The ‘Loss Leaders’ of IPL

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“Famous among other jargon in the retail industry, is a term called ‘loss leaders’. The term is assigned to products that are sold at a price way below their cost price, which results in zero profit to the retailer who sells them. It makes one wonder the reason behind a strategy like this. Commonly, the companies use such products as a gateway drug, which aims at enticing customers to their outlets. Later, as the crowd assembles, they can be sold other products which hold a higher markup of cost. The markup of cost is the percentage of a product’s wholesale price that a retailer adds to its retail price to earn a profit. Simple mathematics, isn’t it? A similar strategy seems to have been deployed by companies who successfully won ownership rights for two new IPL franchises, based out of Pune and Rajkot, on December 8. New Rising, part of the RP-Sanjiv Goenka group, and Delhi-based mobile handsets manufacturer, Intex, would introduce two new teams to Vivo Indian Premier League (IPL) to replace the banned franchises – Chennai Super Kings (CSK) and Rajasthan Royals (RR). All teams in the IPL, like other teams in most modern leagues around the world in any sport, earn a major share of their money from TV Broadcasting rights and sponsorship. An approximate amount of Rs. 70 crores is added to their treasury from a ‘central pool’ maintained by BCCI, and the remaining money comes from sponsorship (about Rs. 30 crores on average) and ticket sales (about Rs.15 crores on average). The generated revenue enables the franchises to cover the franchisee fees, player fees and other operational costs which have to be borne by the franchise. In a unique step, BCCI introduced reverse auction where the bidding opened at Rs. 40 crores. The bidders were invited to submit their lowest bids for a city of their choice where they would want their franchise to be based in. Interestingly, BCCI even allowed negative bids to be submitted. The winning bids were meant to be the amounts BCCI had to pay to the franchises per year for being a part of IPL 2016 and 2017. A negative bid, if declared a winner, would have meant that the particular franchise had to make their ends meet using their earnings from sponsorship and tickets sales alone. On top of that, they had to pay a certain amount to BCCI which would amount to the value of their negative bid. This clearly meant that it was virtually impossible for the franchise/franchises to earn any profit, despite the fact that they did not have to pay any franchise fees. New Rising, and Intex Mobiles, won the reverse auction with their negative bids, 16 crores and 10 crores, respectively. This is exactly what made their respective franchisees seem as ‘loss leaders’. Apart from their expenses, they will have to pay BCCI 10 crores and 16 crores respectively for being a part of IPL 2016 and 2017. Let’s assume the possible outflow of money for New Rising’s Pune team. For starters, it would have to pay Rs. 16 crore to BCCI as franchise fee. Based on the first draft of players conducted on December 15, the Pune franchise has utilized Rs. 39 crores for drafting five players, leaving them with another Rs. 27 crore for buying players at the main auction to be held on February 6, 2016. Even if they restrict their expense on players’ fees to Rs. 60 crores and other expenses pertinent to venue, marketing, and support staff to Rs. 15 crores, they would be shelling out an amount of Rs. 81 crores for a season. Intex owned Rajkot franchise faces a similar situation where in they would have to utilize their resources with utmost caution. Earning any kind of profit in such a scenario seems extremely difficult when you look at their possible sources of income. Even if the franchise’s earnings from jersey sponsorships is approximately Rs. 20-25 crores and from sale of tickets is Rs. 15-20 crores, it would fetch them anything between Rs. 35 to 45 crores, in comparison to an expenditure amounting to approximately Rs. 80 crores. The clear disparity between the income and expenditure for the franchise ascertains that it would be running in loss from Day 1 of the league. Keeping all this in mind, the two new franchises can only hope against odds to earn more money from sale of tickets. In one of the seasons, Sunrisers Hyderabad earned Rs. 13 crores from it and Mumbai Indians earned Rs. 43 crores with the remaining teams’ earnings falling between these two extremes. In any case, BCCI would be picking the cherry off the cake as it would successfully earn approximately Rs. 166 crores from the two franchises per year. So, how does it make any business sense whatsoever? Isn’t business about keeping profit over loss? According to Sanjiv Goenka, it made ‘economic sense’ to submit a negative bid. Much as the owners would not admit publicly, this step seems to be a PR or Branding gig aimed at breaking into millions of Indian households through their TVs without having to spend large amounts on branding and advertising otherwise. In a manner of speaking, running the IPL teams in itself would become the marketing cost. Whether it would pay off in the long run, is the important question to be answered. However, one of the theories floated in support of this strategy, states that it was intelligent to establish franchises in two cities where no current IPL franchise exists. This would potentially allow these franchises to become a part of the expansion plan of IPL after 2017 when CSK and RR would find their way back into the race. The whole idea of adding two new franchises was to keep the IPL viable for the next two years, as a league of six participating teams would have jeopardized various revenue models of the IPL. No matter what sugar-coated version of personal branding or marketing or even, individual egos, the new owners would like to dress their decisions in, the truth remains that they might just have subsidized the survival of an extremely valuable sports brand – The Indian Premier League.

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