January 16, 2012
By Kyle Novak
The recent announcement by Baltimore mayor Stephanie Rawlings-Blake that the city will no longer honor the contract with Baltimore Racing Development (BRD) marks the sign of another street race on the brink of collapse. BRD was the original promoter of the Baltimore Grand Prix and has since been marred in controversy from failure to pay bills to vendors as well as an ongoing failure to pay outstanding bills for city services and taxes. The future of the event is now far from certain. However, IndyCar and the American Le Mans Series (ALMS) still have the event on their respective calendars here and here. While a casual fan may see the recent news as disastrous to the once promising street race, this type of turmoil is nothing new. Lurking behind most street races is a financial model that simply is not sustainable for long-term success. IndyCar continues to move away from racing on ovals and is seeking to make a splash in any new market that will expand the brand. The probability of more street races being added to the schedule continues to rise. But can these events survive on such shaky ground?
Street races can rejuvenate a city longing for an urban renewal. The excitement of world-class race cars screaming down city streets at more than 200 miles per hour can make even the most novice motorsports fan stop and stare. The roar of racecars echoing off skyscrapers is unmatched. The excitement that builds among city residents is greater than any event that doesn’t revolve around a ball or puck. During race weekend, hotels fill, restaurants thrive, and uncanny buzz builds as a city prepares for the spotlight. Convention and visitor’s bureaus glow with the thought of their city being showcased on national TV.
While street races can be a dream for a chamber of commerce looking to shine a positive light on their city, the ability of a promoter to turn a profit in the short life span of these events (often five years or less) is next to impossible. A promoter must be profitable to guarantee long-term success of the event. To ensure profitability, a promoter must do what any other business must do – make more money than it spends. However for a new street race such as the one in Baltimore, the deck is stacked against the promoter before the first grandstand is constructed.
Starting a street race from scratch involves a tremendous amount of start-up expenditures. The temporary concrete barrier wall that lines the circuit must be manufactured, the debris fence that attaches to the wall must be fabricated, and perhaps the most expensive portion of all, city streets must be repaved. Even a small bump on a city street normally traversed by our daily drivers could wreak havoc on an IndyCar or ALMS prototype. The wall, fence, and street repaving projects must all be started at least one year before the event and these costs must be fronted before one ticket is sold and before any sponsor check is delivered. The combined start-up costs for a new street race often hovers between 10 and 15 million dollars. Of course, cities will sometimes contribute to street repaving projects as they benefit residents for years to come but the costs of the race infrastructure is often borne solely by private investors. Banks are reluctant to lend money to an event that revolves around corporate sponsorship and no history of selling tickets.
Keeping in mind the costs to develop basic infrastructure, a new event has to build grandstands, install the race barrier and debris fence, spectator fencing, temporary power, restrooms, signage, security, tents, fuel, construction equipment, tow trucks, safety crews, and most importantly, a staff to run the operation. Even the cash needed to support the volunteer efforts can be in the tens of thousands of dollars. And the extremely time intensive build schedule - often less than 30 days and completely torn down within 15 days – puts additional strain on the event.
As the operational side of a street race starts to chaotically take shape, so does the sales and marketing. Sales managers hustle to find the crown jewel in motorsports event sales – the infamous title sponsor. A title sponsor can make or break any sporting event but are vital to a street race. While other venues such as stadiums and NASCAR ovals can generate revenue opportunities all year, a street race only has one weekend to capture revenue. As the event draws near, the price of potential sponsorships will continue to plummet. A company considering a title sponsorship knows that it can maximize value from a title sponsorship two months from race weekend rather than six months out when the price is twice as high.
To expect a sales department to sell enough sponsorship for the event to break even is simply unrealistic. A $50,000 sponsorship doesn’t offset the cost of chain link fence needed for the safety of the spectators. A $100,000 sponsorship doesn’t offset the bill for security. The list goes on and on. Grandstands cost approximately $20 per seat to build and if each seat is sold for $50, a promoter will profit $30 per seat. If 50,000 seats are built at a total cost of $1,000,000 and then sold for a gross of $2,500,000, the race is left with $1,500,000 in net income – not even enough money to pay for the concrete barrier wall for the first event. This is considering a sell out and every ticket priced at least $50 – both rarities these days. Without a major title sponsor or a large amount of ancillary sponsors, a race simply has no chance to be profitable.
While the sales staff toils away, race financiers soon grow wary with how lopsided the company’s balance sheets have become. Buyers’ remorse sets in once investors realize the amount of money they are actually spending to offset the tremendous operational costs. This is where the problems begin to mount. When checking accounts begin to dry up, vendors are promised payment at a later date. In the case of the Baltimore Grand Prix, sometimes never. Thus the event closes its doors or again seeks to find enough investors to revitalize the event.
Despite the grim outlook, street races can succeed in the right circumstances. Sponsorships and ticket sales are always a necessity, but finding the right city as a host means everything to the success of these events. A city must be willing to be a financial partner, not just a landlord. By doing so, a city can advertise itself as a destination and give people reasons to come visit while ensuring the viability of a positive civic event for years to come. Focusing on big markets for new street races continues this cycle of failure. For example, hundreds of thousands of people come downtown every weekend in Chicago, but rumors of a street race have circulated there for years. There is simply no room for another event in these large markets and no incentive for a city to lay out the cash that is needed to partner with the event. Combined with the competition in these markets from traditional ball sports, a street race is doomed to fail.
Of course, street races will always be expensive to build. The Grand Prix of Long Beach and now defunct Grand Prix of Cleveland are examples of events that can be built in a cost-effective manner. Good civic partners and loyal vendors make all the difference in running an efficient event that has a chance at being profitable. When seeking new events, IndyCar and their partner promoters should look deeply into exactly how much support local governmental officials are willing to provide. Smaller cities without major sports teams should be looked at as possible solutions. If IndyCar would be willing to swallow some pride and go to a smaller city desperately seeking to rejuvenate itself, they may find the next Long Beach. Not just from a purely superficial standpoint but also a financially stable one as well. Street races will continue to be and will always be some of the most unique events on the sporting landscape. However without a better financial model and better management, the unfortunate calamity seen in Baltimore will continue to occur.
KYLE NOVAK is a project manager for Steinberg Sports and Entertainment and will graduate from Ohio Northern University College of Law in May, 2012. He formerly served as Director of Operations for the Cleveland and Houston Grand Prixs in addition to later serving as Program Manager for the Volkswagen Jetta TDI Cup. Follow Kyle on twitter and on facebook.