Tuesday, October 2, 2012

Arsenal - The Song Remains The Same

It has been a mixed start to the season for Arsenal, as promising away performances at champions Manchester City and a rejuvenated Liverpool have been balanced against a disappointing home defeat to Chelsea. However, there is an air of quiet optimism among the fans that Arsène Wenger’s new-look side will be able to mount a challenge once the new players have fully gelled. It certainly feels better than last year when the Gunners were on the wrong end of an 8-2 thrashing by Manchester United.

In fact, Arsenal recovered well after that disastrous start to finish in a creditable third position, securing qualification for the Champions League for a hugely impressive 15 seasons in a row. Even Wenger was moved to describe this feat as a “miracle”, citing the thrilling 5-2 victory over Spurs in the North London derby as the turning point. Nevertheless, it was a close run thing, as Arsenal only made sure of qualifying with a last day victory at West Brom.

The team’s inconsistent performances can be partly attributed to the significant amount of turnover in the playing squad, exacerbated by losing some of the club’s best performers each summer. Last year Cesc Fàbregas returned to his spiritual home at Barcelona, while Samir Nasri moved north to join Manchester City’s project. In the recent transfer window, it was the turn of leading scorer Robin Van Persie to head towards Manchester, though he opted for Old Trafford, while Alex Song joined the long list of Arsenal players transferred to Barcelona.

"Mertesacker - the power of Per-suasion"

Good arguments can be put forward that each of these sales may have made sense individually, e.g. RVP was in the last year of his contract, while the offer for Song was too good to refuse given his tactical indiscipline, but taken together they do give the impression that Arsenal have become a selling club, not overly bothered if their best players leave.

At least Arsenal appeared to have more of a plan this summer, recruiting international replacements before the departures, including the highly talented creative midfielder Santi Cazorla from Malaga, the experienced German forward Lukas Podolski from FC Köln and last season’s top scorer in Ligue 1 Olivier Giroud from Montpellier. Furthermore, the return of Jack Wilshere and Abou Diaby after lengthy absences through injury enabled the club to wheel out the tried-and-tested “like a new signing” line.

However, many fans remain baffled that a club of Arsenal’s immense financial resources did not aim higher in the transfer market, such as buying a striker of the calibre of Napoli’s Edinson Cavani or Atlético Madrid’s Radamel Falcao. Of course, either of these would have broken Arsenal’s transfer record by some distance, but the money is clearly available to fund a purchase of this magnitude.

"Cazorla - Spanish eyes"

To the outside world, it appears that Arsenal have paid rather more attention to strengthening their balance sheet, as opposed to the squad, an impression that was reinforced by last week’s announcement of a hefty profit for the 2011/12 season, described by Peter Hill-Wood as “another healthy set of full year results.”

As is the chairman’s style, that was a beautifully understated description of a thumping great profit before tax of £36.6 million, which was up from £14.8 million the previous year. This was split between £34.1 million from the football business (up from £2.2 million in 2010/11) and £2.5 million from property development (down from £12.6 million).

The massive £32 million increase in football profit was mainly due to profit on player sales rising £59 million to an enormous £65 million, largely from Fàbregas and Nasri, though recurring revenue also rose £10 million to £235 million with more than half of the growth coming from commercial operations.

However, this was offset by substantial increases in staff costs of £40 million: wages climbed 15% (£19 million) from £124 million to £143 million; player amortisation surged 70% (£15 million) to £37 million after last summer’s acquisitions; and a £6 million impairment charge was booked to reduce the value of players “deemed to be excluded from the Arsenal squad.”

Net interest charges continued to fall, down to £13.5 million from £14.2 million (£18.2 million in 2009/10).

As anticipated, there was a further slow-down in the property business with turnover falling from £30.3 million to £7.7 million, as the Highbury Square development is now almost entirely sold.

Chief executive Ivan Gazidis was at pains to emphasise the club’s self-sustaining model, claiming that the club “can and will forge its own path to success”, though he must be concerned about the continuing decline in operating profits, which have fallen from a £31 million peak in 2008/09 for the football business. In fact, excluding property development, the club actually reported an operating loss of £18 million last season, compared to the previous year’s £9 million operating profit. This £28 million turnaround was due to operating expenses (£38 million) rising much faster than revenue (£10 million).

Nevertheless, the bottom line is that Arsenal once again made another sizeable profit, even if it was largely on the back of player sales. There is no doubt that the club’s record off the pitch has been superb, especially in the unforgiving world of football, where large losses are frequently the order of the day. In fact, the last time that Arsenal reported a loss was a decade ago in 2002, amply demonstrating its self-financing ethos. The last five years have been particularly impressive, at least financially, with Arsenal accumulating staggering profits of £190 million, an average of £38 million a year.

Arsenal have consistently been one of the most profitable clubs in the world, though they are not quite the only leading club to make money. Both the Spanish giants have recently reported large profits for 2011/12: Barcelona £41 million (€49 million) and Real Madrid £27 million (€32 million). In addition, Bayern Munich have been profitable for 19 consecutive years. Manchester United slipped to a £5 million loss (before tax) last season, dragged down by £50 million of interest charges, though they made a £30 million profit the previous year.

At the other end of the spectrum, clubs operating with a benefactor model reported enormous losses. Manchester City’s £197 million loss in 2010/11 was the largest ever recorded in England, while Juventus, Inter, Chelsea and Milan all registered losses of around £70 million. As Gazidis put it, “we see clubs struggling to keep pace with the financial demands of the modern game.”

That said, the arrival of UEFA’s Financial Fair Play (FFP) regulations, not to mention the economic difficulties of many of the clubs’ owners, has produced a clear change in behaviour. Milan and Inter have been selling their experienced, more expensive players, while City were relatively restrained in the transfer market (by their own exalted standards) this summer. Even Chelsea’s spending has been on younger players with a future resale value.

So far, so good, but Arsenal’s profits have been very reliant on player sales and (to a lesser extent) property development. In 2011/12, if we exclude the £2.5 million profit from property development and the £65.5 million profit from player sales, the football club would actually have made a sizeable loss of £31.3 million.

No other leading club has been so dependent on player sales as part of its business model. In fact, over the last six years, selling the club’s stars has been responsible for £178 million (or over 90%) of the £195 million total profit. That’s great business, but it makes it very difficult to build a winning team, as Arsenal seem to be perpetually two pieces short of the complete jigsaw.

There’s little sign of this slowing down either, as the sales of Van Persie and Song were made after the 31 May accounting close, so will be included in next year’s accounts, contributing another £37 million of profit.

These “once-off” sales are all well and good, but they have been disguising Arsenal’s increasing operational inefficiency. This can be seen by the decline in cash profits, known as EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation), which has virtually halved from a peak of £66 million in 2008/09 to £35 million last season. That’s still pretty good for a football club, but, to place it into context, it is less than 40% of the £92 million generated by Manchester United, who also forecast growth to £107-110 million this season.

This may be a tiresome accounting term, but it is important, as it represents the cash available for a club to spend – unless it sells players or increases debt. Assuming no change in overall strategy, this means that Arsenal will continue to sell players unless/until they grow revenue or cut their wage bill.

As Gazidis explained, “The reason we talk about the financial results at all is that it provides the platform for us to be successful on the field.” Given this truism, let’s look at some of the challenges facing Arsenal.

1. How will the club grow revenue?

Looking at the club’s revenue of £235 million, which is the fifth highest in Europe, it is difficult to imagine that this could be an issue, especially as it is only surpassed by Manchester United in England (£331 million in 2010/11, £320 million in 2011/12), while it is way ahead of clubs like Liverpool £184 million, Tottenham £164 million and Manchester City £153 million.

However, there are three problems here: (a) the gap to the top four clubs is vast; (b) Arsenal’s revenue has hardly grown at all in the last few years; (c) other clubs have continued to grow their revenue.

Real Madrid and Barcelona generate around £200 million more revenue than Arsenal. Even though this shortfall would come down if the current exchange rate of 1.25 Euros to the Pound were used instead of the 1.11 prevailing when Deloitte produced their survey, the disparity would still be around £150 million, which makes it difficult to compete.

Although revenue rose £10 million last season to £235 million, this is effectively the only revenue growth since 2009, when revenue was £225 million. The largest increase in this three-year period came from broadcasting, which rose £11 million from £73 million to £85 million in 2012, as a result of centrally negotiated deals for the Premier League and UEFA (for the Champions League), so Arsenal’s board cannot take a great deal of credit for that.

Much was made of commercial revenue rising £5.6 million to £52.5 million, but this is only £4.4 million higher than the £48.1 million received in 2009. In other words, this crucial revenue stream has only grown by a miserable 9% in three years. Even though Gazidis stated in an interview with the club website that commercial partnerships were “well ahead of our five-year plan”, I would suggest that to date there has is not exactly been a scintillating return on investment in the expensive new commercial team.

"Giroud - handsome devil"

The most important revenue stream for Arsenal, match day income, has actually fallen from £100 million to £95 million, despite ticket prices being raised last season.

It is imperative that Arsenal manage to find ways to profitably grow their revenue, as Gazidis acknowledged during the results presentation, “Our activities to increase revenue are important. Increased revenues allow us to be more competitive and to keep pace with the ever present cost pressures in the game.” The club’s Chief Commercial Officer, Tom Fox, re-iterated this, when he described his role as “to build and grow the multiple revenue streams at the club in order to maximise the money available for the board and the manager to spend on the squad.”

Arsenal’s real revenue problem is that while they have struggled to increase their revenue, other leading clubs have continued to grow their business. In the three years since 2009, Real Madrid and Barcelona both grew revenue by around £90 million. Madrid have just announced record-breaking £411 million (€514 million) revenue for 2011/12, while Barcelona are not far behind with £381 million (€476 million).

For English clubs, United’s revenue fell back to £320 million in 2011/12 after their earlier Champions League exit, but still represented growth of £42 million since 2009, while the 2012/13 revenue outlook they provided to analysts was a mighty £350-360 million. The only leading club whose growth was anywhere near as low as Arsenal’s was Chelsea, but their 2011/12 figures will be much higher, due to the Champions League victory and new commercial deals.

Arsenal’s Achilles’ heel from a revenue perspective has been commercial income, which is extremely low for a club of Arsenal’s stature. Even after the 13% increase to £53 million in 2011/12, this still pales into insignificance compared to the likes of Bayern Munich £161 million, Real Madrid £156 million and Barcelona £141 million.

The story is no better in England, as Arsenal’s £53 million is less than half of Manchester United’s £118 million. While Arsenal have barely registered any commercial growth since 2009 (just £4 million), others have steamed ahead, including Manchester City (£41 million growth) and Liverpool (£17 million growth). The discrepancy will be even worse when those two clubs publish their latest accounts, as the 2010/11 figures do not include the increases for new sponsorship deals with Etihad and Warrior respectively.

Arsenal’s problems in this area can be highlighted by a comparison with Manchester United, who admittedly are the commercial benchmark for English clubs. Back in 2007, Arsenal’s commercial income of £42 million was just £14 million lower than United’s £56 million, but since then Arsenal’s revenue has only risen 26% to £53 million, while United’s has rocketed 110% to £118 million, leading to an annual difference of £65 million. Mind the gap, indeed.

Arsenal’s weakness in this area arises from the fact they had to tie themselves 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 how much money Arsenal leave on the table every season.

The Emirates deal was worth £90 million, covering 15 years of stadium naming rights (£42 million) running until 2020/21 and 8 years of shirt sponsorship (£48 million) until 2013/14. Following step-ups the shirt sponsorship deal is worth £5.5 million a season, which compares very unfavourably to the amounts earned by the other leading clubs, who have all improved their deals in recent seasons, so Liverpool, Manchester United and (reportedly) Manchester City earn £20 million from Standard Chartered, Aon and Etihad respectively.

In fact, no fewer than eight Premier League clubs now have a more lucrative shirt sponsorship than Arsenal. As well as the usual suspects, Arsenal’s deal is behind Sunderland’s barely credible £20 million deal with Invest in Africa, Tottenham £12.5 million (Aurasma £10 million plus Investec £2.5 million), Newcastle £10 million (Virgin Money) and Aston Villa £8 million deal (Genting).

The news is no better with Arsenal’s kit supplier, where the club signed a 7-year deal with Nike until 2011, which was then extended by three years until 2013/14. This now delivers £8 million a season, compared to the £25 million deal recently announced by Liverpool with Warrior Sports and the £25.4 million paid to Manchester United by Nike.

Gazidis talks a good match, “we continue to be successful in attracting top brands to sign on as commercial partners”, but the reality is that Arsenal have been outpaced in this area. Yes, they have indeed signed some new sponsors, such as Carlsberg, Indesit, Betsson, Bharti Airtel and Malta Guinness, while other like Citroen and Thomas Cook renewed for a higher sum, but there has been little tangible revenue improvement. Furthermore, Manchester United continue to attract more secondary sponsors than Arsenal, including seven since 1 July 2012 alone.

Indeed, much of the commercial revenue growth was down to the overseas tour to Malaysia and China, which is something of a double-edged sword, as it may well have had a detrimental effect on the players’ pre-season preparation.

"Jenkinson - corporal punishment"

More positively, Arsenal will have a fantastic opportunity for what Gazidis calls “a significant uplift in revenue” when the main sponsorship deals are up for renewal at the end of the 2013/14 season. If they could match the £45 million currently received by United and Liverpool for main shirt sponsor and kit supplier, that would imply a £32 million increase in revenue.

Great stuff, but the trouble is that the bar is being continually raised in sponsorship deals, so United have recently announced a truly spectacular deal with Chevrolet. Not only will this rise to an astonishing £45 million ($70 million) in 2014/15, but the sponsor will even pay them £11 million in each of the previous two seasons – while Aon are still the sponsors. Not only that, but United have also persuaded DHL to pay £10 million a season to sponsor their training kit.

In other words, there is no guarantee that Arsenal’s new sponsorship deals will ride over the hill like the seventh cavalry to save them, especially if the brand is damaged by a failure to qualify for the Champions League (though that has not prevented Liverpool from securing superb deals). Gazidis has said that “in terms of the financial impact, it will be as significant a step forward as the stadium was in 2005”, but his commercial team will have to significantly up its game – or Tom Fox will be considered about as effective “in the box” as Franny Jeffers.

Match day income of £95 million is the fourth highest in Europe, only behind Real Madrid, Manchester United and Barcelona, but that makes the club very reliant on the revenue generated in the stadium – “more so than any other club”, as Gazidis stated. Wenger confirmed its importance, “We are very lucky because we have good support and the income of our gates is very high.” Indeed, the £3.3 million that Arsenal generate per match is more than twice the amounts earned by Tottenham and Liverpool.

However, this revenue stream seems to have reached saturation point, as Arsenal continue to register capacity crowds of 60,000 and their ticket prices are among the highest in the world. In fact, match day income was actually higher in 2008/09 at £100 million, largely due to the high number of home games played (or old-fashioned success on the pitch). Furthermore, revenue per match has also fallen from the peak of £3.5 million in 2009/10.

Indeed, after the deeply unpopular 6.5% ticket price rise in 2011/12, most prices were frozen for this season, though 7,000 Club Level members were asked to pay an additional 2%. The media made great play of the cheapest tickets for the match against Chelsea (an A category game) being an obscene £62, though they have been less voluble about the 28% reduction in prices for C category games from £35 to £25.50. In addition, Arsenal have introduced a number of pricing initiatives, e.g. discounting lower-tier tickets to £10 for the Capital One Cup game against Coventry City.

The other issue here is what would happen if Arsenal failed to qualify for the Champions League, even if the inferior Europa League was on offer, as the season ticket includes the first seven cup games from European competition and the FA Cup. The club would surely have to issue credits, potentially leading to a 10-20% reduction in revenue.

The majority of Arsenal’s television revenue comes from the Premier League central distribution with the club receiving £56 million in 2011/12, unchanged from the previous season. Each club gets an equal share of 50% of the domestic rights (£13.8 million) and 100% of the overseas rights (£18.8 million) with the only differences down to merit payments (25% of domestic rights) and facility fees (25% of domestic rights), based on how many times each club is broadcast live. This methodology is very equitable with Arsenal only receiving £4.4 million less than champions Manchester City.

However, the signing of the £3 billion Premier League deal for domestic rights for the 2014-16 three-year cycle, representing an increase of 64%, will “provide clubs with a significant boost to their revenue” per Gazidis. If we assume (conservatively) that overseas rights rise by 40%, that would increase Arsenal’s share by around £30 million (using the same allocation system).

Of course, other English clubs’ revenue would also rise, though lower placed clubs would not receive as much in absolute terms, but this would certainly help Arsenal’s ability to compete with overseas clubs, especially Madrid and Barcelona, who benefit from massive individual deals.

The other major element included in TV revenue is the distribution from the Champions League, which was worth around £24 million (€28 million) to Arsenal in 2011/12. The amount earned depends on a number of factors: (a) performance – a club receives more prize money the further it progresses; (b) the TV (market) pool allocation – half depends on the progress in the competition, half depends on  the finishing position in the previous season’s Premier League; (c) exchange rates – the 2011/12 figure was adversely affected by the Euro’s weakness.

In this way, Chelsea earned more than twice as much last season as Arsenal with €60 million after their triumph in Munich. Interestingly, Manchester United (€35 million) also earned more than Arsenal, despite being eliminated at the group stage, as their share of the market pool was higher after winning the previous season’s Premier League, while Arsenal finished fourth. Potentially, Arsenal could increase their revenue by €30 million if they managed to emulate Chelsea’s success, but, by the same token, they could lose €30 million if they missed out on qualification to Europe’s flagship tournament.

However large the differences are between the English clubs that qualify for the Champions League, it is still much better than the Europa League, where the highest amount earned by an English representative was the €3.5 million that went to Stoke City. Financially, the Champions league is the only game in town, especially now that the prize money for the 2012 to 2015 three-year cycle has increased by 22%.

2. Are expenses out of control?

Last season saw the first operating loss in many years after expenses rose at a much faster rate than revenue. In particular, the wage bill shot up 15% from £124 million to £143 million, despite the sale of Fàbregas and Nasri, two of the highest earners. Part of the increase was presumably due to rushing in the likes of Per Mertesacker, André Santos and Park-Chu Young last summer without enough time for meaningful salary negotiations.

In addition, a once-off charge of £2.2 million was included to top-up the pension provision, while Arsenal’s lack of trophies and commercial growth did not prevent Gazidis’ package rising 24% to £2.15 million (salary £1.366 million, bonus £675,000, pension £100,000).

The explosive wage growth is nothing new. In fact, since 2009 wages have gone up £39 million (38%), while revenue has only grown by £10 million (5%), leading to a significant worsening in the wages to turnover ratio from 46% to 61%. This is by no means terrible (most Premier League teams have a ratio above 70%, while Manchester City notched up 114% in 2010/11), but is of concern, especially as Manchester United have managed to maintain their ratio around 50%. Though not the only reason, this helps to explain why so little has been spent in the transfer market.

The problem is that wages in football resemble a sporting arms race, as other clubs continue to set the agenda, notably Manchester City, who have increased their wage bill from £36 million to £174 million in just four years. Arsenal’s wage bill of £143 million is now the fourth highest in England, behind City, Chelsea £168 million (2011) and Manchester United £162 million (2012).

Arsenal’s performance in regularly finishing third or fourth in the Premier League means they have slightly outperformed expectations based on the wage bill, though Tottenham fans would note that they ran them very close last season with £30 million less wages.

"Wenger - train of thought"

One issue at Arsenal is the equitable wage structure, which means that the top salaries are not enough to attract the world’s best, while fringe players like Sébastien Squillaci and Marouane Chamakh are handsomely rewarded for sitting in the stands. Arsenal’s wage bill is sufficient to sign world-class players, but that would mean reducing the salaries of lesser lights. This has been tacitly admitted by Gazidis: “Can we compete at top salary levels? Yes we can, but we have an ethos at the club - the way Arsène expresses it is that it is not about individual players, it is what happens between them.”

The difficulty is in getting the unwanted players off the payroll at their high wages, hence loans for Nicklas Bendtner, Denilson and Park when the club would have preferred to sell them. However, there are signs that the club is now acting on this with numerous departures this summer and the hard line over contract discussions with Theo Walcott. This is a tricky balancing act for the board: if they extend contracts too early, they risk paying over the odds in wages; if they wait until the last minute, they risk losing the player for nothing on a Bosman.

The other expense impacted by investment in the squad, player amortisation, has also risen significantly from £22 million to £37 million. For those unfamiliar with this concept, amortisation is simply the annual cost of writing-down a player’s purchase price, e.g. Mikel Arteta was signed for £10 million on a 4-year contract with the transfer reflected in the accounts via amortisation, which is booked evenly over the life of his contract, so £2.5 million a year.

Many of the players that have been sold were fully amortised, so amortisation was reduced much by the departures, but it has increased following investment in new players. To give this some perspective, it’s still a lot less than Manchester City (£84 million), but significantly more than previous years.

3. Where has all the money gone?

After so many years of large profits, it is difficult for most supporters to understand where all the money has gone. Gazidis is adamant that it has been spent on football, “We generate revenue and we reinvest all of that revenue in football. We don't pay dividends, the money doesn't come out of the club. All of the money we make is made available to our manager and he has done an unbelievable job in managing that spend.”

That’s sort of true, but the reality is that very little has been spent on bringing in new players with net player registrations of just £4 million in the last six years. Instead, the vast majority has been gone on the new stadium, property and other infrastructure (e.g. enhancements to Club Level, “Arsenalisation” projects, new medical centre) with more planned for development at the Hale End youth academy.

Since 2007 Arsenal have generated a very healthy £376 million operating cash flow, but have spent £71 million on capital expenditure, £110 million on loan interest and £64 million on net debt repayments, while the cash balances have risen by £118 million. Astonishingly, only 1% (one per cent) of the available cash flow has been spent in the transfer market.

Although Arsenal have laid out a fair bit of cash on buying players in the last two seasons (nearly £90 million), this has been more than compensated by big money sales, so their net spend has still been negative. In fact, since they moved to the Emirates stadium, they have made £49 million in the transfer market, where they are the only leading English club to be a net seller.

Of course, Manchester City and Chelsea have been the big spenders in recent years, splashing out £444 million and £235 million respectively since 2006/07. Little wonder that Peter Hill-Wood complained, “At a certain level, we can’t compete.” That said, in the same period, Liverpool, Manchester United and Tottenham have also all spent considerably more than Arsenal.

Following the elimination of the property debt, the club has managed to reduce its gross debt to £253 million (down £5 million from last year), leaving just the long-term bonds that represent the “mortgage” on the Emirates Stadium (£225 million) and the debentures held by supporters (£27 million). Once cash balances of £154 million are deducted, net debt is now only £99 million, which is a significant reduction from the £318 million peak in 2008.

Despite the high interest charges, it is unlikely that Arsenal will pay off the outstanding debt early. The bonds mature between 2029 and 2031, but if the club were to repay them early, then they would have to pay off the present value of all the future cash flows, which is greater than the outstanding debt. In any case, the 2010 accounts clearly stated, “Further significant falls in debt are unlikely in the foreseeable future. The stadium finance bonds have a fixed repayment profile over the next 21 years and we currently expect to make repayments of debt in accordance with that profile.”

4. How much is available to spend?

This question is provoked by Arsenal’s incredibly high cash balances of £154 million, which are significantly higher than any of their competitors with Manchester United the closest with £71 million (down from £151 million in 2011). Of course, not all of this is available to spend for a couple of reasons: (a) the seasonal nature of cash flows during the year, e.g. the May balance will always be high following the influx of money from season ticket renewals, but this money is used to pay annual expenses, including wages; (b) as part of the bond agreements, Arsenal have to maintain a debt servicing reserve, which was £34 million in 2012.

Nevertheless, there is clearly still a large amount of cash available to spend, especially as the cash balance does not include £26 million to come from the Queensland Road property development (though this is only payable in instalments over the next two years) and more (£10 million?) from the two remaining “smaller projects” on Hornsey Road and Holloway Road. It also excludes any money from this summer’s transfer activity with the accounts giving a positive net impact of £11 million.

Although this is probably the figure most fans want to know, it is actually almost impossible to calculate what could be spent in the transfer market for many reasons. For example, most transfers are funded by stage payments, so all the money is not needed upfront. In addition, Arsenal could easily take on some additional debt, given the strength of the balance sheet. Nevertheless, I estimate that Arsenal could safely spend £50-60 million from cash resources.

"Diaby - king of pain"

The other point that people often raise when discussing the transfer fund is that it would also have to fund a new signing’s wages, so if the club bought a player for £25 million on a five-year contract at £100,000 a week, that would represent a commitment of £50 million. That is undoubtedly true, but it is a little disingenuous, as it ignores the fact that this would be at least partially offset by the departure of an existing player, not least because of the limitations imposed by the 25-man squad rule, as highlighted by Wenger himself.

5. Will FFP come to Arsenal’s rescue?

It is no secret that Arsenal hope that UEFA’s FFP regulations will reward their prudent approach, as these aim to force clubs to live within their means, thus restricting the ability of benefactor-funded clubs to spend big on players. Indeed, Gazidis stated that the advent of FFP meant that “football is moving powerfully in our direction”, while the results press release was actually entitled, “Results confirm Arsenal strongly placed to meet UEFA’s new financial rules.”

On top of that, there are discussions at the Premier League to introduce similar rules domestically. However, although there are some signs of clubs modifying their behaviour, Arsenal’s faith in the new system may not work out as planned.

First, there is much leeway in the FFP rules, e.g. clubs are allowed to absorb aggregate losses of €45 million (around £36 million), initially over two years for the first monitoring period in 2013/14 and then over three years, as long as they are willing to cover the deficit by making equity contributions. In addition, certain costs such as depreciation on fixed assets, stadium investment and youth development can be excluded from the break-even calculation.

Furthermore, there is a sliding scale of sanctions for offenders, so it is far from certain that clubs will be excluded from UEFA competitions. This is without considering the threat of a legal challenge from a leading club.

Second, it is evident that FFP will benefit those clubs that have the highest revenue, as they will be able to spend more on their squad, but, as we have seen, other clubs continue to power ahead, so Arsenal are likely to always have a shortfall against some clubs.

"I am Vito Mannone!"

With the new commercial deals in 2014 plus more money from better central TV deals for the Premier League and Champions League, Arsenal should surpass £300 million revenue in two years, but Real Madrid and Barcelona are already around £400 million, while Manchester United are projecting £350-360 million next year.

That said, Arsenal’s revenue will place them in the revenue elite (“the top five clubs in the world with separation from the rest”, said Gazidis), so they will be very handily placed to benefit from FFP, though it is unlikely to act as some kind of magic potion to solve all of their financial issues.

In many ways, Arsenal’s self-sustaining approach has been admirable, though it has often felt like the club has been overly cautious. Gazidis speaks of avoiding “the many examples of clubs across Europe struggling for their very survival after chasing the dream and spending beyond their means”, but Arsenal are a long way from such an awful predicament. As we have seen, Arsenal do face issues around lack of revenue growth and an ever increasing wage bill, but they still have much more room to manoeuvre than most.

"Vermaelen - Tommy, can you hear me?"

The price of Arsenal’s self-sustaining model has been to regularly sell the club’s best players, while charging the highest ticket prices in the country, so this is not quite the financial Utopia that has often been portrayed in the media. For the fans, it must be particularly galling that the club’s two majority shareholders, Stan Kroenke and Alisher Usmanov, are both billionaires, but there is little sign of either making any investment into the squad.

Arsenal’s financial results are undoubtedly impressive and they have done well to consistently finish in the top four, but whether the current strategy is enough to bridge the gap to the leaders and actually win an important trophy is debatable.

The board wastes no opportunity in telling supporters how ambitious the club is, e.g. last month Peter Hill-Wood argued, “We have a pretty good chance of challenging for the Premiership. I don’t see why we cannot win it this year”, but  whether the fans believe that this is credible is another matter, especially when the club does not use all the resources at its disposal.


  1. Thank you, I really think there are a lot of gems in this analysis, and although I am not a financial expert, this analysis is an interesting read and really explains some of the behaviours of Arsenal in the transfer market.

    Gazidis pull your finger out commercially(again!)
    Players wages look high, given all the transfers out
    FFP is not a robust strategy, it will not propel us the league or have an impact on other clubs

  2. Another excellent post. Particularly appreciated the general discussion on wages as it answered a question I had been kicking around since last week: how can the wages be going up so much when the best players are being shipped out?

    Forgive me, but I do have a general accounting question. What is the purpose of reporting EBITDA? While it is a common practice, it has always struck me that if a company can reasonably anticipate payments on taxes, interest, etc. then what is the point of reporting earnings that do not reflected the actual revenues and profit?

    1. EBITDA can be a useful measure for cash profits, but I agree that it can be dangerous to look at it in isolation. As the great investor Warren Buffet once cautioned, “References to EBITDA make us shudder. It makes sense only if you think that capital expenditure is funded by the tooth fairy.”

    2. Your reference to the two billionaires not "making any investment" !? creates the impression that you do believe tooth fairy funding.

  3. I imagine you are going to get slaughtered with questions :-) but here goes my two cent..

    1. Would you say selling top players or generating profits from players sales has been club's policy (or a need) for the last 3-4 years..
    2. Do you feel it's club's policy to do the minimum for the 4th and CL thus limiting investment in the squad

    Judging from your articles the last few years I would say both yes...

    Do you think the wage bill structure, along with slow growth in revenue, is the biggest obstacle in having a squad that will compete for trophies...

    Why do you think such conservative handling of the money? As you said even if don't make a profit it's not like we are going to instantly go broke...

    and great analysis.. as usual I might add..

    1. I think selling players has been partly a policy to compensate for low commercial revenue and interest payments, but has also partly been driven by players wanting to leave, due to lack of success (winning trophies) and the (relatively) low wages for top talent.

      The wage bill structure is certainly a major issue, as it prevents the recruitment/retention of the absolutely top talent.

      I can only guess that the club is holding the excess cash as a buffer against not qualifying for the Champions League.

  4. Great post again.

    Just a suggestion, what about writing about top clubs in smaller leagues (not top 4), would be great Portugal, the Netherlands or another league. An ideal start point would be the EC's report about the investing in youth academies (Sporting Club, Ajax, RC Lens, Feyenoord or even Dinamo Zagreb would be pretty interesting!).. again, just a suggestion.

    1. I have occasionally written about clubs from smaller leagues, e.g. Ajax, PSV, Porto, Lille, but it is not always easy to get hold of enough information to write a detailed analysis.

      You can see a list of all the clubs that I have analysed on the right side of the blog.

    2. There is also a disparity in terms of what teams in the top financial bracket can pay in terms of salary which is gorwing exponentially against the other teams making it harder for unwanted players to be off loaded.

      We have seen it this summer in concert with the FFP rulings and the softening of the market due to financial weakness on the continent.

      Thereby, we have been less able to ween off our excess players and free up the wage bill.

      Would love to see an indepth on this situation and how FFP may/may not help at all.

  5. Wow, that is pretty amazing and exhaustive analysis. As a Liverpool fan I am happy to see that we are starting to play the attractive football that I've admired Arsenal for. Any chance you could do that type of analysis for Liverpool so I can know if FSG really has them headed in the right direction?

    1. Thanks. I actually reviewed Liverpool in May, which you can find here: http://swissramble.blogspot.ch/2012/05/liverpool-keep-car-running.html

  6. Any way you can send this to Gazidis? Perhaps he thinks these minimal rises in commercial revenue are respectable gains and hasn't been made aware of how the opposition are blowing us out of the water on the commercial front? Considering Wenger knows quite a bit about business and economics then it could be assumed that this puts a lot of pressure on his shoulders and he finds a share of responsibility for balancing the books when that really shouldn't be his job. Still, if it means buying players like Cazorla for £12 million then it has the odd benefit.

  7. awesome!!!!!!!!!!!!!!!!!!!!!!!
    Could you do FC BARCELONA one day???? That'd be amazing if you could

    1. Thanks. I've looked at Barcelona a couple of times in the past, though admittedly not for a while. You can find the last pieces here:



  8. Great article as always Swiss.

    Lets hope Wenger has realised this equality wage structure is bollix I know its a balancing act but the fact we couldnt sell Alumnia, Squllaci, Denilson, Chamakh, Arshivan, Bendther and Park should drive home its seriously flawed it is.

    No point of watching the pennies and blowing money on very bad contracts on very average players and although I dont want players to be paid 200K a week etc we cant compete with that.... the top players should be on alot more money than reserve players. It's a no brainer for me.

    We also have alot of playing staff thats contibuting to the wages cost again linked to better managment of player contracts.

    Lastly really wish I could click my figures until these commerical deals are up, they are disgracfully. I know at the time they made sense but didnt someone in our managment team have the cope on to try and insert break clauses or uplifts based on other PL teams future deals????

    Someone needs a kick in the hole most likely the person who allowed V Persie and Theo contract to run into the last 12 months. It shouldnt happen and this its not the first time Flamini and Wiltord being other examples.

    IMO that happens once if a first team player who has two years left and wont sign on then its bye bye and he is sold to the highest bidder end of.

  9. Good post as ever Kieron, a question on the sponsorship deal section if you don't mind. As you note these are getting bigger and bigger and they are leaving Arsenal behind at the minute, but won't Arsenal's new deals immediately catch them up?

    That is to say that when the shirt sponsor and supplier deals are negotiated for 2014 onwards the amounts agreed will reflect the going rate at the time (which will surely be in the mid 40m's or even perhaps the low 50's which would outstrip the recent pool/spurs figures if these deals continue to get more and more lucrative), it's not as though they'll be negotiating for 2010 prices.

    I realise that the 2014 deals will likely end later than Liverpool's ones with Warrior/Standard charter will expire/be renegotiated for more lucrative terms but perhaps for those years before that happens Arsenal could actually be in the more advantages position and as these things only seem to go up and up it's likely that, unless a peak is reached, Arsenal's deals after the next one might surpass Liverpool's next deal. And that will just keep happening as football doesn't have a centralised kit deal like the NFL and sponsorship contracts come up for renewels on different years.

    And even so there's no need for the club to enter into the sort of long term guarunteed money contracts they did when moving to the grove that have seen them left in the dust, whatever happens with them going forward will likely be at a pace in keeping with what all other clubs are doing.

    All that being said there is obviously an issue of concern with the commercial side of the club, and for me that's the area of secondary contracts and partnerships. Why aren't our players doing humilating ads that expose their lack of acting talent for all sorts of shit on the telly like United players are??

    1. Yes, that's a fair point. As I said in the article, the bar keeps getting raised higher and higher with sponsorship deals, so it's difficult to estimate what the new deals will be worth in 2014. Fingers crossed that this is when the famous five-year plan delivers.

      Your last paragraph made me LOL!

    2. Problem is all the top clubs are £20/25m and United are £50m so arsenal will be lucky to get £25m tops

    3. The flip side of that same problem is that United have now locked their main income stream for the next 7 years from 2014. That is a long time for others to catch up. Kudos to them for being commercial trailblazers though.

  10. Brilliant!

    Really loved this. Thanks for all the trouble and time you put in. It has really opened a whole new world for me. Good job.

    As an AFC fan it is sad, however to see black on white that we are not spending anywhere near what we could.

  11. We really are much further behind the really "big clubs" than we let on, are we not? Every Arsenal fan who posits that the club has money and refuses to spend it ought to take time out and get an education out of this piece. One thing is certain, we desperately need FFP to have any hope of closing the gap between us and the likes of City. There just doesn't seem to be any other way so long as the self-financing model is the option the club insists on.

    Nice piece, once again @swissramble. It was well worth the wait

    1. "Every Arsenal fan who posits that the club has money and refuses to spend it ought to take time out and get an education out of this piece."

      Really? Did you actually read that post? "The last five years have been particularly impressive, at least financially, with Arsenal accumulating staggering profits of £190 million, an average of £38 million a year."

      You might want to revise that statement.

    2. Yes, but mostly due to player sales, which is what most fans gripe about. Plus there's the buffer he alludes to for the risk of non-qualification to the CL, which is prudent. As well, the opaque nature of cash flows, timing and the availability for player acquisitions.

      What is evident is that the club are actually well positioned should they meet revenue objectives. Short term laggard but potentially medium to long-term competitive. Remember, you don;t have to be the highest earning club to win title, just somewhere near it.

  12. Great article.

    It reminded me of something I've been wondering about recently: Bayern, Barca and Madrid all have huge commercial revenues, a fair bit higher than Man Utd's, yet Utd seem to have higher (or comparable) shirt sponsorship & kit deals to the other 3 clubs. Utd also have the £10m DHL training kit deal and a seemingly endless list of "secondary" sponsors. So how are Bayern, Barca & Madrid generating much more than Utd in commercial revenue?

    1. United's new sponsorship deals were not included in the latest Deloitte Money League comparison, which was based on 2010/11 accounts. The DHL deal started in 2011/12, while the Chevrolet sponsorship only starts (in full) in 2014/15.

      For a reasonably detailed analysis of Bayern's commercial strength, you could look at this old piece http://swissramble.blogspot.ch/2012/02/bayern-munich-opportunities-lets-make.html

    2. Thanks. Interesting to see how the host of "premium" and "classic" sponsors has boosted Bayern's commercial income. It reflects badly on the management at Arsenal looking at their relative lack of secondary sponsors.

  13. Out of curiosity, was the payment for naming rights to the Emirates a lump sum, or is there any chance of them being renegotiated early?

    1. I would be surprised if that deal was renegotiated early, unless it was somehow tied in to a renewal of the shirt sponsorship.

  14. Mr Parker's DogbiteOctober 3, 2012 at 3:12 AM

    For me it seems disingenuous to call Arsenal's model 'self-sustaining' when it seems that they only remain largely positive in cash terms due to the yearly subsidy they receive through player sales to benefactor backed clubs like Manchester City and financial powerhouses like Manchester United and Barcelona. Maybe they will get away with it because of increased revenue from elsewhere but I do wonder what impact FFP might have on the Arsenal 'self sustaining' financial model if these other clubs are no longer willing or able to spend big on whichever above average player Arsenal have been made available each summer?

    1. My guess would be that we would see wages return to more sensible (if you could call it that) levels. The benefactor backed clubs have exponentially driven up wages in football as a whole which has affect Arsenal massively. If salaries were lower, other revenues would be more than enough to carry Arsenal through a financial year.

  15. Great blog as always! I have a couple of requests and it would require a scenario where you would be, say the CEO of Arsenal and the ideal situation we could compete in:
    1. If all Commercial Deals were renewed, what would our Shit/Kit sponsorship be like or acceptable amount be in 1-2 years (in terms of pounds/season)? (Ignore Stadium naming as it is a fair while away)
    2. Any other avenues of increase in commercial revenue contribute to the yearly cashflow?
    3. In the 25 man squad, how many marquee players (say over 100k pounds per season), starting players (80-100k) and squad players (30-80k) players can we afford in this ideal situation financially?

    It would involve a lot of assumptions in terms of current player salaries and getting a few players off the books etc. But the only way we can compete with Man U, City, Chelsea in terms of attracting players is by paying the money to the players and achieving success on the pitch. We need to be winning trophies whilst paying high wages, because most players CAN do that with United/City/Chelsea.

    Such a shame we have not managed our finances and commercial revenue better. All this profits is such smoke and mirrors and as an avid Arsenal fan, you cannot help but feel deceived.

    1. Pay me £2.1 million a year and I'll give you an answer ;-)

  16. Do you know how wages are reflected in the accounts? If player x signs a 4 year deal for $16 million, but the actual salary is broken down as follows: Year 1 - $3million
    Year 2 - $3million
    Year 3 - $5million
    Year 4 - $5million

    Is the salary reflected in wages on a straight-line basis, or recognised on a cash basis in the accounts to match what is actually paid?

    If it is a cash basis accounting treatment, how prevalient are backloaded contracts in the premier league? Arsenal?

    1. It would be accounted for on a cash basis. I don't know how many back-loaded contracts exist, but my guess is that it's relatively few.

    2. Maybe not full on backloading, but would contracts not include an annual step up for inflation/COLA? While I have zero knowledge of player contracts, I would imagine this wouldn't be unusual and for example an average cost of living adjustment across the squad of 5% would go some of the way of explaining why wages are consistently increasing year on year. Do you think this is the case?

  17. Excellent and lucid read, as ever. The main themes, commercial revenue shortfalls compared to rival clubs because of covering the stadium financing, and the importance of net transfer spend to the bottom line are consistent with your previous analyses. The decline in operating profit seems a new twist, and disturbing if it heralds a trend. Cash in the bank also seems to have peaked, although that should be noted with the usual caveat about not drawing too firm conclusions from one six-months of figures. The inability of the club to increase commercial revenue more than it has does seem surprising in the light of the management resources being devoted to it. Is this simply because the shirt sponsorship and stadium naming rights are the big nuts, and they can't be renegotiated yet, or is there more to it?

    1. Clearly, a large part of the disappointing commercial revenue is due to the restrictions around the main sponsorship deals, but IMO they should really have done more with the secondary deals.

    2. True.

      I would think it is easier to position for a better deal retrospectively which is what United have done for the Aon years rather than before the fact.

      Might be a bit tricky for us because of existing agreements in place.

  18. Do you think it is possible that Stan/Usmanov buy out the Arsenal debt and charge interest free loan repayments? Wouldn't that be much better for the club. Furthermore it would also endear the fans much more to the owners.

    1. It's possible, though Kroenke has shown little appetite to clear the club's debt. Usmanov has actually suggested such a policy, but he would only do it if the club gave him greater influence.

  19. As always you make the numbers plain for all to see for all this is a great education for all gooners wish they would all spend 10 minutes to read it will as always share the link on the hope they will thanks

  20. I got a question regarding the annual report published by Arsenal last week.(link below)
    In the balancesheet there is a post "Creditors: amounts falling due within one year" on (145,159).
    Could anyone here point out what this post actually is?
    I'm thinking this probably is some interest-bearing short term debt related to season tickets, club shop, running cost, etc. And liabilities related to different real estate projects.

    Am i far off in my suggestions.
    Thanx for any answers.


    1. Page 53 of the Annual Report (in your link above) gives a break-down of the main liabilities included in short-term creditors, though not enough detail to fully answer your question.

      You might find a piece that I wrote about debt helpful: http://swissramble.blogspot.ch/2012/04/truth-about-debt-at-barcelona-and-real.html

  21. This is an incredible blog post. I have only read a couple of your posts before but this one is fantastic. I hope a news outlet signs you up! The style of writing was great and the information was first class. Good job!

    If the FFP rules do come in, this could be bad for smaller clubs as the large clubs with the biggest revenues will expand at a faster rate leaving smaller clubs in the dust. Arsenal are by no means a small club in that regard but we are not top 3. How many businesses operate with 5 top companies? Smartphones are made by Samsung and Apple, with HTC falling behind in 3rd and that is a massive growth market.

    Perhaps an unforeseen consequence of FFP could be a widening of the gap between the top clubs and the lower clubs, which for me isn't a good thing. The premier league is the best league because of this competition. However I do appreciate that no business can continue if clubs are losing £30 million a season... It's a tough one. Football is perhaps the only business where money can be lost every season because there will always be some millionaire philanthropist throwing his cash in an effort to play a real life championship manager.

    Personally I feel a wage cap is needed for the continued growth of football, as well as a transfer cap. Anyway great post and I shall follow this blog now :)

  22. Excellent article. As an Arsenal fanatic for over 60 years it hurts now just to be a revenue stream but it is still worth it!!!

  23. Great blog as always but other than a one-off flutter of £50 or £60m to in an attempt to usurp Abramovich/Mansour which is almost certainly doomed to failure there aren't any proposals for alternative strategies are there.

    Compare commercial growth to the highest figure (£48m in 2009)in the last 5 years (which I think was attributed to a none off boost) doesn't paint an entirely accurate picture of commercial growth. Take an average of the previous 5 years and last years growth of 17% reflects a little better on the clubs commercial development. The bigger sponsorship numbers are still a couple of seasons away but that they're there is clear for all to see.

    1. There are quite a few alternatives, which I did not explore here, but have looked at in previous posts on Arsenal.

      Two points on commercial growth:

      1. I deliberately chose 2009 as the starting point, as this is the closest to Tom Fox's start date (September 2009).

      2. I added comparisons against other leading clubs to provide some context, namely while Arsenal's commercial growth has been virtually non-existant, others have made great gains.

      Clearly, much of this is down to the restrictions on the main sponsorship deals, but that should not have prevented more progress on secondary sponsors.

  24. Thank you for your dedication to Arsenal and the time you spend to enlighten us about what's going on "behind the scenes" at Arsenal. I do really appreciate your articles, I've read them all (12 !) and I've learnt so much. But considering I'm not an Englishman (neither an accountant) I sometime struggle to fully understand financial vocabulary.

    I couldn't understand the part about "Where has all the money gone ?" (part 3 in this article)

    I have a few questions and I hope you -or someone else- can answer me (with simple words, so I can get it):

    _ What does "Operating Activities" mean ? What does the £376m of operating activities since 2007 refer to ?

    _ What does "Interest Payments", "Capital Expenditure" and "Debt Repayments" mean and/or refer to ?

    In your previous article (Arsenal's Mystery Dance, 28 February 2012), to the question "Where has all the moeny gone ?", you wrote this :

    Unsurprisingly, it’s all about the new stadium, property and other infrastructure (e.g. the new medical centre at London Colney) with £180 million going on capital expenditure and £111 million on loan interest. Since these loans peaked in 2008, another £156 million (net) has been used to repay debt. And of course the cash balances continue to rise…

    I couldn't understand how loan interest could be so heavy ? I tought the interest rate on the Stadium Debt was at a 5.5% rate ? And where does the £156m you're talking about come from ?

    To put it simply, I just would like to understand where has all the money gone , and what "money" do you refer to when you talk about "all the money" ? Sorry if I sound stupid, I know that's exactly what you're explaining, but because of my poor English, I think I missed the point, or just misunderstood something.

    _ am I right if I understand that "Net Cash Inflow" of £88.5m from 2006 to 2011 (Arsenal's Mystery Dance) means all the profits the club has made since 2006 that haven't been re-invested ? It means those £88.5m went into the Cash Balance, right ? It would explain how the cash Balance rose so much in the last few years, right ?

    Arsenal had serious cash problems in the early 2000s. The club reported a huge loss in 2002, and according to Peter Hill-Wood, at the time the club survived on Cash Balance. Maybe it could explain why Arsenal has become so cautious, keeping so much "powder dry" and saving cash for a "rainy day" ?

    Well, I hope someone can give me some ansewers about those questions, it would be a really huge help ! Thanks a a lot.

  25. Even though I try very hard to explain the finances in layman's terms, I appreciate that it's not always totally straightforward, so I'll try to clarify a little.

    If you look at the Cash Flow table (the first in that section), you will see the first line is Operating Profit/(Loss), which is simply recurring revenue (i.e. excluding player sales) less expenses. You can see that in the detailed Profit and Loss account table towards the beginning of the piece (it's the lowest blue line). This was a loss of (16.3)m in 2012.

    However, that operating loss includes some non-cash expenses, such as depreciation, player amortisation and player impairment (total of 53.7m), so these have to be added back to get a pure cash profit. You then have to make some working capital adjustments (9.7)) for things like paying creditors earlier or later than booked in the P&L, which will give you the "clean" cash flow from operating activities.

    That cash flow is then available to spend on various items. In Arsenal's case, almost all of it has been spent on paying for the new stadium and other infrastructure. So, capital expenditure is the investment into those assets, interest payments are on the loans/bonds taken out to fund that investment, while debt repayments are exactly that (also including some for property development). The final figure in the cash flow statement is simply the increase in cash balances.

    1. Thank you for your explanations Sir, I'm very grateful to you !

  26. Thanks for the thorough and in-depth review of AFC's accounts, I don't believe that there is another blog (let alone "paid for" publication) out there that does this to the same quality.

    I won't be surprised to see your article being paid the "greatest compliment" in various Newspapers over the coming days.

    As an Arsenal fan and Season Ticket holder, I and many others find ourselves having to ask the question as to whether the continuous sale of world class players and their replacement with capable but bargain basement replacements or young prospects for the future, is a de-facto long term club policy or a short term fix to boost competiveness whilst tied to long term (but uncompetitive) commercial deals.

    This article and previous ones provide some hope that there is light at the end of the Tunnel. Nonetheless all Arsenal Fans (and fans of almost all other clubs) need to accept that we'll (they'll) never match ManUre, Arcelona or Real in the spending race, let alone Chelski, PSG or Citeh with their petrodollar funded losses.

    I like attending and watching football matches and I'm an optimist in matters AFC, but unless there is a level playing field to allow true competition, then you'd have to question the wisdom of forking out so much dosh each year on a seaon ticket simply to watch AFC hopefully reach fourth place in the league, even though we're told it is as just like winning a trophy.

    To that extent, FFP is the only hope that a club outside the ones mentioned above will have a realistic chance of challenging for and maybe occasionally winning the Premier League and Champions League on a regular basis.

    In my darker moments I find myself asking whether every club running at a loss are mad short termists and AFC are the lone voice of reason, or whether there is another game afoot that Club Owners want to be in on (European / World Super League anyone ?), think of the TV rights packages that could be sold.

    Kind Regards


  27. Top, top analysis mate.

    Have you ever compared how Arsenal spend their wage bill compared to the others?

    There's obviously a fair bit more than players in the wage bill but how does what we have add up to £143m?

    Man City £174 million
    Chelsea £168 million (2011)
    Manchester United £162 million

    How do these guys end up spending double what we will on a case by case basis and yet only add up to £20m-£30m more? Who is getting more at Arsenal than their equivalent at each of these clubs - clearly not the big names?

  28. Good stuff as ever Swiss but I would take issue with your 'buy Falcao or Cavani' point. Not only would they cost £40M+ in transfer fee but their wages would be over £200K a week - a commitment of £90M over five years. Plus it would fuel internal wage inflation heading us in the direction of Chelsea and City (who must be pushing the £200M pa when this year's numbers appear).

    1. Thanks. Let me explain my thinking about a big money striker:

      1. Napoli and Atletico Madrid manage to have Cavani and Falcao, even though their wage bills are about a third of Arsenal's £143m, so we have a significantly higher spending capacity overall. Napoli's is £42m (€52m), while Atleti's is £51m (€64m).

      2. I'm not sure that they would command £200k a week. For example, Cavani's annual salary (per a survey published by La Gazzetta dello Sport) is €4.5m, which is equivalent to £3.6m (or £69k a week). Sure, he would expect a big increase for his next move, but doubling it to £140k might be sufficient.

      3. Much, if not all, of his salary could be funded by removing some of our current forwards from the wage bill, e.g. Chamakh, Park and Bendtner, who are reportedly all earning at least £50k a week.

      4. If we had better players, then the chances of success should improve, which would mean more prize money and better sponsorship deals. Obviously no guarantee, but it does improve the odds.

    2. very true. The current list of players that need to be moved are : Bendtner, Arshavin, Chamak, park, Squallachi, Denilson, Rosicky, one of the keepers (Vito/Fab) and maybe Diaby.
      This will probably free up potentially around 500K per week. so even if we get 3-4 players in the wage bracket of 100K I think we would be in saving around 5-10 million every year (Does arsenal pay the players even when the season is not in progress?)

    3. Ahhhh.....I didn't know Swiss was an Arsenal supporter.

    4. ...that is IF you can move the rejects (Bendtner, Arsharvin, Chamakh etc) in the current soft market and with the disparity between wages that are paid by certain clubs (including ouselves) increasing against those that used to be able to be paid for by 'second tier' clubs (financially)

      + Once you increase on a big player, you are also likely to feel some pressure from other 'less significant' players who believe they should be on a higher pay scale (like say Song). Your overall pay scale would have to go up again BEFORE 2013-2014 kicks in.

      I'm sure Wenger may have considered loading on another striker BUT with the inability to shed of some of the current excess players, there may have been some hesitancy in piling on the wage bill before an improvement in the sponsorship/commercial issues.


    5. But the problem with thinking like this is surely if we are going to achieve the best commercial deals we need to be successful on the pitch, which means having top players, so in the long run it might make more sense to spend on another 2-3 top players in order to compete for the top prizes so we can acheive 'mega' commercial deals rather than run of the mill ones.

      Certainly Wenger's and/or the boards strategy on wages has backfired on them and we must stop paying average players big money, if they leave so be it, they don't seem to have helped us win anything anyway.

  29. The lack of growth of commercial revenue v. Man U is only partly explained by the shirt and training kit sponsor deals. To what extent do you think it is explained by sales of marque players (being fabregas, nasri and van persi)?

    1. Good point. It's impossible to quantify, but I'm sure that it has made a difference. Star players have certainly contributed to the commercial success at Real Madrid, Barcelona and Bayern Munich.

    2. Infact RealMadrid had supposedly recouped the entire Ronaldo Trnafer fees in the first two years thru shirt sales. I think Arsenal now do not have a marquee player who is identified strongly with Arsenal brand and selling quality for commercial products.
      Unless Arsenal win something and one of the players Santi/Alex/Giroud/Jack have an outstanding season, I don't see things moving up next year either. They are the players with the best potential to market.

  30. I am not what you call a numbers person. But I have been diligently reading up on your articles on arsenal finances as I truly want to understand whether the Board is trying to pull one over the fan base. This is the first time the article makes enough sense to my rather limited financial intellect. Truly appreciate the breakdown and explanation.

    I think the biggest question mark is on the wage bill and Commercial revenue. I think Arsenal have to be more transparent. If you can clarify some of the questions, it would be really helpful.
    1) how much is the board is payed as salaries and is it comparable to other top clubs?
    2) How big is the Commercial team and how much are they paid? How big is ManU's and what is the earnings to cost ratio of ManU team as compared to Arsenal? - I am taking ManU as a touchstone.
    3) Can Arsenal buy back the kit/Shirt deal and sell on this year itself? I read Chelsea have done so. Or is the Arsenal's reputation as gentleman dealers going to play a part of decision making process?


  31. Great article, l wonder if you have a bit more information on the wage bill, my understanding is that Arsenal include everyone in this not just the players, which may not be the case with other clubs?

    1. Thanks. Yes, the wage bill includes all employees, not just the players, but that is also the case for other clubs. There is a fairly standard way of reporting staff costs in the accounts. In other words, the wage bill comparisons are on a like-for-like basis.

  32. Fantastic article though there is a point to be made about the huge wage bill.

    Because Arsenal have purchased so many new players recently, a lot of them is in the start of their contract. This means there will be very few contract renegotiations in the next 2 years for all the important players, whist both Squillaci and Arshavins contracts will end next summer. Futhermore Podolski, Cazorla, Arteta, Mertesacker and Sagna will be in their 30's at the end of their contracts which may very well be their last for the club .

    To sum up, the wage bill has indeed grown very rapidly in recent years, but is unlikely to continue its meteoric rise in the coming years due to the current contract situations amongst the key members of the squad.

  33. Can you please just answer me one question that nobody has yet been able to answer. If we made a £30+m profit over the last year then why is our cash balance at the end of the year still around £150m like it was at the start of the year? Surely it should be up at around £180m?

    1. Because cash is also used for items not included in the profit and loss account, such as investment in the stadium and repayment of debt. In addition, the purchases of players are only reflected in the P&L via amortisation, not the full purchase price.

      Here's an answer that I gave to a similar, earlier question that might help your understanding:

      "If you look at the Cash Flow table (the first in the section on Where's the Money Gone?), you will see the first line is Operating Profit/(Loss), which is simply recurring revenue (i.e. excluding player sales) less expenses. You can see that in the detailed Profit and Loss account table towards the beginning of the piece (it's the lowest blue line). This was a loss of (16.3)m in 2012.

      However, that operating loss includes some non-cash expenses, such as depreciation, player amortisation and player impairment (total of 53.7m), so these have to be added back to get a pure cash profit. You then have to make some working capital adjustments (9.7)) for things like paying creditors earlier or later than booked in the P&L, which will give you the "clean" cash flow from operating activities.

      That cash flow is then available to spend on various items. In Arsenal's case, almost all of it has been spent on paying for the new stadium and other infrastructure. So, capital expenditure is the investment into those assets, interest payments are on the loans/bonds taken out to fund that investment, while debt repayments are exactly that (also including some for property development). The final figure in the cash flow statement is simply the increase in cash balances."

  34. West Upper

    Excellent analysis as usual - thanks for taking the trouble to prepare this.

    Key take outs for me:

    1. Be prepared to reward merit NOT mediocrity - this applies to back office staff as well as the players.

    2. Intense focus is required on driving Commercial revenue up - heads should roll if this is not accomplished.

    3. On the field success is key - 7 years without a trophy and counting. The board should demand that Wenger discloses and agrees his strategy for addressing this. As you say we have been close at times in the past few seasons but an unnecessarily miserly approach has meant we have drawn a blank.

  35. Great article, love reading your stuff and look forward to the next one. I remember reading ages ago in a world soccer article that as part of a deal with the local council to build the new stadium, Arsenal had to invest money in improving the local London underground stations but this got scrapped due to problems which I can't remember. How much worse would had this been for Arsenal if they were also forced to do this.

  36. Many people comment on wages... It is not only the problem of Arsenal and football in general. I suggest everyone to analyse the wages and contracts in the NHL ice-hockey to understand the massive problems they have. For example, Rick DiPietro signed years ago a 15-year-contract, but has basically been injured all the time. There are many long-term contracts to cheat the salary cap, but basically the clubs pay for the potential. Just like in football! The only difference is that the ice-hockey players don't whine and moan a new contract every two years like in football.

  37. I find it incredible that Arsenal's wage bill is £143.4 million. If you take off Wenger's (£6 million) and Gazidas (£2 million) and say another £25 million for the various backroom staff, directors, other employees, and non-first team footballers (does that sound about right?), that leaves £110 million to distribute to the 25 Premier League players.

    Or put another way, the 25 players earn an average of £84,615 a week. If I increase 'other wages' to £40million (surely too high), they earn an average of £73,077 a week.

    Given half of those 25 players aren't even in the first team and some can't be on particularly high wages (I can't see the Ox/Wilshere/Scquillaci etc. negotiating their way to those salaries before establishing themselves) who is getting that amount of money?! Maybe Podolski/ Santi/ Vermaelen/ Waclott/ Arsharvin, but who else is there? For a club that can't keep hold of players like Nasri/possibly Theo/Adebayor/Toure etc. partly due to wages, Arsenal is sure spending a lot of money on them. I know football clubs don't like to reveal their players' wages, but I can't get my head around where Arsenal is spending this amount on wages. Any ideas?

    1. There are a number of players whose futures are uncertain at the club but who are still on the fringe that we are unable to shed at the moment and that may weigh into the thinking I believe with regard overstretching in terms of wages when bringing in new players at the moment.

      Sadly, that has as always left us one or two players short of the full puzzle and reliant on certain younger players in upping their game.

      Mind you, I still don't understand the thinking with regard Song (vis-a-vis Walcott's situation)

      Song has 3 seasons left on contract. If rumours were true (which they never are of course)< he was angling for an increase from 55K per week (obscene money for most of us as is) to 80K. That's not a huge amount in context with things and considering he covers an area which we are quite obviously short on (hence the pursuit of Sahin) and ependant on return of injury prone (Diaby) or injured players (Jack or young players (Coquelin)

      Meanwhile, Walcott is perfectly replaceable in the market (Affelay was hankering for a move, or Konoplyanka)

      I would have called Song's bluff, extended him by a season to the sum he was looking for, had him for cover and bought time for our injured mids/younger prospects, to bed in, then sold him next summer if attitude remained.

      The extra 25K per week could have been easily covered or more than made up for with an early sale of Walcott when Victor Moses, Adam JOhnson, Jack Rodwell etc were hitting the market (we would have gotten a better price then)

      Baffling to me.

  38. Stan Kroenke must be taking money out of the club what does it show up as in the accounts.

    1. According to the annual report, the only money Kroenke took out of the club in the 2011/12 season was a £25k directors' fee (note 7 of the accounts).

  39. Hi Swiss,

    Brilliant as always. Considering Dortmund's remarkable growth in the past two years thanks to their two titles and forays into CL consequently, can we have an analysis of Dortmund again? Keeping in mind that the last time you wrote about them, you were almost prescient when you predicted that they looked ready to step up and duly they did so!! Also that would give us an insight on your take on the new BL TV deal. Thanks!

  40. This is yet another fascinating and insightful entry. Anyone who's interested in strategy and corporate finance but lacks a background in those areas would benefit from reading your work. That goes even for those who aren't interested in sports or football. The clarity, flow, and depth are almost perfect.

    On to the particulars.... The post and many of the comments are unsparing in their criticisms of the Arsenal's commercial revenue. Those points are on the money, so to speak. I'd suggest that Gazidis's job depends on at least doubling the commercial revenue figures in the next two years. If he and his team don't do that, they are leaving the club little choice but to be net sellers in the annual transfer market.

    You've also made me think hard about the cash balance and its potential impact in the transfer market. Let's assume the club isn't doing something wacky with the 52MM in one-year investments/debt it now owns, so that at least half of it can go toward to planned acquisitions. That'd take the available pool to about 180MM. As you point out, existing debt covenants require the club to keep 35MM in reserve, which reduces the amount to 145MM. Set another 30MM aside as insurance against missing the Champions League, and we're looking at 115MM.

    This seems like a big pot, and it is by the standards of modern football clubs. Perhaps it would go further in the transfer market than I had assumed. Let's say Cavani would require a 35MM transfer fee and a 140k weekly wage over a four-year contract. That's a 70MM total commitment, or 17.5MM annually assuming a straight line amortization.

    The nagging question is about confidence in future cash flows, because 17.5MM is a small percentage of the available 105MM, but it's half of the EBITDA figure from the last reporting period. Sure, we can say that selling Park, Bendtner, and Chamakh would free up the cash for Cavani; you know the effort was behind that this summer, and nothing happened. Unless those three contracts expire or Arsenal is willing to subsidize at least part of their wages, we can't expect much of the future cash flow to be liberated. So maybe an acquisition like Cavani is just too big a risk.

    As I hope you can tell, your work is appreciated and thought-provoking. I'm hoping for similar effects from my own relatively new blog, 900 Foot Gooner.

  41. As someone who enjoys following the business aspect of football alongwith the sporting ones (Arsenal supporter for a decade now :) ) . I enjoy reading this column. Clearly you are a Gooner ,the quip about like a new signing !

    This article quantifies my concerns about Gazidis and co selling FFP as our saviour, when we ourselves haven't pushed ourselves to really grow as a club (to the stature of Man Utd,Real , Barca and Bayern both financially and from a sporting aspect).

    The big challenges for the club look to be
    1. Switching away from the equitable wage structure model
    The idea was noble but clearly hasn't worked. It will be another two seasons hopefully one until we are freed from Squillaci , Arshavin, Bendtner ,Denilson,Chamakh,Park and maybe even Diaby,Djourou (all 40-60k/week with Arshavin probably higher at 80k) for good. With the exception of Andre Santos all the new signings look good value for their wages the last two seasons, Mertesacker,Arteta,Cazorla Podolski,Giroud and most are internationals as well. People complaining about us not paying Walcott 100k a week should realize that this is exactly the kind of deal we should not buckle down.

    2. Commercial revenue
    I am sure the club can squeeze atleast 40m more per year from the Shirt and Kit sponsorship deals in 2014. And surely commercial revenue should be pushing 100m once those deals run out in 2 years.

    My only concern is how long would fans be willing to pay one of the highest season ticket prices for a team that looks set up to finish in the top 4 not actually win the title.Like you said , always two players short of having a winning squad. Having said that I'm actually pretty optimistic about this season. If we sort out our calamity defending at times (Go Mert!) we should be pushing the top 3 all the way.

  42. Great Read. I have been onto your blog before and I found the analyses somewhat complex, but I must say you've done a stirling job of explaining in in layman's terms. I think it does a lot to help undertsand the real financial situation at our beloved AFC. I must challenge you on the available 50M to spend. If EBIDTA or cash balance as you say is 36M where did the other 14M come from ? Property sales ?
    Other than that I prviously thought the stadium naming rights were ending in 2013 so it's quite horrific to learn the very poor deal lasts until 2030 or so. Commercial revenue is a disaster as you say, but I have to point out the wage bill is the other part of flushing moneyed millions down the drain, namely poor players (no need to mention their names) on fairly good wages paid to sit on a bench or in the stands, woudn't that be an instant profit if notthe case, and for that the manager must surely take some responsibilty.

    1. EBITDA is not the same thing as cash balances. As explained in section 4, the cash balance is £154m. I have reduced this for various factors to get to the £50-60m estimate of money available to spend.

    2. Ok Swiss, thanks, forgot my university economics from 20 yrs ago, that the key operational distinction between EBITDA and CFO/OCF is the change in Net Working Capital, or something like that. Great post again, re-read part 4.

  43. Each year Arsenal perform and, and off, the pitch. They are run properly, respect to the Arsenal board.

  44. Thank you again for a detailed and interesting piece.
    I have enjoyed reading your posts about Arsenal for several years now.
    Excellent work!

  45. It maybe worth exploring a couple of other hypotheses that are pretty crucial moving forward, that is the boards acknowledgment of failed wage structure, which they say they will address over the next few seasons. This includes removing the likes of NB, SS, Almunia, Denilson, Park, Chamack, Arshavin, Vela, and Benayoun, who would have eaten up at least £425k a week or £25m while trying to get a fee where possible. The new signings this season should have been mainly offset by the departing wages keeping the coming season rise a lot flatter.

    Couple this with the fact that between now and 2014 it is not unthinkable that our base commercial revenue could have increased to around £70m based on similar growths seen this season. I would also hypothesize that Arsenal can attract higher deals than those seen at Liverpool, after all that is the reason for the Far East trips adding £30m to £40m extra to the coffers. This would put com revenues at over £100m matching match day revenue. Then include broadcasting revenue assuming CL.

    This puts Arsenal's revenue at close to £320m, or a growth of around £100m I dont see Liverpool, Chelsea, Spurs or City getting anything close to this level of growth. If we can add wage stability that could deliver a £125m swing, ok this is all rose garden stuff but even if thy only deliver 60% of this takes then even if we sold no players this season we would have still delivered a £35m profit.

    Add to that if FFP holds any water, that puts Arsenal in a far more competitive position, they still might not win but it gives them a better chance. It is also worthwhile noting that the club have a track record of developing player who have great resale value unlike most other big clubs, as well as bringing player through Wilshere, Schz, Gibbs, Jenkinson, Frimpong, Mannone, Conquelin, and Diaby all starting 11 contenders with a combine fee of less than £4m but a resale of probably £50m to £70m.

    All in all there is a very sound underlying position, where as you look at the supposed big clubs with the exception of Man U and the picture is a lot less rosy.

    Start with Chelsea, they need to build a new stadium if they want to increase revenue but they cant get the fans to move, their com revenue is similar to Arsenal and they recent squad investment is likely to drive losses even higher. How do they comply with FFP?

    Liverpool, look even further away from the top 4 than they ever have. They have went through a cost reduction exercise causing them to have a very thin squad, this might deliver margin profits however there is not many avenues left for them to deliver large growth especially if they continue to fall outside the top 4. Couple this for the need for a new stadium leaves them in a difficult position as their owners dont want to put money in.

    Spurs have built a strong squad however it again has ben thinned to keep costs controlled, how will this fair across the full season? There is a need for a new stadium, where is the funds coming from as they are not making profits?How does that effect future spending? Can they grow their commercial revenue? Thy have a lot to do to establish themselves as one of the big boys.

    City have fast tracked success however if this seasons buying is to go buy they are trying to reduce their spend but will it be enough to comply with FFP? With their stadium deal can they grow revenue to cover their massive wage bill? Where are their future stars coming from?

  46. Do you have any insight in to why or where the wage hike has come from?

    As looking at transfers I would estimate around £50k to £100k maximum difference between leavers versus incoming, so lets say £75k plus the £90k to cover Benayoun that is only around £10m.

    Would sign on fees be in there, inflating the figure?

    Does that mean we might only see a wage bill this year closer to £130m?

    Less sign on fees, no one of costs, more loans out, reduction in squad numbers etc as if last season included sign on fees and Benayoun then it is possible that there was over £17m that would not be in this years accounts.

  47. Great piece again! Love reading your work :) I have a question though that has been bugging me for a long time about the takeover of the club by Silent Stan.

    Initially, I remember that the board was against Stan's takeover because they believed that he (or any individual for that matter) would try become an Abramovic and start using the club as his toy. They believed that the club was in a healthy position and giving any one person absolute power would be a threat to their 'sustainability' model.

    Suddenly in 2011 they changed their stance completely and started encouraging shareholders to sell to Stan, trying to convince them that Stan had Arsenal's best interests in mind. After the takeover, they were very vocal, praising Stan Kroenke for being the kind of person who would not interfere in the club's daily matters and let the club run in its sustainable way.

    My question simply and finally is - then what was the point of the takeover? If Arsenal was running sustainably before Stan, and he in no way is influencing club affairs by making executive decisions or even by putting in some of his own money, then what was the need for a takeover at all?

    The more I think about it, the more I realize who the majority shareholders of the club were prior to Stan. Most of them were on the board of directors or were ex-members of the board. They made ridiculous sums of money by selling their shares to Stan, which they could not really have done randomly without a takeover bid, or else the fans would have jumped on them.

    Stan's really living the good life right now. He's having to put NOTHING into the club and even if he sells his stake today, he'll make hundreds of millions of pounds more than what he spent because of the increase in the club's value.

    So who really profited? To a big extent, people related to the board and Stan himself. Maybe they were in this together to make a quick buck at the expense of the club? Sounds very controversial I agree, but if the club was doing perfectly fine earlier, there was no reason to sell the club at all. If the board is agreeing to get a new majority shareholder in, you want him to be affecting the club positively and being involved in making it more successful. But Stan just seems content on sitting silent.

    Is there a even a little bit of sense in my argument or am I being too naive? Do you think that there's some knowledge that I seem to lack that would support the takeover?

    1. Sounds like nail on the head stuff to me, they made money selling their shares and because they were generally ignorant old toffs they sold to the wrong man.

    2. The board sold their shares to preempt the tragic and untimely death of Danny Fiszman. Due to Danny being the largest single shareholder in the club except Kroenke and Usmanov, the board had to make the decision between the two as to who would be the best future custodian of the club. They believed, as do I, that we were in much more danger of becoming a billionaire's plaything, losing the core values and ideals of the club, if Usmanov gained control than Kroenke. Add to that the fact that Stan had, by that time, been on the board since 2008 and the decision becomes clearer to understand. Kroenke's purchase of Fiszman's shares took his holding in the club to over 30%, thus requiring him to present a formal offer to the remaining share holders for their shares at the highest value that they had been sold for in the previous 5 years. A lot of them sold up, making significant profits but retaining their places on the board. The decision to sell the Kroenke can't have been taken lightly or been an easy one - Danny Fiszman was a beloved and respected member of Arsenal FC and a legend of the club - but it was better than the only other alternative - a bun fight between the 2 biggest shareholders as to who gets to own the club. Overall, the board did the right thing, even if it seems that they were only in it to line their pockets.

  48. I think there has been a small miscalculation of the Distribution of European funds. Arsenal have also gained €2.1 million by participating in the 2011/12 Chmapions League play-off. As I understand from every UEFA financial report on that matter, UEFA contributes €42 million in favour of all the 20 clubs involved Champions League play-off (€2.1 million per club) irrespective of the tie results - not only for the losing sides.

  49. The property development is a bit funny. Over the years, the venture has created about GBP40M profit before tax. I am pretty sure highbury stadium was fully paid up so although the profit is a positive things but it seems too little. I mean, imagine selling highbury stadium as it is (without any development), I believe the club would have gotten much more.

    Recently the Battersea Power station was sold for almost GBP500M. I estimate Highbury was a third in size. OK, Highbury was developed several years before - but I think for all the effort and stress, GBP40M is too little. Don't you think?

  50. It looks like there are a lot of things up in the air that could go either way, and, cause Arsenal to start making massive losses, small losses, break even, make a small profit, or, a massive profit. The main example of this is the commercial side of things.

    I don't understand the point of signing such crap deals to enable us to build the new stadium judging by the way Manchester City got so much more money than we did. I know the Manchester City deal was partly to do with it was a family agreement, but, that wouldn't be the only cause of the deal being so much more than ours. I'm inclined to think that all the clubs that need a new stadium will never do what Arsenal did again because we got such a bad deal out of it.

    Are the new commercial deals that we sign after the current ones finish going to make a massive difference? I'm inclined to think they are either going to make no difference or very little.

    What does everyone else think?

  51. Really salient points about the transfer market and the opaque nature of the cash flows, and what's available to spend. Thanks for illuminating us.

    ".. the reality is that very little has been spent on bringing in new players with net player registrations of just £4 million in the last six years."

    This point is a little misleading in isolation, as it focuses on the price vs rather than the value of the transactions. That is, there are more able bodies in the squad now than at any time in the past 4 or 5 years, as they have been brought in at lower prices than those players being sold (sometimes two for one, even - Grioud/Pod vs RvP). Sure the squad cap is 25, but there have been ample players out on loan - a problem of sorts in itself that needs remedying - but I suggest the average quality of squad quality has improved, even if there aren't as many top, top players. All done at very sound prices too (e.g. cazorla).

    From a playing perspective I think this makes it easier to close the gap with the other top 4 clubs, particularly once the new commercial contracts are signed and accruing, and the Board gets the chutzpah to release the funds on a big player such as Goetze, Falcao etc., which general and often warranted cynicism aside, I believe is that the club is working towards affording.

    Thanks again for writing this.


  52. Your figures are factually correct but I detect a lot of negativity in your elaborations on some of the figures, this might be because you genuinely do not believe in the way Arsenal have gone about managing the change that has engulfed the club, the PL and football globally or more likely an expression of 'journalistic license' to either keep your audience interested or take digs at a club you do not support.

    I think you are a bit disingeneous with your elaborations on Arsenal's wage structure in particular, the fact remains that in the past two seasons, Arsenal came 4th in the league with the 5th highest wage bill, you couldn't resist making a dig about Tottenham running Arsenal close but Tottenham have

    1. Not finished above Arsenal for a long while (even while Arsenal were managing the cost of building the Emirates)
    2. Not been forced to sell their players the way Arsenal has (Luka Modric aside) partly because they've not developed high calibre of players or bought young top class talent with good resale value (apart from Modric perhaps) whom by the very nature of their talent also command adequate remuneration (hence the high wage bill).
    3. Are struggling to get a stadium upgrade off the ground when Arsenal according to you have virtually fully paid back the cost of a 450m stadium.

    What I think you also fail to see is that there is a correlation between Arsenal's 'moderately' high wage bill (which is still and has consistently been about 20m lower than the least wage bill of the 3 other clubs Arsenal is seen as competing against i.e. United, City and chelsea) and the fact that the club is able to consistently turn a profit from player trading. The logic is simple and goes thus.

    1. Arsenal cannot compete with the highest paying clubs while bogged down with the low Commercial income and paying off the cost of building their stadium.
    2. Because of 1, Arsenal looks to obtain exceptional talent while they are young and, adequately pay them and nurture their talent while ensuring their contracts do not wind down
    3. Push this youngsters to the very limits of their ability and try to win silverware with them.
    4. When the said players mature and some of them begin to demand excessive pay (in line with their talent and going rates (which have been grossly inflated by the big benefactor backed spenders) but which the club due to its financial constraints cannot meet) sell them for profit.

    Even you must admit this model has served Arsenal well (from the financial information you've supplied about the amount Arsenal have made from player trading) while competitively keeping in touch with the games elite in europe.

    Please Note that I'm not saying that every youngster invested in has been a success story, I'm only saying that if you thoroughly examine this model, it has served Arsenal extremely well through the period from the building of the Emirates till now.

    I'm also not advocating that Arsenal should continue with this model in its current form (nor do I imagine that they will do so when the commercial income stream improves) and do agree that the model needs to be consistently fine tuned with emerging realities in the game.

    1. It' a balanced piece that praises Arsenal for the elements that they have managed well and criticises them for those that they have not. They have consistently performed well over the past few years, but the question is whether they should have done better.

      As your final paragraph suggests, a club's model "needs to be consistently fine tuned with emerging realities in the game". I'm not sure that the Arsenal board has fully achieved this.

      By the way, when you say "the fact remains that in the past two seasons, Arsenal came 4th in the league with the 5th highest wage bill", then you are incorrect, as Arsenal in fact finished third last season, a point that I happily acknowledged in my second paragraph.

    2. You make a lot of sense Rambler, a lot more than people who just pull figures out of the air and you do a lot to explain the account and help accounting lay men understand them but I question some of your assertions particularly about Arsenal's wage bill and potential Commercial growth.

      To summarise, I believe you get the accounting right but missed out on the economics. The idea of limited means having alternative uses. The alternatives and examples you've suggested and explored didn't stand up to my scrutiny as I sort of get the idea that you're suggesting that Arsenal's restructuring of their wage bill and spending more to buy top players would guarantee silverware when in the alternative it could lead to a totally out of control wage bill without any guarantee of success.

    3. You're guilt of extrapolating from what I've actually written to an assumption about what that actually implies here.

      Clearly, buying top players is no guarantee of success, though all the academic studies show that this improves the chances of winning. At no stage have I suggested that the wage bill should be allowed to run wild. Instead, I have suggested that Arsenal could make better use of their resources, such as the second highest revenue and largest cash pile in England. There is a happy medium between spending like a lottery winner and saving for a rainy day.

      In particular, my belief is that the wage bill could be better allocated. Indeed, Arsenal appear to be quietly moving in that direction recently. Of course, if the performance on the commercial side (excluding the main sponsorship deals) had not been so abysmal, then the club could have safely increased the wage bill in line with the revenue growth.

  53. Out of interest, if you were the one faced with the same challenges Arsenal faced then and still face to a lesser degree, I'd like to see you propose a solution (which does not include spending 1 billion pounds in 3 seasons as City have done).

    I'm a bit amazed that someone of your highly respected financial acumen (and I sincerely do respect your financial acumen) cannot see this. I can only imagine that this is because of some other subjective considerations having little to do with Finance and Management.

    Arsenal is currently undergoing another transition, lets see the full results for the current year and the impact of the new commercial team on the new kit and shirt naming deals come 2014, I'd imagine they will have a massive impact on the turnover to wages ratio and will give the club more than enough room to maintain and more likely improve their standing among the game's elite particularly if FFP has the desired impact its supposed to have on the game.

    I do think that United deserve a lot of commendation for the growth in their commercial income, I term them 'Commercial income trailblazers' in the PL

  54. Ah, those mysterious "subjective considerations".

    I'd happily give you my solution to Arsenal's challenges. Pay me £2m a year and they're all yours.

    1. I don't doubt you would though its much harder to walk the talk. You must be a genius of some sort though as I do not see any other club doing it in the PL or anywhere else. Even your example of Napoli and Cavani is not valid as there is no inflow of 'crazy money' into Italian football yet as we've seen in the PL and Napoli do not have an history of making the UCL in the past 15 seasons.

  55. Great blogging Swiss, you're a legend in your own lunchtime. Presumably you must be fairly clued up on Tax efficient salary vehicles living in the 10 cantons as you do !

    Do you think the Board and Manager are too wedded to the idea of financial prudence to ever make a marquee signing again, as we did in the days when we signed the legend that was/is Bergkamp ?

    To my mind I can't see us ever spending any of the cash pile we've built up buying a proven world class international who is sitting on a long term contact at their current club> We'll most likely continue to deal astutely by grabbing players in the last year of their contract or buying players from clubs in financial difficulty.

    I think in that sense AFC is now truly a business rather than a football club, the people running the club are not Arsenal Fans and therefore will never the display the passion (madness) that being a fan would demand. Hence we can forget about signing any player that is linked to City, ManU or Chelsea or as you suggest someone of the calibre of Cavani, the Board simply don't have the balls to compete financially, I believe they'd see it as pissing money up the wall needlessly.

  56. Another outstanding analysis as always!

    I have a couple of questions for you Swiss in relation to the shirt sponsorships;

    1) Quoted from the above article - "8 years of shirt sponsorship (£48 million)" By my calculation this should be £6m per year not the £5.5m everyone has quoted. Should we be alerting the police to some rather ballsy embezzlement?

    2) On a more serious note, if a new shirt deal had been agreed this season for say £20m (considering 15 years of champs league and being near the top tier of worldwide shirt sellers this seems < market rate) that would bring in £40m during the current deal. Less the £11m the current deal will earn that’s £29m in extra revenue. Even with horrendous break penalties there is still room for plenty of profit. The same applies to the kit deal with Nike. That’s upwards of £50m extra revenue. After all its not exactly unprecedented in shirt sponsorship deals, however I have no idea about the terms of the contract. Do you have any thoughts as to why this approach has not been taken? It seems a real missed opportunity?

    As for everyone complaining about how restrictive the current deals are, please bear in mind this was record-breaking at the time, even outstripping the mighty Man U for a while!

    1. 1) i think there was a lump-sum in advance + backloaded annual payment... so arsenal recieved less than £5.5M annually during the earlier years of the deal - but not 100% sure

      2) i remember Hill-Wood (a couple of years ago) saying that arsenal wont break the nike / emirates deals, and that arsenal are above such things and are cultivating good relations, yada, yada etc... which seems pretty crazy to me considering the damage they do to the club financially when compared arsenals peers. i suspect that there are horrendous break penalties that outweigh the obvious benefits

      however much everyone hates the manure yanks, their ability to pull in unbelievable commercial deals is truly astounding. Kroenke, Gazedis and co should be taking notes

  57. Great post Rambler.

    There is just one thing I have been thinking about that I would like to get your opinion on.

    Through the comments we have seen a lot of talk about the commercial revenues. We all agree that Arsenal should increase their commercial revenues a lot when the old contracts expire in 2014. But could the lack of success in secondary sponsors be a direct result of the problematic deals they have with their primary sponsors?

    I mean if we compare with Man United: how should Arsenal be able get anyone to pay a reasonable sum of money for the training shirt, for example, while Emirates pays almost nothing to be seen on the main shirt.

    I just think that Arsenal must have a pretty good brand, don't they? A bit like Barcelona - playing creative "fun to watch" football, they have a great stadium, solid finances: a role model in almost every way in football. So I can't imagine that the idea of being associated with Arsenal should be extremely hard to sell to companies. Which means that either the marketing team are a bunch of buffoons, or there must be some other explanation.

    I also wonder if you know why the kit deal was extended with Nike for such a small amount a couple of years ago.

  58. Best blog on tinterweb, keep up the good work. :)

    Putting aside the commercial revenues, I'd be really interested to know the difference in earnings between Arsenal & their two main rivals Man Utd & Chelsea since they last won a trophy? Talking in terms of prize money from progression in domestic & European competition & finishing positions in the league.

    That would give a good indication whether extra expenditure on marquee signings during that time could potentially have been negated by achieving a better league position or progressing further in the cups.

  59. hey great-blog.i will have to re-read it a lot of times since there is a lot of stuff here.But since i see u patiently answering so many questions i want to ask you some more.1. Do u think ffp will have any effect on club spending (or they will just walk around it )?2. do u think clubs like manchester city and chelsea have made wise decisions ( they have really smart people and people with lots of money to invest) in investing so heavily , and that they will eventually make loads of profits? 3. do u think that most clubs will eventually drive each other to bank ruptcy ( like football bubble ) or they are too big to fail .also do u think arsenal owners have been selfish enough by not investing enough , and thereby slowing down the growth of the market value (as well as the team) and thereby having the complete share of the pie when arsenal starts making loads of profit. just wanted your expert comments on it. also what do you think about the possibilty of making a mathematical model of these clubs. If its possible it will certainly lead to the possibilty of making a much more robust policy(than ffp) and could possible save us from global extinction of football and sports as we know it (last part just to give a dramatic effect )

    big fan here since u make me think.(please forgive for any grammatical mistakes)

  60. Wow! An amazing amount of info. Great blog post!

  61. Gooner here. Love your analysis.

    Not sure if this has been asked. If so please refer me to relevant section.

    As I see it investment in playing = net transfer spend + increase in wages

    This is because players like chamakh arrive on 'free transfers' but the fee is effectively hidden in the exorbitant wages.

    Could you provide some analysis on who invests most on investment in playing squad in recent years?

  62. Was this article updated after Arsenal announced a new deal with Emirates?

  63. So going by this cause we are tied in with the emirates we will have trouble growing our comercial revenue, will this be a problem for a while? You saying the stadium is actually costing us money cause we cant grow commericial revenue, would you go as far in saying it would of been better not to have got tied in with the emirates. Also if we keep failing to win anything will it lose us money in deals in the near future?

  64. One factor Arsenal doesn't factor by increasingly saving for future and not spending today, is the loss of new fans..

    How many new fans would have started supporting Arsenal these last few years? I beat not less than 10% of number of new fans of Man City or Man Utd or Chelsea..

    That is the bread and butter for a football business.. The fans.. The money comes to the club indirectly from fans through commercial revenue, tv rights, etc.. So though it is good to cut down on certain silly expenses, the player wages and transfer spend should be increased, so that team starts winning, new fans come and consequently more revenue can be made to match those expenditure..

    Being too conservative doesn't help anyone including the business..

  65. I think that Arsenal didn't lose much fans in last trophyless years, cuz many like the style they play and they are still the one and only, the invincible.... but this might change soon.


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