Beating the Offside Trap


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Beating the Offside Trap: Driving Forward the Commercial Performance of Football Clubs

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Beating the Offside Trap

  2. 2. Beating the offside trap:Driving forward the commercialperformance of football clubsPublished byValue Partners Management ConsultingLimited, 16 Smith Square, 7th floor,Kings Building, London SW1P 3JJ, UKNovember 2012Written and edited by:Enrico LanzavecchiaFaizal PatelMarco LabiancaIf you would like an electronic copyplease write to:enrico.lanzavecchia@valuepartners.comFor more information on the issuesraised in the report please contact:enrico.lanzavecchia@valuepartners.comfaizal.patel@ valuepartners.commarco.labianca@valuepartners.comIf you would like to subscribeor to be removed from our mailing listplease write to:subscription@valuepartners.comvaluepartners.comCopyright © Value PartnersManagement Consulting LimitedAll rights reserved
  3. 3. 3 Executive Summary Football clubs have always been unique as “businesses” – as they are a rare example of an industry in which generating profit is not the primary objective. Sporting success has always been prioritised over commercial success, with wealthy investors and in some cases, local government, willing to support football clubs in pursuing success on the pitch at the expense of profitability. However the status quo is being increasingly challenged by the growing concern of football bodies over the state of finances in the football industry. UEFA is introducing a new set of regulations called Financial Fair Play, which will be fully operational in 2013 and will affect the whole European football industry. These new regulations mandate that football clubs must keep much tighter control over their finances and accounts than previously and will also encourage long-term investment in youth development and infrastructure.perspective BEATING THE OFFSIDE TRAP
  4. 4. 4 Significant revenue growth is vital for most football clubs to face this upcoming challenge and ensure regulatory compliance and the possibility of profitability. However, we argue that, as of today, the majority of European football clubs have not optimised their core revenue streams, nor sufficiently captured revenue growth opportunities. In this paper, Value Partners aims to show that financial success for football clubs is possible, though this will require the aggressive maximisation of core revenue streams and the exploration of creative business opportunities, the successful facilitation of which may require a change in mindset for many clubs.perspective BEATING THE OFFSIDE TRAP
  5. 5. 5 New regulations will come into force in 2013/141 Relevant income Financial Fair Play regulations (FFP) are Based on the current accounts of foot-calculated as revenue from coming into force in the 2013/14 season ball clubs, the majority are unlikely togate receipts, TV rights,sponsorship, commercial (though UEFA will take into account be compliant.activities and profit losses from the two preceding years)from disposal of playerregistrations. Relevant and stipulate that: Of the top 20 European clubs (rankedexpenses calculated as cost by total revenue registered in 2010/11),of sales, employee benefitsexpenses, amortisation _Relevant income and relevant expens- only 7 could be considered fully compli-costs and finance costs. es1 must be equal2 ant with FFP regulations, with profitable(UEFA Article 58 – Notion clubs being the exception. This themeof relevant income andexpenses). _The negative equity rate, i.e. the differ- is consistent across Europe, with Italian2 The acceptable deviation, ence between the value of assets and and French clubs in particular appear-considered as the the balance of outstanding loans, can- ing to struggle to meet FFP criteria.maximum deficit betweenincome and expenses, not be greater than the previous yearis €5 million (extended Profitability is just one of the indicatorsto €45 million for thefirst two years if entirely _Clubs cannot have overdue payables considered by UEFA in the new regula-covered by injections from as of 30th June of any given year tions, with the wages-to-turnover ratioequity participants). also taken into account. Moreover, regulations additionally state that detailed financial information must In the Premier League for example, be provided to UEFA to ensure that around half of clubs are currently employee benefits do not exceed 70% exceeding the maximum wages-to- of total revenue. turnover ratio. Other European peers also appear to be unready to meet thisOf the top 20 European clubs, requirement, with 8 of the 20 topranked clubs exceeding the 70% threshold.only 7 could be consideredfully compliant with FinancialFair Play regulations (FFP) In order to be fully compliant with FFP regulations, all European football clubs have to fulfil all of the abovementioned requirements set by UEFA. If not com- pliant, clubs in question will be penal- ised by UEFA with sanctions including fines, point deductions and bans from UEFA competitions.perspective BEATING THE OFFSIDE TRAP
  6. 6. 6Cumulative top 20 European Clubs profitability before taxand wages-to-turnover ratio over 3 years, 2008/09-2010/11 (€m)45% 56% 47% 50% 52% 79% 86% 99% 63% 53% 57% 110% 74% 63% 74% 46% 73% 35% 74% 41% 131 88 76 33 33 16 8 -3 -11 -13 -42 -40 -78 1 -73 -86 -165 -174 -218 -306 -493Note: (1) Club historicallyprofitable; registered negativeresults in 2010/11 due to reducedbroadcast revenue after TVrights collectivisation andnegative sport performancein UEFA competition.Source: Deloitte, Press, Clubs’Annual Reports, Value Partnersanalysis.perspective BEATING THE OFFSIDE TRAP
  7. 7. 7 The situation is worsening as wages are increasing Player wages have rapidly increased For example, Bayern Munich’s salary over the last 4 years in all of the top 5 costs have grown by 6% on average European leagues: from 2007/08, wage over the last three years, whereas total costs have grown by an average of 5.2% revenue grew at a rate of 5% on average each year. But as wages are increasing, over the same period. the revenue of clubs is failing to keep pace. Even Manchester City, who have ex- perienced substantial revenue growth For example, in the Serie A, the overall (27%) over the last three years follow- league-wide wages to turnover ratio ing their takeover by the Abu Dhabi increased from 68% in 2007/08 to 75% United Group, have seen salary costs far in 2010/11. outstrip this, growing by 45%. The trend is similar across Europe. It is clear that if historic trends in player Of the top 20 European clubs, only 3 wages and revenue growth continue, have managed to decrease their overall football clubs will have a challenge in expenditure on employee benefits, with complying with FFP regulations. salary cost growth exceeding revenue growth for the majority of clubs. Wage inflation in the Top 5 European Leagues, 2007-2011 (€m) 1,800 5% 1,700 1,600 1,500 1,400 1,300 1,200 6% 1,100 4% 1,000 900 8% 800 3% 700 2007/08 2008/09 2009/10 2010/11Source: Deloitte, Press, Clubs’ 07-10 CAGR Premier League BundesligaAnnual Reports, Value Partners Serie A Ligue 1analysis. La Ligaperspective BEATING THE OFFSIDE TRAP
  8. 8. 8 clubs need to find ways of significantly increasing revenue There are a number of areas that clubs However clubs can and should focus should look at in order to optimise on optimising the other 2 main sources commercial performance within existing of revenue, namely commercial and revenue streams. matchday revenue. Broadcast revenues form the largest contributor – almost 50% – of clubs’ an- nual income, however given that broad- cast deals are managed collectively by most leagues, there is little that individ- ual clubs can do to significantly enhance revenue (besides try to improve on- pitch performance, finishing higher in leagues and qualifying for/progressing further in European competition).Top 5 European Leagues revenue breakdown, 2007-2011 (€m) 2,515 1,746 1,718 1,553 1,040 Commercial 24% 47% 30% 27% 29% Matchday Broadcast 24% 13% 25% 13% 60% 58% 52% 23% 45% 30%Source: Deloitte, Value Partnersanalysis.perspective BEATING THE OFFSIDE TRAP
  9. 9. 9 Extract maximum value from shirt and technical sponsorship The global sponsorship market is large This is all the more crucial given that the and experiencing considerable growth. majority of these deals are long-term Today the market is worth €23 billion, deals (5 years+), so clubs must ensure and is growing by around 5% per year. that they are not locked into underval- Top tier or ‘premium’ market segments ued long-term contracts. are experiencing the strongest growth, since this type of sponsorship is attract- Liverpool FC for example has done well ing an increasing share of marketing to fully exploit the value of its technical spend at the expense of more traditional sponsorship property. Liverpool re- forms of advertising, due to: cently signed a new technical sponsor- ship deal with the American sportswear _An overall reduction in the effective- brand ‘Warrior’, thought to be worth ness of TV advertising due to audience ~€29 million per year. Warrior paid a fragmentation and increased ad-skip- significant premium (one of the high- ping est in Europe) to ‘buy-in’ to European football, having recognised the poten- _The enhanced brand exposure offered tial benefits of associating with football by sports sponsorship of a live broad- in order to enter the European market. cast, attracting large audiences, particu- Liverpool managed to achieve one of larly of hard-to-target market segments the highest value technical sponsorship (i.e. young men) deals in Europe, despite their recently disappointing league performance and _An increasing recognition by advertis- failure to qualify for the Champions ers of the value of associating brands to League. sports Tottenham Hotspur is another good Football clubs have a concrete oppor- example of a club pursuing an innova- tunity to exploit this growth, given that tive strategy to maximise sponsorship top clubs can attract vast audiences, value. Tottenham managed to secure providing sponsors with huge exposure, a 50% revenue uplift from shirt spon- while their two key properties - shirt and sorship by selling shirt sponsorship technical sponsorship - are ‘premium’ rights to two main sponsors: properties given the high visibility and to ‘Autonomy’ for Premier League brand engagement that they offer spon- games, and to ‘Investec’ for cup sors. competitions. Clubs therefore need to ensure that they fully exploit the revenue potential of these properties when negotiating deals, by exploring all potential oppor- tunities and innovative strategies.perspective BEATING THE OFFSIDE TRAP
  10. 10. 10 Develop international sponsorship strategy European football is growing in popu- The club has recently signed a series of larity worldwide: European clubs are exclusive sponsorship deals with 13 tel- estimated to have nearly 1 billion non- ecoms operators spanning 42 countries, domestic followers in total, with some through which each sponsor receives clubs reported to have more fans in Asia extensive affiliation rights within their than they do in Europe. own country. For example, FC Internazionale and While the exact revenue derived AC Milan are becoming considerably from this programme is not officially popular in China, while Real Madrid and reported, Value Partners estimates Manchester United have millions of sup- that Manchester United’s international porters across the Far East. sponsorship strategy is worth ~€15-20 million per year. Considering their growing global appeal, European clubs have the op- Clubs can further enhance their in- portunity to leverage this interest by ternational image and brand reputa- developing an international sponsorship tion, which in turn can lead to greater programme. sponsorship revenue, by developing international soccer schools. Manchester United have led the way in exploiting their global popularity Manchester City, Manchester United to increase international sponsorship and Real Madrid are considered bench- revenue. marks for the development of such initiatives. Manchester United, for instance, now have soccer schools in 9 different geog-European clubs are raphies, including the UAE, Canada and Australia.estimated to have nearly1 billion non-domesticfollowers in total, withsome clubs reportedto have more fansin Asia than they doin Europe.perspective BEATING THE OFFSIDE TRAP
  11. 11. 11 Optimise ticket pricing strategy A club’s matchday revenue is to a cer- Fan base engagement and price dis- tain extent limited by stadium size, the crimination are key enablers for ticket number of fans and the level of sporting price optimisation, though attention has success achieved, however clubs can to be given to ‘fair’ pricing. attempt to maximise revenue within the context of these limitations, through a Clubs are challenged by the delicate series of actions, such as: trade-off between raising ticket prices to boost revenue while ensuring that _The development and adoption of a they remain inclusive and open to a sophisticated and dynamic ticket pricing broad socio-economic demographic, model, based on variables such as the and do not alienate their traditional economic context, the timing of ticket fanbase. purchase and which team the club is playing _Ticket pricing differentiation through effective segmentation of the fan base, based on demographic variables (e.g. age, consumer preferences, etc) Of the top European clubs, English clubs are by far the most commercially sophisticated in terms of maximising matchday revenue, with Chelsea, Man- chester United and Arsenal being the most successful. For example, Chelsea achieved the high- est revenue per number of seats avail- able in Europe, and also has the highest matchday revenue per number of do- mestic fans. Through accurate fan base segmentation and the development of a dynamic ticket pricing strategy, the club has managed to achieve close to 100% attendance, despite significantly raising ticket prices.perspective BEATING THE OFFSIDE TRAP
  12. 12. 12Matchday revenue comparison, 2010/11 (€) € 123.6m € 110.7m € 120.3m € 71.9m € 103.2m € 74.7m € 35.6m € 32.9m € 45.3m 1,786 1,710 1,538 1,578 1,114 1,029 999 445 411 47 33 26 20 18 9 10 7 8Source: Deloitte, Press, Clubs’ Matchday revenue Matchday revenue,Annual Reports, Value Partners per number of Stadium 2010/11analysis. seats Matchday revenue per number of domestic fansperspective BEATING THE OFFSIDE13 12 – TRAP
  13. 13. 13 Monetise fans who are unable to go to the stadium Given the growing media exposure and Moreover, clubs can utilise the growth visibility of football clubs, clubs have of internet and mobile usage to sell an increasing number of fans who never digital media content such as video-on- attend football matches at stadia. demand, video games, etc. Even though such fans do not buy tick- ets for matches, nor merchandise from Manchester United for example, shops on matchdays, clubs still have through their international partnerships opportunities to monetise such fans, with telecoms operators, offers digital by exploiting the level of engagement content to mobile devices, generating they have with their supporters, utilising almost €20 million per year. social media and e-commerce. Effective digital strategies offer the dual benefits to clubs of generating directEven though an increasing revenue (from product sales) along with engaging fans with clubs to a greaternumber of fans never attend extent, which will generate additional indirect matches at stadia– fans who do not buy ticketsfor matches, nor merchandisefrom shops on matchdays –,clubs still have opportunitiesto monetise such fans. One possible way for clubs to address such opportunities would be through the optimisation of their websites. Clubs need to ensure that their websites have good e-commerce functionality, stimulating users to purchase club merchandise online.perspective BEATING THE OFFSIDE TRAP
  14. 14. 14 More radical solutions could be required Given the current state of the finances In Turkey, the top 4 clubs, namely of many European football clubs, op- Fenerbahçe, Beşiktaş, Galatasaray and timising existing revenue streams may Trabzonspor, have all launched mobile not be enough to ensure compliance virtual network operators (MVNOs) in with FFP. For example, based on the order to exploit the loyal brand follow- latest available accounts (2010/11) of AC ing that they have amongst their large Milan, FC Internazionale and Juventus, fan base. we estimate that they need to increase revenue by an average of €82m each in In addition, some clubs are exploring order to comply with FFP. even more radical ways of generating new revenue, by attempting to utilise Therefore given the scale of the chal- other physical assets that they hold. lenge, some clubs are beginning to explore radical solutions for addressing For example, Arsenal and Juventus this financial conundrum, by diversifying have taken advantage of their respec- their business into fundamentally new tive moves to new stadia to invest areas. in the real estate business. This has enabled them to generate significant Football clubs are uniquely able to additional revenue from non-football transfer the use of their brand outside of activities, with Arsenal for example core activities given their large and loyal earning £156.9m from their property following and strong deeply-entrenched development business in 2010, which brand qualities. Therefore many clubs was equivalent to ~70% of turnover from have been attempting to leverage their football operations. brand appeal outside of sports-related areas to generate revenue from new Trabzonspor in Turkey has pursued even markets. Real Madrid, for instance, has more radical opportunities, by develop- recently announced a plan to build a ing a hydroelectric power plant, invest- themed holiday resort in the UAE. The ing over $50 million (approx. €40 mil- project, called ‘Real Madrid Resort lion) into the scheme. The club expects Island’, is estimated to be worth $1 bil- that the new facility will generate ~$10 lion (approx. €770 million) and is aimed million a year in additional revenue. at creating a significant new revenue stream by leveraging the club’s brand reputation in the Middle East. Manchester United is also leveraging its strong brand to augment its revenue from non-football operations; the club is franchising its brand for the develop- ment of branded café bars in Asia.perspective BEATING THE OFFSIDE TRAP
  15. 15. 15 Conclusions and recommendations From our experience of working with Clubs need to do as much as possible a number of leading European sports to optimise commercial performance in clubs and leagues, we believe that core revenue streams there are opportunities for many We have found that many European football clubs to significantly increase football clubs have untapped opportu- revenue, but in order to do so, most nities to optimise commercial perform- clubs need to pursue a number of initia- ance; however this takes time, consist- tives simultaneously. ent effort and long-term planning.The revenue growth opportunity for football clubs Current Technical/shirt Exploitation Matchday Monetisation Potential Creative Total potential revenue sponsorship of international revenue of “armchair revenue business revenue maximisation sponsorship optimisation fans” from core opportunities negotiations operations (non-football operations)Note: exhibit is illustrative.Source: Value Partners analysis.perspective BEATING THE OFFSIDE TRAP
  16. 16. 16 The optimisation of matchday and The NFL, through the establishment of commercial sponsorship revenue for a single entity for commercial negotia- instance, are two areas yet to be fully tions, collects income from licensing explored and exploited by football deals and distributes the earnings to clubs, with many clubs relying too heav- the league’s teams equally. The majority ily on growing TV and media revenues. of commercial rights deals are handled The two main challenges that clubs face centrally, with ~60% of the total revenue are the limited availability of sufficient of NFL teams being generated centrally. in-house teams to exploit all oppor- This strategy has been successful, with tunities, and also the trade-off that the league registering approximately exists between long-term planning and $4.5 billion from commercial revenue in short-term results. In order to improve 2010, making the NFL one of the most their financial performance, clubs need commercially successful sports events to ensure that they invest in the right globally. skills and capabilities and have a clearly defined commercial strategy, or they Similarly, European football clubs and risk missing growth opportunities. leagues could explore the opportunity to collectively sell some packages of Clubs and leagues need to work togeth- rights and properties. While many er more to take advantage of collective major rights will always be managed by opportunities clubs (e.g. shirt and technical sponsor- The collectivisation of sponsorship and ship properties), it is conceivable that commercial rights can help clubs to some smaller commercial assets (e.g. achieve greater returns on commercial sections of perimeter inventory) could deals. Indeed, when negotiating agree- be managed by a central league body ments jointly, clubs and national leagues who could use these assets to create are creating a larger property that can a “league-wide” property, that could guarantee the sponsor higher visibil- generate incremental value for all clubs. ity, which sponsors are willing to pay By working together, clubs and league exponentially larger amounts in order to governing bodies could considerably secure. Additionally, through collectivi- increase overall commercial revenues. sation, clubs and leagues hold a better bargaining position, which can also enable them to achieve greater revenue. The commercial success of the National Football League (NFL) in the US high- lights that the effective collectivisation of commercial rights can drive greater revenue for all the teams in a league.perspective BEATING THE OFFSIDE TRAP
  17. 17. 17 Clubs should also explore more creative Ajax, for example, has recently launched business opportunities an MVNO for its domestic fans, through Maximising the revenue coming from a partnership with the mobile platform core activities and traditional busi- supplier 6GMobile. The offering is ness models may still be not enough targeted to its 4.3 million supporters for some clubs to achieve profitability. and is made up of 4 subscription plans Thus we believe that clubs may need to as well as a prepaid plan. Ajax mobile explore more radical revenue opportuni- subscribers can also benefit from in- ties. novative value added services, such as free extra call minutes whenever Ajax However, clubs need to be sensible scores or SMS match updates. when undertaking new initiatives and must ensure that they understand their In order to successfully strengthen their key assets and capabilities, only launch- finances in preparation for incoming ing new initiatives that are in alignment FFP regulations, football clubs need to with these. For football clubs, these are maximise core revenues as well as ex- largely their strong brands, loyal fan plore new business opportunities. There base and media exposure. Clubs also are a wide range of initiatives that clubs need to face up to the challenge posed can explore (optimising sponsorship by a lack of in-house skills and a pos- negotiations, reviewing ticket pricing sible institutional sense of rigidity and strategies, exploring innovative new resistance to disruptive initiatives and opportunities, etc) however clubs have practices. key challenges that they must recognise and overcome. To drive forward their Clubs therefore need to make sure that commercial performance and beat the any revenue diversification strategies ‘offside trap’ set by FFP regulations, utilise their main assets and do not ex- clubs need to invest time and effort tend too far beyond their core capabili- in exploring opportunities to increase ties. We believe that one such initiative revenue from traditional sources and to that could potentially be undertaken by generate returns from beyond the world many European clubs would be launch- of sports. ing a Mobile Virtual Network Operator (MVNO). MVNOs can be reasonably easy to be set-up, simply requiring clubs to form a commercial agreement with a mobile operator, who will manage the majority of the key network and opera- tional functions. At the same time, run- ning an MVNO enables a club to utilise two of its key assets: strong brand and loyal fan-base.perspective BEATING THE OFFSIDE TRAP
  18. 18. AUTHORSEnrico Lanzavecchia Faizal Patel Marco LabiancaDirector Associate Business analystManaging Partner of Value Partners Based in Value Partners London Based in Value Partners LondonLondon office office
  19. 19. 19AboutValue PartnersValue Partners has an established Founded in Milan in 1993, today it For more information on the issuessports strategy practice with sig- draws on 25 partners and over 275 raised in this note please contact thenificant experience of helping clubs, professionals from 23 nations, work- authors.leagues and industry investors from ing out of 10 offices in Milan, Rome,across the world to solve a range London, Istanbul, São Paulo, Buenos Find all the contact details onof commercial and regulatory prob- Aires, Beijing, Shanghai, Hong Kong valuepartners.comlems. and Singapore. MilanFor example, we have a track record Value Partners has built a portfo- Romeof helping top European football lio of more than 350 international Londonclubs and major football leagues to clients – from the original 10 in 1993 Istanbuldevelop their commercial strategies – with a worldwide revenue mix, as São Pauloand grow revenue. Our advice to the over 60 percent of the management Buenos Airesfootball industry has spanned across consulting revenues are generated Beijinga range of issues including sponsor- outside Europe. Shanghaiship, ticket pricing, fan engagement, Hong Kongdigital media and brand licensing. Value Partners combines methodo- Singapore logical approaches and analyticalValue Partners is a global manage- frameworks with hands-on attitudement consulting firm that works and practical industry experiencewith multinational corporations developed in an executive capacityand high potential entrepreneurial within each sector: telecommunica-businesses to identify and pursue tions, new media, financial services,value enhancement initiatives across energy, manufacturing and hi-tech.innovation, international expansion,and operational effectiveness. In 2007 Value Partners acquired Spectrum Strategy Consultants –a leading UK company specialized in publishing, broadcasting, entertain- ment, IPTV and mobile – thus further strengthening its international pres- ence. Today Value Partners is a lead- ing advisor in the telecom, media and technology sectors worldwide. Copyright © Value Partners Management Consulting Limited All rights reservedperspective BEATING THE OFFSIDE TRAP