27th March 2020

Blog – 15th March 2020

15th March 2020

There is no doubt that we are living in extraordinary times. What we all took for granted as normal daily life has been transformed by the COVID-19 outbreak. And there will be more change to come as the virus continues its spread throughout the population.  It almost goes without saying that it is vitally important to all of us that we take the necessary precautions to remain fit and well without placing ourselves and others in positions of heightened risk.

We have been tracking the progress of the outbreak via the excellent website provided by the Centre for Systems Science and Engineering (CSSE) at Johns Hopkins University (JHU). Sadly, the United Kingdom has been rising in the rankings over recent days. So, it came as no surprise that football and most other sports in the UK have sensibly decided to cease activity given the current and potential risks to both participants and supporters.

Unfortunately, the wider economic picture is deteriorating rapidly. Arguably, the airline industry is often viewed as good surrogate for economic activity, thriving in times of economic expansion and prosperity but a combination of travel bans and a reluctance by the general public to travel has decimated load factors and prompted the CEO of British Airways to state in no uncertain terms the seriousness of the situation to staff via a memo – ‘The Survival of British Airways’.

The UK economy along with many in the western world faces business shutdowns, supply chain disruptions and layoffs.

Within the world of football, the economic and financial “shakedown” that we have always predicted is, in our opinion, now with us albeit via the most unfortunate combination of circumstances.  Certainly, in our first report released towards the end of 2016, we stressed the importance of Broadcast revenues to overall club viability.  Consequently, any disruption or reduction in proceeds is an obvious and significant risk to club solvency.

As we moved through 2017 and 2018, our respective annual reports on the Premier League clubs highlighted the underlying and worrying financial and economic trends as revenues rose, economic losses increased, and the level of value destruction of the division’s clubs became more apparent. Furthermore, the high cost of promotion into the top division and the devastating financial effects of relegation despite the parachute payment scheme became key themes of our work – often counter to the prevailing narrative.

Indeed, our press releases, blog entries and media coverage have been nothing but consistent in terms of theme and content.

A man on a Clapham omnibus would observe that football clubs generally spend more than they earn in revenue and in many cases are overly reliant on TV revenue and overly-generous owners. Therefore, football as an industry has not been able to manage itself into a position of ongoing financial self-sufficiency. Indeed, the regulatory oversight for the Premier League and the EFL allows for ‘losses’ so there is little to no incentive for owners and clubs to move the dial into profitability when the herd is operating with consistent losses.

When we calculate the economic profit position of Premier League and EFL Championship clubs, the inclusion of all costs including tax and equity capital paints a very depressing picture. For those of you who follow vysyble on Twitter you will have seen a number of recent tweets highlighting the running totals of revenue, pre-tax performance and economic profit performance for the Premier League and Championship clubs as they release their 2018-19 financial accounts statements.

Suffice to say that the Premier League clubs based on current evidence are heading for a year of record economic losses (-£508m at the time of writing with 8 clubs yet to release data) whilst the Championship clubs are doing what they have always done in recent years which is to incur a high level of economic losses which are usually comparable to the Premier League clubs but on a sixth of the Premier League clubs’ revenue, despite a few stadia sales here and there.

Our point is that given recent financial and economic performance, football is ill-equipped to deal with a financial shock of any kind.

Given Friday’s decision, football clubs cannot generate matchday-related revenue until the first week of April. However, it is looking increasingly likely that the suspension will continue for some considerable time thereafter given the increasing threat and expected rise in the infection rate. The option to play behind closed doors remains but this too looks increasingly unfeasible.

For Premier League clubs the potential loss of matchday revenue for the remaining games in the season will have an effect. Matchday-related revenues account for an average of 13.5% of club revenues across the 20 clubs although the range stretches from 24.3% at Arsenal down to 6.25% at Watford based on current and incomplete 2018-19 data. Matchday income for the 2017-18 group of Premier League clubs was £663m.

Previous notions that some clubs could actually make a profit without a crowd are sadly misplaced as the longer-term financial trends clearly show losses at all levels, even with regular capacity crowds.

Should the season be unfortunately curtailed then the issue of TV/broadcast money raises its very important and decisive head as it accounts for an average of 54% of club income across the division although again the range can be quite extreme; Manchester United’s TV revenue accounts for 38% of total revenue (£241.20m) whilst it is 83% at Watford (£123.80m).

The point here is that the smaller revenue clubs ie those outside of the Big 6 group, will be especially vulnerable. With the potential for a ‘no product, no payment’ situation, the financial implications go much further when sponsorship agreements, advertising activity and other exposure-related commercial activities are all factored in. Insurance might come to the rescue but it is by no means guaranteed. The only winners, we think, will be the lawyers.

Seven of the 14 clubs within the 2018-19 Premier League cohort (outside of the Big 6) have released their 2018-19 accounts (Wolves, Everton, Leicester City, West Ham United, Watford, Brighton & Hove Albion and Cardiff City) with combined economic losses of –£200.24m from revenues of £1.145bn. For every £100 of revenue, this group of clubs achieved economic losses of -£17.48.

For the Big 6 of which five clubs have released their 2018-19 accounts – we await Tottenham Hotspur – the combined economic losses amount to -£308.63m from revenues of £2.54bn. For every £100 of revenue, this group of clubs achieved economic losses of -£12.13.

If the top clubs are already performing poorly, then what about the rest?

Lower down the footballing pyramid, the effect of the potential loss of matchday revenue becomes more acute as the value of TV contracts diminish hugely when compared to the Premier League. Even more worrying in our view is the exposure of club owners to the worsening economic situation. Given the choice of propping up their core business that provided the wealth to buy the football club in the first place versus the survival of the football club, the contest from our perspective becomes very one-sided indeed and not in the football club’s favour.

Certain commentators have suggested that the Premier League and its clubs have the means to subsidise the EFL clubs in their hour of need. The Premier League already does so via solidarity payments. Given the poor condition of Premier League club finances as we have highlighted above, it seems to us that it is entirely possible that some club owners may object to providing further finance to what are largely loss-making and in some cases badly run enterprises further down the pyramid when their club will be facing its very own financial issues.

We have also seen cash rankings and other examples in the media of how ‘rich’ the Premier League clubs are supposed to be. As we have consistently pointed out, they do generate a lot of revenue – we expect just over £5bn for 2018-19. But they also spend more than they earn in contracted wages, agent fees, debt servicing etc.

From time to time we release via Twitter what is known as a ‘Movement’ note which tracks club financial and economic performance over a 10-year period and is a good indicator of the financial position of the operation. For many clubs, the overall financial situation over the 10-year period has not improved. Indeed, the increase in costs outruns the increase in revenue for quite a few clubs.

81 years ago, the onset of the Second World War halted the regular football leagues in the United Kingdom although the Football League War Cup and other competitive matches were indeed held eg the London War Cup. Halting football completely for public health reasons has, as far as we know, no precedent. As we mentioned, these are extraordinary times.

If English football was in a better financial position, it might be able to better weather the current disruption and shutdown. There are some clubs that are run on a profitable and sustainable basis notably Tottenham Hotspur and Burnley. The problem is that the vast majority are not. Just nine of the current 44 Premier League and Championship clubs have achieved overall economic profits over their most recent 5 years of accounts.

For all those clubs that have played in the Premier League since 2009, just 13 from 37 have achieved an overall pre-tax profit in the period 2009-19. Just 6 have achieved an overall economic profit (Burnley, Tottenham Hotspur, WBA, Swansea City, Southampton, Hull City).  It is not difficult to see that with this level of poor financial performance football is not best-placed to deal with the operational adversity it now faces.

In our opinion, the inconsistent application of what is a weak regulatory oversight, as was evident in the demise of Bury FC, under normal business conditions suggests that the game’s administrators will be unable to prevent the now-inevitable raft of club insolvencies without, perhaps, wholesale intervention from HM. Govt.

We think that the trade-off for assistance in this way, if it ever does come to pass, will be a root and branch upheaval and restructure of football’s financial operating practices and regulatory framework.

Given the challenges ahead, it may turn out to be a small price to pay for the health of everyone else. For now, though, Saturday has gone. It remains to be seen how it returns and in what form.

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