Nike’s Billion Dollar Shoe
On February 20, 2019, Duke Men’s Basketball was competing against UNC Chapel Hill when start forward, Zion Williamson, planted his left foot and punctured a hole in the side of his shoe. This is one of the highest watched games, even exhibiting the attendance of former President, Barack Obama, and is watched by millions on television. The resulting shoe rupture left Zion on the court holding his knee, which was hurt in the process.
The resulting media response demonstrated the impact that the news outlets attributed the shoe damage to the parent company, Nike. Many of the responses discussed how Nike’s stock price was taking a hit in the pre-market trading, dipping as much $1.72 prior to the opening bell on February 21. While the media was discussing the negative business impact of the shoe, it also presented an opportunity to exam the statistical significance of the shoe using an event study.
Markets are thought to be efficient in stock price, meaning that the known information about a company is reflected in the share price (Fama, 1998). If this is the case, then what should lead to changes in price are new information (Coates & Humphreys, 2008). However, it has also been observed that negative media news has a predictable pattern on share price causing a drop on the day of the news, but the price rising to pre-fall price over the next few days (Tetlock, 2007). The Nike shoe provided an example to examine if this was indeed the case.
Prior to the game, Nike closed trading at $84.84 per share and opened the following day at $83.57, a decrease of $1.27 or 1.5%, which resulted in a decrease in market cap of approximately $2Billion! Over the course of the day, Nike’s share rose and it closed on 2/20/19 at $83.95 and opened the following day at $84.20. Its closing price on the afternoon of $84.76 was close to the pre-shoe incident, thus supporting a short term drop in price that regained its level over the resulting few days. The statistical analysis predicted a percent price decrease on 2/20 of 1.32%, which did not achieve statistical significance (p 0.199). Thus, this price decrease, while having a market cap loss of $2Billion was not an unusual occurrence for Nike’s stock.
Coates, D. & Humphreys, B. (2008). The effect of on-field success on stock prices: Evidence from Nippon Professional Baseball. International Association of Sport Economists. Working Paper Series, Paper number 08-05.
Fama, E. F. (1998). Market efficiency, long-term returns, and behavioral finance. Journal of Financial Economics, 49, 283-306.
Tetlock, P. C. (2007). Giving content to investor sentiment: The role of media in the stock market. The Journal of Finance, 52(3), 1139-1168.
Economic Review of Home Ownership
I have always had in interest in how things work and why certain recommendations are made. I recently got curious about the profitability of home ownership and resell value, so I undertook some research to ascertain what the research community had to say on the subject.
First, it is very hard to get economic information on a local level; most of the information that is compiled looks at national trends and large regional differences. Second, access to information is quite limited; the research articles are not accessible to the general public and I had to rely on my University credentials to gain access to the information. This poses a barrier to information for interested consumers to make fully informed decisions. Third, the research has a hard time controlling for all the variables and assessing the full picture. In an effort to provide a full picture of home ownership as a driver of wealth I will rely on the information gleaned from several articles in an attempt to clarify the boundaries of wealth building.
I suppose many of us have been told that home ownership is the path to wealth and that we should buy a house as soon as possible. The rationale given is that your monthly payments go toward decreasing the principal owned on the house and thus constitute equity. The second aspect of home ownership is that land appreciates over time and when you sell you will not only receive the equity you have paid into the house, but also the difference in cost from the selling price to the purchase price. In this way you will have acquired 'wealth'.
What has always struck me about this is the cost of ownership. When you purchase a house you have additional costs that you have to consider above the cost of renting. These costs include insurance, mortgage insurance, interest, taxes, home improvements and equipment or appliances. While you can deduct interest and taxes on your income taxes the other payments need to be rolled into the total cost of ownership when considering home ownership as a wealth builder. When you go to sell your home, these incremental costs need to added to the initial purchase price along with the closing and realtor fees in order to truly determine if home ownership is a profitable endeavor.
When deciding to purchase a home, think with the end in mind: how desirable will your house be when you decide to sell? There are two types of home buyers; consumers and investors. Consumers buy a home in as desirable a neighborhood as they can afford without considering ownership implications and resell value. Investors, on the other hand, view home ownership as a means to an end and buy ever increasing houses over a period of time to ultimately end up in a highly desirable neighborhood. As they buy and sell they look to buy in areas that will appreciate over time to maximize their resell value, whereas consumers purchase homes that they want to live in without considering resale value. Those that follow an investor mind set build more wealth and see more money at resale over consumers. The main risk is predicting what will be a desirable neighborhood when the home goes up for resale. The desirability of a location is what drives the underlying appreciation of the housing asset.
For homeowners that buy a house and subsequently undertake remodeling projects to increase home value, they also need to be wary of what projects they choose to do. The idea that a remodel will increase home value above the cost of the remodel is not a guarantee. If the remodel is not in line with other houses in the community then the value will not be realized. For example, if no other house in the neighborhood granite counter tops then putting in granite may not make sense for that particular market. Once again, think with the end in mind. If a remodel is meant to improve your experience in your house then by all means do it to maximize your enjoyment, but go into it knowing that it might not increase your home value. When you go to resell it is important to determine what your remodel recoup ratio is to determine profitability: the cost of remodels added to the purchase price compared to the sale price. Achieving a ratio of 1 (100% return) is very unlikely. As with all things, there are external factors that determine this ratio, what is the cost of construction (materials and labor), what is the cost of new housing and what is the market doing. Remodeling can provide a return close to, or above 1, if the cost of construction is low and the market is strong at resell. Those two factors allow a housing remodel to achieve profitability.
So far we have seen that it is possible to earn a profit at resell, but it is not a guarantee, so the other question is how does home ownership compare to renting and investing as a means of wealth creation? One study compared these over series of 30 years from 1970-1999 in 10 year increments. The author compared home ownership appreciation (sales price minus purchase price) to renting and investing the difference in cost of home ownership to renting into a stock and bond portfolio. After 10 years, the house was sold and the portfolio was sold and the incremental value was compared to each other. For 1/3 of the time, home ownership was preferable to renting and investing for wealth, 1/3 of the time renting and investing was preferable to home ownership and 1/3 of the time it was impossible to tell. The identified factors that led to wealth were as follows: market timing of home purchase and resale (buy low sell high) and interest rates. If a home buyer was lucky to buy a home when the market was low and sell when the market was high they would achieve greater profitability. If they bought when the market was up then this limited profitability. There are a couple of limitations that need to be addressed though: 1. The resell value only looked at resell to purchase and did not consider remodeling costs 2. the stock and bond portfolio was not specified, so the asset allocation was unknown. 3. The assets were sold after 10 years thus limiting continued compounding earning potential that is proven to be a builder of wealth.
Our final article looked at home ownership as a builder of wealth, specific to minorities. Once again, the results are mixed: home ownership was preferable since it provided a forced savings mechanism both in saving for a down payment and in the monthly pay down of principal. Ownership wealth is also dependent on the resale value which is dependent on location and market cycles. In order to modify the risk of market fluctuations, time lived in the home is a factor. Length of time will flatten the risk profile, with 8 years being the cutoff time to both pay equity and build wealth. Once again, total wealth is dependent on market conditions at time of resale. Wealth is only realized if ownership is maintained, those that lose their house, lose their wealth. On the other hand, for renters to achieve wealth they must invest money into an investment account. Failure to invest provides no opportunity for wealth.
Overall, it appears that to a certain extent, luck is involved when looking to build wealth with a home, you are dependent on the market conditions at both purchase and resale, as well as the borrowing environment as a whole. In order to truly create wealth and earn a profit with a home sale a full cost of ownership picture needs to be considered that adds the incremental cost of ownership to the purchase price, remodeling costs, maintenance and closing costs. It is also advised to invest money for both home owners and renters to take advantage of wealth accumulation over time. To the old real estate caveat location, location, location needs to be added market timing, market timing, market timing. Only an ideal combination of location with low purchase price and high sale price leads to wealth maximization via home ownership.
The water is a bit murky when it comes to home ownership and resale as a sure thing. The best we can do is to make wise decisions based on all the available information and to incrementally invest money.
It may be that we need to rethink home ownership as a profit building mechanism and change our view to one of a savings account. In this light, we can change our thought processes from home ownership being a way to build wealth and look at it as a way to build up a cash cushion that is realized at resale, regardless of how profitable the endeavor was.
Choi, H., Hong, H., & Scheinkman, J. (2014). Speculating on home improvements. Journal of Financial Economics, 111. 609-624.
Haavio, M., & Kauppi, H. (2013). Buying a home with a resale value: Location, location, location. Scandinavian Journal of Economics, 115(4). 1046-1083.
Herbert, C., McCune, D., & Sanchez-Moyano, R. (2013). Is homeownership still an effective means of building wealth for low-income and minority households? Joint Center for Housing Studies, Homeownership built to last: Lessons from the housing crisis on sustaining homeownership for low-income and minority families-a national symposium, September 2013.
Rappaport, J. (2010). The effectiveness of homeownership in building household wealth. Economic Review, Fourth quarter 2010. 35-65.
The Business of SKiing
When there’s snow, there’s a chance to ski and enjoy outdoor entertainment. Ski resorts have long been a destination for those seeking recreational activities during the winter, and the economics of the ski industry are varied depending on region and structure. Skiing as an industry is unique since the competitive environment is set: the cost of entry is so high that no new resorts enter the market. Of grave concern to the industry, however, is the impact of climate change on factors relating to the ski industry: precipitation, temperature, skier days and skier retention. In order for ski areas to continue to grow, they need to attract new skiers and convert them to a core customer. A decrease in these factors forces ski resorts to make adjustments to their product in the form of reduced hours of operation, staffing, increased snow making and variable ticket pricing. Each of those has an effect on the consumer’s decision to frequent their local area. Skiers who rate themselves as beginners are more likely to leave the sport altogether, thus losing the chance to increase this core customer group.
When looking at ski resort financials, you can see start to discover trends within the industry. While ticket sales make up the majority of revenue to a ski industry (about 50%) there is still plenty of opportunity for increased revenue from cross selling and upselling, including dining, rental, ski school programs and overnight stays if the resort owns the hotel. Resort and hotel ownership is also one of the ways for a ski area to increase its total value. Resorts that are struggling financially seem to be doing so by having a larger percentage of revenue going to operations and staff, as well as having a high debt load that increases the interest payments on loans or increased leasing costs. Financially strong resorts have been able to decrease their total debt load, while increasing revenue and controlling expenses.
As resorts work on their marketing plan, they should also break their consumers into segments. Different sub groups of skiers have different preferences; women and men view resorts and amenities differently, as do intermediate and advanced skiers. Resorts that have more difficult terrain tend to attract higher level skiers, who value the difficulty of the terrain and are less concerned with amenities, while easier resorts would be better suited by focusing on the customer experience and the inclusion of a nice dining area.
The current state of the industry shows positive economic impact of ski resorts, as well as providing insight for managers of resorts. To adequately see a return on investment, resorts should understand their current consumer and target skiers of similar demographics. Resorts should also focus on viewing skiing as a complete experience, including the snow, quality of runs, customer service provided members, onsite lodging and dining experiences. Viewing the experience as a whole allows resorts to increase their revenue from multiple streams, while supplying their customer with everything required to meet their needs.
Belin, D. (2016). Eye on the industry: 2014-15 economic analysis of US ski areas. National Ski Area Association Journal, Spring 2016. http://www.rrcassociates.com/wp-content/uploads/2016/08/Economic-Analysis-1415.pdf
Faullant, R., Matzler, K., & Fuller, J. (2008). The impact of satisfaction and image on loyalty: the case of alpine ski resorts. Managing Service Quality, 18(2), 163-178.
Fredman, P. (2008). Determinants of visitor expenditures in mountain tourism. Tourism Economics, 14(2). 297-311.
Matzler, K., et. al. (2008). Customer satisfaction with alpine ski areas: The moderating effects of personal, situational, and product factors. Journal of Travel Research, 46. 403-413.
Rutty, R., et. al. (2015). Behavioural adaptation of skiers to climate variability and change in Ontario, Canada. Journal of Outdoor Recreation and Tourism, 11. 13-21.
Thompson, D. (2012). No business like snow business: The economics of big resorts. The Atlantic; February 7, 2012.
Sponsorships in high school sports
Even though sports continue to be an important part of high school life, school budgets continue to suffer. Participation in athletics contributes to the development of important real-world skills including self-confidence and self-esteem, dedication, time management, fitness and even improved performance in school. As schools try to balance the budget with the global needs of the school district, it is easy to pull finances from the athletics department. In order to maintain programs and participation, it may be time for high schools to look at alternative methods of generating revenue, including sponsorships.
Sponsorship of events is a common marketing strategy for many institutions of higher learning, community based programs and professional sports. The same concepts that garner support and revenue for those programs can be done at the high school level. Recent research out of Indiana can help programs identify and cultivate potential sponsors.
At the high school level, sponsorship of athletics occurs across all domains: large and small schools, urban and rural communities and by local and non-local businesses. There are many varieties for potential sponsorships, as well. Possibilities include banners on the walls, scoreboard and press area, along with logos and ads in the programs, ticket stubs, concession stand and venue identification. While these offer a variety of opportunity, they are not exhaustive.
The type, and amount, of sponsorships may vary, but what they all have in common is the desire to partner with the schools. Local businesses are interested in forming partnerships to generate community good will, while larger businesses are looking to attract new business. For both cases, the school is the winner. The school has a readily available gold mine for potential sponsorship at its fingers that it can use to create relationships with the businesses in the community and the broader geographic area. The two industries with the highest level of total sponsorship are professional organizations (physician practices, insurance companies, hospitals, lawyers, etc) and food and beverage companies (restaurants, fast food, beverage distributers, etc). Other businesses are also interested in available sponsorship opportunities, so school administrators are encouraged to reach out to many different businesses to gauge their interest.
At higher levels of sponsorship, the most prominent forms are facility and field naming rights. Not every school is willing to enter into naming rights deals with their community, but other options exist including game sponsorships, field sponsorships, tournament sponsorship and department sponsorships.
As school budgets continue to struggle and athletics budgets are continuously analyzed under a microscope, there is hope that additional funding is available if a school makes a priority of developing additional revenue streams. The identification of businesses willing to sponsor the school provides additional funding to the athletics programs and enhanced good will and business visibility in a win-win relationship.
Pierce, D. and Petersen, J. (2011). Corporate sponsorship activation analysis in interscholastic athletics. Journal of Sponsorship 4(3), 272-286.
Economics of the olympics
The summer Olympics in Rio are quickly approaching, and not without their fair share of drama. So far, the Russian Track and Field team is banned from competition, there are health concerns regarding Zika virus and the sanitation of the water, and the city is suffering a financial short fall and has asked the State for additional financial support. But, once the Games arrive and the spectators are in, Rio will make their money back, right? A new study says perhaps not.
The actual costs to host the Olympics are incredibly high, starting with the bidding process. Just applying to be a host city can cost over $70million. This is the just the beginning. The proposal has to then outshine all the other cities vying to be the host, so the proposed venues compete for the most outstanding (insert price increase) and then there is the cost of updated infrastructure and room capacity. Once the games commence, there are event management costs, opening and closing ceremonies and security personnel to pay. While the revenues generated by the Olympics are considerable, they are nowhere near the actual cost of hosting the Games: Vancouver in 2010 garnered $1.5B but spent $7.5B, London in 2012 brought in $3.3B but spent $11.4B.
Host cities believe that they will receive downstream revenue from being an ‘Olympic City’, increased international exposure and trade deals. While, this is correct, the amount generated is not substantial and not more than other cities that applied, but were not awarded the hosting of the Games.
Then, there are the facilities. The host city constructs elaborate facilities for the events and the staff, but after the games they are of little use. There is not the ability to reuse these facilities due to the specificity of their construction and unless facilities exist to be reused, the buildings fall into disrepair at the conclusion of the Games. So, what is to be done?
The popularity and expense of hosting the Olympics is not going away anytime soon and as long as cities and nations feel that the international exposure is worth the risk, they will continue to bid on them. In order to help the host nation avoid financial distress as a result of hosting, it has been proposed to limit the hosting to a handful of sites in order to reuse existing buildings. It has also been proposed to make the Games more sustainable for the host City including using current facilities, better economic forecasts and more reasonable infrastructure upgrades. Time will tell if the city of Rio sees an economic benefit for hosting the Games, or if they, like other cities, will have lost money on the venture.
Baade, R. and Matheson, V. (2016). Going for gold: the economics of the Olympics. Journal of Economic Perspectives, 20 (2). http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.30.2.201
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