Roula Khalaf, the esteemed Editor of the Financial Times, shares her insights in this weekly newsletter, highlighting critical voices within the sports industry concerning the evolving trade landscape.

Gerry Cardinale, the managing partner and chief investment officer of RedBird Capital Partners, which owns the renowned AC Milan football club, has expressed optimism about the resilience of the sports sector in the face of the new U.S. tariff regime. He acknowledged, however, that if the ongoing trade tensions escalate, the industry could suffer from a detrimental decline in consumer confidence and spending.

In his recent statements, Cardinale reflected on the indirect impacts of the trade war initiated by U.S. President Donald Trump. He noted that while sports operations have historically demonstrated resilience during economic downturns, including the global financial crisis of 2008 and the unprecedented challenges posed by the coronavirus pandemic, there are still potential pitfalls ahead. The tariffs, particularly those imposed on Chinese exports to the U.S., could ultimately squeeze consumer wallets, limiting their discretionary spending.

On April 9, President Trump imposed a staggering 125 percent tariff on all Chinese exports to the U.S., prompting a retaliatory move from Beijing with similar levies on U.S. goods. Although many tariffs on other countries have been postponed, a 10 percent levy remains on various goods from countries outside of China, alongside heightened duties on imports of cars, steel, and aluminum, creating a complex landscape for businesses.

Cardinale highlighted the importance of examining the value chain to fully comprehend the ramifications of a tariff war on the sports ecosystem. He stated, The pressure point in the sports ecosystem is going to be really around the consumer first and foremost. As consumer spending takes a hit, particularly in entertainment sectors like sports, there is a likelihood of reduced spending on tickets and media subscriptions. Yet, he remains hopeful that wealthier consumers may continue to indulge in high-end hospitality packages and VIP experiences, indicating a disparity in how different income brackets are affected by the tariff situation.

At the very high premium end, I think thats relatively income inelastic, Cardinale pointed out, suggesting that those who could afford premium prices before the tariffs would likely still bear the costs afterward. In contrast, for average consumers, who rely significantly on their discretionary income, Cardinale cautioned, Theyre likely to cut back. Thatll be an issue that will ripple through the value chain.

This outlook resonates with a broader sentiment in the sports sector, which generally views itself as somewhat insulated from the direct impacts of tariffs, given their focus on long-term contracts for media rights and sponsorships, as well as ticket sales. However, there are growing concerns over the potential effects that new tariffs may have on merchandise sales and ongoing or planned stadium projects.

Vasu Kulkarni, a partner at Courtside Ventures, a fund specializing in early-stage sports investments, echoed Cardinale's sentiments about the unwavering loyalty of fans, stating, Nobody stops watching sports, no matter how bad things get.

Recently, private investment firm Arctos Partners released a report asserting that the sports industry enjoys a unique characteristic: it exhibits a lack of correlation with the wider economy, meaning that teams' success does not necessarily mirror economic downturns. This insight has been pivotal for investors, as Arctos has built a diverse portfolio, including minority stakes in prominent franchises such as the Los Angeles Dodgers and the Golden State Warriors.

Kulkarni expressed confidence that high-net-worth individuals and professional sports investors would continue to invest heavily in the field, especially in light of the financial turmoil many sports organizations faced during the pandemic. We believe theres always five billionaires who are in line to purchase the next sports team that comes up, he stated, suggesting that the allure of sports investments remains robust.

While Cardinale has previously warned of massively inflated valuations within the sports industry, he believes that the fundamental value of these franchises will likely hold steady. However, he acknowledged the possibility that the appetite among wealthy investors could temper, a shift he views as potentially beneficial for the market's health. Guys who jump in because everything keeps going up theyre going to be the first to leave, he suggested.

Arctoss report further cautioned that sports operations looking to make substantial physical investments, such as stadium developments, may encounter elevated risks due to the current tariff regime. While projects currently under construction are expected to endure without significant financial shocks, those still in the early planning phases could face cost pressures as supply chains remain unestablished. This uncertainty adds another layer of complexity for sports teams, as these developments are often crucial for increasing revenue streams.