Citius, Altius, Fortius

01 Jan 2012

The 2012 Olympic legacy

10 years of Vision: London 2012’ may not have lived up to its promise to get more people to play sport, but most would agree the regeneration of the area around the Olympic Park has been a success. With the exception of the stadium, home to West Ham United FC, the park has been transformed, and prime office rents in the area rose 150% from 2010-206 (compared with 36% in the City of London).

Ahead of the London Olympics, Vision 2012 highlighted that opinions on the economic impact of the Games remained positive despite a slump in public support.

As far as London 2012 is concerned, Baron de Coubertin’s famous motto scores two out of three. The main stadium was built faster than expected and the overall budget is certainly higher. However, in a world that has changed a good deal since the day in July 2005 when the games of the XXX Olympiad were awarded, enthusiasm for them in the UK is weaker rather than stronger.
 
At the time of the bid decision [in 2007], an opinion poll for the International Olympic Committee (IOC) indicated that public support exceeded 70%; a recent survey by PriceWaterhouseCoopers (PwC) showed that only 37% of UK residents have positive views, although this rises to 46% in London.
 
Nevertheless, opinions about the economic impact of the Games are positive according to the PwC survey. 54% of UK residents (48% in London) believe there will be a boost to the economy.
 
Among business owners 70% expect there to be a short-term benefit and 39% foresee longer-term gains, although the majority in London expect no impact on their businesses. In truth, the overall economic impact of the Olympics is incredibly difficult to measure with any accuracy. There are a number of reasons for this.
 
How would the economy have performed if the money had been spent on something else?
First, some of the supposed benefits are intangible; how do you measure the value of green spaces and wildlife havens where once stood derelict industrial buildings? Second, what is the opportunity cost – how would the economy have performed if the money had been spent on something else, or not at all? Third, how much of the economic activity surrounding the Games – for example tourism, advertising – is incremental and how much is merely displaced from other periods?
 
The cost side of the equation is also problematic. For example, what is the right proportion of transport infrastructure upgrade costs that the Olympics budget should bear? And what of the cost to the economy of disruption to non-Games transport, absenteeism, etc?
 
Olympic spending chart for Vision
 
Although the overall economic impact is hard to gauge it is equally clear that an undertaking of this scale brings commercial benefit to many organisations and potential opportunities for investors*. After all, the budget for providing the infrastructure for the Games (including a £2bn contingency but excluding most of the required transport upgrade cost) is £9.3bn.
 
This is the responsibility of the Olympic Delivery Authority (ODA) and comes mostly from the public purse as shown in the chart above.  
 
In addition, the budget for staging the Games themselves is around £2bn. This is the responsibility of the Games’ organiser LOCOG (The London Organising Committee of the Olympic and paralympic Games) and is sourced privately from sponsorship, ticket sales, licensing/merchandising, a share of broadcast rights and IOC contributions.
 
The economic activity relating to the Games can broadly be divided into three chronological segments – before, during and after – although inevitably some activities span more than one of these periods.
 
For the companies involved [construction] should have been a welcome and genuine boost.
The principal activity before the Games is the construction phase, encompassing the building of the Olympic Park, the Olympic Village and parts of Stratford City, along with upgrades to the transport infrastructure (notably Stratford station). This activity is now substantially complete and no longer relevant from an investor’s perspective.
 
Clearly most of the work would not have been done if it were not for the Olympics, and because it took place against a background of relatively weak economic conditions the work wasn’t displacing other projects. Thus, for the companies involved it should have been a welcome and genuine boost.
That having been said, opportunities for investors to capitalise were thin on the ground given the prevalence of foreign and/or private companies. The ODA’s delivery partner responsible for overseeing construction was CLM, a consortium of a US engineering business and two privately owned UK contractors.
 
The main Olympic stadium was built by Sir Robert McAlpine (private) and the Stratford station upgrade was carried out by Hochtief (German). Among high profile projects awarded to quoted UK companies was the Aquatics Centre, built by Balfour Beatty. However, a total of c.1500 direct contracts were awarded, 98% of them to British firms from all over the country.
 
The after-Games period – the politically all-important ‘legacy’ – will focus on the transformation of the Olympic Park and Village into a mixed-use commercial and residential development. It is here that the greatest long-term effects originate.
 
The construction has been led by Lend Lease (Australian) and post-Games the Olympic Village will be managed by a joint venture between private UK property developer Delancey and Qatari Diar which will work alongside Triathlon Homes (a consortium, principally of housing associations) that will manage the affordable housing element.
 
As far as Westfield Stratford City (the largest urban shopping centre in Europe) is concerned the Australian developer should be a longterm beneficiary but it is possible the tenants (which include Marks & Spencer and Next) will merely displace business from other stores. The London 2012 bid was always anxious to avoid the risk of white elephants and many of the venues were designed to be temporary (e.g. hockey, basketball) or with specific future use in mind.
 
The main stadium has famously been the subject of a battle between West Ham United and Tottenham Hotspur football clubs (both of whose plans involve some substantial redevelopment work) while the velodrome and aquatics centre are earmarked for use by local communities and elite athletes. Serco is among the companies short-listed to operate the aquatics centre, with a decision expected in early 2012.
 
The period around the Games themselves is perhaps the most interesting, although its importance shouldn’t be exaggerated – after all the Games themselves last for less than three weeks. During this period the influx of people into London can be expected to be positive for retailers, bars, hotels, restaurants and pubs. Among the quoted pub companies Fullers and Youngs have high exposure to London.
 
Hotels will be full – LOCOG has secured 55,000 rooms, although it drives a hard bargain, demanding a four year average room rate and no minimum stay. Many visitors will choose to stay outside London in budget hotels such as Whitbread’s Premier Inns, while the business class hotels – Millennium and InterContinental – should benefit from increased corporate travel timed to coincide with the Games.
 
The Olympics is a marketing bonanza that contributes to the typical 1-2% boost in global advertising expenditure.
The Olympics is also a marketing bonanza; it is one of the key events, along with the US Presidential election, that contributes to the typical 1-2% boost in global advertising expenditure every fourth year.
 
As the country’s largest free to air broadcaster, ITV should see a positive impact on its advertising revenues around the Games, even though it is not the rights holder, as Olympic commercial partners support their sponsorship activity with spot advertising and others ride on their coat-tails. Although the majority of activity will be concentrated around the period of the
Games it will be spread over a long period and has indeed already started.
 
Of LOCOG’s £2bn budget for staging the Games, around £700m has been secured from domestic sponsorship deals, with more than 44 partners, supporters and suppliers. Many of these are household names, others less well known. Some of the agreements are for ‘value in kind’ – i.e. the provision of goods or services to a specified value in lieu of cash.
 
During tough economic times such arrangements can be very beneficial to the sponsor since they need to spend no cash and can use stocks or capacity that might otherwise go unsold, thus avoiding the opportunity cost and enhancing the value of their brand exposure. Among the suppliers of goods and services, look out for Aggreko (power generation), G4S (security) and GlaxoSmithKline (drugtesting).
 
London 2012 Olympic Games Partners
Olympic partners Olympics supporters
Adidas Adecco
BMW Arcelor Mittal
BP Cadbury
British Airways
Cisco
BT Deloitte
EDF Thomas Cook
Lloyds TSB UPS
 
None of this marketing activity takes place without the input of the communications agencies. For example WPP, the world’s largest marketing communications group, has been advising Procter & Gamble, one of the 11 Worldwide Olympic Partners, on aspects of its marketing activity surrounding the Games. Among smaller companies Chime Communications has an extensive sports marketing division that acted for G4S in its London 2012 sponsorship deal and represents South African athlete Oscar Pistorius (aka Blade Runner) for PR.
 
Licensed merchandise also forms part of LOCOG’s budget and is expected to contribute more than £80m. Among UK listed companies that are official licensees are Hornby (toys) and Tandem (cycles). Hornby has already highlighted the growing sales momentum in its London 2012 ranges.
 
In an economic climate every bit as competitive as the Games there are no guarantees of success, but there is clearly no shortage of companies that think they can strike gold through their association with the Olympics.
*References to particular companies should not be construed as specific investment recommendations

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