Financial Analysis – Can Arsenal transfer profits into trophies?

Since the introduction of Financial Fair Play (FFP), there has been one club in England who seems to be least affected due to their prudent financial policies.

On the face of it, Arsenal seem to exemplify exactly what FFP stands for. Yearly profits and reasonably high cash reserves has resulted in Arsenal living within their economic means. This is ultimately the aim of FFP.

Of concern to all Arsenal supporters though, has been the lack of trophies over the past eight years. Well-established clubs such as Manchester United, Real Madrid, Barcelona and Bayern Munich have all balanced managing finances with success on the field in recent history. Why haven’t Arsenal?

Let’s take a closer look at Arsenal’s finances and how they have obtained significant profits, and see if there’s anything in it that has prevented them from converting their financial success into football success.

2012

2011

2010

(£ ,000)

(£ ,000)

(£ ,000)

* Turnover

243,013

255,692

379,856

Wages

143,000

124,000

111,000

Profit on player sales

65,456

6,256

38,137

Profit after tax

29,593

12,633

60,992

* Included in Turnover
Commercial revenue

52,515

46,323

43,973

Property development

7,684

30,282

156,910

Arsenal’s majority shareholders are Kroenke Sports Enterprises (owned by US resident Stan Kroenke) with 66% and Red and White Securities Limited (owned by Russian billionaire Alisher Usmanov and Farhad Moshiri) with 29.9%. As Kroenke owns a greater than 50% majority, no-one is able to outvote him on anything to do with the day-to-day running of the club.

As can we seen from the table above, Arsenal has achieved substantial profits over the past 3 years. In fact the last time Arsenal recorded a loss was in 2002. However what immediately stands out is the significant profit on player sales figures.

If we were to remove the profit on player sales as well as profit on the property development (2012: 2.5m; 2011: 12.6m; 2010: 11.2m), Arsenal would incur losses for 2012, 2011 and achieve only a relatively small profit for 2010. Fundamentally, Arsenal’s current economic model has been reliant on selling their top players in order to achieve profits. This is essentially why Arsenal have been without a trophy for so long and unable to replicate their financial success on the football field.

Arsenal’s finances and ‘Profit’

When evaluating profit on player sales it is important to understand the nature of this accounting term ‘profit’. It does not simply mean transfer sales less transfer purchases. Players are recognised as assets by football clubs and amortized over their contract length.

As an example, if Arsenal purchase a player for £20million on a 4-year contract, the player’s value decreases by £5million (20 divided by 4) each year. Therefore if they were to sell the player in the year after purchase for £18m, this does not constitute a £2m loss. The player’s value in his second year would be £15million (20 minus 5) and Arsenal would recognise a profit on player sales of £3million (18 minus 15).

Looking back at the figures, contributing to the profit on player sales for 2012 was the sale of Cesc Fabregas, Gael Clichy and Samir Nasri. Arsene Wenger, on the back of much criticism, then invested more prolifically in the transfer market than usual at the beginning of this season.

Lukas Podolski , Santi Cazorla, and Olivier Giroud were brought in to bolster the squad. However the sales of Robin van Persie and Alex Song will result in Arsenal achieving a significant profit on player sales figures once more for 2013.

Arsenal finances analysis

Class

The question then arises; how can Arsenal retain their top players in order to challenge for top honours but still live within their economic means?

Revenue growth is ultimately what every business strives for. A football club’s revenue generally includes 3 main areas; match day revenue, TV broadcasting revenue and commercial revenue.

Commercial revenue: key to Arsenal’s future

A quick review of Arsenal’s revenue breakdown in their annual reports and one can understand why Wenger has become obsessed with his 4th place ‘trophy’ and Champions League qualification.

While Arsenal have managed to steadily increase their commercial revenue, at 21.6% of total revenue in 2012, it is a far cry from their competitors. A quick scan through the Deloitte Football Money League and we can see that the commercial revenue percentage of total revenue in the same period for Manchester United is 37%, Manchester City is 49%, Chelsea is 27% and Liverpool is 42%.

Taking Arsenal’s low commercial revenue percentage into account, qualification for the Champions League and the resulting increase in match day and broadcasting revenue become vitally important.

Successful clubs such as Bayern Munich, Real Madrid and Barcelona have managed to successfully establish their brands in the global market. While it may be futile to compare Arsenal to these giants of world football, it’s worth noting that Arsenal have somewhat struggled to grow their brand as a commercial product in the recent past.

Perhaps the first major positive sign which confirms that Arsenal’s years of austerity may indeed be over is the news of a new shirt sponsorship deal with Puma. The story emerged in early May 2013 that Arsenal are set to sign a five-year £170million deal with Puma, making it the biggest kit deal in English football.

The agreement is yet to be finalised but it will see Arsenal wearing Puma from the beginning of the 2014/2015 season upon the expiration of the current Nike shirt deal. This will definitely boost Arsenal’s commercial revenue and give Wenger, or whoever the manager is at the time, extra cash to delve into the transfer market.

While shirt deals are part and parcel of football, Arsenal have done well to secure such a lucrative deal. They will however require further initiatives to this regard in order to grow their brand and increase their commercial revenue. Only then will their reliance on profit on player sales become something of the past and only then can they become legitimate contenders for the big trophies.

What do you think? Are Arsenal now in a position to start winning trophies? Comments welcome below.

See also: Financial Analysis – What next for QPR?

(photo #1 credit: Contz via Flickr Creative Commons, #2 credit: Gooner90)

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4 Responses to “Financial Analysis – Can Arsenal transfer profits into trophies?”

  1. Alan
    June 10, 2013 at 8:11 am #

    Your analysis and evidence supporting it is well made. Yet at the time the stadium was planned and built we were reassured that this would strengthen our ability to attract and keep top players. The opposite has proven to be the case, yet every year we get fed lies by the arsenal board, particularly pre season ticket renewals. You would hope they monitor the serious sites like this and the comments from their fans and respond appropriately. Kroenke and gazidis are frauds, as is wenger, who s renumeration is predicated by his ontribution to our bottom line, not our trophy cabinet. If he had integrity he would force the owner and board s hands in fundamentally changing he model, or moving to an ownership model that delivers what we all want .

  2. Tauriq
    June 14, 2013 at 5:19 pm #

    This is exactly how i have felt for a long time and cant understnad why more Asenal fans dont open their eyes. It is clear the club has no ambition and sole purpose is to make the shareholders richer and Wenger aids this. It is beyond time for change. It is made more clear at the lack of ambition from the club by words spoken by a few players (eg RVP) after they leave. Players from other clubs (even rubbish ones) never speak with such disrepect upon leaving. This says something abuot the club.

  3. David
    June 24, 2013 at 12:34 pm #

    So finances in the Premier League have changed in the last ten years with big money coming into Man City and Chelsea from wealthy private individuals, upsetting Arsenal’s projected plans. Promises or no promises, we are where we are, and have to accept that. It would have been foolish in the last two years to have spent big and substantially increased the debt, thereby extending the pain. They can spend more this year and substantially more next year and beyond that. We shall see whether the new ground with a trophy drought has been worth it. Would we have won that much continuing at Highbury against the big spenders ? I think not. We needed the new stadium to keep up with the top European clubs and the cost would have substantially increased if we had to build it now. The team did well during the second half of the last season, showing spirit and the ability to win when not playing well. Two or three additions to that team could make a big difference to its chances. Stop whingeing and support the players.

  4. Anabelle
    July 14, 2013 at 6:26 pm #

    The title is somewhat delusive: “Can Arsenal spend”, of course they can. Year after year they make a point to loudly tell everyone and their mother how much money they have.

    But do they actually “Want to Spend”? That’s the more appropriate question. And the answer is very simple: No. Evidence shows they never do.

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