As we know both Newcastle and Aston Villa have broken through the big 6 to achieve Champions League status. A major achievement and testament to some great management in both cases. Even more impressive considering Newcastle was only the second club in 18 years to qualify outside the big 6 (Leicester was the other).
But is this sustainable, can these clubs (or others) consistently challenge for champions league places and what impact will the proposed new spending cap have on those with lofty goals. Will it give greater mobility to lower clubs or just lock in the existing disparity between the big 6 and the rest.
To start, let’s assume that on pitch success is closely aligned with the investment clubs make in players. As we know this is not always the case (such as Chelsea 22/23) but if you look at the table below, based on our estimates for 23/24, nine out of the top 10 spenders on players finished in the top 10. Everton (as an underachiever) and Crystal Palace (as an overachiever) the only exceptions. Same if you narrow this down to the top 6 or the bottom 3. So, it’s an obvious correlation between player spend and performance and therefore a fair assumption.
The proposed new rules will cap the investment in players to a % of total revenue (plus a concept of anchoring that we assume is only going to affect the top one or two so is not covered here). So, more revenue, more a club can invest in players. In the past many clubs have tried to compete by spending more on players than their total revenue (Aston Villa, Leicester to name two), but this should no longer be possible.
The challenge for those outside the big 6 is there is a large gap between their revenue and the revenue of the big 6, so their spending power is always going to be lower. Except for Chelsea, the big 6 have low player spending as a proportion of revenue because their revenue is so high. They can spend more on players and keep their % relatively low. The below chart shows (based on our estimates for season 23/24) that five of the big six are in the lower half when measuring staff costs as a % of revenue, but overall staff spending is significantly higher.
In this article we look at where (if any) the opportunities lie for non-big 6 clubs to grow their revenue and hence increase their capacity for player investment. For the purposes of the cap calculation, we assume that revenue includes operating revenue (revenue earned in the normal operations of the business) plus any profit from player sales, so will look at both.
Starting with operating revenue our estimates for season 23/24 show there is a big gap between 6th place Chelsea and the rest at $170m and more. Even Newcastle, with their entry in the Champions League, are way behind.
So, can they close the gap? Let’s look at the three main operating revenue streams for clubs; matchday, broadcast and commercial.
Matchday
Matchday revenue is primarily from matchday ticket sales and hospitality from home matches and accounts for approximately 14% of operating revenue. The FA Cup and EFL Cup are a bit different where matchday revenue is shared between the clubs and the FA. In the chart below the differences between the top 6 and the rest is apparent to see with top place Manchester United’s matchday revenue 20x that of Luton and Bournemouth. Newcastle and West Ham have got closer, with large capacities and European participation (meaning more matches to generate revenue), but the rest are way behind.
So, can clubs increase this? Factors that drive matchday revenue are pretty obvious, average attendances, average ticket prices, number of home matches and success in domestics cups.
Most clubs' average attendances are running at 100% or close to capacity, so there is no room to grow this without increasing stadium capacity. This is hard to shift and takes lots of money and time (although clubs have obviously done it such as Tottenham who are now reaping the revenue benefits).
Average ticket prices are increasing in some clubs, but there are constraints. Clubs cannot significantly increase season tickets without supporter revolt (and should they as you can argue the supporters are part of the product that generates such world-wide appeal). Clubs could reduce the proportion they allocate to season tickets and target those that pay more such as ‘football tourists’ or corporate hospitality, but again this can create supporter backlash.
Increasing the number of games will result in more revenue and this can be achieved through domestic cup success or entry into European cups. But hard to repeat season by season.
So, there is some opportunity to grow but hard to close the gap.
Broadcast Revenue
This is earned as distributions from the Premier League and UEFA. These bodies negotiate broadcast rights centrally and distribute to clubs based on a range of factors. Without going into these in detail you can see below the spread is much more even with Aston Villa, Newcastle and West Ham all exceeding Chelsea and Tottenham who both failed to qualify for European.
This more even spread is due to the premier league’s equal distribution of a large portion of their broadcast revenue. Even the lowest place club (Sheffield United) will receive more than 100m. So how can a club increase this. Broadcast revenue may increase as new deals are struck by the Premier League and UEFA, but this does not give a comparative advantage to a club, and the deals are not growing at previous rates. So, the only way is through domestic and European success. Each league position will generate approximately 3m extra in premier league distributions. Entry into the 2nd tier European cups can generate 15 to 25m and entry into the European Championship can generate a minimum of 30m and potentially much more. So, success is what is needed. The challenge is that success generally follows investment.
Commercial Revenue
The last operating revenue stream to look at is commercial revenue and is a stream the club has most control over. Commercial revenue is earned predominantly from sponsorship (shirts, kits, stadium naming rights), merchandise sales, licencing arrangements, hosting other events etc. And here is where the biggest disparities lie.
Based on our estimates for 23/24, we see below the gap between the big 6 and the rest is huge. Arsenal (who you could argue underachieve commercially compared to their peers) have commercial revenue 2.5 x the next group of clubs (Aston Villa, Newcastle, West Ham).
So how do clubs increase their commercial revenue. Again, this is hard without success or significant investment. With European exposure, sponsors will pay more. New stadiums will give opportunities to generate revenue though hosting events (Tottenham a good example). Also, the brand appeal of the top 6 are in a different league compared to the rest and is where worldwide appeal is concentrated. So, clubs will increase their commercial revenue but to close this gap is a massive task.
Profit on Player Sales
We mentioned that any profit on player sales will get added to operating revenue when calculating the cap. We will go into detail of what this is in a separate blog, but for simplicity it is the transfer income for a player less the book value at the time of the sale. (Book value is their original costs spread over the life of the contract). So, a player that holds (or increases) their value over time or is an academy player (no purchase cost) will generate good profits.
Below shows our estimated profit on player sales for 23/24. You can see it can be a significant amount (particularly for Brighton) and can give a short-term boost to the revenue pool for the purposes of calculating a cap. However, the downside is players must be replaced which requires investment and over the medium term will catch up with the club. Also, it is hard to repeat this year after year (again unless it seems you are Brighton).
Summary
So, what does this mean. If the amount clubs outside the top 6 can invest in players is tied to a % of revenue it is possible it will cement the disparity between the big 6 and the rest. Success drives revenue but success follows investment. If your investment is capped, it becomes very hard. The Anchoring concept (restricting club’s investment in players to a multiple of the lowest clubs broadcast revenue) sounds interesting but will probably be set high (e.g. 5x) so that it will only place minor restrictions on the very top. It may however stop the gap widening even further.
If, however, the club’s ambition is to finish 7th, then the proposed rules work as the differences between 7th and 20th are far less and the cap may limit the ability of the Aston Villa’s and Newcastle’s to significantly outspending the rest.
There will always be exceptions of course, and may create some unusual behaviour, like clubs running unprofitable commercial activities just so they get additional revenue on their books.
Time will tell.
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