Trends in Cost Management

According to the latest analysis released by UEFA under their Fair Financial Game programme, the average cost split in Europe (734 clubs consulted) is as follows:

• Staff costs:               58%
• Operational Costs:   35%
• Transfer Costs:          4%
• Other Costs:               3% 

Staff costs include in this case salaries, wages, Boni, Social charges, Pension contributions, etc. Under "Operational Costs" we will find a compendium of several cost families of diverse nature, such as stadion costs, materials, depreciations, marketing costs, football schools.... Transfer is here defined as the losses derived from transfer operations. We may believe that inflation is high as far as transfers are concerned, but the truth is that clubs handle that part of the business quite poorly, thus generating losses and not gains. Last season almost one billion € were spent in these operations, a value worth taking into account. Finally, most financial costs and taxes, etc are included in Other costs.

When you have a look at the total picture, UEFA clubs spent in the last season more than 14,4 billion €. Big numbers, particularly when you take into account that they only generated 12,7 billion in revenues, resulting in a total loss of 1,6 billion €.

In light of these catastrophic figures we may think that clubs have been working hard in cutting their losses in recent periods, since you may figure out that these trends do not generate overnight affecting 734 clubs in more than fifty countries at the same time. The answer to that thought is "No, the cost structure of the clubs remains the same at least for the last three seasons, and their expenses grow over after year in a higher amount that their revenues do".

In colloquial terms, we may well speak that the real state bubble we are still suffering from was just a joke.

Costs of a football club

It is often argued that the football players salaries are the highest cost that a club has to fece. Indeed it is a big amount, but there's many other factors to add up to that sum.

The costs of a football club can be divided in four different chapters:

1.- Materials
2.- Staff
3.- Asset Depreciation
4.- Other Costs

Materials is not a big deal: it is just basic expenses that the club needs to face in order to keep on going. It's main activity is not to produce goods, so we cannot really speak of raw materials in this field. Balls, T-Shirts, gym machines, office stationary, etc are included in this concept.

Staff is indeed a big contributor to the costs of the club. We are not speaking of the cost of hiring new players here, since this is a concept that is often described as "other income/loss". This is mainly their salaries and social charges. In many cases players agree to sign contracts where their income is to be calculated free of taxes (net), which means that the club needs to pay for the expenses derived from the IRS willingness to cash a big part of the wealth of this market. In most countries the tax charge ranges between 40%-55%, so that means that a player who makes i.e. 10 million per season costs his club about 25 million, when social security charges are added on top.

Asset depreciation has a lot to do with the money that clubs spend in order to buy the rights of a player to play for them. Those licences are to be considered assets which depreciate over time, in most of the occasions in about four or five years, since the working life of a star football player is definitely shirt and subject to multiple risks due the nature of its use. Take the case where a player like Ibrahimovic left Inter to play for FC Barcelona for 75 million Euro. That involved a year depreciation of ap. 15 Million per season, which pops up in the club accounts not only in the balance sheet but also in the P&L account. If that player is to be sold after one year, the book value of the asset would be around 60 million, but if you only cash 25 million for the operation, that means that you also lost 35 more millions: 15 million (depreciation) + 35 million (sale of asset) makes a total cost for the Ibrahimovic operation of 50 millions in one season only, plus his salary, IRS and social security charges. Since he scored 22 goals in the season, each goal had a cost to FC Barcelona of ca. 3 million €. You need to sell many tickets, T-shirts and TV rights in order to make up for that.

Other costs is a big box where all the remains reside: stadium management cots, travel, social involvement, football academies, foundations, other sports linked to the club.

How much does it cost, to be a top performing football club?

This is a complicated question. FC Barcelona's expenses budget for this season is 390 Mio €, while Montpellier HSC, current leader of the French League, is only 35 Mio €.

So how much does it cost to be someone? Apparently, and if clubs are to follow UEFA's guidelines about Financial Fair Game, "as much as you can earn". The key to success does not stand close to money, but to doing the right thing.


Remarkably enough, Montpellier has been reporting profits in the last seasons, while FC Barcelona has yielded nothing but losses. Barça has therefor something to learn, don't they?

What's left this year to earn?

It's April and the end of the season is over, boosted by the Nations Euro Cup and the Olympics this summer. Out of the Top-5 European Clubs only 3 remain fighting for the Champions League. Manchester Utd was not there from the very beginning, and they actually failed miserably in the Euro Cup after their double defeat against At. Bilbao. The other club missing is actually Arsenal, also leading a poor season.

In the meantime, Real Madrid and FC Barcelona are still in big fight in all competitions, and so is Bayern München. The big newcomer this year will probably be Chelsea. We'll see whether the earnings for ManU derived from winning the Premier League serve to balance the account with their rival. Arsenal will sure remain behind, in light of their recurrent inhability to obtain earnings from their marketing efforts and their lack of success both in the island and the continent this season.

For the big three there's still for sure earnings to be made out of a handful of matches: Liga/Bundesliga and the Champions League. Real and Barça still have 1 more game to play home at the Liga, and another one at the Champions League, maybe two if they make it to the final. Barça still has to play the final of the Spanish Cup, bringing in an advantage over Real Madrid. In the meantime Bayern also has still one more game home to play at the Bundesleague, to add up to their earnings in the semifinal and perhaps the final of the Champions League. However they will lose the earnings derived from winning their local competition in favour of Borussia Dortmund. Again either FC Barcelona or Real Madrid will surely top the table of highest revenue-making football clubs in the world.

And T-shirts, of course: the Champions League winning team will sell plenty of T-shirts, at an averable OTC price of ap. 80 € is a big deal, not to speak of the special prices awarded by UEFA. We'll see how numbers add up at the end. Just a couple of weeks to go and this season will be over.

Who's the best at doing what?

Three sources of income, all of them based upon the same fact: success on the football pitch, but with very different business approach in their execution. What club is the best at doing which? Is there one club who is better than the rest at all three leads?

When we have a look at the financial statements and the management reports of the UEFA Top 5 Clubs at the end of last season we can build up the following chart:

Real Madrid stands out of the rest in what relates to match-day revenues ("Spieltag"), while FC Barcelona leads the other two chapters. It catches your eye how little Bayern München makes out of broadcasting rights ("Übertragung"), and how low Arsenal's income in commercial and marketing efforts is.

The ideal Club would be leading all three business lines, and FC Barcelona appears to be doing well in all but the management of their own fixed assets (income from stadium, basically), despite the fact that Camp Nou with capacity for almost 100.000 fans is by far the biggest sport stadium in Europe. Clearly there's a gap between Real Madrid and FC Barcelona of roughly 40 Mio €/year which FC Barcelona needs to close if they aspire to become the top money making club in the world.

Of course Spanish clubs do need to pay for their fiscal liabilities as well. There were news following a debate at the Parliament earlier this week stating that Spanish football clubs owe more than a billion € to the State in delayed income tax and social security charges. Uli Höneß, president of Bayern München, sauerly complained about this fact claiming for equal competitive conditions across the continent. Real Madrid and FC Barcelona immediately reacted to his words stating that they have no debts, and actually so appears in their balance sheets. When UEFAs Financial Fair Game gets into motion, I wonder how many clubs will stand alive. A revolution in the world of professional football is about to come.

Income strategies

When you talk football income, you talk match-day revenues, broadcasting rights and commercial operations. They all look independent and indeed they are, not just in the way you approach your customers, but also in the products in offering, the prices you negotiate and how they are to be paid for, and the way you market them. However they all have their roots in the same core activity: whatever is happening on the pitch.

Clubs are better at one or two of these fronts than at the other for different reasons. For instance matchday revenues are somehow capped by the fact that a stadium has a certain capacity which is not easy to expand from one day to the next. Indeed demand may be elastic depending on the quality of the match ahead, but maybe only 10% or 20% of the matches in a full season raise such levels of attention. TV rights are in some cases negotiated not by the clubs themselves, but by their associations, such as UEFA for the Champions League or the national leagues, which leaves them little space for negotiation of ability to influence the income to receive from those sources. That is a fact, among others, in the Premier League or in the Bundesliga, and indeed is the competitiveness of those clubs jeopardized by the fact that they cannot negotiate independently as Real Madrid or FC Barcelona do.

These environmental conditions do affect the strategies football clubs follow in order to maximise their revenues, and that's made visible overtime. The charts attached show how the UEFA Top 5 clubs stick to their strategies as long as those surrounding constraints do not change.

Real Madrid and FC Barcelona have a 33-33-33 strategy. While their match day revenues have increased in recent years, it is remarkable to observe how the raise of TV income and merchandising have managed to reach the levels of the traditional income sources: daily and seasonal tickets.

It is my belief we are at a tipping point at this sense, since match day revenues will hardly follow the pace of the other two business activities in the years to come. While big stadia awarded a competitive advantage in the past, the future will be led by those clubs who are able to understand and gain the hearts of their worldwide fans, who will pay for watching their matches online or on TV, and buy their branded products from all remote locations of the planet.

The charts also show how little Bayern München is making out of broadcasting rights. but how well do they traditionally handle their commercial efforts. Whether that customer base holds a worldwide nature or is mainly formed up by extremely loyal local fans is a matter of discussion; in any case the potential for growth is huge, and this club is one of the leaders in this chapter. The opposite case is Arsenal, whose income appears to have stagnated in recent seasons, and strongly depends on the traditional sources filling up their brand new emirates stadium every other weekend. In the mean time and in this same chapter Real Madrid and lately FC Barcelona are undoubtedly the big winners of merchandising coming from below, after more than a century of brand-building activities on and off the pitch it looks like they found the right way and for the first time ever they managed to cash more money than Bayern München last season.

UEFA Top 5 Clubs: how much money they make

Football income is growing at the quick speed of about 10% p.a. as an average for the UEFA space. But who's making more than that?

When you have a look at the evolution of the Top 5 clubs you realise that they have mostly been growing like crazy for the last decade. It is only Arsenal the one that has stagnated in recent years, possibly because of their lack of chances to negotiate broadcasting rights independently (it is the Premier League who does in England, and UEFA for the Champions League) and also because their marketing efforts appear not to be flying. The results being achieved this season will not help them either, and Arsenal may fall out of this elite Top 5 Club next season.

Since 2003 FC Barcelona has grown an year-by-yeart average of 26% beating all their competitors and jumping from the fifth to the second position. In the meantime global companies have not -in most cases- been able to reproduce this growth rate (i.e. IBM 2%; Microsoft: 5%... while almighty Mr. Jobs managed to get a 40% growth for Apple at the other side of the equation).

The chart above shows the income of those Top 5 Clubs in € Million. It is not much when you compare them with other companies whose brands have a similar global impact. Actually, with an average of 500-1000 employees they may be considered Medium-sized Enterprises. So the question is: do they make much, or do they make little? Could the Real Madrid Brand be exploited at a higher level? How come the income is so little for such well known firms?

I'm taking Wolford as an example of a listed company, producing and marketing prime quality lingerie in the high end segment (€100 for a pair of stockings is not what you'd consider a commodity, would you). They made slightly over 150 Million Euro last year in sales around the world, a similar amount to what FC Barcelona or Real Madrid managed to cash in through their commercial, marketing & marchandise business units. My point is: is the Wolford brand so valuable as the FC Barcelona brand? If football clubs are wider known as Wolford, why is it that they cannot make more sales? Do they actually a the proper marketing strategy? I believe there's plenty of room for football clubs to develop their business in this sense.

A second source of income is broadcasting rights. There will be quite a lot of movement in this chapter in this paneuropean space we know in the seasons to come, particularly now that consumers are free to choose their providers across the EU and therefore pick the best satelite-TV package at the lowest possible price, beyond the borders of their own country. Streaming is becoming more and more a viable option, the further the IT develop and there where clubs could only offer their show to their local fans some few decades ago, today the whole world is at reach of a button click.

You finally have stadia and match day revenues, which in a visionary perspective may not be so important in the future as they still are today. While crowds only fill about 75% of the stadia, it makes you wonder whether smaller investments and thus ammortisation costs would make sense in exchange of higher ticket prices. If football has been democratised by media, then watching a game live may well be considered a luxury targetted to a premium segment of the public. But we all like to see stadia at full capacity, and TV has not yet been able to reproduce the feeling of singing together with 100.000 other fans. Let's see what the future brings.

So what's the strategy? Clubs tend nowadays to equate all three sources of revenue at a 1/3 ratio each. Matchday revenues do actually have a physical cap in which stadia can hardly be expanded once they are built, and prices may not succeed in growing if they are hardly ever loaded at full capacity. Trend will be that income from broadcasting will grow if well managed. They may stop to be the cashcow they are today in keeping the liquidity afloat, but may well become a growing source of value for clubs if handled properly. The winner team will be the one developing their branding value in the commercial aspect of the business. I personally believe in a 10% - 25% - 65% ratio in ten years from now, time will say.