Although all accountants adopt the generally accepted accounting rules, each industry has its own characteristics. This is why analysts need specific knowledge about the industry so as to decide which set of accounting rules to apply to reflect the financial situation of the corporation best. And in the football industry, perhaps the main characteristics is the fluctuations in revenue and net income due to uncertainties in the industry. A team can earn a huge amount of money in this year but it can find itself losing money in the next year. The uncertainties root from the uncertain results in the league games. The revenues of football clubs heavily depend on the performance of the team in the league. A simple example is that the football club which does well may have a higher revenue than its counterparts due to the elevated demand of the club-related merchandize. So, if the underlying principles that affect the team's revenue-generating factor can be identified, predicting the company performance will be much easier. This shall be discussed in the following by analyzing the annual reports from 2004-2007 of three football clubs, which are Arsenal Football Club, Liverpool Football Club and Tottenham Hotspur. (Notes: The annual report for the year 2007 of Liverpool is not yet released and therefore we use the statistics in 2004 instead. As said previously, since the financial performance fluctuates greatly, we are not going to estimate the figures in 2007.)
There are a number of factors that can affect the ability of a football team of generating revenues. First, it is known that a part of the operating income of a football club comes from the reward of winning a championship. For UK football clubs, they usually aim at advancing in the UEFA Cup or the even loftier UEFA Championship League, which have a relatively high value of prize money. They sometimes pay less attention to domestic competitions like Premier League, Carling Cup and FA Cup. Apart from the prize money, another important factor is the broadcasting revenue. This comes from the agreements signed between the clubs and the league or cup organizers. Each team in the league receives the broadcasting fee directly proportioned to the number of rounds they played. Therefore, a team in the league usually receives the same share of broadcasting revenues. Yet, for the cup competitions where the knock-out system is adopted, a team which makes a deeper run has more matches to play and hence more broadcasting revenues. It also attracts a larger audience to watch the broadcast, thereby benefiting the club. Also, the revenue gained from the gate receipts is also crucial. Similar to the TV broadcasting fees, the better the team performs, the higher the revenue the team gets from the ticket sales, partly due to the brand name effect, which boosts the ticket sales.
The above four factors shall be discussed in the upcoming section of Team Results.
Secondly, the sales of team-related merchandize items can also be a major source of income. This highly depends on the size of fan-base. A larger fan-base has a higher demand in the club merchandize, which boosts the operating income. Clubs tend to invest to enlarge its fan-base, which is often described as a marketing strategy as found in the annual reports. A larger fan-base also enhances the brand name of the football club, which can also be a potential benefit for the football club itself. This shall be discussed in the Fan Base section. Thirdly, a team who is able to control the payroll of independent players better enjoys a greater fiscal freedom due to the stricter cost control, which can be beneficial to the football club. Plus, if a team can efficiently deal with the sum involving trading player, the team places itself to a sound financial position. These factors shall be discussed in the section Payroll and Trading of Players. Last but not least, the administration and policy of the directors influence the sustainability of the club a lot. For instance, the decision of building a new stadium, investing in training facilities or simply renovating their headquarters do play a significant role in the long-term development of the club. Only if the leaders of the club are of visions can they lead the club to adapt to the environmental changes and to survive from different challenges. This shall be discussed in the Team Strategies part.
2004 2005 2006 Average Arsenal 156887 138395 137237 144173 Liverpool 91576 121054 119499 110710 Tottenham 66324 70550 74141 70338
2004 2005 2006 Average Arsenal 8152 8293 7902 8115.667 Liverpool -18220 7533 -4257 -4981.33 Tottenham -2692 4104 -1575 -54.3333
As mentioned before, a team's success in leagues and cups definitely has a great impact on the team's profitability. In particular, European competitions, mainly UEFA Championship League and UEFA Cup, are of the utmost importance to the UK football clubs due to the lucrative bonuses and broadcasting fees. Successes in European competitions also imply a higher visibility and global exposure which help a club capture more fans. It is found that there is sound evidence to draw a positive relationship between the successes of the football clubs to the revenues therefore generate. Both Arsenal and Liverpool were competing in UEFA Championships League in the past few years and Tottenham was only competing in the lower-level UEFA Cup. This explains the huge disparity between the revenue of Arsenal and Liverpool and that of Tottenham. For Tottenham, they also had a break-out last season, which is entering the quarter-final of UEFA Cup. It leads to a boost in revenue from £74 million to £103 million. However, before that, its revenue never exceeds £100 million which makes the club inferior against the other 2 clubs. For Liverpool, its revenue ranges from £92 million to 121 million in 2004-2006. In particular, Liverpool won the UEFA Championships League in 2005 leading to the exceptionally high turnover of £121 million and net income of £7.53 million this year. Yet, in both 2004 and 2006, the club suffers from a great loss which probably due to its early exit in the UEFA Championships League. For Arsenal, its revenue exhibits stability over the past 4 years, especially from 2004 to 2006, where its revenue ranges from £137 million to £157 million. In 2007, however, there is a sudden increase in its revenue, due to the increase of sales of gate receipts in the new stadium (which shall be discussed later in the Team Strategies section). They also earn a positive net income all over the four years which cannot be achieved by the other two clubs. From 2004 to 2006, both revenue and net income of Arsenal are higher than that of Liverpool, even though Liverpool won the UEFA championships League in 2005. This is accomplished by the stable results in the domestic Premier League. Arsenal won the league in 2003/2004 seasons, finished the second and fourth respectively in the next two seasons while Liverpool haven't won the Premier League since 1989/1990. In this season, Arsenal leads the Premier League and has secured a place in the UEFA Championships League First knock-out round while Liverpool faces elimination in the UEFA championships League group stage and is in the 5th place of Premier League. Tottenham is in the 13th place and hence is only competing in UEFA Cup only. We could conclude that Arsenal is now the best-performing team in this season among the three. In addition, the average age of first-team squad of Arsenal is roughly 23, which is much younger than that of Liverpool and Tottenham, which is around 26 and 27. In the foreseeable future, when Arsenal players matures in the next few years, we expect that Arsenal will display high level of football and have a rather bright future and so as their overall team results. Therefore, it is reasonable to assume that Arsenal's revenue and net income will only continue to rise steadily in the next few years. And for Liverpool and Tottenham, both clubs have a large and sole reliance on European competitions; failure in these competitions could undoubtedly drag down their ability to generate income. All in all, Tottenham still has a long way to catch up with Arsenal and Liverpool while Arsenal seems to have a better on-court and financial performance than Liverpool. In terms of that, Arsenal is the best amongst all.
Another major source of revenue is the sales revenue of football kits, souvenirs and other team-related merchandize. This kind of revenue is mainly determined by the fan base of the football club. Usually, the broader the fan-base, the higher the demand of the merchandize, so as the revenue. Therefore the football clubs are more than willing to invest much in extending its fan base.
2004 2005 2006 Average Arsenal 6885 8389 10218 8497.333 Liverpool 11701 12312 16322 13445 Tottenham 4381 4739 5182 4767.333
Among the three football clubs that we are comparing, apparently both Arsenal and Liverpool football club enjoy a broader fan-base than Tottenham Hotspur due to their more glorious history. For example Liverpool has won Premier League for 18 times, a record for English clubs. It also won European Championship League for five times. Nevertheless, Arsenal won the Premier League for 13 times, especially in 2003/2004 season they remained unbeaten for the whole season which may be so incredible that can never be paralleled in the future. All these marvelous results help the team capture die-hard fans. This guarantees the steady, and fortunately increasing, sales of merchandize. Despite the fact that Tottenham also has a long history (125 years at 2007), their incapability in winning the Premier League for years and failures in European competitions limit their reputation and hence their fan-base. This explains why the sales revenue of Tottenham is much lower than that of the other two clubs. Therefore, it is found that Liverpool and Arsenal have overwhelming revenue from merchandize against Tottenham. From the reports, the average merchandize revenue of Tottenham (£4.8 million) is roughly a half of that of Arsenal (£8.5 million) and Liverpool (£10.1 million) only during 2004-2006. On the other hand, apart from the Arsenal football club, both Liverpool and Tottenham do explicitly recognize the potential of foreign markets and therefore state they would extend their markets in the annual reports. Liverpool focuses in extending their fan base in Asia. They have done so by doing promotions in Asia, for instance, they visit and play several friendly matches in different Asian cities in the past few years. For instance, there was a match resulting in 4-1 victory against Hong Kong team in 2006, which created a craze for Liverpool at that time in Hong Kong. And for Tottenham Hotspur, its main focus is on South Africa market. They not only organized a pre-season tour to South Africa, but also supported South African bid to host the 2010 World Cup. They, too, undertook a few social responsibility visits in the tour. As a result, the clubs successfully set up extensive association with South Africa. It also attempted to create strong bonds with the mass media. For example, it recently announced their partnership with SuperSport United, a Premier Football League team owned by SuperSport, which is one of the largest sports broadcasters with broadcast channels to 57 countries. The club-media bonds highly enhance the visibility of the club to its potential fans, thereby capturing more fans. Another key factor that affects the fan base is the presence of charismatic football stars in the team. The movements of popular football celebrities highly affect the size of fan base of a football team. It is not rare that some fans grow interest into particular charismatic players themselves instead of the football club itself. This dependency factor has increased risk for the club as when some players refuse to extend their contracts with the club, the club may lose some of their fans. Therefore to guarantee the sustainability of a club, it tends to sign a longer contract period with the players. Take David Beckham as an example, he was traded to Real Madrid of Spain from Manchester United of England at a cost of €35 million (roughly £25 million) in 2003. The Real Madrid club has received an almost immediate growth in its fan base and therefore has quickly earned enough revenue that can cover the transaction cost by merely the sales of Beckham's kits. In general, signing of football stars does help raise their image and stimulate their sales revenue. It usually provides immediate yet short-term spark to the team. At the end, it also comes to the team performance to both attract and retain fans in the long run to maintain a sustainable growth and development. For Arsenal, the most popular star is undoubtedly Thierry Henry but unfortunately he has left the team to join FC Barcelona. Though there are other rising stars in the team like Cesc Febregas, Theo Walcott and Van Persie who not only help the team to achieve excellent result but also help attracting more people to watch the team's matches, the leaving of Thierry Henry is hardly be compensated. For Liverpool, thanks to their charismatic captain Steven Gerrard and skillful striker Fernando Torres, the team is gaining more and more support from all over the world. And their effort and explore made in Asian market will only further boost their popularity. In comparison with Liverpool and Arsenal, Tottenham obviously lack some trademark football stars. This pays an important role into the poor economic performance of the club. As a short conclusion, Liverpool's effort in exploring new market in Asia is obviously does help the club earn a handsome amount of merchandizing revenue. And due to the departure of Thierry Henry, it probably affects the merchandizing revenue of Arsenal and size of fan-base in the forthcoming seasons. So in term of fan-base, Liverpool does have a slight advantage over Arsenal whereas Tottenham is in the last place again.
Payroll and Trading of Players
Another key stakeholder in determining the performance of a club is the trading of player. Signing a top player not only helps a team by having a strong member in the team in order to remain competitive, but also creates a positive brand name effect to the team. Yet one must not neglect the fact that it may also create severe financial burdens to the club once over-contracting players (diseconomies of scale). For example, Leeds who once entered the semi-final of UEFA Championship League is currently playing in the Football League only, which is two levels lower than the Premier League. The main reason for its failure is its over-expansion. It used to aim at qualifying for the European Championships League and therefore allocated a generous amount of fund for signing top-class players. Its "investments" were financed by borrowing but sadly they failed to enter the UEFA Championship League. As a result, it was forced to sell its players at a cheap price because it didn't have enough cash to repay the debt and the players' payrolls. That's a good example to illustrate the importance of cost controlling. Liquidity and liability must be considered too.
2004 2005 2006 Average Arsenal 0.25 0.66791 0.21227 0.376727 Liverpool 0.00452 0.0104 0.00623 0.00705 Tottenham 0.351 0.824 0.473 0.549333
Financial Leverage Ratio
2004 2005 2006 Average Arsenal 2.546 3.3265 4.96 3.610833 Liverpool 3.13 3.26 3.6 3.33 Tottenham 1.7786 1.696 2.465 1.979867
Considering their cash ratio, both Arsenal and Tottenham are acceptable, with a ratio of 0.38 and 0.55 respectively. But Liverpool's ratio is a low 0.007 only which is an evidence of its risky situation. It has to seek ways to either increase their cash or reduce their current liabilities. For the financial leverage ratio, Arsenal's ratio is 3.61 which is a bit high since Arsenal finances its construction of new stadium mainly by loans. But the club has put in considerable effort to reorganizations of loans by issuing bonds of fixed interest rate. This stabilizes the club's finance. Liverpool's ratio is a little lower at 3.33. Tottenham's ratio is probably the best, with 1.98 which make its plan of building a new stadium possible. These shall be discussed in the upcoming Team Strategies section. But it should be noted that signing of players does not actually affect the net income as the cost of player registration is amortized. So only when players are traded to other clubs, the revenue is affected and either a gain or loss will be recorded. This particularly concerns with the team's ability to sell players at prices higher than their net book values.
Profit on disposal of player registrations
2004 2005 2006 Average Arsenal 2282 2894 19150 8108.667 Liverpool 415 10559 6216 5730 Tottenham -381 5632 12299 5850
This time, Arsenal seems to be the best businessman, earning an average of £8.1 million during 2004-2006, much higher than that of Liverpool and Tottenham, which are £5.7 million and £5.9 million during 2004-2006 respectively. This probably should be credited to Arsenal's manager Arsene Wenger. He is long well-known for transforming average players into top-class players. He signs young players with hot prospect at a low cost and develops them into top-class players. For example, Theirry Henry was signed at a cost of £10 million but sold at a price of £16 million, a 60%-increase in his value. In addition, in the last season, both Arsenal and Tottenham recorded an unbelievably high profit on disposal of player registrations, £18.5 and £18.7 million respectively due to sale of Arsenal striker Thierry Henry and Tottenham midfielder Michael Carrick. Even though the annual report of Liverpool in the last year has yet been disclosed, we don't expect a such high level of profit on disposal of player registrations. Apart from the trading of players, controlling the payroll of players can effectively raise the level of net income as payroll solely takes up for more than 40% of the club's total revenue. The rising of payroll in the Barclays Premier League has called for concern for all football clubs, not only the three clubs that we are comparing. For example, there are more and more players who earn more than £100,000 per week like Rooney, Christiano Ronaldo and Jason Terry. Among all, the player with highest payroll is Michael Ballack, who earns £130,000 per week. This highly reduces the profit margin of the clubs and may therefore trigger a vicious cycle of increasing the payrolls of the players.
Ratio of payroll/net sales
2004 2005 2006 Average Arsenal 0.39086731 0.4090177 0.5022625 0.4340492 Liverpool 0.53166769 0.4708312 0.5084059 0.5036349 Tottenham 0.46171823 0.418781 0.4886095 0.4563696
For these 3 teams, payroll represents 43.4% of Arsenal net sales, 50.4% of Liverpool net sales and 45.6% of Tottenham net sales during 2004-2006. It seems that Arsenal is doing a good job but in fact their ratios have been rising consistently from 39.0% to 50.2% from 2004 to 2006, which is an alarm to the club. They should have paid more attention and efforts to the payroll. For Liverpool, its payroll occupied nearly half of its revenue which is not a good sign at all implying inefficient management. They should be more active in cutting down unnecessary players. For Tottenham, they are doing a pretty good job. Their payroll has never exceeded 50% of their total revenue. However, this season they has just fired their manager Martin Jol and paid quite a huge sum of compensation. An addition of new players like Darren Bent in this season may also create new financial burdens to the club. To summarize, all clubs didn't have big liquidity problem but Arsenal is able to generate the most amount of revenue from profit on disposal of player registrations though there are some concerns about its increasing payroll. Still, Arsenal is advantageous in these aspects due to Liverpool even-worse control on payroll. Despite so, Tottenham can catch up with Arsenal soon if they continue to exert stricter control on payroll and generate income from disposal of player registrations.
Decisions and policies of the teams also play an important role in determining the team's economic performance. For Arsenal, they insist to re-invest profits and surplus cash into team development, including signing and retaining best players in the team, improving training facilities, medical treatments and youth academy. This may reduce net income level but it surely ensures the sustainability of the club. Moreover, Arsenal's new stadium Emirates Stadium has just completed last year, with a great capacity of 60,355 seats, 22,000 more than the old one. This significantly increases the sales of the gate receipts of the team, leading to an increase of revenue from £137.2 million in 2006 to £200.8 million in 2007. Specifically, the revenue from the gate receipt nearly doubled from £42 million to nearly £90 million. Tottenham also plans to build a new stadium which could be a good news to the fans but it could also create financial pressure to the club. They mainly finance the establishment of new stadium by loan. They have to limit the budget for signing players carefully in the next few years implying probable drop in the team competitiveness. Liverpool sees the need of reducing payroll. They therefore wait for surplus players to see out their contracts. But this measure is a little passive. All in all, team strategies take time to take effect. We can't conclude which clubs have the best strategies at this early stage. But we do value Arsenal's approach to re-invest their retained earnings as this certainly ensures the long-term development of the club. And Tottenham's attempt to build a new stadium may limit its short-term development but would greatly increase its gate receipts and therefore its net income. On the contrary, Liverpool seems to lack some long-term development plan which could greatly harm their competitiveness in the future.
On the whole, Arsenal has possibly the best team performance in recent years and future too. It also has the highest profit from disposal of player registrations and ranks second in the both payroll and fan base. It has vision that support sustainability of the club. On top of that, the most impressive thing about Arsenal is its stability over the time period. It exhibits stability in various ratios. It greatly reduce and fluctuation and therefore risks for potential investors. It generates stable yet generous and increasing amount of net income. On the contrary, both Liverpool and Tottenham have a net loss in some years. For investors, Arsenal is certainly a club which worth our attention for holding its stocks in a long term.