beating the offside trap

perspective DECEMBER 2012

BEATING THE OFFSIDE TRAP: DRIVING FORWARD THE COMMERCIAL PERFORMANCE OF FOOTBALL CLUBS

enrico Lanzavecchia, Faizal patel, Marco Labianca

Beating the offside trap:Driving forward the commercial performance of football clubs

Published byValue Partners Management ConsultingLimited, 16 Smith Square, 7th floor,Kings Building, London SW1P 3JJ, UK

November 2012

Written and edited by:Enrico LanzavecchiaFaizal PatelMarco Labianca

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For more information on the issuesraised in the report please contact:[email protected]@ [email protected]

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perspective BEATING THE OFFSIDE TRAP

3

FOOTBAll cluBS HAvE AlwAyS BEEN uNIquE AS “BuSINESSES” – AS THEy ARE A RARE ExAmPlE OF AN INDuSTRy IN wHIcH GENERATING PROFIT IS NOT THE PRImARy OBjEcTIvE. SPORTING SuccESS HAS AlwAyS BEEN PRIORITISED OvER cOmmERcIAl SuccESS, wITH wEAlTHy INvESTORS AND IN SOmE cASES, lOcAl GOvERNmENT, wIllING TO SuPPORT FOOTBAll cluBS IN PuRSuING SuccESS ON THE PITcH AT THE ExPENSE OF PROFITABIlITy.

HOwEvER THE STATuS quO IS BEING INcREASINGly cHAllENGED By THE GROwING cONcERN OF FOOTBAll BODIES OvER THE STATE OF FINANcES IN THE FOOTBAll INDuSTRy. uEFA IS INTRODucING A NEw SET OF REGulATIONS cAllED FINANcIAl FAIR PlAy, wHIcH wIll BE Fully OPERATIONAl IN 2013 AND wIll AFFEcT THE wHOlE EuROPEAN FOOTBAll INDuSTRy.

THESE NEw REGulATIONS mANDATE THAT FOOTBAll cluBS muST kEEP mucH TIGHTER cONTROl OvER THEIR FINANcES AND AccOuNTS THAN PREvIOuSly AND wIll AlSO ENcOuRAGE lONG-TERm INvESTmENT IN yOuTH DEvElOPmENT AND INFRASTRucTuRE.

ExEcuTIvE SummARy


4

SIGNIFIcANT REvENuE GROwTH IS vITAl FOR mOST FOOTBAll cluBS TO FAcE THIS uPcOmING cHAllENGE AND ENSuRE REGulATORy cOmPlIANcE AND THE POSSIBIlITy OF PROFITABIlITy. HOwEvER, wE ARGuE THAT, AS OF TODAy, THE mAjORITy OF EuROPEAN FOOTBAll cluBS HAvE NOT OPTImISED THEIR cORE REvENuE STREAmS, NOR SuFFIcIENTly cAPTuRED REvENuE GROwTH OPPORTuNITIES.

IN THIS PAPER, vAluE PARTNERS AImS TO SHOw THAT FINANcIAl SuccESS FOR FOOTBAll cluBS IS POSSIBlE, THOuGH THIS wIll REquIRE THE AGGRESSIvE mAxImISATION OF cORE REvENuE STREAmS AND THE ExPlORATION OF cREATIvE BuSINESS OPPORTuNITIES, THE SuccESSFul FAcIlITATION OF wHIcH mAy REquIRE A cHANGE IN mINDSET FOR mANy cluBS.


5

Financial Fair Play regulations (FFP) are coming into force in the 2013/14 season (though uEFA will take into account losses from the two preceding years) and stipulate that:

_Relevant income and relevant expens-es1 must be equal2

_The negative equity rate, i.e. the differ-ence between the value of assets and the balance of outstanding loans, can-not be greater than the previous year

_clubs cannot have overdue payables as of 30th june of any given year

moreover, regulations additionally state that detailed financial information must be provided to uEFA to ensure that employee benefits do not exceed 70% of total revenue.

In order to be fully compliant with FFP regulations, all European football clubs have to fulfil all of the abovementioned requirements set by uEFA. If not com-pliant, clubs in question will be penal-ised by uEFA with sanctions including fines, point deductions and bans from uEFA competitions.

Based on the current accounts of foot-ball clubs, the majority are unlikely to be compliant.

Of the top 20 European clubs (ranked by total revenue registered in 2010/11), only 7 could be considered fully compli-ant with FFP regulations, with profitable clubs being the exception. This theme is consistent across Europe, with Italian and French clubs in particular appear-ing to struggle to meet FFP criteria.

Profitability is just one of the indicators considered by uEFA in the new regula-tions, with the wages-to-turnover ratio also taken into account.

In the Premier league for example, around half of clubs are currently exceeding the maximum wages-to-turnover ratio. Other European peers also appear to be unready to meet this requirement, with 8 of the 20 toprankedclubs exceeding the 70% threshold.

NEW rEgULAtIoNS WILL CoME INto ForCE IN 2013/14

Of the top 20 European clubs, only 7 could be considered fully compliant with Financial Fair Play regulations (FFP)

1 Relevant income calculated as revenue from gate receipts, Tv rights, sponsorship, commercial activities and profit from disposal of player registrations. Relevant expenses calculated as cost of sales, employee benefits expenses, amortisation costs and finance costs.(uEFA Article 58 – Notion of relevant income and expenses).2 The acceptable deviation, considered as the maximum deficit between income and expenses, is €5 million (extended to €45 million for the first two years if entirely covered by injections from equity participants).


6

Cumulative top 20 European Clubs profitability before tax and wages-to-turnover ratio over 3 years, 2008/09-2010/11 (€m)

Note: (1) Club historically profitable; registered negative results in 2010/11 due to reduced broadcast revenue after TVrights collectivisation and negative sport performance in UEFA competition.

Source: Deloitte, Press, Clubs’Annual Reports, Value Partners analysis.

88

-86

-218

-174

-11 -13-3

-42

-781

-493

-40

-73

-306

-165

76

16

131

33

8

33

45% 56% 47% 50% 52% 79% 86% 99% 63% 53% 57% 110% 74% 63% 74% 46% 73% 35% 74% 41%


7

thE SItUAtIoN IS WorSENINg AS WAgES ArE INCrEASINg

Player wages have rapidly increased over the last 4 years in all of the top 5 European leagues: from 2007/08, wage costs have grown by an average of 5.2% each year. But as wages are increasing, the revenue of clubs is failing to keep pace.

For example, in the Serie A, the overall league-wide wages to turnover ratio increased from 68% in 2007/08 to 75% in 2010/11.

The trend is similar across Europe. Of the top 20 European clubs, only 3 have managed to decrease their overall expenditure on employee benefits, with salary cost growth exceeding revenue growth for the majority of clubs.

For example, Bayern munich’s salary costs have grown by 6% on average over the last three years, whereas total revenue grew at a rate of 5% on average over the same period.

Even manchester city, who have ex-perienced substantial revenue growth (27%) over the last three years follow-ing their takeover by the Abu Dhabi united Group, have seen salary costs far outstrip this, growing by 45%.

It is clear that if historic trends in player wages and revenue growth continue, football clubs will have a challenge in complying with FFP regulations.

Wage inflation in the Top 5 European Leagues, 2007-2011 (€m)

Source: Deloitte, Press, Clubs’ Annual Reports, Value Partners analysis.

2007/08 2008/09 2009/10 2010/11

800

1,300

900

1,400

1,000

1,500

1,100

1,600

1,700

1,800

700

1,200

4%

6%

5%

8%

3%

Premier League

Serie A

La Liga

Bundesliga

Ligue 1

07-10 CAGR


8

CLUBS NEED to FIND WAyS oF SIgNIFICANtLy INCrEASINg rEVENUE

There are a number of areas that clubs should look at in order to optimise commercial performance within existing revenue streams.

Broadcast revenues form the largest contributor – almost 50% – of clubs’ an-nual income, however given that broad-cast deals are managed collectively by most leagues, there is little that individ-ual clubs can do to significantly enhance revenue (besides try to improve on-pitch performance, finishing higher in leagues and qualifying for/progressing further in European competition).

However clubs can and should focus on optimising the other 2 main sources of revenue, namely commercial and matchday revenue.

Top 5 European Leagues revenue breakdown, 2007-2011 (€m)

Source: Deloitte, Value Partners analysis.

Commercial

Matchday

Broadcast

52%

30%

45%

60% 58%

24%

23%

25%13% 13%

24%

2,515

47%

1,746

30%

1,718

27%

1,553

29%

1,040


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ExtrACt MAxIMUM VALUE FroM ShIrt AND tEChNICAL SPoNSorShIP

The global sponsorship market is large and experiencing considerable growth. Today the market is worth €23 billion, and is growing by around 5% per year. Top tier or ‘premium’ market segments are experiencing the strongest growth, since this type of sponsorship is attract-ing an increasing share of marketing spend at the expense of more traditional forms of advertising, due to:

_An overall reduction in the effective-ness of Tv advertising due to audience fragmentation and increased ad-skip-ping

_The enhanced brand exposure offered by sports sponsorship of a live broad-cast, attracting large audiences, particu-larly of hard-to-target market segments (i.e. young men)

_An increasing recognition by advertis-ers of the value of associating brands to sports

Football clubs have a concrete oppor-tunity to exploit this growth, given that top clubs can attract vast audiences, providing sponsors with huge exposure, while their two key properties - shirt and technical sponsorship - are ‘premium’ properties given the high visibility and brand engagement that they offer spon-sors.

clubs therefore need to ensure that they fully exploit the revenue potential of these properties when negotiating deals, by exploring all potential oppor-tunities and innovative strategies.

This is all the more crucial given that the majority of these deals are long-term deals (5 years+), so clubs must ensure that they are not locked into underval-ued long-term contracts.

liverpool Fc for example has done well to fully exploit the value of its technical sponsorship property. liverpool re-cently signed a new technical sponsor-ship deal with the American sportswear brand ‘warrior’, thought to be worth ~€29 million per year. warrior paid a significant premium (one of the high-est in Europe) to ‘buy-in’ to European football, having recognised the poten-tial benefits of associating with football in order to enter the European market. liverpool managed to achieve one of the highest value technical sponsorship deals in Europe, despite their recently disappointing league performance and failure to qualify for the champions league.

Tottenham Hotspur is another good example of a club pursuing an innova-tive strategy to maximise sponsorship value. Tottenham managed to secure a 50% revenue uplift from shirt spon-sorship by selling shirt sponsorship rights to two main sponsors: to ‘Autonomy’ for Premier league games, and to ‘Investec’ for cup competitions.


10

DEVELoP INtErNAtIoNAL SPoNSorShIP StrAtEgy

European football is growing in popu-larity worldwide: European clubs are estimated to have nearly 1 billion non-domestic followers in total, with some clubs reported to have more fans in Asia than they do in Europe.

For example, Fc Internazionale and Ac milan are becoming considerably popular in china, while Real madrid and manchester united have millions of sup-porters across the Far East.

considering their growing global appeal, European clubs have the op-portunity to leverage this interest by developing an international sponsorship programme.

manchester united have led the way in exploiting their global popularity to increase international sponsorship revenue.

The club has recently signed a series of exclusive sponsorship deals with 13 tel-ecoms operators spanning 42 countries, through which each sponsor receives extensive affiliation rights within their own country.

while the exact revenue derived from this programme is not officially reported, value Partners estimates that manchester united’s international sponsorship strategy is worth ~€15-20 million per year.

clubs can further enhance their in-ternational image and brand reputa-tion, which in turn can lead to greater sponsorship revenue, by developing international soccer schools.

manchester city, manchester united and Real madrid are considered bench-marks for the development of such initiatives.

manchester united, for instance, now have soccer schools in 9 different geog-raphies, including the uAE, canada and Australia.

European clubs are estimated to have nearly 1 billion non-domestic followers in total, with some clubs reported to have more fans in Asia than they do in Europe.


11

oPtIMISE tICKEt PrICINg StrAtEgy

A club’s matchday revenue is to a cer-tain extent limited by stadium size, the number of fans and the level of sporting success achieved, however clubs can attempt to maximise revenue within the context of these limitations, through a series of actions, such as:

_The development and adoption of a sophisticated and dynamic ticket pricing model, based on variables such as the economic context, the timing of ticket purchase and which team the club is playing

_Ticket pricing differentiation through effective segmentation of the fan base, based on demographic variables (e.g. age, consumer preferences, etc)

Of the top European clubs, English clubs are by far the most commercially sophisticated in terms of maximising matchday revenue, with chelsea, man-chester united and Arsenal being the most successful.

For example, chelsea achieved the high-est revenue per number of seats avail-able in Europe, and also has the highest matchday revenue per number of do-mestic fans. Through accurate fan base segmentation and the development of a dynamic ticket pricing strategy, the club has managed to achieve close to 100% attendance, despite significantly raising ticket prices.

Fan base engagement and price dis-crimination are key enablers for ticket price optimisation, though attention has to be given to ‘fair’ pricing.

clubs are challenged by the delicate trade-off between raising ticket prices to boost revenue while ensuring that they remain inclusive and open to a broad socio-economic demographic, and do not alienate their traditional fanbase.


12

Matchday revenue comparison, 2010/11 (€)

Source: Deloitte, Press, Clubs’ Annual Reports, Value Partners analysis.

1,538

1,114

1,578

1,029

1,710 1,786

445 411

999

1820

26

7

33

47

9 810

€ 123.6m € 110.7m € 120.3m € 71.9m € 103.2m € 74.7m € 35.6m € 32.9m € 45.3m

matchday revenue, 2010/11

matchday revenue per number of Stadium seats

matchday revenue per number of domestic fans

12 – 13


13

MoNEtISE FANS Who ArE UNABLE to go to thE StADIUM

Given the growing media exposure and visibility of football clubs, clubs have an increasing number of fans who never attend football matches at stadia. Even though such fans do not buy tick-ets for matches, nor merchandise from shops on matchdays, clubs still have opportunities to monetise such fans, by exploiting the level of engagement they have with their supporters, utilising social media and e-commerce.

One possible way for clubs to address such opportunities would be through the optimisation of their websites.clubs need to ensure that their websites have good e-commerce functionality, stimulating users to purchaseclub merchandise online.

moreover, clubs can utilise the growth of internet and mobile usage to sell digital media content such as video-on-demand, video games, etc.

manchester united for example, through their international partnerships with telecoms operators, offers digital content to mobile devices, generating almost €20 million per year.

Effective digital strategies offer the dual benefits to clubs of generating direct revenue (from product sales) along with engaging fans with clubs to a greater extent, which will generate additional indirect benefits.

Even though an increasing number of fans never attend football matches at stadia – fans who do not buy tickets for matches, nor merchandise from shops on matchdays –, clubs still have opportunities to monetise such fans.


14

MorE rADICAL SoLUtIoNS CoULD BE rEqUIrED

Given the current state of the finances of many European football clubs, op-timising existing revenue streams may not be enough to ensure compliance with FFP. For example, based on the latest available accounts (2010/11) of Ac milan, Fc Internazionale and juventus, we estimate that they need to increase revenue by an average of €82m each in order to comply with FFP.

Therefore given the scale of the chal-lenge, some clubs are beginning to explore radical solutions for addressing this financial conundrum, by diversifying their business into fundamentally new areas.

Football clubs are uniquely able to transfer the use of their brand outside of core activities given their large and loyal following and strong deeply-entrenched brand qualities. Therefore many clubs have been attempting to leverage their brand appeal outside of sports-related areas to generate revenue from new markets. Real madrid, for instance, has recently announced a plan to build a themed holiday resort in the uAE. The project, called ‘Real madrid Resort Island’, is estimated to be worth $1 bil-lion (approx. €770 million) and is aimed at creating a significant new revenue stream by leveraging the club’s brand reputation in the middle East.

manchester united is also leveraging its strong brand to augment its revenue from non-football operations; the club is franchising its brand for the develop-ment of branded café bars in Asia.

In Turkey, the top 4 clubs, namely Fenerbahçe, Beşiktaş, Galatasaray and Trabzonspor, have all launched mobile virtual network operators (mvNOs) in order to exploit the loyal brand follow-ing that they have amongst their large fan base.

In addition, some clubs are exploring even more radical ways of generating new revenue, by attempting to utilise other physical assets that they hold.

For example, Arsenal and juventus have taken advantage of their respec-tive moves to new stadia to invest in the real estate business. This has enabled them to generate significant additional revenue from non-football activities, with Arsenal for example earning £156.9m from their property development business in 2010, which was equivalent to ~70% of turnover from football operations.

Trabzonspor in Turkey has pursued even more radical opportunities, by develop-ing a hydroelectric power plant, invest-ing over $50 million (approx. €40 mil-lion) into the scheme. The club expects that the new facility will generate ~$10 million a year in additional revenue.


15

CoNCLUSIoNS AND rECoMMENDAtIoNS

From our experience of working with a number of leading European sports clubs and leagues, we believe thatthere are opportunities for many football clubs to significantly increase revenue, but in order to do so, mostclubs need to pursue a number of initia-tives simultaneously.

clubs need to do as much as possible to optimise commercial performance in core revenue streamswe have found that many European football clubs have untapped opportu-nities to optimise commercial perform-ance; however this takes time, consist-ent effort and long-term planning.

The revenue growth opportunity for football clubs

Note: exhibit is illustrative.

Source: Value Partners analysis.

creative business

opportunities (non-football operations)

Total potential revenue

Potential revenue

from core operations

monetisation of “armchair

fans”

matchday revenue

optimisation

Exploitation of international

sponsorship negotiations

Technical/shirt sponsorship maximisation

Current revenue


16

The optimisation of matchday and commercial sponsorship revenue for instance, are two areas yet to be fully explored and exploited by football clubs, with many clubs relying too heav-ily on growing Tv and media revenues. The two main challenges that clubs face are the limited availability of sufficient in-house teams to exploit all oppor-tunities, and also the trade-off that exists between long-term planning and short-term results. In order to improve their financial performance, clubs need to ensure that they invest in the right skills and capabilities and have a clearly defined commercial strategy, or they risk missing growth opportunities.

clubs and leagues need to work togeth-er more to take advantage of collective opportunitiesThe collectivisation of sponsorship and commercial rights can help clubs to achieve greater returns on commercial deals. Indeed, when negotiating agree-ments jointly, clubs and national leagues are creating a larger property that can guarantee the sponsor higher visibil-ity, which sponsors are willing to pay exponentially larger amounts in order to secure. Additionally, through collectivi-sation, clubs and leagues hold a better bargaining position, which can also enable them to achieve greater revenue. The commercial success of the National Football league (NFl) in the uS high-lights that the effective collectivisation of commercial rights can drive greater revenue for all the teams in a league.

The NFl, through the establishment of a single entity for commercial negotia-tions, collects income from licensing deals and distributes the earnings to the league’s teams equally. The majority of commercial rights deals are handled centrally, with ~60% of the total revenue of NFl teams being generated centrally. This strategy has been successful, with the league registering approximately $4.5 billion from commercial revenue in 2010, making the NFl one of the most commercially successful sports events globally.

Similarly, European football clubs and leagues could explore the opportunity to collectively sell some packages of rights and properties. while many major rights will always be managed by clubs (e.g. shirt and technical sponsor-ship properties), it is conceivable that some smaller commercial assets (e.g. sections of perimeter inventory) could be managed by a central league body who could use these assets to create a “league-wide” property, that could generate incremental value for all clubs. By working together, clubs and league governing bodies could considerably increase overall commercial revenues.


17

clubs should also explore more creative business opportunitiesmaximising the revenue coming from core activities and traditional busi-ness models may still be not enough for some clubs to achieve profitability. Thus we believe that clubs may need to explore more radical revenue opportuni-ties.

However, clubs need to be sensible when undertaking new initiatives and must ensure that they understand their key assets and capabilities, only launch-ing new initiatives that are in alignment with these. For football clubs, these are largely their strong brands, loyal fan base and media exposure. clubs also need to face up to the challenge posed by a lack of in-house skills and a pos-sible institutional sense of rigidity and resistance to disruptive initiatives and practices.

clubs therefore need to make sure that any revenue diversification strategies utilise their main assets and do not ex-tend too far beyond their core capabili-ties. we believe that one such initiative that could potentially be undertaken by many European clubs would be launch-ing a mobile virtual Network Operator (mvNO). mvNOs can be reasonably easy to be set-up, simply requiring clubs to form a commercial agreement with a mobile operator, who will manage the majority of the key network and opera-tional functions. At the same time, run-ning an mvNO enables a club to utilise two of its key assets: strong brand and loyal fan-base.

Ajax, for example, has recently launched an mvNO for its domestic fans, through a partnership with the mobile platform supplier 6Gmobile. The offering is targeted to its 4.3 million supporters and is made up of 4 subscription plans as well as a prepaid plan. Ajax mobile subscribers can also benefit from in-novative value added services, such as free extra call minutes whenever Ajax scores or SmS match updates.

In order to successfully strengthen their finances in preparation for incoming FFP regulations, football clubs need to maximise core revenues as well as ex-plore new business opportunities. There are a wide range of initiatives that clubs can explore (optimising sponsorship negotiations, reviewing ticket pricing strategies, exploring innovative new opportunities, etc) however clubs have key challenges that they must recognise and overcome. To drive forward their commercial performance and beat the ‘offside trap’ set by FFP regulations, clubs need to invest time and effort in exploring opportunities to increase revenue from traditional sources and to generate returns from beyond the world of sports.

Enrico lanzavecchiaDirector

Faizal PatelAssociate

marco labiancaBusiness analyst

managing Partner of value Partners london [email protected]

Based in value Partners london [email protected]

Based in value Partners london [email protected]

AUthorS


19

Copyright © Value PartnersManagement Consulting LimitedAll rights reserved

ABoUt VALUE PArtNErS

Value Partners has an established sports strategy practice with sig-nificant experience of helping clubs, leagues and industry investors from across the world to solve a range of commercial and regulatory prob-lems.

For example, we have a track record of helping top European football clubs and major football leagues to develop their commercial strategies and grow revenue. our advice to the football industry has spanned across a range of issues including sponsor-ship, ticket pricing, fan engagement, digital media and brand licensing.

Value Partners is a global manage-ment consulting firm that works with multinational corporations and high potential entrepreneurial businesses to identify and pursue value enhancement initiatives across innovation, international expansion, and operational effectiveness.

Founded in Milan in 1993, today it draws on 25 partners and over 275 professionals from 23 nations, work-ing out of 10 offices in Milan, rome, London, Istanbul, São Paulo, Buenos Aires, Beijing, Shanghai, hong Kong and Singapore.

Value Partners has built a portfo-lio of more than 350 international clients – from the original 10 in 1993 – with a worldwide revenue mix, as over 60 percent of the management consulting revenues are generated outside Europe.

Value Partners combines methodo-logical approaches and analytical frameworks with hands-on attitude and practical industry experience developed in an executive capacity within each sector: telecommunica-tions, new media, financial services, energy, manufacturing and hi-tech.

In 2007 Value Partners acquired Spectrum Strategy Consultants –a leading UK company specialized in publishing, broadcasting, entertain-ment, IPtV and mobile – thus further strengthening its international pres-ence. today Value Partners is a lead-ing advisor in the telecom, media and technology sectors worldwide.

For more information on the issues raised in this note please contact the authors.

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