Napoli's Success Story

Despite a disappointing home defeat to Udinese last Sunday, this has still been a great season for Napoli, who currently lie second in the Serie A league table with five games remaining. Even though the scudetto is now probably beyond them, there’s still a slim chance that they could catch the leaders Milan, while qualification for the Champions League looks more than likely. The team has played its football at a fast tempo and with the intensity typical of manager Walter Mazzarri, a shrewd tactician and a powerful motivator, which has delighted the club’s passionate supporters.

The prolific Uruguayan striker Edinson Cavani has been the focal point of some exhilarating displays, scoring 25 goals already this season. His form has been so impressive that a newspaper from his homeland gushingly described him as Vesuvius, a comparison that club president Aurelio De Laurentiis smilingly corrected, “The volcano is dormant, while our striker is very much active.” Equally impressive in a fluid tridente have been the Slovak Marek Hamsik, a skilful midfielder, and the pacy Argentine schemer Ezequiel Lavezzi.

Of course, this is not the first time that South Americans have played a vital role for the Partenopei and this season’s title race with Milan is reminiscent of the glory days of the late 80s, when Napoli became the first mainland southern club to win the league in 1986/87, a triumph that they repeated three years later. At that time, they were inspired by the legendary Maradona, who formed a lethal partnership with Brazilian forward Careca. Ably supported by Italian internationals Ciro Ferrara, Salvatore Bagni and the aptly named Fernando De Napoli, that team also won the UEFA Cup in 1988/89, beating Stuttgart 5-4 over two legs in the final.

"Lavezzi shows some love"

Napoli’s modern day success has been matched by their achievements off the pitch, as they have reported profits four years in a row, a rare feat indeed for any football club. The press has elected the club “queen of the balance sheet” (the Italian word for club is feminine), while saying that its accounts are “Champions League standard”. Given how many clubs in Europe’s flagship competition make hefty losses, this is perhaps not the best analogy, but we understand what they mean and they’re right: Napoli’s progress in recent years has been remarkable and all the more impressive, as it has not been at the price of their finances.

Their accomplishments off the pitch have been maintained despite De Laurentiis funding significant investment in the squad since Napoli returned to Italy’s top tier in 2007 in an ambitious attempt to catch up with the leading clubs. In fact, according to respected website Transfermarkt, Napoli have spent more than any other Serie A club in the last four years with net spend of €118 million, just ahead of Juventus. The fact that they have still managed to balance their books (and more) in the face of such heavy spending is testament to their ability to keep a lid on the wage bill, while boosting revenue, most notably in the commercial arena.

This financial fortitude will come as a great relief to the club’s fans who had to endure so many trials and tribulations after the turn of the Millennium. Following the departure of extravagant longtime president Corrado Ferlaino in 1994, Napoli’s financial woes were laid bare, leading to a rapid fall from grace as a succession of different owners tried to stem the losses. This had an inevitable impact on the team’s performances, leading to relegation to Serie B in 1997/98. Although they managed to return to the top flight two years later, they were again relegated the following season. The endless legal battles among the owners took their toll, culminating in the club being declared bankrupt by a local tribunal in August 2004 with debts of €79 million.

The Italian football federation ruled that Napoli could only survive professionally if an owner started a new franchise for the club in Serie C1 (the third tier of Italian football), otherwise the club would have to compete in amateur competitions. Luciano Gaucci, the owner of Perugia, tried to put together a rescue plan, but lacked the resources to do so, leaving the way clear for Aurelio De Laurentiis to save the club by paying the courts €30 million, ensuring that professional football was kept alive in his home city.

"Meet El Presidente"

“DeLa” is a successful movie producer, nephew of the celebrated Dino De Laurentiis, but he was confronted by a desperate situation: no equipment, no training ground and crucially no players. Furthermore, the new club had not been allowed to retain the name SSC Napoli, so was given the (frankly awful) name of Napoli Soccer.

Nevertheless, where there’s a will, there’s a way and “DeLa” acted quickly to address the club’s urgent problems. He injected money, recruited Pierpaolo Marino from Udinese as sporting director and hired the hard-working Edy Reja as coach. It was the beginning of a new era.

Despite the chaotic circumstances at the start of the season, Napoli only just missed out on promotion from Serie C1 in 2004/05, losing to Avellino in the promotion play-off, but they absolutely stormed the league the following year, winning the title by 13 points. A second successive promotion followed the next season, when they went up from Serie B along with Juventus and Genoa.

They finished in a highly creditable eighth place in their first season back in Serie A, though De Laurentiis admitted that this was in no small part due to the Calciopoli match-fixing scandal that saw Juventus, Milan, Lazio, Fiorentina and Reggina punished. Having qualified for the 2008/09 UEFA Cup, albeit via the Intertoto Cup, and this season’s Europa League, following the more legitimate route of sixth place in Serie A, Napoli are well and truly back.

"Mazzarri encourages the troops"

When De Laurentiis took over the club, he put into place a project to return Napoli to Serie A in five years. As it turned out, they comfortably beat that target, so this can be described as a huge success. However, this did not stop the owner from replacing the popular Edy Reja with the former coach of the national team Roberto Donadoni in March 2009, after a worrying run of form.

This was a sign of things to come, as De Laurentiis embarked on a second cycle that summer, “Tonight starts my new five year era at the club. This is a key time for Napoli and we can’t afford any more errors.” First, he fired respected sporting director Marino, whose spectacular successes in the transfer market like Hamsik and Lavezzi were not enough to compensate for a series of poor purchases. In his place, the club brought in Riccardo Bigon, whose father Alberto Bigon was the coach who guided Napoli to their second scudetto.

Then, it was the turn of Donadoni to get the chop, after the president admitted he had made a mistake in dismissing Reja, with former Sampdoria coach Walter Mazzarri joining the new project. With typical understatement, De Laurentiis said that Mazzarri was “far better” than the then Inter manager Jose Mourinho, but it has to be remembered that he had also said Reja “must stay at Napoli for the rest of his life.”

That said, it would be a brave man that dared to carp at De Laurentiis’ deeds, as he has been an almost exemplary owner for Napoli, completely rebuilding the club in just a few years, so much so that they are one of only two teams in Serie A that made profits in each of the last two seasons (the other one is Catania), generating a total of €11 million. That’s some achievement, when you consider that the only team ahead of them in the league (Milan) lost a combined €77 million in the same period, while the team just behind them (Inter) made staggering losses of €223 million.

While it’s true that money does not always buy success, it sure helps, so for Napoli to be doing so well with such a low budget is praiseworthy indeed. Very few clubs manage to balance success on the pitch with solid financials, so Napoli deserve a big pat on the back, even more so given the challenges faced by Italian clubs, which have had to cope with falling crowds, accusations of corruption and occasional violence and racism, not to mention an over-reliance on television money.

However, Napoli have managed to buck the trend, making profits in each of the last four years. The last time that they made a loss was when they were in Serie C1 in 2005/06. This is even more impressive, when you consider that they have achieved this without the benefit of Champions League money and relatively low profits on player sales, e.g. €6.6 million in 2009/10 (Mannini to Sampdoria €4.9 million, Contini to Real Zaragoza €1.7 million) and €10 million the previous year. It is true that the continued investment in players reduced profit last season from €10.9 million to €0.3 million, as both wages and player amortisation significantly increased, but that’s still pretty good, considering that 16 of the 20 Serie A teams made losses in the same period.

Napoli’s revenue of €92 million is the sixth highest in Italy, on a similar level to Fiorentina and Lazio. However, it’s less than half the revenue generated by the traditional big four clubs, mainly due to their very high individual television deals. Inter lead the way with €225 million, followed by their local rivals Milan €208 million and Juventus €205 million. On the other hand, Napoli’s revenue is in turn more than twice as much as competitors like Genoa, Udinese and Sampdoria.

It also puts Napoli in 29th position in the Deloitte Money League, which ranks European clubs in order of revenue, a fall of one place over the previous season, just below clubs of the stature of Borussia Dortmund, Valencia, Benfica and Werder Bremen.

This is obviously fairly good by most standards, but the European league table also reveals the significant monetary advantage enjoyed by the leading teams with Real Madrid and Barcelona earning four to five times as much income as a club like Fiorentina. To place Napoli’s recent achievements into context, when they lost out to Liverpool in this season’s Europa League, they were facing a team whose annual budget is two and a half times as high as their own.

Two points stand out from the analysis of the revenue mix. Commercial revenue is relatively high, representing 41% of total revenue, which is one of the largest proportions of any Italian club, only surpassed by Siena (48%), but that is more due to the Tuscan club’s incredibly low match day revenue. In turn, this means that Napoli’s reliance on TV income is far lower than other clubs at just 43% of total revenue, which is the lowest in Serie A. As a comparison, the proportions at Juventus, Inter and Milan are considerably higher: 65%, 61% and 56% respectively.

Those of you who keep up with financial affairs may be wondering why the revenue figures used in my Money League are lower than those used in the analysis recently reported by La Gazzetta dello Sport. The reason for the difference is that Italian accounts report gross revenue, while Deloitte show the net income in their annual survey. In order to be consistent with other countries, I have adopted the Deloitte approach in my analysis, so have excluded the following: (a) gate receipts given to visiting clubs €2.7 million; (b) TV income given to visiting clubs €8.8 million; (c) revenue from player loans €1.2 million. Adding the €12.6 million adjustments to the €91.6 million in my analysis gives the €104.2 million reported in Italy.

Napoli’s revenue growth shows just how far they have come since the dark days of C1. In fact, their revenue is more than eight times higher with significant increases in all the revenue streams: match day €4 million to €14.5 million, commercial €5.1 million to €37.7 million and broadcasting €2 million to €39.4 million. The huge differences between each division can clearly be seen in the graph above, first in 2007 after the promotion to Serie B, then the following year with the elevation to Serie A.

The commercial income of €38 million is the most impressive aspect of this revenue growth, reflecting Napoli’s “modern and ambitious plan” to increase their “brand equity”. This is most obviously reflected in the enormous amount of branded merchandise that is available, which clearly demonstrates both the club’s future direction and the supporters’ appetite for all things Napoli.

According to Deloitte, Napoli’s commercial revenue is the 20th highest in Europe at about the same level as Roma, though it is still more than €20 million lower than Milan, who generate most commercial income in Italy, so there is still room for growth.

Napoli have a veritable raft of institutional sponsors, official partners and commercial partners, though their main official sponsor is Acqua Lete, who are paying €5.5 million for the current season. This is lower than Milan (Emirates €12 million), Inter (Pirelli €9 million) and Juventus (BetClic €8 million), but is higher than Roma (Wind €5 million) and Fiorentina (Mazda €4 million). There are rumours that De Laurentiis is looking for a new sponsor to pay €9 million a season, which is ambitious, but is a clear sign of intent (and would have the advantage of replacing the unpopular red Lete logo).

Kit supplier Macron replaced Diadora in 2009, signing a three-year deal worth around €4.7 million a season, which is a fair bit lower than the leading clubs: Milan – Adidas €13 million, Juventus – Nike €12 million, Inter – Nike €18 million. If the commercial aspirations are to be met, this is one area that will have to be tackled.

Despite the growth in commercial revenue, television remains the most important revenue stream, but only just, at €39 million, which is entirely derived from the domestic deal. The importance of Champions League TV revenue can be seen in the graph above, as it contributed an average of €29 million for the four Italian qualifiers (Inter €49 million, Milan €24 million, Fiorentina €22 million and Juventus €21 million). This explains virtually all of the difference in television revenue between Napoli and Fiorentina (€65 million).

To a lesser extent, this factor also explains most of the €3 million reduction in Napoli’s television revenue in 2009/10 from €42 million to €39 million, as the previous year included revenue from competing in the UEFA Cup.

The lack of a level playing field financially in Italy up to now has largely been due to the vast differences in the size of individual TV deals, where Juventus, Inter and Milan have been earning €90-100 million a season – more than twice as much as the likes of Napoli. After many years of protests at this inherent unfairness, this structure was replaced at the start of the current season with the move to a centralised collective deal. The total money guaranteed by exclusive media rights partner Infront Sports will be approximately 20% higher than before at over €1 billion a year, but it is still unclear what the impact will be on the revenue at individual clubs.

There is a complicated distribution formula, which will still favour the bigger clubs, though there is likely to be a reduction at the top end. Under the new regulations, 40% will be divided equally among the 20 Serie A clubs; 30% is based on number of fans (25%) and the population of the club’s city (5%); and 30% is based on past results (5% last season, 15% last 5 years, 10% from 1946 to the sixth season before last).

Of course, Napoli’s “ability to attract the paying public” (per the accounts) is also a key revenue driver. Although their match day revenue of €14.5 million (after deducting €2.7 million given to away clubs) is on the low side, this is not atypical for Italy. In fact, Napoli’s gate receipts are not very far behind Juventus €17 million and Roma €19 million, though Inter and Milan are much higher with €39 million and €31 million respectively.

The average attendance last season of 40,797 was the fourth highest in Italy, only behind Inter, Milan and Roma, and was actually the 30th highest in the whole of Europe, ahead of clubs like Sevilla, Tottenham Hotspur, Lyon and Porto. Signs of the fans’ loyalty abound, such as the 51,000 crowd that they attracted for their final game in Serie C1, which unsurprisingly is a record for that division. More recently, they took 15,000 fans with them when they played a match in Bologna, while their home average attendance this season has risen 9% to 44,509, including a 58,666 crowd for the match against Juventus.

Napoli play their home games at the imposing Stadio San Paolo, which has a capacity of 60,240 and is the third largest stadium in Italy after San Siro in Milan and Stadio Olimpico in Rome. As is the norm in Italy, the ground is not owned by the club, but by the local council, which is paid nearly €600,000 rent a year.

"The sound of the crowd"

This is in marked contrast to their European peers, who have a business model that relies on much higher match day revenue. As an extreme example, Real Madrid’s annual match day income of €129 million is almost exactly nine times as much as Napoli, while English clubs also earn considerably more, e.g. Manchester United €122 million and Arsenal €115 million. Now I’m not suggesting for a minute that it would be feasible for Napoli to attain such levels of revenue, but there is clearly some scope for improvement here, especially if they can adjust the customer mix to include more premium seating.

Some might argue that low pricing at matches is a good thing and has not harmed the financials of German clubs, which I would agree with up to a point, but it is worth noting that match day revenue still tends to be higher in Germany than Italy, e.g. Schalke 04 and Borussia Dortmund, who are analogous to Napoli in many ways (large, passionate crowds), earned €25 million and €23 million respectively last year, nearly twice as much as the Partenopei’s €14 million. Furthermore, Bayern Munich (€67 million) and Hamburg (€49 million) earn a great deal more.

Even though Napoli’s revenue growth has been striking, what is really driving their excellent profits is their ability to keep costs under control, especially the wage bill. Although wages increased 25% last season to €39 million, the important wages to turnover ratio is still only 42%, which is astonishingly low for a major football club and way below UEFA’s recommended maximum limit of 70%. As a comparison, the five Italian clubs with higher revenue than Napoli all have significantly worse ratios: Inter 104%, Milan 83%, Juventus 67%, Roma 82% and Fiorentina 67%.

This reflects the tough wage policy implemented by De Laurentiis, which many of his players have discovered to their chagrin. For example, when Lavezzi asked for a pay rise a couple of years ago, the owner gave him short shrift, “If an actor were to behave like this, I would eat him alive.”

Napoli’s wage bill of €39 million is the seventh highest in Italy, but it’s miles behind the “big boys”: Inter €234 million, Milan €172 million, Juventus €138 million and Roma €101 million. According to the annual salary survey published by La Gazzetta dello Sport, the net cost of Napoli’s first team squad is just €28 million and only four players earn more than €1 million a season: Cavani €1.8 million, Andrea Dossena €1.5 million, Lavezzi €1.4 million and Hamsik €1.3 million.

In fact, La Gazzetta also amusingly pointed out that the €11 million total cost of Napoli’s starting XI is less than the €12 million cost of Milan’s Zlatan Ibrahimovic on his own (salary €9 million, bonus €3 million).

Of course, a club’s total wage bill does not just comprise players’ salaries, though this was the largest element of Napoli’s costs at €29 million. In addition, there were €4.2 million for salaries of coaches and €1.6 million bonuses.

To strike a cautionary note, it is entirely possible that wages will increase further in the future, as the club attempts to retain its crown jewels. Indeed, the accounts specifically mention that these costs will rise as part of the company’s strategic investment, though they argue that any growth will be sustainable. It is also true that sporting director Bigon has been working to move on some squad players, which will be of benefit to the wage bill.

"Walter Gargano - Napoli's other Uruguayan"

Similar to salaries, the strengthening of the squad has resulted in a 45% increase in player amortisation from €28 million to €40 million, which is more or less the same level as Milan and Juventus, but below Inter (€65 million), so is on the high side for a club of Napoli’s stature.

For those not overly familiar with accounting methodology, amortisation is simply the annual cost of writing-down a player’s purchase price. Almost all clubs book this evenly over the life of a player's contract, but Napoli use an accelerated amortisation method, which I have not seen in any other club that I have reviewed. For example, in a five-year contract the amortisation rates are: 40%, 30%, 20%, 7% and 3%.

To illustrate how this works, when Fabio Quagliarella was signed for €18 million on a five-year contract, the entire transfer fee was not booked immediately, but was reflected in the profit and loss account via amortisation with €7.2 million booked in 2009 (40% of €18 million). Thus, the total cost of player purchases does not fully show up in the expenses straight away, but increased transfer spend will ultimately feed through to the accounts as a result of higher amortisation.

Therefore, the fact that amortisation increased by so much (from €4 million in 2007 to €40 million in 2010) would imply that Napoli have been spending big in the transfer market and, as we saw earlier, that is indeed the case. Having spent virtually nothing in the six years up to 2006/07, ever since the club returned to Serie A the taps have been turned on with net expenditure (purchases of sales proceeds) of €118 million. In fact, Futebol Finance placed Napoli in ninth place in their European league of highest spenders in the transfer market in 2009/10.

One of the reasons that former sporting director Pierpaolo Marino was let go was his patchy record in spending the small fortune given to him by De Laurentiis. Although he managed to locate some gems during his tenure, paying just €5.6 million for Lavezzi and €5.5 million for Hamsik, there’s little doubt that many of his purchases failed to live up to their potential with the likes of German Denis, Jesus Datolo and Matteo Contini being moved on at a loss. The owner further complained that “we still have many players here as a result of the errors of previous mercati. Why do we keep players here when we know we don’t have any use for them?”

Riccardo Bigon, the new sporting director, has made an excellent start by making possibly the deal of the season, when he secured the services of Cavani from Palermo’s volatile president Maurizio Zamparini for the ridiculously low price of a €4 million loan fee with an option to buy next summer for €12 million. After a relatively quiet January transfer window when Napoli “only” purchased Victor Ruiz from Espanyol for €6 million (plus Datolo) and Giuseppe Mascara from Catania, all eyes will be on the Partenopei’s dealings in the summer.

In spite of this lavish expenditure on new players, Napoli are in a very good debt position. In fact, they now have no bank debts at all, after eliminating the €32 million balance in 2005, and actually have cash balances of €14 million. They do owe €14 million to the parent company Filmauro (owned by De Laurentiis) and €4 million to shareholders, but this is not a major issue. This enviable position is a sign of the club’s self-sufficiency and is in marked contrast to Milan and Inter, who have large bank debts of €164 million and €71 million respectively, which represents two thirds of the Serie A total of €352 million.

However, one financing mechanism actively embraced by Napoli is stage payments on transfer fees, a device that is very widely used in Italy. This helps explain why Napoli can afford their sizeable transfer expenditure in recent years, as the net transfer fees payable to other clubs have risen to €36 million (payables €48 million less receivables €12 million). As an example of how this works, the transfer fee for Quagliarella was €18 million, but Napoli still owed Udinese €12.5 million as at 30 June 2010 with the following payment schedule: December 2010 €4.9 million, March 2011 €2.1 million, December 2011 €3.85 million and March 2012 €1.65 million.

Nevertheless, Napoli have one of the strongest balance sheets in Serie A with net assets of €25 million, only behind Fiorentina, Juventus, Udinese and Cagliari. What is even more impressive is that this position has very largely been reached without the owner having to cover shortfalls by providing cash injections, as is the case at many other clubs. Furthermore, the club’s profits have been used to reinforce reserves, rather than being distributed to the owners.

So what of the future?

Like every other ambitious club, Napoli will have to meet the challenge of keeping salaries at a low level, while seeking to make further progress in terms of sporting results. It seems likely that costs will continue to rise, especially salaries and player amortisation, as a consequence of strengthening the squad and extending player contracts, so this will be more difficult than in the past. That said, if Napoli do qualify for the Champions League, that could be worth an additional €40 million revenue, mainly from UEFA’s central distributions, but also via more gate receipts and better commercial deals.

In that eventuality, the question is how much of the extra funds Napoli will choose to spend. The money could be used to recruit better players, but this might place a risk on the club’s finances, as there is no guarantee that the European adventure will last more than a single season. This is similar to the dilemma facing Tottenham this season.

"Marek Hamsik rocking the hedgehog haircut"

The question that is probably uppermost in the minds of Napoli fans is whether the club can hang on to its stars. There has been almost constant speculation about Hamsik, Lavezzi and Cavani, who could certainly earn more money elsewhere. The last thing that De Laurentiis would want is for Napoli to acquire the reputation of being a selling club, but the club might be tempted to cash in on its assets, especially if the players themselves want to leave.

Cavani himself has been quoted recently as saying that the only club he would leave Napoli for is Real Madrid, but no less than an authority than Jose Mourinho commented, “Edinson Cavani, Marek Hamsik and Ezequiel Lavezzi are great players in an important club. The side wants to grow, not sell and for this reason I don’t go looking for their players.” However, things can change quickly in the football world, so it would not be a massive surprise to see one of them leave, especially as their value in the transfer market (€147 million per Transfermarkt) is considerably higher than on the balance sheet (€50 million).

On the other hand, De Laurentiis may be tempted to use the Champions League war chest to take the team to the next level, especially as the team seems to struggle when one of the tridente is missing. The president has already announced the purchase of two promising players: Slovenian striker Tim Matavz from Groningen and Argentine defender Federico Fernandez from Estudiantes. Many other potential purchases have been mentioned in dispatches, the most frequent names being Udinese’s Gokhan Inler and Villarreal’s Borja Valero.

"Christian Maggio - flying down the wing"

Any activity in the transfer market will be partly determined by the coach. Although there have been a few whispers that Mazzarri interests Juventus, De Laurentiis has nipped the rumours in the bud, “He still has three years left on his contract. You (journalists) will still be dealing with him for a while.”

However, it’s unlikely that Napoli will suddenly go crazy with their expenditure. De Laurentiis recently stated that the club would “not change its initial plan of gradual growth.” When he was coming under pressure to buy more players in the January transfer window, he argued, “The best signing was made by those clubs that spent the least, thereby keeping their books in order, in line with the financial fair play rules.”

The president of the Italian Football Federation, Giancarlo Abete, recently praised Napoli as an example for other clubs to follow for their ability to compete with the Northern giants while balancing their budget. He further observed that they were already in line with UEFA’s upcoming Financial Fair Play initiative: “Someone like Aurelio De Laurentiis, who has been able to carefully plan for the future, can calmly approach the new environment, keeping costs under control.”

"Paolo Cannavaro - leading by example"

This is one reason why the club is seeking to upgrade its academy, so that homegrown youth players can progress to the first team instead of the club continually having to “gamble” on bringing in new players at exorbitant prices. Indeed, De Laurentiis has spoken of a desire to emulate Barcelona (as indeed have many other owners), but clearly such a project takes time to come to fruition.

In the meantime, there is still all to play for this season. Although the president claimed that he could not compete with the Berlusconis of this world, the fact is that Napoli have done a pretty good job of proving him wrong with their thrilling challenge for the title. As a film producer, De Laurentiis will be very aware that a film does not always have a happy ending, but Napoli’s fans can certainly dream of an exciting future.