When stars endorse brands, it can be lucrative for both the star and the brand. But what happens when there is a scandal?
When sporting giant Adidas terminated its partnership with Kanye West, known legally as Ye, the split proved costly for the German multinational company.
It was also costly for Ye. The severing of ties in October over anti-Semitic remarks made by the star cost Ye his billionaire status.
For Adidas, it lost some of the edge brought by a celebrity who gave its brand the appeal it needed to compete with one of its biggest rivals – Nike.
Ye designed Yeezy trainers for Adidas and the termination of the partnership left the company with unsold stock worth almost $2 billion and the company facing a hit to its operating profit of almost $850 million this year.
Now, Adidas is being sued by investors who claim the firm had known about Ye's controversial behaviour years before it ended their partnership.
They allege Adidas failed to limit financial losses and take precautionary measures to minimise their exposure. But Adidas has rejected these claims as "unfounded".
It had stuck with Ye through other controversies, but the company's past ties with the Nazi regime made it difficult for it to justify its continued support.
The World Jewish Congress has noted that during World War II, Adidas factories "produced supplies and weapons for the Nazi regime, using slave labour".
Adidas was one of a number of brands to desert the rapper. Fashion house Balenciaga did too.
And Yeezy Gap shut down its website with news that The Gap was laying off 1,800 corporate workers.
In its most recent quarter, Gap Inc recorded a 6 per cent drop in net sales and declines across all brand divisions.
While these brands are willing to take more of a hit to their finances than image by dropping Ye, there have been some famous cases where brands have stood by a celebrity who is in trouble – what impact does it have on their bottom line?
And does deserting a celebrity at their lowest point tend to have a negative impact on a brand and the stock market?
According to Griffith University Professor of Marketing François Carrillat, it depends on the severity of the scandal.
Some scandals are relatively minor.
Professor Carrillat would put Britney Spears in that category after she was caught drinking Coca-Cola while signed to rival Pepsi in a reported $US7 million ($10 million) deal in 2001.
"We found that, for what we call benign things like using the competition's product or even saying bad things about the product, the stock market does not react negatively to that," Professor Carrillat said.
That's right — there are examples where celebrities have been dismissive of the products they're endorsing.
"Cristiano Ronaldo was endorsing Coca-Cola and during a press conference, a bottle of Coke was sitting in front of him.
"Then he moved it away from the camera and reporters asked, 'Why did you do that?' and he said, 'Well I think kids should drink water, not soft drinks'," Professor Carrillat said.
Professor Carrillat says the scandal needs to be quite severe to have any impact on the stock market.
"It does react when there's something illegal or something very severe involving physical violence or … doping scandals.
"So, the reaction tends to be very negative to those cases."
Brands are taking a risk, but is it worth it?
It used to be in the 1980s and 1990s that if a brand announced an endorsement deal, the stock market would react positively to the announcement. Not anymore.
Nowadays, there is little to no reaction.
Professor Carrillat puts it down to all the scandals involving celebrities over the years.
"Investors see more of the risk involved with an endorsement … so the stock market basically stays put," he said.
So, why bother with celebrity endorsements?
Well, there are still benefits, including introducing a product to a whole new audience.
"You see that happening a lot in the sports industry when a brand wants to break through into a completely new market in which it has no history or no legitimacy in terms of the technical aspects of the product," Professor Carrillat said.
"A good example of that was Nike with Tiger Woods in the early 2000s. And even before Woods, it was Nike and soccer.
"So, in the 90s Nike was already the number one sports brand in the world, but in soccer, they were not really a player at all.
"And that's the number one sports market in the world. So, what to do about it?
"Instead of slowly building their image, their presence, their product lines, they decided to enter the market with a big boom and they signed an endorsement contract with the Brazilian national soccer team."
The film Air tells the story of Nike breaking into the basketball market in a similar fashion with its deal with Michael Jordan at a time when Adidas and Converse dominated.
How much will a brand pay to secure a star?
Endorsement contracts are usually confidential so there's no saying how much a brand will pay to secure a celebrity.
But Professor Carrillat says there is some data available.
"The investment contract of Nike with Woods was $US100 million in 2000 over five years.
"And some researchers have crunched the numbers and figured out that just with US golf ball sales, which is just a fraction of what they would sell out of the Nike Golf Division, they broke even with Woods."
When a scandal takes hold
Woods had a squeaky-clean image when he signed on with Nike. But that would soon change.
A series of events in December 2009 led to revelations that Woods had had a number of extramarital affairs.
"I was unfaithful. I had affairs. I cheated. What I did is not acceptable, and I am the only person to blame," he admitted in a televised press conference in February 2010.
Professor Carrillat said it did cost Nike.
"But overall, that did not really annihilate much of the value brought by Woods.
"It's estimated that the scandal cost $US1.5 million in golf ball profit in the US for Nike.
"So, it's like 1.5 per cent of profit got eaten away by the scandal.
"When it's really difficult for the brand is when the scandal is related to the authenticity of the athlete's performance.
"In Woods's case, probably not. And so that's why Nike, for example, they stuck with Woods."
How should a brand react when a star is caught up in a scandal?
Professor Carrillat said the Woods scandal set a precedent for celebrity contracts, which these days have morality clauses.
But how should a brand react if their endorser is caught in a scandal?
"What we found out is that when the scandal is very severe on our scale, just around the being charged with sexual assault type of severity, it was a threshold at which dismissing became worth it.
"So, the market reacts positively to the dismissal of an endorser who has done something quite severe even if it's not proven yet, but being charged with it is enough.
"Everything below that, which is quite a lot of scandals, about 75 per cent of the scandals would be below that degree of severity, dismissing is not worth it.
"In fact, when the scandal is very benign and the firm supports the endorser, it can bring a positive reaction.
"For example, Michael Phelps, there were pictures of him just after the Beijing Olympics [in 2008] smoking marijuana.
"And so, I think it was Kellogg's who dismissed him."
Professor Carrillat said there were many voices on social media saying he was one of the world's greatest athletes and he shouldn't have been dismissed after making one mistake.
"After that, Omega stated their support. They didn't condone the behaviour but said they decided to stick by Michael Phelps. [They said] he made one mistake, but he's still a great champion and they saw a boost in their market value."
So, is it worth it for brands to take on celebrities?
"It's worth it if you do it well and you don't pay too much for it," Professor Carrillat said.
"I don't think overall it's a silver bullet."
