A decade of profits (with make-up)

Recently Peter Hill-Wood has told the media that Arsenal Football Club has made a  profit of more than £35 million. While this is all nice I don’t think many fans of the club realise that this means that the last time the club has made a loss was in 2002, when the club recorded a £22 million loss. In other words: Arsenal have been through a decade of profit and have amassed a  stunning £248 million over the course of the past 10 years of which 77% (£191 million) was made in the last 5 years. Arsenal is not the first club to achieve a decade of profits as Bayern Münich has entered their 19th consecutive season recording a profit.

Just a quick glance at the above figure might give the illusion that the club is heading in the right direction, but the devil lives in the details so lets take a closer look at this years profit. To clarify the sales of Robin van Persie and Alex Song are not recorded in the 2012 profits since the end of the fiscal years is not on the same day as new years. So the 2012 accounts have the sales of Nasri, Fabrégas, and Clichy in them but not Van Persie, and Song.

Breaking down the £191 million

We are extremely dependant on 2 things: Players sales, and property development. Without the £2,5 million profit from property developments and the £65,5 million profit from player sales we would have made a sizeable loss of £31 million in 2012. In fact player sales have accounted for 80-90% (about £160-170 million) of our profits in the last 5 years. What this means is that the club has become reliant on player sales to maintain sustainability. Have you ever felt in the past 5 years that the Arsenal squad is a player or two away from title contention? Well this is the reason why. Although the sales of each player can be individually explained (Fabregas wanted to go back to Barcelona; Song had bad discipline) we should take a step back and take a look at the trend that has occurred in the past years: Arsenal has slowly turned into a competitive selling club! (My definition of competitive here is qualifying to the UEFA Champions League)

Now not everything is gloomy: We are still capable of staying competitive on the pitch (thanks to smart investment due to scouting) but title contention is highly improbable. Also thanks to our sustainability we won’t have to walk down the road of Malága, Milan, and Inter who had to part ways from their experienced, expensive players. Heck even Manchaster City was more restrained on the transfer market! The fact that we are run on a sustainable business model means that we will (most probably) always have funds to invest in the squad; however our title contention will be decided, to a large extent, by the lack of transfer dealings by our competitors.

The profit with make-up

Have you ever had a girlfriend who looked stunning with make-up on but once she took it off she wasn’t as hot? Well if not you are soon going to find out what that feels like: Our £35 million profit hides our inefficiency in generating revenue growth. In fact if we exclude property development we have generated a negative operating profit. Of course with property development included we are still making an operating profit but if the current trend keeps up we wont be doing so for long as the Highbury Square property is almost completely sold. The fact that turnover has dropped to £7,7 million from last years £30,3 million in the property segment reflects this. The rise in overall staff costs  from £124,4 million to £143,3 million had an impact on our operating profit as well. This rise in our wage bill can be attributed to our late signings last season. The good news is that the club has learnt from its mistake and concluded its deals well before transfer deadline day. The bad news is that our wage bill (and operating expenses) has grown at a faster rate than our revenue.

Deloitte Money League
(£ mil)
2011 Rev 2010 Rev
1 Real Madrid 433 359.1
2 Barcelona 407 325.9
3 Manchester United 331.4 286.4
4 Bayern Münich 290.3 264.5
5 Arsenal 226.8 224.4
6 Chelsea 225.6 209.5
7 AC Milan 212.3 199.8
8 Internazionale 190.9 184.1
9 Liverpool 183.6 184.5
10 Schalke 04 182.8 139.8
Exchange rate: £1 = € 1.1073 (30-June-2011)

Since I mentioned revenue it is time to look at our biggest weakness: Weak revenue growth due to sub-par commercial revenue. If we look at our revenue we are in the financial elite of Europe standing firm on 5th place with a revenue of £225,4 million last year (Deloitte numbers are not exactly the reported figures of Arsenal due to exchange rates changing). In fact it was reported in May 31 that our revenues have increased to £235,3 million from £225,4 million. which is only surpassed by Manchester Uniteds £320 million in the Premier League. While this might seem impressive Arsenal has only managed to increase their revenue by £10 million in 3 years while Manchester Untied was capable of achieving a £42 million revenue growth in the same time frame.

The biggest defect of Arsenal is its commercial revenue. The reason behind this is the Emirates Stadium: Arsenal had to tie itself down in long term deals to finance the Emirates stadium. The good news is that the Arsenal Board recognises this, hence the Asia tour which attracted commercial partners; however we are still lagging behind Manchester United in this area who are capable of attracting a lot more secondary commercial partners than Arsenal do. However we should not look at this and claim the Asia tour was useless as it is one of the factors behind our £10 million Revenue growth in the past 3 years.

However as Milton Friedman has already said “there ain’t such a thing as a free lunch” and just like everything the Asia tour has costs associated with them. The biggest of these is that the team does not have as much time to gel, not to mention possible injuries. These might not seem like  financial costs but they have an effect on performance on the pitch. And performance on the pitch will have a huge impact on profitability and commercial attractiveness. Long story short: Our Asia tour can attract commercial partners and have an uplift on our revenue growth but such a tour will have an impact on team chemistry come the first week of the league.

The promised land of 2014. The year our shirt deals expire. Many people expect our commercial revenue problems to be solved that year simply because both our shirt  sponsorship and shirt producing deals are pathetically bad and improving on them is a must. The board recognises this: Gazidis has claimed that “in terms of the financial impact, it will be as significant a step forward as the stadium was in 2005”, but if Arsenal FC truly want it to have as huge of an impact as the Emirates Stadium was than the commercial team and Tom Fox have their work cut out for them.

Now many fans will possibly lean back and say: “Who cares. Financial Fair Play is around the corner” and while this is true we must understand that FFP will benefit the teams with the highest revenue, as these are the teams that can spend most on their squad. As I have tried to convey Arsenal has limited to no revenue growth and if it wants to be a leading powerhouse in FFP, solving this is a priority.

What this all means

The point of this analysis is to show the reader how dependant Arsenal is on player sales. It does not need to be this way though. If Arsenal want to be title contenders then revenue growth and operating profit have to be tackled by the Arsenal board. Revenue growth can be achieved by increasing commercial revenue, since Arsenal is behind the curve in this area. The shirt deals will expire in 2014 (the promised land) and the new deals will lessen our dependence on player sales if negotiated correctly.Tackling operational loss making is tougher as it need wage re-structuring. That means the team has to try and renegotiate its wages and try and get rid off “deadwood”. We have seen Arsenal doing the latter by shipping Bendtner, Park, and Denilson out on a loan deal thus decreasing its wage bill but getting rid of unwanted players is imperative to Arsenals success. If neither of the issues are tackled then we will see more reports of profits… with make-up.

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5 comments on “A decade of profits (with make-up)

  1. Pingback: The Evolution of Arsenal’s Gameplay | The Arsenal Way

  2. Pingback: Foreign ownerships effects on the English Premier League (Part 1) | The Arsenal Way

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