Rutgers finances: converting Nike dollars to adidas dollars

This is the second in an occasional series that On the Banks will be presenting on Rutgers Athletics’ financial situation. Previously: Apparel and what it’s worth

Today: What’s its value or what’s it worth?

I supervise student teachers. Last week. I observed a second grade class deal with money. It was really neat to watch little kids begin the process of understanding finances. One hundred pennies. A dollar is a dollar. Always the same, right?

Maybe not.

On Monday, the Rutgers-adidas marriage was announced. It was official that the Nike swoosh was being replaced with the three-striped triangle.

And the money was apparently a bit better. Right? Maybe....it may be, in fact, much better.

Over the last few years, the carousel of schools changing apparel vendors has been non-stop. Michigan went from adidas to Nike and Jumpman. Notre Dame went from adidas to Under Armour. Tennessee went from adidas to Nike. And that Tennessee move caused me to think about Rutgers’ switch and what it might mean.

A July 2015 story in The Business of College Sports made an interesting point on the Tennessee move. As we talked about previously, there are royalties involved in these contracts. But TBCS makes an important point: “...it’s important to understand there are three different types of base compensation in an apparel contract: cash, product and royalties.” A school receives cash, it receives royalties on sales of apparel, and it also gets “product”. And that is an interesting issue.

Again from the story:

Under the Adidas contract, Tennessee received $1.95 million in cash each of the past five years. Going forward, Nike will pay Tennessee $1 million annually for the first four years and $900,000 annually for the last four years of the eight-year deal.

Tennessee did receive a $2 million signing bonus last year, but even with it annualized over the life of the contract, Tennessee is receiving approximately $750,000 less per year on average than under the Adidas deal. [Emphasis added]

Why make the switch? For one, Tennessee’s royalties increased under Nike, going from 9% with adidas to 13% with Nike, and with a daughter who attended Tennessee, I have a real good idea of how much orange stuff is being sold: a ton! But there are still other considerations in these contracts.

The story continues to tell an interesting tale of clothing and equipment:

As it turns out, Adidas and Nike don’t speak the same language when it comes to product allotment. If you’re going to compare the two, you have to adjust the product allotment figure in the contract to account for the fact that Adidas allotments are based on wholesale prices (50% off) and Nike allotments are based on aggregate retail value.

If you look at the Rutgers-Nike contract, which OTB obtained through a Freedom of Information Act request, it states that Rutgers “shall be entitled to order directly from NIKE...indicated amounts of NIKE Products....The aggregate retail value of supplied product....shall be set forth in the table below (each, an “Annual Product Allotment”) [Again emphasis added]

The table they cite is this:

Source: Rutgers University

So, for the 2016-17 school year Rutgers could order $1.1 million in equipment from Nike....at the retail price. Based on what was quoted from the Business of College Sports story, the adidas contract could literally double the value as it uses wholesale pricing.

In fact, that is true. Keith Sargeant posted a story on nj.com in which he spoke with Pat Hobbs about the deal; Hobbs confirmed that the adidas deal uses wholesale pricing. From Sarge’s story:

Rutgers receives wholesale-pricing discounts on its entire line of products, including 50 percent off apparel and accessories, 45 percent off retail pricing for footwear. 50 percent off retail pricing for My Team apparel, and 30 percent retailing pricing on My Team footwear.

We followed up both Sargeant’s and Gannett’s J.P. Pelzman’s stories with a preliminary look at the numbers on Tuesday.

By way of example, Louisville, an adidas school, took the time to “pencil in” the actual value in its contract (photo below), knowing reporters would want to know what it came out to be.

Source: The Business of College Sports

If that is the case for Rutgers, then the $1.7 million from adidas in 2017-18 could actually be worth somewhere around $3 million or more. The total $11 million dollar deal might be worth twice what it would be in “Nike dollars”.

And in that case, those 100 pennies the second graders worked with might turn out to have a lot more value.