by Unknown
That’s certainly not the case for our club. Excluding income from property development, Arsenal’s revenue has nearly doubled in the last five years from £115 million to £223 million, which is second only to Manchester United among English clubs (£286 million) and places us fifth in Deloitte’s Money League.
However, as the legendary investor Warren Buffett advised, “a rising tide floats all boats”, so it might just be that all football clubs have experienced similar revenue growth. In other words, our revenue growth might not be down to our board’s genius, but due to the extra money pouring into football. “Up to a point, Lord Copper”, as Evelyn Waugh once memorably wrote, given that the big four clubs in England have all significantly increased their revenue in this period. Then again, the figures do show that we have outperformed our peers. We have overtaken Chelsea’s revenue, even during a period of sustained success for West London’s nouveaux riches; widened the difference with Liverpool, and slightly closed the gap with Manchester United.
Where money has been growing for football clubs everywhere is, of course, television. Many fans could do without the weekly inanities of the Sky pundits, but, in fairness, “he who pays the piper, calls the tune” and there is no doubt that Murdoch’s men pay a pretty penny for their TV rights with Arsenal receiving a distribution from the Premier League of well over £50 million a season. Interestingly, this is where Gooners abroad indirectly help the club’s finances, as it is the overseas rights that are driving the hefty increases in TV money.
Arsenal are also part of the select group that have benefited from the Champions League, receiving £27 million from UEFA for each of the last two years. Even though the club’s progress in Europe’s flagship tournament has been getting worse over the last three seasons, the revenue has been improving, mainly thanks to a new cycle of broadcasting contracts. Gazidis has claimed that Arsenal budget so that the club could survive missing a year of Champions league football without selling players, but these figures once again demonstrate the importance of qualification to Europe’s elite.
Unlike the vast majority of other clubs, the principal reason for our revenue growth is not television, but match day income. Since the club moved to the new stadium, this revenue stream has more than doubled from £44 million to £94 million, which has had a massive impact on total turnover and justifies the board’s courageous decision to leave Highbury, at least from a financial perspective, even though I for one miss the North Bank terribly. With a capacity of just over 60,000, the Emirates can accommodate 22,000 more fans than that famous old ground, generating an additional £50 million revenue per season. Clearly the costs of running a bigger operation are higher, but it’s still positive financially with each home game generating revenue of around £3.5 million. That is a striking figure, especially when you consider that Manchester United earn only slightly more per match, even though the capacity at Old Trafford is much higher at 76,000.
In fact, our match day revenue is the third highest in Europe with most matches selling out and the club advise us that there is a 40,000 waiting list for season tickets. That’s all very well, but I’m not sure that it justifies the misguided decision to increase ticket prices by 6.5% this season. Although part of this is down to the 2.5% VAT rise, the remaining inflationary increase is a bitter pill to swallow for fans that already pay among the highest prices in world football. In the business world, price increases are often considered the path of least resistance, and football club owners are proving increasingly happy to adopt the same approach, as their “customers” have the fiercest brand loyalty around. After all, you and I are hardly likely to switch our allegiance to Spurs. So, we are a cash-generating machine, but that does not mean that we have a perfect business model. Oh no.
If you take a closer look under the bonnet, there are some underlying issues that suggest that the financial picture is not quite so wonderful as it has been painted. In fact, if the £11 million property profit and the £38 million made from player sales were excluded, the remaining football profit in 2010 would have only been £7 million. That’s still very respectable compared to most clubs, but highlights the importance of these two exceptional factors to Arsenal’s results. There is little doubt that the club has benefited from property development, though the profit of £11 million is not quite as high as you might expect given the £157 million revenue from this activity. Don’t get me wrong, that profit is still better than a kick in the face, but it’s a lot smaller than the £45 million football profit. In other words, it’s still football that’s driving the business (though sometimes it may feel like the other way round).
Although the club almost certainly anticipated higher profits when the Highbury Square developments was launched, the gains actually represent a good turnaround from a couple of years ago, when the slump in the property market forced the club to extend the repayment deadline on the bank loan to reflect delays in sales completion. That said, we can now anticipate some hefty windfall gains from property sales in terms of surplus cash, so the calculated gamble on the property development strategy has just about paid off. Nevertheless, Gazidis pointed out that the club could not afford to be over-reliant on bricks and mortar, “The profits from property are temporary and we need to make sure that in the longer term costs remain at a level which can be paid from our football revenues.”
Those football revenues have been inflated in previous years by excess gains on player sales. In 2010 this was beautifully explained by our old-school chairman Peter Hill-Wood, “profits were boosted by some £38 million from the sales of players who were no longer central to Wenger’s future plans”, in an acidic reference to the transfer of Emmanuel Adebayor and Kolo Touré to the ever-generous Manchester City. This is nothing new, as we have averaged £25 million profit on player sales every season since the move to the Emirates, making good money from stars who were past their sell-by date (Vieira, Henry, Touré) or were disruptive influences in the dressing room (Cole, Adebayor). The lack of big money sales last season, with only Eduardo’s move to Shakhtar Donetsk earning reasonable money, will therefore have a major impact on our financials for 2011, where the football business is likely to be around the break-even level, instead of the large profits of previous years. Of course, this will again change in 2012 after a summer of major sales (Fabregas, Nasri, Clichy and Eboue). However, it is questionable whether it is the right strategy to continually sell our best players. Whereas we have held the upper hand in such transactions in years gone by, the departures of Fabregas and Nasri somehow felt different. To be blunt, my concern is that this might lead to a similar decline to the one we experienced after Brady’s departure in the 80s.
The area that has really restricted our ability to operate at the higher end of the transfer market is the woeful commercial income of £44 million, which lags way behind the rest of Europe’s leading clubs, e.g. Bayern Munich £142 million and Real Madrid £123 million generate three times as much revenue here, while Manchester United have just broken the £100 million barrier. The weakness arises from the fact we had to tie ourselves into long-term deals to provide security for the stadium financing, which arguably made sense at the time, but recent deals by other clubs have highlighted the lost opportunities. The Emirates deal was worth £90 million, covering 15 years of stadium naming rights (£42 million) running until 2021 and eight years of shirt sponsorship (£48 million) until 2014. Similarly, we signed a seven-year kit supplier deal with Nike for £55 million, but that has since been extended by three years until 2013/14. Following step-ups, the shirt sponsorship deal is reportedly worth £5.5 million a season, which compares very unfavourably to the £20 million earned by Liverpool from Standard Chartered and Manchester United from Aon. It’s the same story with the kit deal, which now delivers £8 million a season, compared to the £25 million deals enjoyed by Liverpool with Warrior Sports and Manchester United with Nike (yes, the same company that pays Arsenal much less). It’s not overly dramatic to say that we leave £30-40 million a seaso
n on the table, because of these poor commercial deals, which would fund the purchase of one great player.
Little wonder that the club said, “There is no doubt that the areas of commercial activity and sponsorship provide the greatest opportunity for the Group to generate significant incremental revenues in the medium to long term.” That’s one way of putting it. Although some encouraging deals have been signed with secondary sponsors recently, the bar is continually being raised, as seen by Manchester City’s amazing deal with Etihad and Manchester United securing £10 million a season from DHL for their training kit. It really is about time that Arsenal’s much-vaunted (well, certainly expensive) commercial team pulled their collective finger out.
More revenue is certainly required, in order that we can afford a wage bill that allows us to compete with other leading clubs. There’s certainly been explosive growth in wages, which have risen from £83 million to £111 million in just four years and will again “show a significant increase” in 2011, but this is not really enough these days. In fact, our wage bill is still substantially less than Chelsea (£173 million), Manchester City (£133 million) and Manchester United (£132 million) and just behind Liverpool (£114 million). On the other hand, it is also a lot higher than the chasing pack. In particular, it is a hefty £44 million more than Tottenham (£67 million), who finished just one place lower in the Premier League.
This sometimes comes as a surprise to many fans, given the well-publicised self-sufficient model, but is due to a couple of factors. We have a large squad and, while the wages at the top end might not be the highest, fringe players like Denilson and Diaby are handsomely awarded, as are the young players. In addition, we frequently re-sign players on long-term contracts, which represents “the best means of protecting the value of one of our most important assets”, at least according to Hill-Wood. This is a policy that is well worth reviewing, as it might be more productive to allocate more of the wage bill to the first team.
The price we paid to move into a spanking new stadium was to take on a lot of debt. We have managed to pay off the substantial property development loans, but the club still has gross debt of £263 million, which effectively represents the long-term mortgage on the Emirates Stadium. That said, once cash balances of £128 million are deducted, net debt is down to only £136 million, which is a significant reduction from the £318 million peak in 2008. However, we are still paying around £20 million a year to service these loans. That may be considerably less than the huge interest payments suffered by Manchester United and Liverpool, but it’s still a lot of cash to take away from the annual budget. Put another way, that would cover the wages of four quality players earning £100,000 a week.
It’s not clear whether it would be possible to pay off the outstanding debt early in order to reduce the interest charges, but my guess is that the board is in no hurry to do so, as Gazidis has argued that not all debt is bad, “The debt that we’re left with is what I would call ‘healthy debt’ – it’s long term, low rates and very affordable for the club”. That’s all very well, but as transfer windows come and go with Arsenal seemingly reluctant to shop at the higher end of the transfer market, the fans have become increasingly puzzled about this strange state of affairs. Indeed, some sections of the crowd have taken to urging the club to spend some money, though this message is usually delivered with a great deal more bluntness.
The reality is that we have consistently spent less than our rivals over the last few years in the transfer market. In the era of foreign ownership, Arsenal are the only top club to actually make money from buying and selling players, while Chelsea and Manchester City have spent over £400 million each. Although reported transfer fees are notoriously unreliable, it is beyond dispute that other clubs’ net spend is significantly higher with Liverpool, Manchester United and even Spurs all above £100 million in the same period. Arsène Wenger has steadfastly refused to endanger Arsenal’s financial security by splashing out large sums on over-priced, big name players. For Arsenal to spend not just less, but so much less than these clubs and still challenge for honours is testament to the incredible job that the Frenchman has done with the funds available, but is it enough these days? The landscape of English football has changed dramatically in the last few years with the arrival of Roman Abramovich at Chelsea and Sheikh Mansour at Manchester City. Arsenal’s “commitment to a financially self-sustaining business model” is admirable, but it is very difficult to maintain when you are competing against billionaires for whom money is no object.
A strong balance sheet might be praiseworthy, but it should not be the club’s primary objective, as even Hill-Wood admitted, “Our business goal is not to generate profits as such, but rather to grow the club’s revenues, so that they can be re-invested in the team and the long-term success of the club”. This begs the obvious question as to why has Wenger been so reluctant to spend? There is no doubt that the move to the new stadium limited the transfer budget over the past few years, but the financial situation has greatly improved and it is clear that funds are available to buy the players that the team needs. However, there is still a suspicion that the manager would prefer to build rather than buy, so much of the low spending seems to be out of choice. Indeed, Gazidis clarified the club’s stance last year, “We believe transfer spending is the last resort. That’s a sensible view to have. Re-signing players is a far more efficient system”.
Wenger is clearly singing from the same song sheet, as he has reiterated his preference for developing young players to dipping into the transfer market, “If I go out and buy players, then Jack Wilshere doesn’t come through”. He gave a further insight into his thoughts, when he argued, “The job of a manager is not to spend as much money as possible.”
That was then, this is now.
This summer, it became abundantly clear that the side needed strengthening in order to add some experience and steel to the young talents already there, especially after the high-profile departures of Fabregas and Nasri, hence the “supermarket sweep” on transfer deadline day. There were even rumours about huge bids for the likes of Eden Hazard, Yann M’Vila and Mario Götze, so it looks like the strategy might be beginning to change. Arsenal had hoped that their prudent approach would be rewarded by the imminent arrival of UEFA’s Financial Fair Play regulations, which aim to force clubs to live within their means. In theory, this should mean that the age of the big spender will be drawing to an end, which would benefit clubs like Arsenal who will have no problem complying with the new rules. However, although many clubs have cut back on their spending, the law of unintended consequences might also apply. Specifically, some clubs seem to have opted to improve profitability by increasing their revenue through a plethora of new sponsorship deals, rather than reducing transfers and wages. This may be only a temporary phenomenon, but it’s no longer a slam-dunk that Arsenal’s approach will flourish under FFP.
This might explain the seeming about-turn this transfer window, when Arsenal finally splashed the cash, though it might also be due to new owner Stan Kroenke exerting some influence, as he will surely want to be associated with a winning club. Even though he is one of the wealthiest men on the planet, he gives every sign of being a careful investor. Ideally, he would be in no hurry for major change, but the situation was becoming desperate after a very shaky start to the season, including the 8-2 humiliation at the hands of Manchester United. You have to believe that Kroenke encouraged Arsène into acting more decisively when pursuing new players.
One great opportunity for the American to make an immediate impact would be to pay off the club’s debt early in order to reduce the annual interest costs and free up money saved for improving the squad. Frankly, given Kroenke’s praise for Arsenal’s self-sustaining model, this does not seem too likely, but other club owners have been known to go down this path. Another way of looking at our strategy is to ask whether we can afford not to spend, especially as others seem happy to buy their way to success. The traditional “Sky Four”
has been gate crashed by the extremely wealthy Manchester City and the big-spending Tottenham, so Arsenal can no longer take it for granted that they will secure the lucrative Champions League qualification.
Not only did the collapse towards the end of last season prove disappointing to us fans, but it also hurt Arsenal’s bank balance. The impact of dropping from second to fourth place meant that the Premier League merit payment was lower, but the damage did not stop there, as it also reduces the distribution from the following season’s Champions League, which partly depends on that finishing position. In other words, a little more effort on the pitch would have brought higher financial rewards, which might just have avoided the need to raise ticket prices. Consider that for a moment.
Furthermore, it is evident that sponsors like to be associated with winners, so this should also be a consideration when it comes to deciding how much to spend on buying new players. That ignores the increase in shirt sales and other merchandising that normally results from a club having a world-class player or two on its books.
In summary, our finances are in a somewhat strange position at the moment. Yes, our commercial income is much lower than it should be for a club like ours, but we still enjoy the fifth highest revenue in Europe (excluding any money from property sales), so we are hardly standing in line for the poor house. What is needed, in my humble opinion, is a more sophisticated use of those resources. That means spending less on under-performing squad players to free up funds for those experienced, world class individuals that can make a significant difference. There were encouraging signs of this happening this summer, so fingers crossed that the lessons of the past few unsuccessful seasons have been taken on board. Then, in three years time, the cavalry should arrive in the form of thumping great new commercial deals.