Beating the Offside Trap: Driving Forward the Commercial Performance of Football Clubs

1. perspective DECEMBER 2012
BEATING THE
OFFSIDE TRAP:
DRIVING FORWARD
THE COMMERCIAL
PERFORMANCE Enrico Lanzavecchia, Faizal Patel, Marco Labianca
OF FOOTBALL
CLUBS

2. Beating the offside trap:
Driving forward the commercial
performance of football clubs
Published by
Value Partners Management Consulting
Limited, 16 Smith Square, 7th floor,
Kings Building, London SW1P 3JJ, UK
November 2012
Written and edited by:
Enrico Lanzavecchia
Faizal Patel
Marco Labianca
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For more information on the issues
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faizal.patel@ valuepartners.com
marco.labianca@valuepartners.com
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Copyright © Value Partners
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All rights reserved

3. 3
Executive Summary
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.
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4. 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.
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5. 5
New regulations
will come into force
in 2013/14
1
Relevant income Financial Fair Play regulations (FFP) are Based on the current accounts of foot-
calculated as revenue from coming into force in the 2013/14 season ball clubs, the majority are unlikely to
gate receipts, TV rights,
sponsorship, commercial (though UEFA will take into account be compliant.
activities and profit losses from the two preceding years)
from disposal of player
registrations. Relevant and stipulate that: Of the top 20 European clubs (ranked
expenses calculated as cost by total revenue registered in 2010/11),
of sales, employee benefits
expenses, amortisation
_Relevant income and relevant expens- only 7 could be considered fully compli-
costs and finance costs. es1 must be equal2 ant with FFP regulations, with profitable
(UEFA Article 58 – Notion
clubs being the exception. This theme
of relevant income and
expenses). _The negative equity rate, i.e. the differ- is consistent across Europe, with Italian
2
The acceptable deviation, ence between the value of assets and and French clubs in particular appear-
considered as the the balance of outstanding loans, can- ing to struggle to meet FFP criteria.
maximum deficit between
income and expenses, not be greater than the previous year
is €5 million (extended Profitability is just one of the indicators
to €45 million for the
first two years if entirely _Clubs cannot have overdue payables considered by UEFA in the new regula-
covered by injections from as of 30th June of any given year tions, with the wages-to-turnover ratio
equity participants).
also taken into account.
Moreover, regulations additionally state
that detailed financial information must In the Premier League for example,
be provided to UEFA to ensure that around half of clubs are currently
employee benefits do not exceed 70% exceeding the maximum wages-to-
of total revenue. turnover ratio. Other European peers
also appear to be unready to meet this
Of the top 20 European clubs, requirement, with 8 of the 20 topranked
clubs exceeding the 70% threshold.
only 7 could be considered
fully compliant with Financial
Fair Play regulations (FFP)
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.
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6. 6
Cumulative top 20 European Clubs profitability before tax
and wages-to-turnover ratio over 3 years, 2008/09-2010/11 (€m)
45% 56% 47% 50% 52% 79% 86% 99% 63% 53% 57% 110% 74% 63% 74% 46% 73% 35% 74% 41%
131
88
76
33 33
16
8
-3
-11 -13
-42 -40
-78 1 -73
-86
-165
-174
-218
-306
-493
Note: (1) Club historically
profitable; registered negative
results in 2010/11 due to reduced
broadcast revenue after TV
rights collectivisation and
negative sport performance
in UEFA competition.
Source: Deloitte, Press, Clubs’
Annual Reports, Value Partners
analysis.
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7. 7
The situation is
worsening as wages
are increasing
Player wages have rapidly increased For example, Bayern Munich’s salary
over the last 4 years in all of the top 5 costs have grown by 6% on average
European leagues: from 2007/08, wage over the last three years, whereas total
costs have grown by an average of 5.2% revenue grew at a rate of 5% on average
each year. But as wages are increasing, over the same period.
the revenue of clubs is failing to keep
pace. Even Manchester City, who have ex-
perienced substantial revenue growth
For example, in the Serie A, the overall (27%) over the last three years follow-
league-wide wages to turnover ratio ing their takeover by the Abu Dhabi
increased from 68% in 2007/08 to 75% United Group, have seen salary costs far
in 2010/11. outstrip this, growing by 45%.
The trend is similar across Europe. It is clear that if historic trends in player
Of the top 20 European clubs, only 3 wages and revenue growth continue,
have managed to decrease their overall football clubs will have a challenge in
expenditure on employee benefits, with complying with FFP regulations.
salary cost growth exceeding revenue
growth for the majority of clubs.
Wage inflation in the Top 5 European
Leagues, 2007-2011 (€m)
1,800
5%
1,700
1,600
1,500
1,400
1,300
1,200
6%
1,100
4%
1,000
900 8%
800 3%
700
2007/08 2008/09 2009/10 2010/11
Source: Deloitte, Press, Clubs’ 07-10 CAGR Premier League Bundesliga
Annual Reports, Value Partners
Serie A Ligue 1
analysis.
La Liga
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8. 8
clubs need to find
ways of significantly
increasing revenue
There are a number of areas that clubs However clubs can and should focus
should look at in order to optimise on optimising the other 2 main sources
commercial performance within existing of revenue, namely commercial and
revenue streams. matchday revenue.
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).
Top 5 European Leagues revenue breakdown, 2007-2011 (€m)
2,515 1,746 1,718 1,553 1,040
Commercial 24% 47% 30% 27% 29%
Matchday
Broadcast
24%
13%
25% 13%
60%
58%
52% 23%
45%
30%
Source: Deloitte, Value Partners
analysis.
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9. 9
Extract maximum value
from shirt and technical
sponsorship
The global sponsorship market is large This is all the more crucial given that the
and experiencing considerable growth. majority of these deals are long-term
Today the market is worth €23 billion, deals (5 years+), so clubs must ensure
and is growing by around 5% per year. that they are not locked into underval-
Top tier or ‘premium’ market segments ued long-term contracts.
are experiencing the strongest growth,
since this type of sponsorship is attract- Liverpool FC for example has done well
ing an increasing share of marketing to fully exploit the value of its technical
spend at the expense of more traditional sponsorship property. Liverpool re-
forms of advertising, due to: cently signed a new technical sponsor-
ship deal with the American sportswear
_An overall reduction in the effective- brand ‘Warrior’, thought to be worth
ness of TV advertising due to audience ~€29 million per year. Warrior paid a
fragmentation and increased ad-skip- significant premium (one of the high-
ping est in Europe) to ‘buy-in’ to European
football, having recognised the poten-
_The enhanced brand exposure offered tial benefits of associating with football
by sports sponsorship of a live broad- in order to enter the European market.
cast, attracting large audiences, particu- Liverpool managed to achieve one of
larly of hard-to-target market segments the highest value technical sponsorship
(i.e. young men) deals in Europe, despite their recently
disappointing league performance and
_An increasing recognition by advertis- failure to qualify for the Champions
ers of the value of associating brands to League.
sports
Tottenham Hotspur is another good
Football clubs have a concrete oppor- example of a club pursuing an innova-
tunity to exploit this growth, given that tive strategy to maximise sponsorship
top clubs can attract vast audiences, value. Tottenham managed to secure
providing sponsors with huge exposure, a 50% revenue uplift from shirt spon-
while their two key properties - shirt and sorship by selling shirt sponsorship
technical sponsorship - are ‘premium’ rights to two main sponsors:
properties given the high visibility and to ‘Autonomy’ for Premier League
brand engagement that they offer spon- games, and to ‘Investec’ for cup
sors. competitions.
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.
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10. 10
Develop international
sponsorship strategy
European football is growing in popu- The club has recently signed a series of
larity worldwide: European clubs are exclusive sponsorship deals with 13 tel-
estimated to have nearly 1 billion non- ecoms operators spanning 42 countries,
domestic followers in total, with some through which each sponsor receives
clubs reported to have more fans in Asia extensive affiliation rights within their
than they do in Europe. own country.
For example, FC Internazionale and While the exact revenue derived
AC Milan are becoming considerably from this programme is not officially
popular in China, while Real Madrid and reported, Value Partners estimates
Manchester United have millions of sup- that Manchester United’s international
porters across the Far East. sponsorship strategy is worth ~€15-20
million per year.
Considering their growing global
appeal, European clubs have the op- Clubs can further enhance their in-
portunity to leverage this interest by ternational image and brand reputa-
developing an international sponsorship tion, which in turn can lead to greater
programme. sponsorship revenue, by developing
international soccer schools.
Manchester United have led the way
in exploiting their global popularity Manchester City, Manchester United
to increase international sponsorship and Real Madrid are considered bench-
revenue. marks for the development of such
initiatives.
Manchester United, for instance, now
have soccer schools in 9 different geog-
European clubs are raphies, including the UAE, Canada and
Australia.
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.
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11. 11
Optimise ticket
pricing strategy
A club’s matchday revenue is to a cer- Fan base engagement and price dis-
tain extent limited by stadium size, the crimination are key enablers for ticket
number of fans and the level of sporting price optimisation, though attention has
success achieved, however clubs can to be given to ‘fair’ pricing.
attempt to maximise revenue within the
context of these limitations, through a Clubs are challenged by the delicate
series of actions, such as: trade-off between raising ticket prices
to boost revenue while ensuring that
_The development and adoption of a they remain inclusive and open to a
sophisticated and dynamic ticket pricing broad socio-economic demographic,
model, based on variables such as the and do not alienate their traditional
economic context, the timing of ticket fanbase.
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.
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12. 12
Matchday revenue comparison, 2010/11 (€)
€ 123.6m € 110.7m € 120.3m € 71.9m € 103.2m € 74.7m € 35.6m € 32.9m € 45.3m
1,786
1,710
1,538 1,578
1,114
1,029 999
445 411
47
33
26
20
18
9 10
7 8
Source: Deloitte, Press, Clubs’ Matchday revenue Matchday revenue,
Annual Reports, Value Partners per number of Stadium 2010/11
analysis. seats
Matchday revenue
per number of domestic
fans
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12 – TRAP

13. 13
Monetise fans who
are unable to go to
the stadium
Given the growing media exposure and Moreover, clubs can utilise the growth
visibility of football clubs, clubs have of internet and mobile usage to sell
an increasing number of fans who never digital media content such as video-on-
attend football matches at stadia. demand, video games, etc.
Even though such fans do not buy tick-
ets for matches, nor merchandise from Manchester United for example,
shops on matchdays, clubs still have through their international partnerships
opportunities to monetise such fans, with telecoms operators, offers digital
by exploiting the level of engagement content to mobile devices, generating
they have with their supporters, utilising almost €20 million per year.
social media and e-commerce.
Effective digital strategies offer the dual
benefits to clubs of generating direct
Even though an increasing revenue (from product sales) along with
engaging fans with clubs to a greater
number of fans never attend extent, which will generate additional
indirect benefits.
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.
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 purchase
club merchandise online.
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14. 14
More radical
solutions could
be required
Given the current state of the finances In Turkey, the top 4 clubs, namely
of many European football clubs, op- Fenerbahçe, Beşiktaş, Galatasaray and
timising existing revenue streams may Trabzonspor, have all launched mobile
not be enough to ensure compliance virtual network operators (MVNOs) in
with FFP. For example, based on the order to exploit the loyal brand follow-
latest available accounts (2010/11) of AC ing that they have amongst their large
Milan, FC Internazionale and Juventus, fan base.
we estimate that they need to increase
revenue by an average of €82m each in In addition, some clubs are exploring
order to comply with FFP. even more radical ways of generating
new revenue, by attempting to utilise
Therefore given the scale of the chal- other physical assets that they hold.
lenge, some clubs are beginning to
explore radical solutions for addressing For example, Arsenal and Juventus
this financial conundrum, by diversifying have taken advantage of their respec-
their business into fundamentally new tive moves to new stadia to invest
areas. in the real estate business. This has
enabled them to generate significant
Football clubs are uniquely able to additional revenue from non-football
transfer the use of their brand outside of activities, with Arsenal for example
core activities given their large and loyal earning £156.9m from their property
following and strong deeply-entrenched development business in 2010, which
brand qualities. Therefore many clubs was equivalent to ~70% of turnover from
have been attempting to leverage their football operations.
brand appeal outside of sports-related
areas to generate revenue from new Trabzonspor in Turkey has pursued even
markets. Real Madrid, for instance, has more radical opportunities, by develop-
recently announced a plan to build a ing a hydroelectric power plant, invest-
themed holiday resort in the UAE. The ing over $50 million (approx. €40 mil-
project, called ‘Real Madrid Resort lion) into the scheme. The club expects
Island’, is estimated to be worth $1 bil- that the new facility will generate ~$10
lion (approx. €770 million) and is aimed million a year in additional revenue.
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.
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15. 15
Conclusions and
recommendations
From our experience of working with Clubs need to do as much as possible
a number of leading European sports to optimise commercial performance in
clubs and leagues, we believe that core revenue streams
there are opportunities for many We have found that many European
football clubs to significantly increase football clubs have untapped opportu-
revenue, but in order to do so, most nities to optimise commercial perform-
clubs need to pursue a number of initia- ance; however this takes time, consist-
tives simultaneously. ent effort and long-term planning.
The revenue growth opportunity for football clubs
Current Technical/shirt Exploitation Matchday Monetisation Potential Creative Total potential
revenue sponsorship of international revenue of “armchair revenue business revenue
maximisation sponsorship optimisation fans” from core opportunities
negotiations operations (non-football
operations)
Note: exhibit is illustrative.
Source: Value Partners analysis.
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16. 16
The optimisation of matchday and The NFL, through the establishment of
commercial sponsorship revenue for a single entity for commercial negotia-
instance, are two areas yet to be fully tions, collects income from licensing
explored and exploited by football deals and distributes the earnings to
clubs, with many clubs relying too heav- the league’s teams equally. The majority
ily on growing TV and media revenues. of commercial rights deals are handled
The two main challenges that clubs face centrally, with ~60% of the total revenue
are the limited availability of sufficient of NFL teams being generated centrally.
in-house teams to exploit all oppor- This strategy has been successful, with
tunities, and also the trade-off that the league registering approximately
exists between long-term planning and $4.5 billion from commercial revenue in
short-term results. In order to improve 2010, making the NFL one of the most
their financial performance, clubs need commercially successful sports events
to ensure that they invest in the right globally.
skills and capabilities and have a clearly
defined commercial strategy, or they Similarly, European football clubs and
risk missing growth opportunities. leagues could explore the opportunity
to collectively sell some packages of
Clubs and leagues need to work togeth- rights and properties. While many
er more to take advantage of collective major rights will always be managed by
opportunities clubs (e.g. shirt and technical sponsor-
The collectivisation of sponsorship and ship properties), it is conceivable that
commercial rights can help clubs to some smaller commercial assets (e.g.
achieve greater returns on commercial sections of perimeter inventory) could
deals. Indeed, when negotiating agree- be managed by a central league body
ments jointly, clubs and national leagues who could use these assets to create
are creating a larger property that can a “league-wide” property, that could
guarantee the sponsor higher visibil- generate incremental value for all clubs.
ity, which sponsors are willing to pay By working together, clubs and league
exponentially larger amounts in order to governing bodies could considerably
secure. Additionally, through collectivi- increase overall commercial revenues.
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.
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17. 17
Clubs should also explore more creative Ajax, for example, has recently launched
business opportunities an MVNO for its domestic fans, through
Maximising the revenue coming from a partnership with the mobile platform
core activities and traditional busi- supplier 6GMobile. The offering is
ness models may still be not enough targeted to its 4.3 million supporters
for some clubs to achieve profitability. and is made up of 4 subscription plans
Thus we believe that clubs may need to as well as a prepaid plan. Ajax mobile
explore more radical revenue opportuni- subscribers can also benefit from in-
ties. novative value added services, such as
free extra call minutes whenever Ajax
However, clubs need to be sensible scores or SMS match updates.
when undertaking new initiatives and
must ensure that they understand their In order to successfully strengthen their
key assets and capabilities, only launch- finances in preparation for incoming
ing new initiatives that are in alignment FFP regulations, football clubs need to
with these. For football clubs, these are maximise core revenues as well as ex-
largely their strong brands, loyal fan plore new business opportunities. There
base and media exposure. Clubs also are a wide range of initiatives that clubs
need to face up to the challenge posed can explore (optimising sponsorship
by a lack of in-house skills and a pos- negotiations, reviewing ticket pricing
sible institutional sense of rigidity and strategies, exploring innovative new
resistance to disruptive initiatives and opportunities, etc) however clubs have
practices. key challenges that they must recognise
and overcome. To drive forward their
Clubs therefore need to make sure that commercial performance and beat the
any revenue diversification strategies ‘offside trap’ set by FFP regulations,
utilise their main assets and do not ex- clubs need to invest time and effort
tend too far beyond their core capabili- in exploring opportunities to increase
ties. We believe that one such initiative revenue from traditional sources and to
that could potentially be undertaken by generate returns from beyond the world
many European clubs would be launch- of sports.
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.
perspective BEATING THE OFFSIDE TRAP

18. AUTHORS
Enrico Lanzavecchia Faizal Patel Marco Labianca
Director Associate Business analyst
Managing Partner of Value Partners Based in Value Partners London Based in Value Partners London
London office office office
enrico.lanzavecchia@valuepartners.com faizal.patel@valuepartners.com marco.labianca@valuepartners.com

19. 19
About
Value Partners
Value Partners has an established Founded in Milan in 1993, today it For more information on the issues
sports strategy practice with sig- draws on 25 partners and over 275 raised in this note please contact the
nificant experience of helping clubs, professionals from 23 nations, work- authors.
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across the world to solve a range London, Istanbul, São Paulo, Buenos Find all the contact details on
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For example, we have a track record Value Partners has built a portfo- Rome
of helping top European football lio of more than 350 international London
clubs and major football leagues to clients – from the original 10 in 1993 Istanbul
develop their commercial strategies – with a worldwide revenue mix, as São Paulo
and grow revenue. Our advice to the over 60 percent of the management Buenos Aires
football industry has spanned across consulting revenues are generated Beijing
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Value Partners is a global manage- frameworks with hands-on attitude
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and high potential entrepreneurial within each sector: telecommunica-
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leading UK company specialized in
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strengthening its international pres-
ence. Today Value Partners is a lead-
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Management Consulting Limited
All rights reserved
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