Football clubs must have clear plans for the future. This is especially relevant when making asset acquisitions or sales, something which teams constantly do. In this essay I will attempt to highlight these factors and determine which are the most important .
I predict that my findings will indicate two groups of factors which must be considered. I believe the two categories will be macroeconomic factors, comprising of broad economic information and microeconomic factors such as match attendance. I predict that while macroeconomic factors will have to be considered, microeconomic conditions are likely to be more important.
I will first look at the macroeconomic factors that clubs must consider. The first consideration is likely to be the general state of the economy as this will directly determine the disposable income of the supporters . This will not only affect the attendances, the primary source of revenue for clubs, but also the sale of merchandising, the secondary source of income. While clubs could analyse national economic trends, it would be more effective for them to consider the trends within a specified area around the stadium as this will provide economic data for the catchment area of the club. Specifically clubs will analyse disposable income levels as this shows whether or not people can afford the luxury of football tickets, a product with elastic demand traits. Nationally appealing teams, whose merchandising and tickets are purchased from a significant number of people not in the immediate geographic vicinity, may be more concerned with national economic trends as this will affect them directly. Nationally appealing teams must still consider the local economy however as a significant percentage of their consumers will live within 20 miles of the ground itself. The survey response that I received did not indicate that macroeconomic conditions such as these are considered, I believe however that even if they are not considered consciously they will play a significant role in the decision to spend money on an asset.
A macroeconomic factor which will be vitally important to all clubs throughout the leagues will be the interest rates. The majority of clubs within the football league have large debts. Nearly all clubs have borrowed in order to purchase players and upgrade stadium facilities. This has left many with truly massive debts. Chelsea FC declared debts of £31.1m in their 2002 annual report and Leeds United are known to be struggling. With comparative debts at clubs throughout the country it is obvious that fluctuations in interest rates could have massive repercussions. If rates were to rise then the money set aside for a new player’s wages may be spent on keeping up with loan repayments. Conversely, if rates fell there may be spare capitol for investment in ground improvements or new players.
While macroeconomic factors will give the clubs a sense of whether or not they can invest safely, microeconomic factors will show whether a club can invest successfully. Microeconomic factors can be split into two sub-categories; factors relating to stadium development and factors relating to player purchasing. When looking at stadium development a club must look at a number of microeconomic factors. Firstly, a new stadium will only be a profitable venture if the stadium can be filled to a capacity that makes use of all its facilities. This means that there must be sufficient demand before a new stadium venture can be considered. This demand could already exist (if, for example, all games are sold out or near capacity as was the case at Leicester City) or could be predicted, for example if moving from ground A to ground B will attract new fans because of better facilities. This was the case with Hull City, who saw gates move from an average of 8,582 to 15,397 following their move from Boothferry Park to the K.C. Stadium.
A new stadium or a stadium development project is likely to incur costs for the club that are beyond normal operating margins. The development of club facilities will reduce the capital available for player acquisitions in the future. If a club is operating at full capacity this could be offset by the increased revenues once the stand/stadium is opened and the considerable debts have been paid. It is entirely possible however that the development of a new stadium will attract players to a club that would otherwise fail to bring in good quality playing staff. Examples of this include Oxford United’s Kassam Stadium and the Kingston Communications Stadium in Hull. Though not a tangible benefit of a new stadium the ability to acquire more talented players may allow a club to gain promotion or a better league position which would be rewarded with a better reputation and therefore the ability to sign even better players, the new players leading to higher attendances in the future. This of course relies on the success of new players and a certain degree of luck. Many teams have gambled on investment yielding future success and have lost heavily. Teams such as Hull City consistently under-perform despite heavy investment, creating financial difficulties that have led to three winding up orders.
When considering an addition to the playing staff a club must look at a wider range of factors. The initial factor must of course be whether or not the player would benefit the team performance. However once this has been decided by the manager there are still a number of extremely important factors to be considered. This is perhaps the single most important consideration for clubs because success on the pitch will lead to amplified tertiary benefits such as attendance and those detailed below.
The club will then need to ascertain whether or not they can afford a players transfer fee and wages. Many clubs are currently struggling because players were purchased on the basis that television revenues from ITV Digital would pay for their wages. The removal of this money has left many clubs seriously under financed and some, such as Yorkcity Soccer Club and Bradford City, are now in serious financial difficulties. Difficulties arise here as clubs cannot accurately predict the attendances, and therefore cash flow, of all the games for the next three years. Uncertainty prevents accuracy and so clubs must air on the side of caution.
The next factor considered by many clubs is the player’s future value. Many teams purchase young players with a view to introducing them to the team years to come or in the hope that a larger team will see the potential and pay a considerably higher sum, allowing the first club to make a profit. This “sell on revenue” cannot be relied on as a player may not show the promise of his early days or might decided he wants to stay at the club, possibly on higher wages. Increasingly teams such as Manchester United are signing any young players with a potential to avoid high transfer fees in the future. Some players will also depreciate in value, such as those nearing the end of their career or those wishing to retire. In these cases a club must consider whether the benefits gained from the player during his contracted period will outweigh the losses on transfer fees and wages.
The purchase of a new player will also have an effect on the match day attendances. With attendance being a large consideration in terms of financial planning, it is not uncommon for players to effectively pay for themselves with increased gates. An example of this is Carlisle United’s acquisition of Stuart Green which took the attendance from 3,457 to 5,206 . This would earn the club an additional £3000 from one game alone, allowing them to pay the players wages for an estimated 3 weeks. Towards the end of the season many clubs make purchases as part of an extension strategy to prevent attendances sliding once the chances of play-offs, promotion and the threat of relegation have subsided. In these cases they must carefully consider whether the costs involved in buying the player can be offset by the sustained revenues for the remaining part of the season.
Clubs must also factor in the likelihood that a player may end his career through injury, retirement or a number of other causes before his contract has ended, forcing a payout clause to be initiated, or before he can be sold on, removing the possibility for capital growth or a return on the investment made by the club in his training. In these cases, the retirement/injury is amortised in the accounts for the remainder of the contract, meaning any such chance incidents may hamper a club for a significant period of time. However, factors such as injuries can be offset by paying into insurance schemes.
The opportunity for merchandising will also be considered before purchasing any new players. When a major new signing arrives at a club sales of replica shirts with the players name and sponsorship often increase extraordinarily. With merchandising playing a crucial role in the clubs revenues, they must strongly consider whether a more expensive play may bring in more revenue sales. This is more of an issue for Barclaycard Premiership teams that Nationwide League teams as their merchandising forms a larger part of their revenues. Premiership teams also have the ability to sign well know players on longer contracts where Nationwide league teams may struggle to bring in names which command high merchandise demands.
In conclusion, I believe that football clubs must always consider the broader macroeconomic conditions but that microeconomic conditions are more important as they provide an insight in the future profitability and survivability of the clubs. Clubs must also factor in a safety margin as the uncertainty of all business; especially football may lead to unexpected costs or reductions in revenue that simply cannot be planned for.
Bibliography and sources
- http://www.saveyork.co.uk/article047.htm - York City Supporters Trust
- ://www.chelseavillage.com – Chelsea Football Club Owners Website
- Questionaires sent to 5 clubs, of which only Hull City replied
- Nuffield Text Book
- Previous conversations with Adam Pearson, chairman of Hull City.