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Phelps' Deals Not Quite Up In Smoke; Pot Pictures' Impact On Endorsements Still Hazy

The San Diego Union-Tribune, February 07, 2009

By Jennifer Davies

Michael Phelps is mired in some nasty waters.

For Phelps, winner of 14 gold medals and erstwhile darling of corporate America, the pictures of him apparently puffing marijuana from a bong couldn't come at a worse time.

With the economy continuing to sputter, industry watchers say companies once willing to shell out millions of dollars on lucrative sponsorships and endorsements are pulling back and looking for any reason to ditch their high-priced athletic pitchmen.

"Companies are saying, `We're hurting, and we're not seeing the kind of payback we'd like from this sponsorship activity,' " said Michael Belch, a marketing professor at San Diego State University.

It once was predicted that Phelps, who has done deals with Visa, AT&T and Kellogg's, could make as much at $100 million in endorsement deals throughout his lifetime. Now that estimate may be changing.

IEG, a Chicago firm that tracks corpora te sponsorships, said this year will have the slowest rate of growth for those types of deals in seven years. Sports marketing will grow by 1.8 percent to $11.6 billion this year, but that's far off last year's growth of 14.7 percent.

While some sponsors such as Speedo and Omega watches, which called the controversy a "nonissue," have backed Phelps, the 23-year-old swimmer lost his deal with Kellogg's. He also was suspended by USA Swimming for three months. Subway will continue its newly minted business relationship with Phelps but said it was "disappointed in his behavior." Other corporate sponsors such as AT&T and PowerBar had ended their deals with Phelps at the end of last year, before the controversy erupted.

William Chipps, senior editor of the IEG Corporate Sponsorship report, said it's easy to see why companies have handled the issue differently. Kellogg's, which makes such kid-friendly fare as Frosted Flakes and Froot Loops, can't be seen as condoning drug use. Omega and Speedo, which are targeted at the adult consumer, can be more forgiving.

"Companies are definitely keeping an eye on their expenditures and are focusing only on partnerships that will directly help their bottom lines," Chipps said.

Bob Dorfman, executive creative director of Baker Street Partners, an advertising firm in San Francisco, said the Kellogg's deal was set to end at the end of February, so the controversy might have actually benefited the company.

"It gave them a little opportunity to get rid of him and make themselves look good in the eyes of the youth of America, or at least to the parents of America," he said.

Even athletes unblemished by scandal are losing endorsement deals in this economy, Dorfman said. He pointed to Buick's recently ending its relationship with Tiger Woods.

"He's the top jock endorser in the world," Dorfman said. "If he's not worth it, then nobody is. The problem is now you need proof that there is a real return on investment, and you can't always do that with a star athlete."

Skepticism about endorsements is spilling beyond individual athletes, too. Citigroup's proposed $400 million deal with the New York Mets for naming rights to the team's new ballpark is causing controversy because the bank was a recipient of federal bailout funds.

"The concern is that they are throwing away taxpayer dollars," Chipps said. "Still, Citigroup has to market themselves, and sponsorships are a proven way to do that."

The question for Phelps is whether companies will continue to want to use him to market their products, especially because this isn't his first infraction. In 2004, Phelps pleaded guilty to drunken driving.

Dorfman said the alleged pot-smoking incident, photographs of which were sold to a London tabloid, probably will scare away any potential corporate suitors -- at least in the near term. If Phelps stays on the straight and narrow and continues his current campaign of contrition, there will be plenty of takers when the 2012 Olympics ramp up, Dorfman said.

Phelps is hardly the only athlete to get into trouble. From Lakers star Kobe Bryant to Ray Lewis of the Baltimore Ravens, there's no shortage of examples of athletes behaving badly.

Bryant, who lost his corporate backing in 2003 after rape allegations surfaced, has rebounded, making an estimated $16 million in endorsements in 2007, according to Fortune magazine. Among his stable of current high-profile partnerships are Nike and Sony.

Eric Wright, vice president of research and development for Joyce Julius & Associates, a sports sponsorship research firm in Ann Arbor, Mich., said that time and again, companies look to successful athletes to bolster their brands and create awareness of their products. While corporations might quickly separate themselves from disgraced athletes, they always come back -- even in tough economic times.

"It blows up and then it blows over, and life goes on," Wright said