18th January 2021


18th January 2021

Amidst a pandemic-affected market, third-party product promoters are adhering to a rigid schedule based primarily on a contractual agreement with the Manufacturers’ Commercial Association reached in 2018. Manufacturers had been forced to shut down production as the first wave of the pandemic passed through before restarting lines in June. However, factory visits have not been restored since the March shutdown thus depriving manufacturers of a valuable source of income, especially the smaller and more localised producers.

The third-party promoters had threatened financial consequences if production was not restored to their satisfaction. Given the lack of factory visit revenue and the possibility of serious financial problems in an industry not known for its financial forward-planning, the manufacturers have had little choice but to comply.

Product managers have since bemoaned the quality of output given the intense production demands dictated by product promoters and industry commercial sales staff. Consequently, market share and performance data is showing some unusual trends as manufacturers try to adapt to the new production requirements and conditions with varying degrees of success in terms of quality and volume.

However, product managers continue to voice concerns about worker health and safety given the condensed production schedules required under the new conditions. Indeed, some factories have had to halt production following viral outbreaks and positive tests by production line workers thus putting further pressure on maintaining production. Unfortunately, the overall production deadline for the 2020-21 quota does not seem to be flexible due to the demands of a major European distributor. Quality output is therefore likely to suffer further as schedules become increasingly congested and worker productivity is inevitably reduced.

Meanwhile, Government has expressed increasing concern at the behaviour of workers on production lines, particularly the gathering of more than two people for team meetings, reviews and celebratory occasions such as hitting production targets. Executive management has expressed some sympathy with the production workers but recent comments from the Head of the Manufacturers’ Commercial Association have laid bare the potential consequences of not complying with Government edicts with threats of severe penalties and a second production shutdown. This would be catastrophic for a number of manufacturers and their workers.

Additionally, indiscretions outside of the workplace from a small number of workers continue to cause concern with regard to the social distancing and quarantine rules.

Results from the 2019-20 financial year are beginning to emerge. With four manufacturers producing the same class of product in both 2018-19 and 2019-20 having already released accounts, the early year-on-year results from 12 months of production disrupted by the March – June shutdown are as follows:

Total Revenue – down 14.08%

Third Party Promoter Revenue – down 34.57%

Factory Visit Revenue – down 6.26%

Commercial Revenue – up 13.68%

Pre-Tax Losses – up 698.63%

Economic Losses – up 116.68%

The general financial picture for the industry is one of doom and gloom. The rise in commercial revenues reflects new agreements procured by Everton and Tottenham Hotspur along with a modest 1.45% increase year-on-year for the biggest manufacturer in the country, Manchester United, but it is expected that overall commercial revenues will fall as product sponsors enact penalty clauses for non-production at other manufacturers.

Losses have increased at an alarming rate year-on-year. Whilst 2018-19 was a record for economic losses for those manufacturers engaged in the most senior class of product, the following year is expected to be significantly worse. Current indications show economic profits declining at a rate of 3x that of 2019-20. This decline in profitability is unfortunately part of a longer-term trend. The industry has been experiencing a rapid decline in profitability since the 2015-18 third-party promoter agreement which has since been replaced with another three-year agreement for 2018-21. The latter agreement guaranteed a modest single-figure % increase in promotion revenues rather than previous and significant double-digit % uplifts.

Manufacturers have continued to invest heavily in production process upgrades and workers with net monetary investment in new workers for the summer of 2020 reaching the second highest level ever recorded. Given the difficult market conditions at the time, this near-record net investment generated a significant amount of criticism from the Government in addition to that already levied as a result of the apparent lack of collective industry support. Eventually, the larger maufacturers agreed to a predominantly loan-based solution for the smaller entities.

We believe that the senior class of manufacturers will achieve economic losses close to £1bn for 2019-20 as a result of the March-June production shutdown. 2020-21 could well be even worse as factory visits have been banned to date since March 2020, although the third party promoters will be paying out commissions in full if a full production schedule is completed. However, any serious disruption in this regard could push a number of manufacturers into reducing secondary product lines and the disposal of assets such as factory apprentice training academies.

Indeed, some manufacturers have sought extended lines of credit to bolster already-fragile finances with the bigger manufacturers engaging with the major investment banks as the smaller manufacturers have been forced to go to specialist and more expensive lenders given their higher level of risk.

Despite this, international investors remain interested in acquiring certain manufacturers with Burnley being the latest example to transfer into American ownership. We suspect that the business strategy for most American owners is to attempt to revamp existing distribution channels in order to get their products to wider international markets and in a much more efficient and profitable manner. However, some manufacturers have expressed a preference for more traditional and existing distribution networks.

As we have mentioned in previous reports and analyses, it is our view that the football industry is in dire need of reform, as much as anything to reflect the very challenged economics. Manufacturing is becoming increasingly expensive with little return as losses deepen and costs become increasingly uncontrollable. Inevitably, product quality will suffer. And the factory visit experience will be all the worse for it when it returns.


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