20th November 2018
The Premier League continues to accumulate revenue records with almost monotonous regularity. However, is there a direct link between the wealth of clubs and on-pitch performance? Our work suggests that the relationship between money and playing performance is more complex than a simple linear proposition.
For example, the top 6 clubs by revenue i.e. Arsenal, Chelsea, Liverpool, Manchester City, Manchester United and Tottenham Hotspur, despite producing positive “profit before tax” numbers, have not achieved a collective economic profit since 2009. Chelsea and Manchester City are collectively responsible for £1.3bn of the £1.9bn of economic losses accumulated in the division since 2009.
The notion that the Premier League, with its current economics, is the modern equivalent of the “Gold Rush” is quite simply wrong. The record shows that over a period of 9 years, owners have given their wealth to other stakeholders to the tune of £1.9bn, predominantly to players and their agents. This is despite a rate of revenue growth that most other industries can only dream of.
By developing the Economic Profit concept further, we believe that valuable and more detailed financial insights can be uncovered by benchmarking all the clubs using a single index. Accordingly, we developed the vysyble Football Profitability Index® (FPI) which measures the economic efficiency of each club based on the simple relationship between revenue generated and economic profit. In other words, how much revenue is actually translated into an economic surplus?
It is expressed as EP/R ®.
For instance, an FPI value of 100 represents a break-even position i.e. £0 economic profit/loss per £100 of revenue. An FPI value of 95 represents an economic loss of £5 per £100 of revenue i.e. 95-100. An FPI value of 105 represents an economic profit of £5 per £100 of revenue ie 105-100.
The index reveals some very interesting features about the inherent dynamics within the Premier League particularly when it comes to the business of relegation. The following table shows each of the three clubs at the bottom of the Premier League from 2009 to 2017 with their FPI values and FPI ranking within the Premier League division.
If the top 6 clubs by revenue are excluded from the analysis, then we see that the lowest-ranking clubs by FPI value – and therefore the most economically inefficient clubs – have been relegated every season for the last five seasons when accounts have been available. As a matter of interest, the clubs that were ranked by FPI value in 19th position in 2016 and 20th position in 2017 were Chelsea and Manchester City respectively.
An alternative view is to take the same table but to highlight the most economically efficient clubs in the division.
When viewed through this lens, in four of the last nine seasons the most economically efficient club has been relegated.
Surely something is amiss?
We do not think so. In fact, we think that there are a number of factors at play here.
As we have already mentioned and despite impressive revenue growth, the Premier League is economically-challenged primarily, but not exclusively, to Chelsea and Manchester City; two clubs which have in effect warped football’s financial fabric in a similar manner to that of a black hole warping time and space. In the desire to remain competitive and attract the “best” players, other clubs have been sucked into the gravitational pull of ever-increasing player wages which in turn raises costs. The dynamic derives its energy source principally from the increasing TV revenues.
The relegated clubs with low index values e.g. QPR, Aston Villa, Sunderland etc have over-extended themselves and in effect taken on commitments way beyond their economic capacity in a “dash for growth” that has unfortunately failed with damning consequences. Getting too close to the financial “black hole” can have very serious consequences.
The opposite position is aptly illustrated by those clubs that have chosen to preserve their financial sanity over and above any notion of staying in the Premier League ‘at all costs’. Whilst the lucrative revenues of the Premier League has clouded rational thought on occasion, the preservation of the balance sheet for certain clubs is paramount, regardless of performance on the pitch. In this regard, the business strategy is both sensible and pragmatic and accommodates a longer-term view in that the ability to return and fight another day prevails.
Indeed, the combination of relegation with a healthy balance sheet provides for an increasingly quicker return back to the top flight when compared with clubs with damaged and battered balance sheets, as Burnley FC has ably demonstrated on three occasions since 2009.
Given the index output, is it possible to predict the relegation candidates of the future? The very nature of reporting accounts means that the ‘view’ is almost out of date as soon as it is published as there is usually a 6-9 month period after the accounting year-end before the numbers are released to the public.
Occasionally there are pointers. For example, there is an inevitable decline in economic performance over time once clubs have experienced a first season in the Premier League following promotion and the accompanying wall of revenue money when compared to Championship-level earnings. However, with one-third of promoted clubs experiencing relegation during that first season, the financial fillip of promotion can be relatively short.
Over longer periods of time, clubs eventually fall into a phase that we term ‘economic exhaustion’ whereby the annual FPI value either consistently falls albeit with small increments or sits on the breakeven line until the club simply does not have the economic means to compete and is subsequently relegated.
Stoke City’s recently released 2017-18 accounts display all the hallmarks of a club that has fallen into this trap with a marginally positive (ie above 100) FPI performance from 2013 up to 2016-17 before sharply dropping in 2017-18 with an FPI value of 72.49. The club was thus operating at a much higher level of economic inefficiency than big-spending Manchester City (FPI value 89.30) during its relegation season.
It would seem that the club’s undoing was a combination of rising wages and a drop in revenue which realised an economic loss of £35m despite 2017-18 being the second year of the usual three-year domestic TV cycle.
Whether or not Stoke City has the dubious honour of the lowest FPI value in the Premier League for 2017-18 remains to be seen, but it is the lowest value achieved by a non-top 6 club since Aston Villa’s 65.82 in 2015-16. Nevertheless, Stoke City shows that the relationship between poor economic performance and relegation is maintained.
Conversely, the proposition that the top performing club in economic profit terms is a candidate for relegation is much more problematical and less consistent.
Overall, whilst it might seem obvious that poor financial management leads to poor on-pitch performance, the continued and widespread use of the revenue number as a measure of financial performance provides for a wholly misleading view. The desire to maintain Premier League status and thus revenues has driven a number of clubs beyond the margins of financial safety and without consideration for the overall financial wellbeing of the club.
Nevertheless, the Football Profitability Index has shown that what matters off the pitch can be just as important as what matters on it. With that in mind, it may be that the most important position in a football club is not the manager/coach but the Finance Director.
9th October 2018
As much as we get asked the question ‘What do you do?’ we invariably find ourselves explaining why we do it. When we mention Matchday Data as a constituent element in that explanation, the listener usually expresses a modicum of surprise as to why it hasn’t been done before.
For those of you who don’t know, Matchday Data is our summarised financial preview of each Premier League fixture in an easy-to-read format. Hitherto, it is distributed via Twitter (@vysyble).
An example of the Matchday Data format.
The reason ‘why’ is very simple – a belief in transparency combined with a deep love of the beautiful game. The more we analyse football club financials, the more obvious it becomes to us that the economic performance of football clubs is a key ingredient in determining on-the-pitch outcomes. Indeed, within our work we have found a more than casual relationship between relegation from the Premier League and the condition of a club’s finances and its economic performance. A lot of football fans tell us that intuitively they had always believed this to be the case and accordingly the club’s financial strategy has to play a part in the overall “football success” equation.
In our consulting activities we frequently use examples from football to explain specific points or to highlight aspects of a particular business strategy or a market dynamic. The reaction is usually one of surprise. The wider public, along with some within the media, understandably conflates marketing reach with value creation and consequently perceives football to be highly profitable and awash with cash. Well, one of these assumptions is correct but sadly it is not the former. Football is a sport that does capture attention but increasingly we find that the hidden recesses of its financial picture is gaining more interest as we continue to dig deep.
The economic profit metric is central to what we do because it has repeatedly proven to be the most informative and rigorous benchmark in measuring business performance. Furthermore, when the principles of economic profit are applied to business strategy, the transformation can be spectacular. The few business tomes that do mention economic profit usually cite the example of Coca-Cola under the stewardship of Robert Goizueta. The late Mr. Goizueta implemented an economic profit-driven business strategy under which the company’s share price grew a not-so-modest 7,200% during his tenure.
English football has changed markedly since the formation of the Premier League in 1992. The senior division has capitalised upon its appeal through successive and lucrative media rights deals to the extent that annual Premier League club revenues exceed £4.5bn (2016-17). All clubs that now participate in the Premier League will turn over a 9-figure sum so from a business perspective, these are significant economic entities managing huge budgets and commitments.
Whether the league itself is more competitive is perhaps open to question – since the formation of the EPL in 1992-93, some 25 seasons ago, six clubs have won the title of which two – Leicester City and Blackburn Rovers – managed a single success. To put it another way, in 23 of the last 25 seasons the title has been shared between four clubs; Arsenal, Chelsea, Manchester City and Manchester United. Contrast this with the old English First Division over the previous 25-season period from 1967 through to the formation of the Premier League in 1992 – nine clubs in total won the title with six accounting for 21 successful campaigns. The full list is as follows; Arsenal (1971, 1989, 1991), Aston Villa (1981), Derby County (1972 & 1975), Everton (1970, 1985, 1987), Leeds United (1969, 1974, 1992), Liverpool (1973, 1976, 1977, 1979, 1980, 1982-84, 1986, 1988, 1990), Manchester City (1968), Manchester United (1967) and Nottingham Forest (1978).
In more recent times, the biggest clubs by revenue (Manchester United and Manchester City) enjoy a combined turnover in excess of £1bn (2017-18 accounts: Manchester United £590.02m, Manchester City £500.46m). The remaining members of the so-called ‘Top 6/Big 6’ group – Arsenal, Liverpool, Chelsea and Tottenham Hotspur – earned £1.46bn in revenue in 2016-17. In fact, the biggest 6 revenue-earning clubs account for almost 55% of total divisional revenues. Dominance on the pitch starts from financial imbalances off it or, to put it another way, perhaps the financial football playing field is not as “level” as some would have you believe.
Despite this, the economic profit picture for the six clubs is poor. As a group, it has failed to achieve a single economic profit since we started monitoring the data in 2009. The lack of an economic profit means that as businesses they are not covering all of the costs of doing business – including tax and a charge for ALL of the capital required by the clubs.
At a more granular level, Chelsea and Manchester City have failed to post an economic profit since 2009, Arsenal since 2010 and Manchester United since 2013. Indeed, given the 54 opportunities to achieve an economic profit between 2009-2017 for the six clubs, the reality is that there have been only 11 instances, 7 of which can be attributed to Tottenham Hotspur (4) and Manchester United (3).
Unfortunately, the commonly used Pre-Tax profit number does not go deep enough into the performance of the business as it does not cover ALL costs and charges. Viewed through the Pre-Tax lens one might conclude that Arsenal is highly successful off-the-pitch (£230m of accumulated Pre-Tax profits since 2009) but then add in the tax and a charge for all the capital used by the club and the position changes to a cumulative economic loss of -£133.42m. Sadly, this is not an untypical situation.
Both Manchester City and Manchester United have released their 2017-18 accounts. Combined Pre-Tax profits = £36.54m. Combined Economic Profits = -£94.61m
There are indeed some clubs that are run exceptionally well and achieve economic profit more often than not – Tottenham Hotspur as mentioned is a notable example along with Burnley and Everton. Despite the rises in media rights revenue, football is, even at the uppermost levels of the game, generally an economic loss-generating enterprise.
It is this point which persuades us to provide supporters and fans with the financial data associated with their club and others within the division on a regular basis. It could be argued that it is not in the interests of the Premier League to divulge what has been a fairly poor run of club financial results over the last 9 years, nor is it in its interests to have this information presented back to supporters on a regular and weekly basis. Certainly, our own experience in dealing with the Premier League (and the EFL) is that it would very much like us and our work to go away.
Nevertheless, in the interests of transparency, it is the right thing to do in order to raise awareness amongst the faithful who spend their hard-earned money supporting their club. The underlying economic profit patterns reveal just how vulnerable this sporting ecosystem really is to the whims of the so-called “richer” clubs. In addition, we feel that it is vitally important that there is a mechanism by which fans can see just how their own club is faring against the opposition both on and off the pitch and on a regular basis too.
The proof is that Matchday Data has become the most interactive thing that we do online. Whilst we might not currently enjoy thousands of followers on Twitter (our output is predominantly about finance and company performance…), the achieved impression (no. of eyeballs) and engagement levels have been steadily increasing since the start of the season. We also follow each weekend with the Premier League table along with a highlighted economic/financial theme. The table, it is often said, never lies, but then neither does the economic performance.
We like to think that the message is starting to get through that the financial position of the clubs will dictate the future direction of English and European football. La Liga clubs playing in the US are doing it for a reason that is purely financial. A European Super League will happen because of the potential financial gains to those clubs that found it.
Long gone are the days of parochial patronage. Today’s football is about social media reach, Asian fan numbers, sponsorship deals and marketing platforms. At least with the Matchday Data service, the average supporter can see just how that money is being spent/squandered and just how predictable the Premier League has become as a result.
17th August 2018
So, La Liga’s gone and done it. League games. In the US.
The cellphones of Stan, Josh, David, Shahid, John, Joel and Avi (and the rest of Glazers) plus their trusted executive Ed, must have been twitching avidly following La Liga’s announcement. Football is going to America again. But this time it is a Spanish incursion and not the American-owned Premier League clubs which will spread the word in the apparently unconquered land of the free. On this occasion the “Armada” will continue to sail westwards.
Still, the Premier League’s 39th Game concept remains firmly etched into the collective memory as an ill-thought out, poorly conceived idea. However, the Spaniards have gone the whole hog and committed to the real deal rather than the anglicised ersatz version in a push to win hearts and minds.
But, like missionaries planning their land grab of souls in far-off pastures, does it really make sense to have competing themes when the single deity of football can possibly be honoured more efficiently and profitably via one single point of worship i.e. a Super League format?
We’ve written and debated this point ever since we first covered the fiscal intricacies of football in late 2016. In applying basic corporate and economic principles at club level, the Super League format leaps out as an obvious next step and we have repeatedly said so, even in a Forbes article published just seven days ago.
Indeed our own annualised review of the Premier League clubs – ‘We’re So Rich..’ – points directly towards the bigger clubs i.e. the ‘Top 6’, elevating even further away from the pack, driven partly by a need to seek out new and increased revenues in order to fuel consistent economic losses, but also to break away from a competitive format that, in their view, does not bring enough rewards for being better than the rest. Hence the cash grab for international media right earlier this year and the beginnings of a disenfranchisement process regarding the remaining pack of 14. The original founding concept of the English Football League – that of a mutual interest between the clubs is long forgotten.
We made it very clear that we believe that the Premier League is already on the road to its demise. Yesterday’s announcement has reinforced our view.
From a strategic standpoint, La Liga’s announcement is really a prompt to get things moving. It may indeed be the case that those cellphones were already full of text messages hinting or knowingly expressing a view ahead of the official announcement. It comes as no surprise that Relevent, La Liga’s partner in this enterprise, is also behind the International Champions Cup which could, after a couple of drinks and an argument over who is better between Messi and Ronaldo, be seen as a pretend-lets-see-how-it-goes-not-so-sure-super-league-prototype-perhaps-only-in-the-summer kind of tournament.
Whilst there may be a few Spaniards in the works, there could be a few spanners too. Will the United States Soccer Federation allow the presence of the Conquistadors on their own doorstep? Will FIFA step in and if so what action will it take? Will the reaction in Spain and the rest of Europe be negative as it was when the the 39th Game was proposed? In turn, will the top European clubs seek a breakaway? All this and more in next week’s episode…
The situation will be fluid for the weeks and months to come. However, to us the end-game will have two simple outcomes. Firstly, there will be a means whereby the top clubs will be able to make significant profits in either an adaptation of current competitive formats eg a revamped Champions League, or in a new competition ie a Super League with all its protective and commercial traits. The second outcome is the trail of destruction that such developments will leave behind. Local leagues will suffer. Of this we have no doubt, both in terms of quality and financial standing. Again, we have written about this on previous occasions.
Unfortunately, English clubs face further complications from the potential implementation of rules restricting the movement of labour from EU countries once Brexit has been implemented.
Given that the top 6 clubs have occupied the top 6 positions in three of the last four seasons, the smaller clubs must be feeling somewhat disheartened at the prospect of paying inflated prices for players with established international playing records and who also meet the entry and work permit criteria for the soon-to-be EU-free United Kingdom. This, of course, does not pose too much of a problem to the bigger clubs and less so if the competitive landscape presents more lucrative opportunities, whether they be at home or abroad.
It does, though, reinforce the performance gap between the haves and the have nots.
Do we feel vindicated? Not yet, but we can see that the Super League is edging closer to fruition. Even if La Liga gets to stage a game or two in the US, the machinations behind the scenes to push for a more profitable and uniform resolution to the future structure and make-up of the upper tier of European football, driven by the likes of Stan (Arsenal), John (Liverpool), Joel, Avi and their trusted executive Ed (Manchester United) and the other US-owned Premier League clubs (Josh and David at Crystal Palace and Shahid at Fulham – soon to be of Wembley too) will be relentless.
The risks are large as are the rewards for the chosen few. However, in the quest for the conversion of souls, the game is in grave danger of losing its own.
9th August 2018 – Reaching for Sky – the sequel – Latest offer price for satellite TV company is good for shareholders, less so for prospective owners.
8th August 2018 – American Dreams – English Premier League economic dynamics and American money – is a Euro Super League the next step?
3rd August 2018 – Mall Administration – Retail Property Co. bonus payouts at odds with increasing shareholder value.
20th April 2018 – Goonernomics Part Deux – The departure of Arsene Wenger…
18th April 2018 – The Price of Everything – Tesco’s latest numbers offer little in value.
12th April 2018 – Say What? – WPP’s very mixed message.
14th February 2018 – In Case of Emergency – Premier League’s UK TV rights auction comes up short.
4th December 2017 – A Billion here, a Billion there… – The Premier League reaches a major milestone, quietly…
25th November 2017 – Getting 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 2017 – Football’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 2017 – Football’s Summer of Money and the £65 pint of beer. The sport that just can’t spend enough.
11th July 2017 – Football Special. Observations following the launch of ‘We’re So Rich…’
9th May 2017 – Illuminating, non? Political energy lacks vision and power.
2nd March 2017 – Claudio’s Burden. The price of failure outweighs the price of success.
12th January 2017 – Shopping for Godot. A never-ending quest for value in Retail.
27th December 2016 – Reaching for Sky. Is Rupert Murdoch’s £10.75 per share a fair price?
6th December 2016 – Auld Lang Syne. A reminder from history of the damage that poor financial planning can cause.
1st December 2016 – Fork Handles? Four Candles? Tesco’s blurred strategic vision.
27th November 2016 – Football’s Instant Replay. Financial warning signals for the top English Premier League clubs.