7th February 2023


7th February 2023

January. Arguably the most miserable month of the year but then there is always the engaging distraction of watching events unfold in the football transfer market. This time around it has been something of a bumper period; Premier League clubs spent (without considering income from sales) £755.9m plus add-ons and other fees, and by way of context, the total net spend for the 2017-18 season which includes both summer and winter transfer windows was ‘just’ £754.1m.

Notwithstanding income due from player sales – £100.2m – we arrive at an eye-watering record net spend of £655.7m for the post-Christmas period. The previous transfer window of the summer of 2022 resulted in a net spend of £1.168bn. Therefore, the nation’s stand-out sporting division has accumulated a record-breaking net spend of £1.824bn in a single season, almost doubling the previous high of £918.8m in 2018-19.

The focus during both transfer windows has been drawn towards Chelsea and their new American owners who have been particularly bold and ambitious in spending a net £503.9m in a single season on new and allegedly improved talent.

At this point we recall Mr. Richard Scudamore’s aspiration, expressed in the early days of his Premier League stewardship, to attract American investment and ownership into the division with a view to leveraging their financial and marketing expertise.  In due course, it was hoped that they would expand both the reach and financial worth of England’s senior clubs. Despite some American disruption from Manchester and Liverpool in trying to take their jumpers and move onto a seemingly bigger and more lucrative pitch called the European Super League, the new executive team at Chelsea have made quite the impression so far but not necessarily with Mr Scudamore’s aspirations in mind..

Much of the recent attention has focused on the frankly ridiculous commentary relating to amortisation with Chelsea offering longer contracts with the apparent intention of spreading the cost of that contract over an extended period. The result of this practice is to reduce any short-term year-by-year potential impact regarding FFP (Financial Fair Play). 

Of course, despite one BBC journalist describing this as “brilliant”, there is a rather obvious downside in that if a player is sold, say three years into an eight-year contract, then this practice may come to haunt them because the asset (in this case the player) may not have been written down enough to match the lower market value and hence the potential sale could crystallise a loss – in other words they may have under-amortised the asset.

We are not saying or seeking to imply that amortisation in itself is a bad thing. We just don’t happen to believe that the true problems evident within the game stem from whether Chelsea’s amortisation policy differs from that of Aston Villa or Arsenal or indeed any other football club.

Nevertheless, whatever the length of the contract, it is highly unlikely that Chelsea’s new employees are going to be paid at national minimum wage levels. Thus, the annual staff cost for the club could rise significantly, which again could be an issue further down the track as UEFA seek to implement restrictions on squad operational costs vs revenue.

Furthermore, as the graphic below demonstrates, even before the takeover, Chelsea have had the highest staff costs to revenue ratio within the Premier League Big 6 group in recent years (i.e. before the club was sold by Mr. Abramovitch.)

When Chelsea spent money on talent in net terms, the club under Abramovich usually achieved an economic loss (see graphic below). 

We expect that the 2021-22 economic loss to be significantly less than the previous year but given that Chelsea has failed to achieve an economic surplus at any point since 2008-9, it is highly unlikely that an economic profit will materialise which, in a rational, logical market, will affect the ultimate valuation.  In fact, the cumulative economic loss over the period 2008-9 through to 2020-21 comes to £1.001bn.

However, logic also tells us that the potential is there for Chelsea to achieve the biggest ever economic loss in football once again (the club’s £207.51m economic loss in 2020-21 is the current record) driven by the purchase price of £2.5bn plus the club’s recent acquisitions becoming part of the overall quantum of Invested Capital, unless there is a radical upturn in revenue and operational efficiency. And this is Chelsea’s challenge going forward.

Our previous graphic illustrating the staff costs to revenue ratio shows Chelsea at the higher end of the Big 6 pack in recent years. Behind the data is a consistent trend of higher staff costs and lower revenues relative to the likes of the two Manchester clubs (City in more recent years) and Liverpool.

The lower revenue level can be seen below…

The new Chelsea regime has referred to a new stadium which through a narrow revenue lens could improve matters given that the club’s annual matchday revenue is some £50m short of Manchester United’s matchday income.  However, the considerable funds required to fund such a project would add to the invested capital amount and thus further increase the annual capital charge which in turn would depress economic performance even more. It is certainly not cheap or easy to build a new stadium in one of the most expensive zip/post codes on the planet for real estate.  

Other options for increasing revenue include enhanced sponsorship agreements and partnerships. After all, making the headlines can be productive in other ways. Also, there is the increase in broadcast revenues expected from the Premier League’s improved international contracts. However, it is very difficult to see any of these options getting close to covering the transfer outlay that we’ve seen so far not only from Chelsea but from the Premier League as a whole.  Furthermore, as we have highlighted elsewhere, Comcast recently wrote off $8.5bn concerning the Sky business. According to Comcast’s own narrative, this write-down is a consequence of a fall in projected revenue.

In Chelsea’s case, the club’s total revenue over the period 2018-21 came to £1.748bn. Our own transfer data (before add-ons, agent fees and other additional charges) points to Chelsea’s net expenditure over the same period as £293m. Therefore, the ratio of net spend to revenue is 16.7%. If, for the sake of argument, this ratio is to be maintained in 2022-23, given a net spend of £503.9m, the club’s annual revenue would have to be £3.017bn which is a far cry from the stated revenue in the most recently released financial statements (for the year ended 30 June 2021) of £437m.

At divisional level, the issue for the Premier League becomes even more apparent…

If the 2022-23 net spend of £1.824bn represents 29.9% of an estimated £6.1bn revenue then to revert to the Premier League 2015-22 average of 15.43% between 2015-22, the divisional revenue level would have to hit £11.821bn for 2022-23.

We can safely say that whilst Chelsea’s transfer adventure will challenge not only the balance sheet but also the club’s strategic path, the wider issue is that, to us at least, the Premier Leagues clubs have taken what can only be described as a “very brave and aggressive” step into the future given the above calculation.

Of course, the psychology may be that a regulator is imminent as are UEFA’s new financial regulations and this most recent spending spree is a means of stockpiling talent before the shop shuts. From a financial perspective, it looks like a dangerous high wire financial experiment and given even more recent events concerning financial behaviour emanating from Manchester, the credibility of what has been so far a marketing and image-exporting phenomenon is now under serious scrutiny for a lack of timely probity.

For Chelsea’s new owners, it may spur them on to go further and ‘buy’ the market. But the problem with buying markets is that you end up becoming the market and that is a very, very perilous place to be.


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