Turnover vs Track Performance: What F1 Team Finances Can Reveal About Success
Introduction
Formula 1 is a sport defined by its adrenaline-fueled racing, cutting-edge technology, extraordinary innovation and fierce rivalry. Formula 1 has long been and is likely to remain widely seen as the pinnacle of motorsport.
Formula 1 is also known as a sport of great luxury, affluence, wealth and extravagance which never fails to attract the rich and famous race after race and year on year. For a sport that was once only really enjoyed by devoted racing enthusiasts, the global appeal is now at an all-time high, with record-breaking viewership, sold-out race weekends and an ever-growing fanbase spanning the world. Various sponsorship deals, the Netflix documentary Drive to Survive that debuted in 2019 and the expansion of the yearly race calendar into America with races taking place in Miami and Las Vegas, have all played a significant role in the ongoing rise in Formula 1’s popularity.
The rising global appeal and popularity of Formula 1 in recent years has meant that Formula 1 itself and their owner Liberty Media have witnessed tremendously high revenue and profit figures. According to Forbes, in the year 2022 Formula 1’s total revenue reached $2.573 billion dollars, up from $2.136 billion the year before in 2021 (a 20.5% increase). Formula 1’s operating income which is a type of profit increased by a staggering 333% from 2021 to 2022, where in 2021 figures were at $40 million dollars, compared to 2022 where they took $173 million dollars.
However, behind the glamorous race weekends are the individual teams and their complex financial dynamics. The financial health of a particular team impacts and almost entirely determines their success as much for each race year, but also for the long-term. Team budgets, stretching into the hundreds of millions of pounds, must be considered by each team, each year. Allocating money towards car components, equipment to run the car, team personnel (interestingly excluding the drivers and three highest paid staff members), transportation (these are costs associated with transporting staff and equipment from race to race) and other costs such as fuel, technology and everything in between. Merchandise, driver fees (including registration fees and a fee per penalty point given in the previous year) and mid-season car upgrades (crucial to a team’s success that race year) will also be considered in the budget and cost of sales.
This article therefore will take a deeper look into the financial performance of certain Formula 1 teams, examining turnover, cost of sales, gross profit (or loss) and the profit margins. The finances of Formula 1 and for each individual team has become ever so slightly more complex in the past few years as for one, the surge of popularity in the sport has seen an increase in the commercial aspect of the sport meaning more money allocated to merchandising, marketing and sponsorship deals. Also, possible regulatory changes that can happen within Formula 1, can have detrimental effects on team budgets. For example, the introduction of the F1 Cost Cap in 2021, meant that all teams are now to an extent financially kept under some control, and have a limit on their spending per race year. This regulatory change if put simply, is to prevent spiralling costs and to encourage a more level-playing field when it comes to the actual racing. The dynamic combination of a team’s turnover, gross profit, team value and regulatory changes will all be discussed in more detail throughout the article.
Visual Representations
Comparing Gross Profit & Gross Profit Margins Between Teams: Key Insights
Overall Increase In Profitability: A general upward trend from 2021 can be a result of the introduction of the ‘Cost Cap’ regulatory change, which has likely contributed to an increase in profitability within teams. The continual growth of F1 popularity, increases global appeal and therefore attracts better commercial partnerships and sponsorship deals – a what can be crucial lifeline for teams.
Positive COVID Recovery: There is a general upward trend in gross profit after 2021, which can imply that the economic recovery for the Formula 1 teams is positive. A reason for this could also be the return, post-pandemic, of a full race calendar, with full attendance every race weekend which brings in revenue for teams.
The Impact Of The 2021 ‘Cost Cap’
Unlike many other sports, Formula 1 can be a difficult balancing act when it comes to entertainment. Although for viewers, fans and race attendees the race weekend is always the big spectacular, when instead looking at the bigger picture, for the teams in particular, this is only a small part of the sport. There are very few sports that rely so heavily on technology and meticulous engineering for success, whilst alongside this also spending hundreds of millions of pounds on designing and developing a car that ultimately needs to be the fastest on track. If a team’s car is unstoppable and unapproachable on track, the other 9 teams and 18/19 drivers will not be able to stand a chance, and for the race viewers, there will be very little thrill and entertainment.
“We live with cycles. It’s relevant to keep the attention of the sporting action on the track. I think we pass through years where we have a dominant team and a dominant driver without affecting the nature of the sport – this is something we try to rectify with regulations. Not in a fake way, but how we make competition tighter without affecting the regulations – for example, with the introduction of the budget cap.” – Stefano Domenicali, CEO of Formula One Group.
As Formula 1 is a sport so reliant on ever-evolving automotive technology and progressive engineering, money within teams is very important. Teams such as Mercedes and McLaren money-wise are in a completely different ballpark to teams such as Williams or Haas. Therefore, to try and minimise this difference on track, Formula 1 introduced a ‘Cost Cap’ in 2021 that to some extent ultimately controls each team’s spending. It prevents spiralling costs, encourages a more level-playing field and brings the performance of teams closer together. There has also been praise towards the Cost Cap in relation to sustainability and preventing unnecessary spending.
The F1 Cost Cap introduced in 2021 limits what a team can spend on the car, ultimately. The cap limits spend on all parts on the car, all equipment needed to run the car, team personnel, garage equipment, spare parts, transport costs and other costs such as fuel and other services. Teams will also be penalised if they go over this cap. By introducing this cost cap, lines should become blurred between the richer and the poorer teams on the grid and allow for a more even competition, whilst also maintaining a thrilling entertainment level for fans and viewers. Although having been introduced relatively recently, the Cost Cap will change team’s success and performance on track, whilst also proving from the figures above that it has increased profitability for teams.
The Future Of Formula 1 Finances
Data published by Statista has ranked the most valuable Formula 1 teams for 2023, of which is Ferrari, followed closely by Mercedes. The value of a Formula 1 team in the landscape of the sport today is crucial. Having seen the popularity of Formula 1 skyrocket, the commercial side of Formula 1 is now more important than ever. Placing at the top of the value chart likely means better sponsorship and partnership deals. For example, Ferrari is partnered with Shell, Mercedes is partnered with Petronas and Red Bull Racing is partnered with Oracle.
Sponsorship deals within the sport can be a lifeline, providing revenue streams that can fund car design and development, operations and the overall competitive performance. These partnerships too, are not just limited to the teams but to Formula 1 as an entity, which will ultimately continue to enhance its forever-growing global appeal.
Therefore, Formula 1 teams have a complex financial landscape to manage. Having looked at turnover and gross profit, it is obvious that it varies across the grid, there are the wealthier teams such as Mercedes and Red Bull, compared to the smaller teams such as Williams and Haas that perform under a more modest amount of money. The disparity does correlate to success – the more money within a team means more success. However, with that said, all teams must adapt to possible regulatory changes such as the Cost Cap. In Formula 1, money does make the cars go round.