Why F1 needs a marketing department

Imagine being CEO of a multi-billion-dollar purveyor of products - automobiles, burgers, widgets, whatever - active in 200 territories, yet the company has absolutely no need for a coordinated marketing department. That's because its suppliers (and their suppliers and partners) underwrite high-profile campaigns across the globe.

So the company accounts contain but four basic line items - sales (income); cost of sales (disbursements); operating costs and personnel - while enjoying the complementary services of third-party marketing campaigns. It's a commercial dream that must surely facilitate annual gross profits of 30 per cent or more.

Now imagine a sea-change shift of policies at supplier level, with primary partners being prohibited by law from advertising in most civilised countries, while regulatory changes effectively reduce competition at second-tier supplier level, further reducing ad spend by tens of millions per annum. Effect: a total marketing blackout.

A commercial crisis? Absolutely. In the words of a seasoned marketer, operating in an advertising vacuum is akin to "whispering in the dark: you alone know what you're up to."

The logical solution is for our CEO to establish a fully fledged marketing department able to, by the most basic definition of the science, formulate a set of processes for creating, delivering and communicating value to customers [in order to] satisfy needs and wants through exchange processes, and [the] building [of] long-term relationships.

But his conglomerate has been acquired by a private-equity fund with a global reputation for squeezing the last dollar out of acquisitions while investing absolutely the minimum at every level. Its principals have little experience of that particular market sector, nor an in-depth grasp of any historical factors. So they see little reason to create a major cost centre where none previously existed. Double crisis.

In addition, the company has a deep-rooted suspicion of marketing activities, viewing them as being, in the words of a respected source (one who has been close to the situation for over a decade), "in conflict with contractual obligations. [Formula 1] has concentrated on the protection of its commercial rights, rather than the commercial exploitation of those rights."

Crowd numbers at Spa were down this year © XPB

That describes precisely the situation the sport now finds itself in, with falling attendance at combined spectator and TV-audience levels, increasingly disillusioned fans, a raft of struggling suppliers (teams), reducing sponsorship base and, crucially, dwindling outlets (race promoters and TV transmitters).

This weekend past hammered home yet another nail: Spa officially hosted just 44,000 paying punters - 10 per cent down on last year - on Sunday, despite the grand prix venue having a catchment area comprising Paris (Elf, Renault), Amsterdam (Max Verstappen) and northern Germany (Sebastian Vettel, Nico Rosberg, Mercedes), the last-named due to the Nurburgring sitting out 2014 due to its illogical rotating deal with Hockenheim.

In addition, Spa is the season's second-closest circuit for Londoners (Lewis Hamilton), and, given the challenges (and costs) of Silverstone and a variety of cross-Channel links, is to many the preferred option - particularly as the weekend marked a bank holiday. Yet the circuit hit a 10-year spectator low.

According to sources, TV audiences proved equally alarming: The average UK live audience, for Sky and BBC, dropped below the three million mark, with Germany's RTL (free-to-air) failing to hit its golden five million figure. Sky Deutschland? Less than half a million.

All this begs the question: where has F1 gone so wrong of late? Worryingly, a meeting called by F1 tsar Bernie Ecclestone on Saturday at Spa to discuss this very aspect seemed to have missed the sweet spot. "It was a bit like the blind discussing the latest fashion in sunglasses," said one attendee. "No one has a clue what to look for."

Politically incorrect, maybe, but indicative of the levels of scepticism currently prevailing in the sport's upper echelons, and no less accurate for them. Given that the average age of the folk attending the meeting panned out at almost 55 years, is it any wonder they evidently fail to grasp the essence of social media and associated global trends?

Pirelli motorsport director Paul Hembery admits to being concerned about the sport's apparently kneejerk reactions in its attempts to spice the show as it seeks to reverse the trend.

Hembery has repeatedly voiced his concerns about F1's marketing plight © XPB

"When you're in business, the first thing you do is try to understand your customer," he said. "I think it's very dangerous for a sport like F1 to invent rules, regulations and ideas without extensively understanding what the customer expects from it."

But Saturday's meeting was a continuation of a crisis summit called last month in Hungary, during which it was agreed to establish a Marketing Working Group, with the first sitting scheduled for F1's summer break.

That was postponed (cancelled?) due to Mercedes motorsport director Toto Wolff requiring medical attention. All well and good, but surely such important issues should not be binned due to the absence of one man.

True, new circuits are joining the fray; but, over the past decade, F1 has lost no fewer than five of the 10 new venues it attracted. In primary markets the broadcast landscape has changed dramatically since CVC Capital Partners acquired the majority slice of F1's commercial rights in 2006. Customer service (fan engagement) is basically non-existent.

When analysing F1's current business model, those marketing key phrases - "needs/wants", "exchange processes" and "long-term relationships" - are eerily absent. Any wonder the sport faces such fundamental challenges?

The reason for F1's malaise is historical. When Ecclestone's Formula One Management operation eventually sealed the deal to acquire F1's commercial rights in 2000, a (McLaren) Mercedes driver, Mika Hakkinen, was reigning world champion, prompting the German car company to trumpet its achievements. Ferrari had taken the constructors' title, a tale told by every pack of Marlboros.

BMW made its entry, Jaguar bought Stewart, Toyota was about to join, while Renault negotiated to acquire Benetton. Not only did they throw the might of their global ad spends at F1, but these powerhouses brought in blue-chip partners, who in turn screamed their F1 links. Bridgestone and Michelin were engrossed in a tyre war every bit as ferocious on-track as it was on billboards.

Manufacturers followed each other into F1 at the turn of the century © LAT

Collectively they bought £3000 Paddock Club passes by the hundred, signed for "bridge-and-board" circuit signage packages and took expansive (and expensive) merchandising areas. Toyota is estimated to have blown upwards of £10million on rental alone for its enormous merchandising palaces during a nine-year tenure in F1, while stands erected by the rest were not much smaller. Advertising came in the form of double-page spreads everywhere.

Dealers, too, joined in when F1 came to town, running local promotions and feting VIPs and key customers during events. Thus F1 enjoyed staggering exposure on a truly stratospheric scale, all paid for by teams and their commercial/technical partners. When F1 folk needed to consult market research, some company somewhere had commissioned the numbers.

In short, FOM had no need to spend a brass bean on marketing, instead enjoying the luxury of suppliers and third parties funding all such activities, who told its message. Then manufacturer teams left in droves, disillusioned by the lack of return on (massive) investment and taking their partners with them.

An anecdote linked to Bridgestone goes some way towards illustrating the protection/exploitation-of-rights dilemma: when the Japanese tyre company entered the sport in 1997, it planned to distribute doormats bearing the words 'F1 - The Challenge' to thousands of outlets globally.

The commercial rights holder allegedly demanded a licence fee running to many millions, prompting Bridgestone to destroy its mats. Forget Bridgestone's benefits from the campaign: what price free F1 awareness in virtually every tyre outlet across the world?

Simultaneously, tobacco advertising had been outlawed in Europe (and elsewhere), and as the baccy ban neared, so cigarette companies ramped up their activities. This initially created greater awareness for F1, but not without causing a massive vacuum upon their departure post-2007. Did FOM step into the breach?

Of course not. At that point CVC began leveraging its two-thirds majority on F1's commercial rights and, with eyes firmly on a Singapore listing within five years, the investment fund set out to dramatically boost short-term profitability through a combination of cost-slashing and maximisation of turnover. What long-term marketing strategies?

The prevalence of tobacco sponsors such as Ferrari's partner Marlboro took the marketing pressure off the sport itself © LAT

Instead, hosting fees shot through the affordability ceiling, causing ticket prices to rocket, while TV gradually migrated to pay-per-view channels. This meant that sponsors and partners no longer enjoyed massive audiences, forcing most to (negatively) reconsider their engagements. Withdrawal resulted in reduced activation, followed by reduced awareness.

The shift to PPV TV has been drastic for another reason. Where once free-to-air stations - usually national channels - regularly promoted upcoming F1 broadcasts as part of regular scheduling breaks, bringing the sport to the attention of the entire audience spectrum, the current arrangement of shared (oft-delayed) broadcasts means channels such as BBC and TF1 (who take back seats to Sky and Canal+ respectively) are no longer enthralled by F1.

After all, why should they carry promo previews that ultimately benefit their opposition? Equally, when Sky or Canal+ run previews, they are preaching to the converted, who have in any event already subscribed.

So F1 gradually slipped down the awareness order, and the only wonder is that it took five years for the effects to wash through the system, which bears testimony to the deep-rooted passion of the sport's fans, but is equally an indictment of the sport's commercial owners.

F1 apologists blame the economic crisis, but their 'facts' simply don't stack up. Porsche and Audi commit F1-level budgets to the World Endurance Championship; Volkswagen and Hyundai spend massive amounts on World Rally Championship campaigns. BMW commits an estimated £75million per season to the DTM, in real terms a national championship, while the respective spends of Mercedes and Audi cannot be significantly less.

Yes, Honda returns in 2015 - marking the first return of a major marque in six years - but, crucially, as engine supplier only. No others are on the horizon, despite most motor manufacturers being bullish about their immediate and longer-term futures.

As for Bridgestone, having departed in the wake of the manufacturer exodus, the company recently set its sights on the Olympic Games, signing a 10-year deal - saliently covering just two Games during that period - valued at £200million. In real terms, that pans out at £100million per month.

Porsche chooses to invest in sportscars rather than F1 © LAT

Global sport spend too is up: Manchester United recently signed a record 10-year shirt deal worth £90million per annum, while the top five European football leagues last year turned over a combined £20billion, probably five times F1's 2013 cumulative turnover. According to reports, F1's TV audience is shaded by Turkey's football league.

Yet F1 does not seem to accept that it's staring a crisis in the face. Last Saturday, the attendees in the meeting held in the top floor of the Mercedes Palace (allegedly) drew solace from suggestions that the global sports market is contracting, and that F1's numbers are simply following that trend.

This, though, stands in stark contrast to findings of the world's largest professional network, auditing giant PriceWaterhouseCoopers, which foresees global sports spend increasing at the rate of four per cent per annum. PWC estimates the market to be worth £110billion annually, and in a recent report foresaw a "resurgence of financial services and automobile companies to sponsorship".

If so, not only are car companies and banks giving F1 a wide berth, but FOM is turning over around one percent of annual global sports spend. Take F1's cumulative turnover - team budgets, circuit income, etc - and the figure hits 3.5 per cent. Such information would not exactly enthrall Singaporean IPO analysts, possibly explaining why, from a purely financial perspective, CVC's planned listing is on hold.

A global survey undertaken last year found that over the five years from 2009 - the exact period of the global economic crisis - the sport-sponsorship market grew by almost 20 per cent, thus further contradicting the claims made at noon last Saturday.

The underlying message to F1 is clear: establish a structured, strategic marketing department PDQ, or the downward spiral will continue, particularly if new/social media are excluded from the equation.

"Adapt or die", it's called.