Rabu, 22 Agustus 2012

Money Talks: Can EPL clubs be profitable?

Did Arsene Wenger do the right thing when he refused to increase Robin van Persie's salary, thus sold Arsenal's top scorer to ManUtd?

Has Sir Alex Ferguson gone mad when he offered £225k/week salary to RvP? 
RvP probably earns more money PER WEEK than avg ivy league-MBA graduates earn PER YEAR

Will Roman Abramovich and Sheikh Mansour make profit after they poured tons of money to Chelsea and Manchester City?

Those were headlines in the newspapers, blogs, and also my questions for the past one month.

I am a gooner, yet when it comes to tactics, wonderkid players, history of each clubs, and all about transfer rumours, i know very little.

Yet, having a bit finance background, i always have one question in my mind:

Can EPL footbal clubs be profitable business?
Then after gathered some data from the internet, my answer is: 

YES, they can... and they should be, if they want EPL to be sustainable....

In this blog, i will show my simple analysis on Financial condition of top 6 EPL clubs: 

  1. Arsenal 
  2. Chelsea 
  3. Liverpool
  4. Manchester United 
  5. Manchester City 
  6. Tottenham

This financial analysis is based on each club's financial report for 2010-11 season, so this is not 2011-12 season when ManCity win EPL. 
This analysis also excluded players' transfer transaction happened after 2010-11 season (e.g Nasri to ManCity, Fabregas to Barcelona, etc).
Most of the raw data is available online (you can google it) and i used most data from "Telegraph" website here and from Deloitte's Football Money League report.

Who has the highest revenue?

Answer: Manchester United

With £331 mn of total revenue, ManUtd revenue is 30% higher than Arsenal, and even 50% higher than Oil-billionaire-backed Chelsea. 31% of ManUtd revenue was coming from its "Commercial" contracts (i.e contract with sponsors) vs only 20% and 25% of Arsenal's and Chelsea's revenue were coming from "commercial". 
The higher portion of commercial contract for ManUtd was mainly due to its bigger brand name compare to other top-6 clubs. ManUtd also has better marketing personals who "sold" their brand strategically to other companies, such as DHL who gave £40mn to ManUtd just to put their logo on ManUtd's training jersey! (not even main jersey!)   

ManUtd has the highest revenue among all top-6 clubs

Who is the most generous? (to pay salary)

Answer: Manchester City

Manchester City paid more for salary cost than it can get from its revenue, what a great business practice! 
That what you have to do when you signed a bunch of world-class player. 

Actually, ManCity was only the 2nd highest salary payer (after Chelsea), but because their revenue was the lowest among top-6 clubs, the proportion of salary cost was even higher than its revenue.

On the other side, Arsenal and ManUtd were playing a relatively healthy business practice, with salary cost only represents 49% and 46% of their total revenue.

ManCity: Too generous to its players?

Who has the highest operating profit?

Answer: Manchester United

To calculate operating profit, i used EBITDA (Earnings before interest, taxes, depreciation, and amortization).

ManUtd higher revenue combine with its relatively low salary cost had resulted in highest operating profit among top-6 clubs. 
ManUtd operating profit reached £108mn during 2010-11 season, this was almost double than Arsenal's operating profit.

On the other hand, ManCity great business philosophy had resulted in £105mn operating profit loss during the same year. 
Yes, this loss was barely 1% of Sheikh Mansour's total wealth (approx. £15bn), but to put things into perspective, with £105mn you can buy 8,300 units of small MPV cars in Indonesia (Toyota Avanza), you can also buy 1,600 medium-size houses in Jakarta's suburb area (BSD).   

Different sides of Manchester: One Profitable - One Financial Disaster

Who has more debt?

Answer: Manchester United

Unfortunately for ManUtd, their great financial performance had to be hampered by its huge pile of debt.
After Glazer's £790mn leverage buyout in 2005, ManUtd still had the highest debt level compare to other top-6 clubs in EPL.
This huge debt burden has made not only ManUtd financial position unstable but also made ManUtd  to pay more than  £50mn of interest expense every single year vs only  £17mn of interest expense for Arsenal.

ManUtd: Huge debt after Glazer's Leverage Buyout

Who has more money to buy new players?

Answer: Manchester United

Even after paying huge interest expense, ManUtd still has significant amount of money for Sir Alex to sign new players that he wants.

This calculation is based on assumption that the club will pay new players' signing fee from club's own operating profit and not from additional cash given by club's owner. 

That's why Manchester City's Free Cash Flow is negative as it should not be able to buy new players unless Sheikh Mansour pour another tons of money to the club.  

Sir Alex has tons of money to be spent on new players

Can EPL clubs be profitable?

So, back to our initial question: 

1) Can EPL clubs be profitable?

The data shows YES, they can...
ManUtd, Arsenal, and Spurs have shown that is doable. 

2) Did Arsene Wenger do the right thing when he refused to increased Robin van Persie's 
salary, thus sold Arsenal's top scorer to ManUtd?

Probably not, Arsenal's financial condition is not as good as ManUtd's. 
So, increasing RvP's salary will only trigger another players to ask for the same thing, thus it may decrease club's profitability (not to mention RvP's old age, injury history, etc. but this is not the scope of this blog)

3) Has Sir Alex Ferguson gone mad when he offered £225k/week salary to RvP? 

Probably not, with ManUtd's sound financial condition, Sir Alex may have bigger flexibility to increase players' salary. 
RvP's signing may also increase ManUtd revenue from merchandise sales etc. 

4) Will Roman Abramovich and Sheikh Mansour make profit after they poured tons of money to Chelsea and Manchester City?

Abramovich became Chelsea's owner in June 2003 and after 8 years, Chelsea still made £3.5mn operating profit loss. 
Yes, this loss has been in downward trend since June 2005 when Chelsea recorded £140mn loss. 
But still, 8 years pouring tons of cash with no profit? come on.. you gotta be kidding me :)

Can you buy EPL title? 
yes you can.. Chelsea and ManCity have proven it.

Can you make profit after pouring tons of cash into one club?
I hope so, even after 8 years, Chelsea still not making any profit.
I hope Abramovich and Sheikh Mansour have lot of patience to see their investments grow.

5) What if UEFA Financial Fair Play be implemented completely?

Hmm, this is quite tricky question.
If the summary of this new regulation is "to prevent professional football clubs spending more than they earn".
I may interpret this statement by saying: "club's Operating profit (EBITDA) should be positive."

Well, this is a good news for clubs with positive operating profit like ManUtd, Arsenal, and Spurs.

But probably bad news for ManCity, Chelsea, and Liverpool, as they need to increase their operating profit level. 
To do this, they can either: 

  1. Increase their revenue by increasing ticket price, boosting marketing activity like ManUtd did, or 
  2. They can start to cut cost by lowering players' salary or selling some players which has high salary.

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