BEATING THE OFFSIDE TRAP: DRIVING FORWARD THE COMMERCIAL PERFORMANCE

Transcription

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 If you would like an electronic copy please write to: For more information on the issues raised in the report please contact: valuepartners.com If you would like to subscribe or to be removed from our mailing list please write to: valuepartners.com Copyright Value Partners Management Consulting Limited 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.

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.

5 5 New regulations will come into force in 2013/14 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). 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 expenses 1 must be equal 2 _The negative equity rate, i.e. the difference between the value of assets and the balance of outstanding loans, cannot 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. Of the top 20 European clubs, only 7 could be considered fully compliant with Financial Fair Play regulations (FFP) Based on the current accounts of football 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 compliant with FFP regulations, with profitable clubs being the exception. This theme is consistent across Europe, with Italian and French clubs in particular appearing to struggle to meet FFP criteria. Profitability is just one of the indicators considered by UEFA in the new regulations, 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-toturnover ratio. Other European peers also appear to be unready to meet this requirement, with 8 of the 20 topranked clubs exceeding the 70% threshold. 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 compliant, clubs in question will be penalised by UEFA with sanctions including fines, point deductions and bans from UEFA competitions.

6 6 Cumulative top 20 European Clubs profitability before tax and wages-to-turnover ratio over 3 years, 2008/ /11 ( m) 45% 56% 47% 50% 52% 79% 86% 99% 63% 53% 57% 110% 74% 63% 74% 46% 73% 35% 74% 41% 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.

7 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 experienced substantial revenue growth (27%) over the last three years following 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, ( m) 1,800 5% 1,700 1,600 1,500 1,400 1,300 1,200 6% 1,100 1,000 4% % 3% / / / /11 Source: Deloitte, Press, Clubs Annual Reports, Value Partners analysis CAGR Premier League Serie A La Liga Bundesliga Ligue 1

8 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. However clubs can and should focus on optimising the other 2 main sources of revenue, namely commercial and matchday revenue. Broadcast revenues form the largest contributor almost 50% of clubs annual income, however given that broadcast deals are managed collectively by most leagues, there is little that individual clubs can do to significantly enhance revenue (besides try to improve onpitch performance, finishing higher in leagues and qualifying for/progressing further in European competition). Top 5 European Leagues revenue breakdown, ( m) 2,515 1,746 1,718 1,553 1,040 Commercial Matchday Broadcast 24% 47% 30% 27% 29% 24% 25% 13% 13% 52% 23% 60% 58% 45% 30% Source: Deloitte, Value Partners analysis.

9 9 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 attracting an increasing share of marketing spend at the expense of more traditional forms of advertising, due to: _An overall reduction in the effectiveness of TV advertising due to audience fragmentation and increased ad-skipping _The enhanced brand exposure offered by sports sponsorship of a live broadcast, attracting large audiences, particularly of hard-to-target market segments (i.e. young men) _An increasing recognition by advertisers of the value of associating brands to sports Football clubs have a concrete opportunity 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 sponsors. 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 undervalued long-term contracts. Liverpool FC for example has done well to fully exploit the value of its technical sponsorship property. Liverpool recently signed a new technical sponsorship deal with the American sportswear brand Warrior, thought to be worth ~ 29 million per year. Warrior paid a significant premium (one of the highest in Europe) to buy-in to European football, having recognised the potential 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 innovative strategy to maximise sponsorship value. Tottenham managed to secure a 50% revenue uplift from shirt sponsorship by selling shirt sponsorship rights to two main sponsors: to Autonomy for Premier League games, and to Investec for cup competitions. Clubs therefore need to ensure that they fully exploit the revenue potential of these properties when negotiating deals, by exploring all potential opportunities and innovative strategies.

10 10 Develop international sponsorship strategy European football is growing in popularity worldwide: European clubs are estimated to have nearly 1 billion nondomestic 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 supporters across the Far East. Considering their growing global appeal, European clubs have the opportunity 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. 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. The club has recently signed a series of exclusive sponsorship deals with 13 telecoms 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 ~ million per year. Clubs can further enhance their international image and brand reputation, which in turn can lead to greater sponsorship revenue, by developing international soccer schools. Manchester City, Manchester United and Real Madrid are considered benchmarks for the development of such initiatives. Manchester United, for instance, now have soccer schools in 9 different geographies, including the UAE, Canada and Australia.

11 11 Optimise ticket pricing strategy A club s matchday revenue is to a certain 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 Fan base engagement and price discrimination 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. _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, Manchester United and Arsenal being the most successful. For example, Chelsea achieved the highest revenue per number of seats available in Europe, and also has the highest matchday revenue per number of domestic 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.

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 1,538 1,578 1,710 1,786 1,114 1, Source: Deloitte, Press, Clubs Annual Reports, Value Partners analysis. Matchday revenue per number of Stadium seats Matchday revenue per number of domestic fans Matchday revenue, 2010/11 perspective BEATING THE OFFSIDE 12 13TRAP

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 tickets 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. 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. Moreover, clubs can utilise the growth of internet and mobile usage to sell digital media content such as video-ondemand, 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. 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.

14 14 More radical solutions could be required Given the current state of the finances of many European football clubs, optimising 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 challenge, 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 billion (approx. 770 million) and is aimed at creating a significant new revenue stream by leveraging the club s brand reputation in the Middle East. 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 following 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 respective 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 developing a hydroelectric power plant, investing over $50 million (approx. 40 million) into the scheme. The club expects that the new facility will generate ~$10 million a year in additional revenue. Manchester United is also leveraging its strong brand to augment its revenue from non-football operations; the club is franchising its brand for the development of branded café bars in Asia.

15 15 Conclusions and recommendations From our experience of working with a number of leading European sports clubs and leagues, we believe that there are opportunities for many football clubs to significantly increase revenue, but in order to do so, most clubs need to pursue a number of initiatives simultaneously. Clubs need to do as much as possible to optimise commercial performance in core revenue streams We have found that many European football clubs have untapped opportunities to optimise commercial performance; however this takes time, consistent effort and long-term planning. The revenue growth opportunity for football clubs Current revenue Technical/shirt sponsorship maximisation Exploitation of international sponsorship negotiations Matchday revenue optimisation Monetisation of armchair fans Potential revenue from core operations Creative business opportunities (non-football operations) Total potential revenue Note: exhibit is illustrative. Source: Value Partners analysis.

16 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 heavily 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 opportunities, 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 together more to take advantage of collective opportunities The collectivisation of sponsorship and commercial rights can help clubs to achieve greater returns on commercial deals. Indeed, when negotiating agreements jointly, clubs and national leagues are creating a larger property that can guarantee the sponsor higher visibility, which sponsors are willing to pay exponentially larger amounts in order to secure. Additionally, through collectivisation, 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 highlights 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 negotiations, 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 sponsorship 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 17 Clubs should also explore more creative business opportunities Maximising the revenue coming from core activities and traditional business models may still be not enough for some clubs to achieve profitability. Thus we believe that clubs may need to explore more radical revenue opportunities. However, clubs need to be sensible when undertaking new initiatives and must ensure that they understand their key assets and capabilities, only launching 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 possible 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 extend too far beyond their core capabilities. We believe that one such initiative that could potentially be undertaken by many European clubs would be launching 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 operational functions. At the same time, running 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 innovative 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 explore 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.

18 AUTHORS Enrico Lanzavecchia Director Faizal Patel Associate Marco Labianca Business analyst Managing Partner of Value Partners London office Based in Value Partners London office Based in Value Partners London office

19 19 About Value Partners Value Partners has an established sports strategy practice with significant experience of helping clubs, leagues and industry investors from across the world to solve a range of commercial and regulatory problems. 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 sponsorship, ticket pricing, fan engagement, digital media and brand licensing. Value Partners is a global management 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, working out of 10 offices in Milan, Rome, London, Istanbul, São Paulo, Buenos Aires, Beijing, Shanghai, Hong Kong and Singapore. Value Partners has built a portfolio 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 methodological approaches and analytical frameworks with hands-on attitude and practical industry experience developed in an executive capacity within each sector: telecommunications, 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, entertainment, IPTV and mobile thus further strengthening its international presence. Today Value Partners is a leading advisor in the telecom, media and technology sectors worldwide. For more information on the issues raised in this note please contact the authors. Find all the contact details on valuepartners.com Milan Rome London Istanbul São Paulo Buenos Aires Beijing Shanghai Hong Kong Singapore Copyright Value Partners Management Consulting Limited All rights reserved