Sports suffer as sponsors tighten their purse strings

From football and rugby to the Olympics, the battle for companies' cash is on.

Samsung plays Chang Beer next Saturday in the E.ON cup at a stadium sponsored by Microsoft, Coca-Cola and others. But while either Chelsea or Everton could win the FA Cup Final at Wembley, sponsorship is one of the recession's certain losers. Firms seeking cost cuts are finding this form of marketing an easy saving.

And it's not only football that's suffering. The Chelsea Flower Show last week was notably short of corporate sponsors financing displays. Next week's Epsom Derby was set to be run with no sponsor at all until a last-minute, cut-price deal was struck this month.

The dearth of sponsors means they can drive a hard bargain. Internet gambling group 188Bet has just signed up two Premiership football clubs at about £650,000 a year each when it would have had to pay at least 50 per cent more before the credit crunch. The two-year deals with Bolton and Wigan replace Reebok and the retailer JJB Sports, which has just agreed a creditors' voluntary arrangement to avoid insolvency.

Some of the biggest sponsorship deals of recent years were with companies that have failed to survive the recession intact. AIG, the American insurance group, beat competition to sponsor Manchester United, for £20m a year, but, after the $185bn bail-out by the US government, the club is seeking a new name for its shirts. XL's backing for West Ham ceased when the travel company went into administration last autumn. And English cricket can no longer rely on Sir Allen Stanford for support now that his banking empire has collapsed.

Freddie Huxtable, the head of sports at the AIM-listed Vantis consultancy, says: "There is serious downward pressure on deals and people are negotiating heavily when renewing. If you are a finance director thinking of cutting costs, you ask, 'what am I paying for? What am I getting? And is it sending out the right message?' "

Whether spending millions sends out the right message is a question worrying banks that have had to turn to the Government or to other investors for help. Some are moving sponsorship from marketing budgets to their social responsibility programmes, finding it more acceptable to finance clubs' community and schools activities instead of exploiting the opportunity for corporate hospitality.

Financial-services firms have been the big source of sponsorship for many events. Barclays sponsors the English Premiership, and Clydesdale Bank has taken over the sponsorship of its Scottish equivalent from Bank of Scotland. And besides Man Utd's deal with the US-government-owned AIG, the nationalised Northern Rock sponsors Newcastle United, while Bradford & Bingley backs Bradford City. Nationwide Building Society sponsors the Football Association and Wembley Stadium.

In rugby, Northern Rock backs Newcastle Falcons, Royal Bank of Scotland has paid to put its name on the Six Nations contest, while HSBC is sponsoring the British Lions tour to South Africa, which kicks off on Saturday. Friends Provident and NatWest both sponsor one-day cricket.

"If a business is cutting costs and losing jobs, will it want its name on shirts or on a stadium?" asks Huxtable.

Karen Earl, the chairman of the European Sponsorship Association and head of the Synergy agency, concedes the potential for embarrassment but argues that consumer brands need promotion whatever the state of their balance sheets and whoever owns them. "When business is suffering, everything has to be looked at, including sponsorship, but scrutiny will show that it offers really good value for money. For every withdrawal you read about, there are 10 renewals or new deals," she says.

Good sponsorship can have a longer-lasting effect than advertising. Many people still associate Embassy with snooker, or John Player, Prudential and Equitable with cricket, long after their deals ended.

But with tobacco firms banned from putting their name to events, the forced withdrawal of financial-service firms leaves fewer companies to bid and less choice for those seeking sponsors. And the demand for sponsors is increasing just as the supply shrinks.

England's bid for the 2018 football World Cup launched last week has a £5m hole in its £15m budget that would have to be filled by sponsors. But business would also be expected to help finance the 2015 Rugby World Cup if England hosts the contest, and the Commonwealth Games are to be held in Glasgow in 2014.

But the big sponsorship requirement is the 2012 Olympics in London. After Beijing, four of 12 major sponsors – Kodak, Johnson & Johnson, Lenovo and Manulife – pulled out. Lloyds TSB agreed an £80m sponsorship deal before the Government became its biggest shareholder, but, despite BT, British Airways and others joining it as official partners, the London Olympic Committee is still seeking sponsors.

Julie Clark at accountants PricewaterhouseCoopers, which is advising on the 2018 football bid, says: "It's going to be a very competitive market for the next few years. We're recommending that anybody with a contract coming up for renewal in a couple of years' time start talking now."

Sponsorship was once a chance for chairmen to indulge their sporting passions, but recession is ensuring that it is scrutinised for value. Whoever's name next appears on Manchester United's shirts will be competing not only against the brand on the opposing team's kit but also against all Man Utd's other sponsors. Last week, the club added Airtel, an Indian phone company, to a list that already includes Budweiser, Nike, Betfred, a tyre company, a watchmaker and Seoul, the Korean capital, besides AIG.

The team may have the global power to find a new sponsor to match AIG's £20m, but Chelsea has met opposition in forcing more cash out of Samsung.

However, it is not only major teams and tournaments that suffer. A CCPR survey of sports from croquet to golf, mainly involving minor British clubs, found 60 per cent reporting a fall in revenue. Insolvencies of sports businesses have more than trebled since the summer of 2007.

And although sponsorship provides just part of clubs' revenues, ticket sales, merchandising and TV rights are being squeezed too. "It is the icing on the cake," says Huxtable. "The real money comes from TV deals and the real threat is what happens after the next round of deals or if one of the companies goes down".

With less money expected from broadcasting as well as sponsorship, a wide range of sports will have to reduce costs. Formula 1, which will no longer have Royal Bank of Scotland sponsoring Williams, or ING backing Renault, has imposed a spending cap of £40m on each team – less than half the current cost of some competitors. In horse racing, thoroughbred prices have fallen as sponsors cut back on prizes. London's Olympic plans are being trimmed.

After Chelsea and Everton settle the Cup on Saturday, football could have to rein in its spending too.