For more than three decades, Nike (NKE) has built its brand on the backs of the biggest names in sports. From Michael Jordan to Bo Jackson to Tiger Woods, the company associates with the best of the best.
But associations between brands and big-time athletes can turn sour overnight, as was the case with the longtime face of Nike Golf, Tiger Woods.
On Monday, Nike announced that it had inked a new contract with Woods' heir apparent -- Rory McIlroy -- in a deal that dwarfs his predecessor's pay scale.
McIlroy and Nike aren't officially releasing the details of the endorsement, but initial reports said it was a $250 million contract over 10 years. More recent reports say it's a more reasonable five-year, $20 million a year deal. And even if the payday is less than what is rumored, it still puts to shame the $40 million that Nike paid Tiger Woods over his first five years on the tour, and already makes the 23-year-old one of the highest-paid people in sports.
Brand Building, One Name at a Time
Nike has tried for years to move beyond Tiger Woods as the one-man-band atop Nike's golf brand.
The company signed David Duval, and the watched as he lost his grip on the game. Anthony Kim never developed into the superstar Nike had hoped, and Stewart Cink hasn't exactly become a household name.
With brands like Oakley and Puma nipping at its heels, Nike had to pay up for the biggest draw in golf outside of Tiger Woods.
That's the biggest risk for both sides: If McIlroy slips as a player once his bag goes all-Nike, the company could lose a lot of sales to more-established golf rivals.
Upping the Ante
This move also puts pressure on everyone else in the golf industry to up their game.
Oakley lost a big name in McIlroy just as the company was entering the golf fray in a meaningful way. Callaway (ELY) is a big name in golf, but it doesn't have the income to compete with Nike, especially since it is posting losses year after year. Newcomers like Under Armour (UA) are overshadowed by Nike's newly renewed dominance.
The truth of the matter is that none of Nike's competitors in golf have the bankroll to make the bold moves that it does. Nike has $24 billion a year in sales compared to a paltry $889 million at Callaway last year. The fight isn't even fair. Even if Callaway has better equipment, Nike has the money to surpass it with a few tweaks and the help of Rory and Tiger.
Don't Bet Against the Big Dogs
Nike's bet on McIlroy comes with some eye-popping numbers, but for Nike, the investment is well worth it.
Tiger Woods came to Nike at a time when no one knew the company even made golf gear. With Tiger's career trailing off, it's time to pass the baton to a younger, preternaturally gifted golfer. Rory McIlroy fits the bill, and he's just entering the prime of a career that could last another two decades. For now, he's at least set himself up financially for life.
This looks like a win-win situation for Nike and McIlroy, and it puts the sporting giant back on the forefront of golf in one fell swoosh.
Motley Fool contributor Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour.