsors, First Interstate Bank of California, had hoped to market Olympic coins but found itself stymied when the coin program bogged down. Peterson approached the bank, and offered it his limited edition collector's set as a substitute. The bank tested it in 25 branches, and it did so well, Peterson explains, "that now they want to take all 20,000 of them." Two years before the Olympics, Ooh La La had sold out its first series of pins.
Peterson intends to introduce two more collector's series (the first 10,000 of the 30,000 sets in each series are reserved for the LAOOC and Olympic companies), and to continue selling individual pins. But for the moment, his attention is fixed on his Olympic bedfellows. "I went over to Anheuser-Busch, and now we've got a tremendous program going for them," he explains. Ooh La La is producing Olympic pins promoting Anheuser-Busch's Budweiser, Busch, and Michelob lines. "We're also doing business with Coke. . .and we're working on a program with McDonald's." After a year of selling, Peterson has revised his projections: He now expects the company will sell $10 million worth of Olympic merchandise.
"A lot of people think, Well, I've got the license for the Olympics, I've got it made," observes Peterson "No Listen, brother, that's only the beginning. . . . We found out that our regular distribution system didn't work, we had to find new ways of selling and merchandising product that we never knew existed. . . .The Olympics has really opened our eyes."
Knapp Communications Corp. Unlike Ooh La La and other licensees, Knapp Communications Corp., the publisher of Bon Appetit, GEO, Architectural Digest, and Home magazines, was interested in image rather than profits when it went after the Olympics. "It wasn't just a business decision," says Raymond E. Hebert, president of Wilshire Markcting Corp., the Knapp division, based in Los Angeles, that will produce fine-art posters and calendars for the games. "We position ourselves as one of the premier, affluent publishing companies in the U.S., and we felt quite strongly that we should be attached to this historic event."
Nevertheless, Hebert admits, a lot of "business" went into making the deal. He spoke with former licensees, weighed the financial risks and opportunities, and prepared a formal proposal. "It was very elaborate," says Hebert, "flip-chart presentations, samples, financial pro formas." After nearly two years of negotiations, Knapp was finally selected over four other companies.
Since that time, the LAOOC and Knapp have signed 15 major American artists--among them, John Baldassari, Richard Diebenkorn, David Hockney, Roy Lichtenstein, and Robert Rauschenberg -- to execute the posters. As with every other licensed product, each poster had to be approved by the LAOOC. "They have final approval of the images," Hebert explains, "of anything, in fact, that carries the Olympic symbol." Advertising, packages, lettering on the side of a company's truck -- if the Olympics are mentioned, the committee rules on it, and, for some licensees, it has turned thumbs down.
The annoyance factor, Hebert notes, is more than offset by the benefits: quality products and fierce protection of the Olympic name. "There have been problems in the past with competing, unlicensed products," he says, "but I can tell you right now, I know the attitude of this committee -- they'd go right after them." Even the phrase "Olympic Games" is protected.
Knapp will produce a signed edition of 750 posters, which will sell for $250 each as well as unsigned $30 prints. "If one of the images really hits we might sell 20,000 of them," he notes, "and if I don't have every signed poster sold by this time next year, I'll be very disappointed." The prime customers for signed posters will be other licensees and sponsors. Hebert has been negotiating with such companies as ABC television network, GM, and Levi Strauss that have expressed interest in using the posters for promotional purposes.
The company will also put out wall and Olympic items. "We have a very sophisti -- cated marketing plan," Hebert says. "We're going to sell posters by direct mail, as well as through the magazines... and through a retail network -- both national and international -- of museums, galleries, and fine-art stores.
"I can tell you right now," he continues, "that we're going to commit millions of dollars to marketing," a significant investment for Wilshire. "We have a staff that's totally dedicated to this one project."
Good public relations, rather than the profit motive, may motivate Knapp, but the bottom line isn't being overlookedPapel Inc. The bookshelf sitting behind Joe Walsmith, president of Papel Inc., in his North Hollywood office is vibrant with Olympic giftware: The red, white, and blue stars of the logo decorate ashtrays and plates; Sam the Eagle carries the Olympic torch on mugs and dinner bells. Papel, a small company (125 employees, less than $20 million in sales) founded by Phil Papel 26 years ago, has had its license for two years, and has already been transformed.
Stan Papel, son of the founder and currently chairman of the board, "saw it as an opportunity to leverage the company in terms of its image and position in the giftware community," Walsmith explains. "He viewed it clearly as a commercial opportunity. " Although the games are still almost two years away, the investment has already paid off handsomely. An Olympic virgin, like most of the other licensees, Papel had intended to retail its line at hotels, airports, theme parks, and gift shops, as well as at the games themselves. (Its items are already moving well at major Southern California tourist attractions) What it hadn't counted on was the lush opportunity presented by Olympic sponsors
"That opportunity is significantly larger than the retail opportunity," observes Walsmith. "We'll make more profit dollars off of sponsor-promotion activities than we will off retail sales." Papel is already producing a series of collector's beer steins for Anheuser-Busch, manufacturing "official" coffee cups for AMF, CocaCola, Arrowhead Puritas Waters, and Converse, and pursuing programs with all the sponsors, such as Levi Strauss and Buick. "If we were to work out something with McDonald's," muses Walsmith, "say, a Sam the Eagle figurine, I mean, you're talking millions of units."
What sort of financial impact has the license had? "Well," says Walsmith, "using '82 profits as a basis, if we were to do nothing else but Olympic merchandise in 1984, our'profits would be... worst case: 2x, best case: 4x." And Papel, Walsmith makes clear, is not about to sit back and do nothing else; he knows that, as of August 12, 1984, the Olympics will be over.
"We look at the Olympics as an opportunity to increase our capital base and leverage our future," Walsmith explains"Those profit dollars are going to be reinvested in things like an East Coast distribution center and used to strengthen our sales and distribution center and to introduce three new marketing programs in January." He notes that Papel has been able to hire employees it couldn't have afforded before. "We have a new director of marketing, and we just shook hands with a new controller today -- both have great credentials.
"I've been meeting with banks all this week," he adds, "and I can assure you that they're very interested in those profit dollars in terms of the amount of credit they give us today. . . ."
Like many of the licensees that obtain their product from overseas or from subcontractors, Papel will have no problem dealing with the surge in demand, its giftware comes from Japan but is decorated in North Hollywood. "Slapping on decals is relatively simple," says executive vice-president Dick Saklad, "so scheduling production is fairly straightforward." Even so, Papel intends to take no chances. The giftware licensee for the Montreal Olympics ran out of product, Saklad notes, even before the games started. "That won't happen with us," he vows. "We'll crank it out 24 hours a day, seven days a week if we have to, to feed the pipeline. We've got contingency plans -- we can even bring in trailers and work out of them."
For a small, closely held company such as Papel, the Olympics can represent a major stepping-stone. "I don't think there's any question that the Olympics are a unique phenomenon in the life of a company like Papel or Ooh La La," says Walsmith. "It puts us on the map in no uncertain terms."