28th November 2016















20th April 2018


Given the announcement that Arsene Wenger is to step down after 22 years in the position of Arsenal manager, we thought it would be a good idea to repeat and update where possible our ‘Goonernomics’ blog article which was first released in October 2017.

There is no doubt that he has been hugely influential in the thinking and development of not only Arsenal but also the Premier League and football in general. However, in recent years the club’s economic position has not been conducive to repeating the dominance evident in the first half of his tenure. We take a look through the economic lens to see why.


It is not our intention to write a ‘blog’ every time a club from the Premier League publishes their latest accounts.  However, in this case we will make an exception – the fortunes of Arsenal regularly crop up as a discussion point when we deliver presentations as part of our work with clients.  Arsenal may not have won the Premier League since the 2003-4 season but after Manchester United, it is the club where the most questions regarding the club’s economic position are forthcoming.

With several well-known “celebrity” fans – Piers Morgan is a regular commentator (and latterly a critic of the club’s manager, Arsene Wenger) – plus Idris Elba, Colin Firth, Joan Collins, Barbara Windsor, Alan Parker, Sam Mendes, Rory McGrath, Nick Hornby and Roger Waters ranking amongst the long-list of high-profile personalities who have pledged allegiance to the North London club, it is not entirely surprising that interest in the club is so high.

The ‘Bank of England’

If we go back almost 100 years to the 1920s, with the club under the innovative stewardship of Herbert Chapman, Arsenal developed a reputation for big spending and for even bigger gate receipts. It wasn’t long before the club became known colloquially as the ‘Bank of England’.  In the minds of the public, this reputation is seemingly an enduring one – even today when people, irrespective of their football allegiance, ask us about our work they often begin with the following assumptive question;

“Well, surely Arsenal must be the best performing club financially….” 

Through the revenue lens

Indeed, when one looks in isolation at the club’s revenue performance over the period 2012-17, one can only be impressed.  The club has produced an absolute increase in revenue of £181m or 74% and furthermore at a compound rate of growth 11.8% per annum.

Fig. 1. Arsenal’s revenue growth profile.

Our clients in the commercial sphere would undoubtedly envy such performance and when viewed through this lens the club’s “Bank of England” reputation would appear to be in safe and secure territory.

However, the great Roberto Goizueta – CEO of Coca-Cola between August 1980 and October 1997 (and surely a candidate for the most outstanding businessman of the 20th Century in producing returns for shareholders over his tenure of close to 7,100%) once said;

“The curse of all curses is the revenue line”

Goizueta was referring to the difficulties managers, owners and executives have in saying “no” to revenue even when it is clearly value-destroying as well as highlighting the dangers of judging the economic health of an organisation purely from the revenue line.  Sadly, and despite the great man’s wise counsel, the myth that all revenue is value-enhancing perpetuates to this day. It is something that is experienced almost daily in business consulting.

Economic Profit – a more demanding measure of performance

We prefer the use of economic profit defined as net operating profit after tax less a charge for ALL the capital used by the organization.  Furthermore, when working with clients, we advocate looking at economic profit over time.

Set out below is a graphic showing the revenue and economic performance over the period 2012 through to 2017:

Fig.2. Over the period 2012-17, revenues equalled £1.9bn. However, there is an improvement in economic performance with the club posting a relatively minor loss of £4.4m in 2017 although over the six years of analysis, the club has produced a total economic loss of £133.8m without any incidence of a surplus.

What is going on here? Despite impressive revenue growth and whilst there is a significant improvement in 2017, the club has not produced a positive economic profit over the last six years.

Often the best way to discern organisational performance at a more detailed level is to analyse the movement across the constituent parts of the economic profit calculation; in this case revenue, costs including taxation, NOPAT, the charge for capital and the resulting economic outcome between the beginning and the end of the analysis period.


Fig.3. The increase in revenue is £181m whilst costs have increased by £175m. The capital charge has increased by £5m which means that there is an overall reduction in economic losses of £1m. Evidently, and more importantly, revenue and costs are broadly in line.

What this evidently illustrates is that the impressive growth in revenue, which amounts to £181m between 2012 and 2017, has been closely matched by an increase in expenditure with costs rising by £175m over the period.  This demonstrates the danger of judging organisational performance on revenues alone as, in this case, we can clearly see that almost all the impressive revenue growth has been taken in expenses.

How Arsenal compares against Tottenham Hotspur and Manchester United

Set out below is the economic performance for each club over the period 2012 through to 2017:

Fig. 4. Arsenal’s economic performance has been one of steady, if shallow, decline since 2010.


Overall, Arsenal’s North London neighbours Tottenham Hotspur (under the excellent stewardship of Mr Levy) is in economic surplus. Over the six years from 2012 through to 2017 the club produced an economic surplus of £73.01m.  By contrast, Arsenal’s economic loss over the last six years is £133.8m despite the club’s significant economic improvement in 2017.

Over the same period, Manchester United posted an economic loss of £80.9m which, given the size of its balance sheet and the geographic spread of its revenue base, is not remotely terminal but nonetheless it will need to be managed going forward (and we have every confidence that it will be).

In terms of economic efficiency, when we look at the relationship between economic profit and revenue, we can see just how far Arsenal is behind both its North London rivals and its traditional Mancunian adversary.

Fig. 5. An £8 per £100 of revenue economic differential exists between the North London neighbours.



Nobody is pretending that Arsenal’s economic position is terminal but perhaps this work does shed some light on Arsene Wenger’s apparent reluctance to spend aggressively in the transfer market over recent years.  Furthermore, there is evidence in the most recent numbers that economic performance is improving. Whether it will prompt the board to revise the club’s transfer policy remains to be seen. Perhaps the new manager will be more persuasive in dealings within the boardroom.

All that said, from our other work we have seen that in the first year of a new domestic TV deal, economic performance across the entire Premier League does improve, usually for a solitary season before normal service is resumed and the trend reverts into more challenging economic territory in the subsequent years of the TV contract cycle. Given the latest round of TV contract dealings, the next 5 years will present some significant challenges.

Also, the gap between Tottenham Hotspur’s 6-year track record of economic profit and Arsenal’s 6-year total stands at £206.43m –  a sum that is more than enough to purchase two decent central defenders or perhaps the more productive half of a certain Lionel Messi. This is an economic differential that may shrink in time depending on how Spurs fare with the financing of its new stadium but is does illustrate the current divide between the two clubs in terms of economic performance.

Against this background (and again stressing that the position is certainly not terminal), the club’s reputation as English football’s “Bank of England” and the reasons why Arsene Wenger was latterly hard-pressed in attempting to overhaul the dominance of the Manchester and West London Premier League clubs requires a degree of re-evaluation. In our opinion he has done a fine job and a Europa League triumph would indeed be a fitting conclusion.














18th April 2018


A week ago, Tesco plc announced its results for the 52 weeks ended the 24th February 2018. As is the usual practice these days, the breakfast television programmes featured numerous discussions with retail and financial pundits as the numbers were digested and dissected. However, it became very apparent that the talking heads were very wide of the mark in assessing Tesco’s performance as their wisdom seems to collectively rest on two in-going principles;

  • Earnings performance is a good indicator of the overall economic performance of Tesco.
  • All parts of the “market” are economically attractive and consequently a “high market share” must be a good thing.

Both of these assertions or beliefs are highly dubious.


On 21st July 2014, Tesco replaced its previous CEO, Philip Clarke.  On that day the share price closed at £2.88.  Within weeks Dave Lewis, previously of Unilever, was appointed as CEO and by the 1st September he was at his desk, presumably ready for the challenges ahead.

At the time of writing, on the back of what appears to be an encouraging set of results, the Tesco share price has risen to £2.35.  So almost 4 years since the Board replaced one CEO, presumably because of a lack of share price appreciation, the shares are still 53p or 18.8% lower than they were on the date when Philip Clarke left the business.  Against this background, talk of a recovery should perhaps be more a little more circumspect…

Of course, the shareholder perspective is rarely touched upon by the media – probably because it appears a little “dry” or not even newsworthy.  From our perspective, this has always seemed a little odd. Tesco’s shares reside in most of the corporate and personal pension plans in existence in the UK so there is a good case for Tesco’s capital market performance to garner a higher profile.

Then again, perhaps the company does not help itself – for instance, in the Core Purpose and Values section of the company’s website the ‘shareholder’ is not mentioned.

We keep coming back to this point, but the reminder is nonetheless very necessary. If the company is NOT being run for the benefit of the shareholders – who ultimately own the enterprise – then for whose benefit is it being run?

Current performance

Despite all the above, there are tentative signs that Tesco’s performance, whilst not in economically positive territory, is nonetheless improving.

By way of background, we believe that value is created by investing capital and generating a return greater than the cost of that capital.  Furthermore, we believe that economic profit, defined as net operating profit less a charge for all the capital used by the business, is the best metric to fulfil such a definition and consequently is the best surrogate over time, for the trajectory of the share price.

Set out below is the economic profit performance for Tesco split into the constituent parts of the calculation.

In the year to February 2018 the company posted an economic loss of £958m, up £1,015m on the loss of £1,973m for the year to Feb 2017.

According to the ‘experts’, the company is well on its way to recovery. However, the economic picture highlights an economic loss of close to £1bn based on the latest full year accounts.

In 2011/12, Tesco produced an economic profit of £398m from a NOPAT (Net Operating Profit After Tax – see methodology) of £3,191m and a capital charge of £2,793m.   Interestingly, in the latest results for 2017/18, the company produced an economic loss of £958m from a NOPAT of £1,815m and a capital charge of £2,773m.

Therefore, despite all the changes initiated by the CEO Dave Lewis, the capital charge has barely changed over the intervening six years having remained around the £2.7bn – £2.8bn level.

Or to put it another way, if Tesco is to become economically neutral with its current capital base then NOPAT must rise by £958m – or 52.7%.

Whilst we are encouraged by the latest numbers (against a backdrop of financial carnage throughout UK retail, the effects of Brexit etc) perhaps a more sobering assessment of the company’s recovery to a position of economic surplus given the above is required?

Looking forward

In all sincerity, we wish the company and its management team every success.  Indeed, from an earnings perspective the business would be judged as doing well.

However, we know that beneath the surface there will be a mix of business areas exhibiting value-creation and value-destruction, each aspect of which demands a very different strategic and operational approach.

From experience, we would not be surprised if capital is being allocated to activities and areas that are indeed value-destroying and, more worryingly, management is being incentivised to do things contrary to the interests of the shareholder.

As such, the resulting economic performance will reflect the imbalance created by the opposing value dynamics. Commonly, the executive team will be unaware of this in their own business and indeed of that of their competitors. It is extremely difficult to manage what is not seen…

We also know that strategies fail to generate value and returns for shareholders because of a combination of the following:

  1. Corporate and business objectives need to be aligned with value.
  2. Management needs better visibility of the sources and drivers of value creation and destruction across and within the various businesses. This should inform strategies and management priorities and also the trade-off between growth and profitability.
  3. The strategy and execution process needs to be more value-based in order to drive value creation
  4. Key managers need to have the “skill and will” to manage for value. Value-based managers are trained, not born.
  5. Blockages to value creation in areas such as structure, roles, responsibilities, management reward and management information need to be identified and removed.
  6. Communications – both internally and to the stock market – need to become more closely aligned with value creation

None are sufficient on their own – all are essential ingredients.

So, go and compare the above six points with the content of Tesco’s latest company report. You will find that none of the above feature. Not that it comes as a surprise.

We have previously written about Tesco and we find ourselves returning to the same issue –  the vision is still blurred with the company stumbling around the depths of negative economic performance. Given the established correlation between positive economic performance and increasing total shareholder returns, it can only be in Tesco’s interest to grasp the value-driven nettle.
















12th April 2018


“We’re flawed because we want so much more. We’re ruined because we get these things and wish for what we had.” — Don Draper, partner in the fictional Sterling Cooper advertising agency.


The above quote is taken from the Mad Men series which charted the trials and tribulations of a Madison Avenue advertising agency as the partners and employees negotiated the twists, turns and social upheavals of the 1960s.

The advertising agency ‘model’ as it was then consisted of creative and media buying with a smattering of in-house research. Major consumer research studies were usually conducted by specialist research companies. Many agencies tended to focus on a creative specialism eg print or TV. Public Relations was a separate and insular business sector. Thus the ‘communications’ ecosystem was a fragmented and highly inefficient challenge for major advertisers in terms of  operational and cost management, particularly for multi-national companies where the duplication of effort and skills from various sub-contractors and suppliers made herding cats look easy.

Martin Sorrell changed all that. His vision was to service multi-national clients with the complete communication package including research, creative, media buying, Public Relations, evaluation and even audience measurement under one roof – the one-stop shop. After a turbulent transformation into the advertising and communications markets (buying JWT,  a global recession and the subsequent heavy cost of acquiring Ogilvy & Mather), the manufacturer of supermarket trolleys and baskets known as Wire and Plastic Products Ltd eventually grew into the multi-national, multi-faceted behemoth that we know today. Consequently, Sir Martin Sorrell is quite rightly recognised as one of the most influential figures in the history of advertising.

Today, WPP is making headlines but not necessarily for the right reasons. Indeed, the rumblings of discontent have been evident since 2012 when Sir Martin’s £12m+ pay award was rejected by shareholders. The general impression is that the boardroom has not been a happy place for some time. The evidence strongly suggests that the private equity-level remuneration that Sir Martin has sought is not being matched by private equity-level performance.

Certainly, shareholders have seen a level of under-performance relative to peers in recent years.

Total Shareholder Return (TSR) re-based to 100 through to the end March 2018

Whilst the advertising/communications sector is particularly sensitive to the cyclical nature of the global economy, WPP’s total shareholder return performance has declined well ahead of the markets in a period of rising interest rates and increasing noise around global trading tariffs.  From 2016, the recent underperformance when compared with Interpublic – a close competitor – is marked.

The irony that permeates the current position is at odds with the very core competency of the WPP empire – communication.

The latest WPP company report offers the following;

‘Our goal remains to be the world’s most admired, creative and respected communications services advisor to global, multinational, regional and local companies. To that end, we have four core strategic priorities:

  1. Advance the practice of ‘horizontality’ (connected know-how) by ensuring our people work together for the maximum benefit of clients: through cross-Group Communities and Practices, Global Client Teams, and Regional, Sub-Regional and Country Managers.
  2. Increase the combined geographic share of revenues from the faster-growing markets of Asia Pacific, Latin America, Africa & Middle East and Central & Eastern Europe to 40-45% of revenues.
  3. Increase the share of revenues from new media to 40-45% of revenues.
  4. Maintain the share of more measurable advertising and marketing services – such as data investment management and direct, digital and interactive – at 50% of revenues, with a focus on the application of technology, data and content. 

And so, we find ourselves somewhat puzzled by the arch-communicator regarding the ‘message’. For example, where is the strategic prioritisation in terms of shareholder returns? Indeed, for whose benefit is the company being run for, if not for the investors?

Furthermore, how do clients and shareholders measure or benchmark ‘maximum benefit’?

Indeed, the statisticians at subsidiary companies Kantar TNS and Millward Brown must be tearing their hair out at the arbitrary 40-45% share of revenues from everywhere other than the USA. A 5% differential can be anywhere between £0 and £760m…

Finally, the 50% revenue share from the advertising and marketing services element of the business does not address the question of the proportion of that revenue which is profitable? Certainly, Kantar Futures would have us believe that all revenue growth is good (Follow the Money, 2018) because demand delivers dollars etc. Of course, taking an economic perspective negates much of demand-driven dynamics when it comes to revenue growth. Value engines within business operations need to be carefully nurtured and managed with consistent measurement and sensible strategic deployment. Blind revenue growth is the root of value destruction and ultimate elimination eg Enron, Carillion et al. Perhaps not quite the sound advice to be giving to clients.

A business based around the art of communication seems to have lost its way. Our view is that the turmoil surrounding Sir Martin’s tenure is more of a strategic shift than a disagreement about expenses. The unique appeal of the one-stop shop model is losing its allure as others replicate it (Dentsu, Interpublic, Omnicom and Publicis) or even execute it in a better form than the originator. For some, the local independent creative/media shop provides a more nuanced approach to the demands of single country markets.

For the one-stop shop providers the era of creating value through acquisition coupled with fierce cost control is over. Those private equity-level returns have been nibbled away by diminished acquisition opportunities and the ingress of social media as stand-alone advertising platforms. More recently, the digitalisation of advertising has enabled some lawn-parking by the global consultative herd. The conversation surrounding WPP is not one of value creation for the shareholder. The message that emerges is muddled and difficult to understand. The capital markets seem to agree.

And as the fictional Don Draper said in a pitch to an advertising prospect, ‘If you don’t like what’s being said, change the conversation’. Until Sir Martin’s position is clarified, that might be difficult.






Previous Entries

14th February 2018In Case of Emergency – Premier League’s UK TV rights auction comes up short

7th February 2018 – Lost in Transmission – Top Premier League clubs look beyond domestic TV rights

4th December 2017A Billion here, a Billion there… – The Premier League reaches a major milestone, quietly…

25th November 2017Getting out of Toon – Is Mike Ashley pitching the sale price of Newcastle United at the right level?

16th October 2017 – Goonernomics. How the ‘Bank of England’ club falls short of its North London neighbour.

25th September 2017 – Highlights. More record-breaking numbers from the biggest football club in the land, but no economic profit…

23rd September 2017Football’s Economic Back Pass. A guest blog for the Soccernomics website

12th September 2017 – Crystal Balls-up. Changing strategic direction is not a good idea when you haven’t looked at the economics.

27th July 2017Football’s Summer of Money and the £65 pint of beer. The sport that just can’t spend enough.

11th July 2017Football Special. Observations following the launch of ‘We’re So Rich…’

9th May 2017Illuminating, non? Political energy lacks vision.

2nd March 2017Claudio’s Burden. The price of failure outweighs the price of success.

12th January 2017Shopping for Godot.  A never-ending quest for value in Retail.

27th December 2016Reaching for Sky. Is Rupert Murdoch’s £10.75 per share a fair price?

6th December 2016Auld Lang Syne. A reminder from history of the damage that poor financial planning can cause.

1st December 2016Fork Handles? Four Candles? Tesco’s blurred strategic vision.

27th November 2016Football’s Instant Replay. Financial warning signals for the top English Premier League clubs.