Economic Factors Affecting UK Non League Football Clubs
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An investigation of the economic factors affecting the commercial success and sustainability of UK non league football clubs
Football clubs are traditionally not the strongest or most profitable businesses. This is supported by Deloitte’s (2007) annual report into the state of football finance, which stated that, outside of the Premier League, UK football as an industry recorded a net operating loss. Even in the Premier League, where clubs benefit from higher levels of sponsorship, media exposure and TV revenues, four clubs posted an operating loss in the 2005 / 2006 season. This implies that, the lower the division a club is in, the harder it is for them to survive and become commercially sustainable, let alone successful. Indeed, there is an argument that many football clubs will not survive without some form of outside financial support, such as a rich benefactor or owner. However, with increasing pressure from fans to spend money on securing the best players and challenging for success, whilst not increasing ticket prices to cover any additional expenditure, many wealthy businessmen, and even multi millionaires, are finding that bankrolling a football club is beyond their means. This is reflected in the view of Henk Potts, a strategist at Barclays who claims that “Any business model that revolves around 11 overpaid players kicking a piece of dead cow around on a wet November evening is no place to put your money” (Tomlinson, 2004).
Issues such as these are exacerbated at the non league level. Not only must non league clubs put up with similar demands for success, but they often find themselves within the catchment area of a league, or even Premier League, club. In addition, with the rise of cable and satellite television, many people who would have previously watched their local non league teams on a regular basis can now choose to watch a variety of league matches from the comfort of their own home. This has put downward pressure on attendances for a number of non league clubs, making it even harder for them to survive and succeed. Ashford Town is a prime example of such a struggling club. As can be seen from the six years of accounts in the appendix, Ashford Town’s level of debt has increased from less than £40,000 at the end of 2002 to more than £90,000 at the end of 2007. In the same period, the club’s losses, and hence net worth, has fallen to -£70,000, with the club posting a net loss in every single one of the last six years.
Attempting to address issues such as these is something which has been the subject of significant amounts of research and discussion over the past few decades. As such, this dissertation will not attempt to reach a solution to all of the numerous issues affecting the modern UK football industry. Instead, it will attempt to determine the extent to which contemporary management theories and techniques can be used by non league football clubs aiming to improve their sustainability. This aspect has been chosen because, in spite of the significant amount of research carried out into the sustainability of football as a business model, there has been little attention paid to smaller non league clubs. As such, the initial investigation will entail a detailed and structured review of the existing literature, around how the commercialisation of football has developed and what useful lessons this can provide. This will be followed up by a questionnaire survey of ten non league football clubs, including Ashford Town, to determine the extent to which they have followed contemporary business practices, and the extent to which said practices have aided their commercial sustainability. Finally, the results of these investigations will be used to attempt to put together a business plan for Ashford Town, in an attempt to demonstrate how the club may be able to turn its current, loss making, performance around.
Aim and objectives
As discussed above, the main aim of this dissertation will be to carry out an investigation of the economic factors which impact on the commercial success and sustainability of non league football clubs in the UK, and how contemporary management theories may be able to assist in boosting said success. In order to achieve this, it will be necessary to examine how football has developed as a commercial enterprise, and how this has impacted on the divisions of revenue and profits within the industry. As part of this, it would be useful to analyse the main revenue streams of football clubs, as well as the main parts of their cost base, and how these can best be managed. One of the main sources of revenue for most clubs will likely be gate receipts, however many clubs will likely make a significant amount of revenue from marketing, commercial activities, and sponsorship, particularly in the upper leagues where commercial opportunities are likely to be larger. However, it is expected that commercial and marketing opportunities will also exist in the lower leagues, and even for non league sides. As such, this piece will also investigate the extent to which non league teams take advantage of these opportunities, as well as the need to control for factors such as on pitch performance and success, with the associated potential prize money and increased takings.
The following objectives will be addressed as part of this study:
- To assess the factors which underlie the commercial success of football clubs, and hence also the factors which could lead to clubs going into administration, and potentially ceasing to exist.
- To examine some of the most successful football clubs and football business practices in the UK, and identify how these clubs and practices can contribute to maintaining commercial sustainability.
- To examine the extent to which contemporary models of business organisation and competitive strategy are relevant to football clubs.
- To identify and analyse the role broader business opportunities can play in increasing the stability of football clubs.
- To identify areas of financial savings and cost efficiency which can be used by football clubs without adversely affecting their on pitch performance.
It is expected that, in answering these objectives through the literature and primary research, sufficient insight will be obtained to allow the formulation of conclusions and recommendations for non league football clubs wishing to boost their income, or control their costs. These conclusions and recommendations will be used to analyse the commercial business potential of Ashford Town, as a key example of a struggling non league football club. As such, part of the final report will include recommendations for inclusion into sustainable business plans detailing how the club can learn from other clubs, and economic and management theories, to ensure future economic stability. Ideally, in addressing the various objectives above, and looking at the ongoing performance of Ashford Town, it should be possible to gain an understanding of the critical factors which can affect the commercial sustainability of the football club. As such, the findings can then be applied to Ashford Town, helping to contribute to the recommendations around the formation of a sustainable business plan.
Research is defined as the collection of data in order to answer research questions or address research objectives. As this obviously presents a significant range of potential data to collect, and numerous ways to collect it, there are various defined theoretical approaches, the most important of which will be assessed in this section. These are: action research, surveys, case studies, experimentation, grounded theory and ethnography (Saunders et al, 2007). The first of these, action research, involves researchers actively collaborating and working with practitioners in their chosen field in order to investigate a well defined issue or problem, with the aim of finding practical solutions to said issue. As such, action research is a highly involved research methodology, which enables researchers to examine an issue in significant depth, investigating the root causes and creating detailed cause and effect chains. However, it can cause the researcher to have too narrow a focus when examining the problem, leading them to ignore contributing factors from outside their field of study. Indeed, in a study such as this one, where the aim is to determine what the factors affecting football club commercial success are, action research is likely to be unsuitable.
Surveys, on the other hand, are more often used for descriptive and exploratory research, as they enable the researcher to cover a wide scope and thus make recommendations for future research and study. In addition, surveys allow researchers to collect significant amounts of both qualitative and quantitative data, thus supporting a broad range of qualitative and quantitative analysis techniques. This is because surveys can include questionnaires and various types of interviews. Of course, the counter to this is that the broad reach of surveys makes it hard for researchers to gain much depth to their research, and surveys are unlikely to reveal the root causes of the phenomena they observe. Case studies represent something of a middle ground, combining the best aspects of action research and surveys, and thus allowing for both depth and breadth to be obtained. This is because they carry out research at a distance from an organisation, thus avoiding the researcher becoming too involved with the organisation, and developing a narrow view. However, the attempt to achieve both depth and breadth means that the research will not actually achieve full depth or full breadth, rather it will fall somewhere in between (Saunders et al, 2007).
The other three approaches, experimentation, grounded theory and ethnography, do not actually refer to the collection of data, but to the methods used to observe and categorise said data. Of these, experimentation is based on setting up specific scenarios, in order to determine how said scenarios occur, and then compare the results to theoretical predictions. As part of this, certain external factors can be controlled, whilst others are allowed to vary, hence making it easier to observe and categorise certain factors as either causative or non causative, and also to rank the impact of each factor. Unfortunately, such experiments are often difficult to set up, particularly when attempting to observe large and complicated phenomena. In addition, there is an argument that the level of control implied in experimentation creates unrealistic environments, within which individuals do not behave as they do when not being observed or where nothing is controlled (Saunders et al, 2007). In contrast, grounded theory focuses on observing scenarios naturally, observing what the factors are affecting said scenario, and attempting to use theoretical perspectives to explain what occurs. These theoretical perspectives are then tested against other scenarios, and refined until they describe the behaviour of the phenomenon as well as possible.
Finally, ethnography is more inductive, and involves simply observed the phenomenon, looking at the factors which have combined to cause it, and attempting to decide which key factors and behaviours have caused the phenomenon to behave as it did. In contrast to grounded theory, ethnography does not attempt to objectively define the various factors and theoretical models affecting an observed phenomenon. Instead, ethnography focused on the qualitative effects which both the factors and the individuals concerned have on a phenomenon, and also looks at the perceptions the actors have of the key causal factors (Saunders et al, 2007). In this case, because this dissertation is attempting to analyse a more general phenomenon,: the factors affecting the commercial success of football clubs, a broad research perspective should be taken. As such, this piece will use a survey, to help frame and investigate said factors, as well as using a limited case study of Ashford Town, to examine the factors which specifically impact on this club. Ethnography will be used as a guiding principle when analysing the results and attempting to determine which factors are most important to non league football clubs. This is because football clubs are not renowned for their use of specific management theory and techniques, and hence any attempt to directly fit their behaviour to the theory would likely harm the relevance of the results to other clubs looking to make use of them. In addition, the nature of football, where success is defined by on pitch results rather than profitability, means that existing theory is unlikely to be an exact fit to the football context. As such, ethnography will be used to help explain the techniques used, and how these could fit to management theory and observations.
The surveys themselves will include both a questionnaire and an interview with the club officials, either the club Secretary or Chairman, regarding the commercial realities confronting the club, as well as the existing financial situation including any handouts from wealthy club benefactors, loans, grants, and sponsorship. Unfortunately, details of the income and revenue streams are not available, and thus it is impossible to complete a full and detailed analysis of income streams and expenditure analysis, with the exception of those of Ashford Town. As such, the findings will be used to analyse the revenue and costs of Ashford Town, with the aim being to assist in assessing the clubs overall position; and whether it is under performing, or whether a business and financial saturation point has been reached. Given that only the financial accounts, and not the management accounts, of Ashford Town are available, detailed analysis of the revenue streams and costs will not be possible. As such, and as discussed above, the quality and depth of data is likely to limit the extent to which specific recommendations can be made.
In addition, this dissertation will attempt to make use of both qualitative and quantitative data, as both of these types of data can make positive contributions to a study. Qualitative data methods aim to gather data which is difficult to represent in a numerical form. As such, qualitative data gathering tends to focus more on asking people their opinion around certain topics, as well as their perceptions of various factors. As such, qualitative data tends to be richer than its quantitative equivalent, although it is usually not as easy to analyse and represent it in graphical forms or through statistical analysis techniques. This is because qualitative data can help to explain why relationships occur between data, as well as helping to explain relationships that are not as unclear when examined from a quantitative point of view. In contrast, quantitative data collection methods tend to based on simply gathering and analysing quantitative observations and data, or data which can be represented in a numerical form. This is usually achieved through actually observing quantifiable phenomena, such as the profits made by football clubs or the number of clubs going into administration. However, it can also be gathered by asking individuals to assess qualitative factors from a quantitative point of view, such as by asking them to rank factors on a Likert scale, like the importance of their sources of income (Saunders et al, 2007). As a result, whilst this piece will look to use some quantitative data, the primary research and data analysis will be performed via qualitative data, analysis, and interpretation.
As a consequence of the above discussion, this dissertation will use one main method of primary data collection, and one secondary method, to address the research questions. This will thus help increase the value of the dissertation, by providing more depth and insight to the analysis, as well as allowing triangulation with the results from the literature review, which will increase the validity of any conclusions and recommendations (Saunders et al, 2007). The main method of primary data collection will be the questionnaire survey of ten non league football clubs. This data will be used to assess the various factors impacting on these clubs, and their relative importance, as well as looking at the key income streams and costs incurred by the various clubs. As such, this data will be both qualitative and quantitative, and will act as the survey part of the methodology. The secondary set of primary data will be obtained from the financial accounts of Ashford Town, which will be provided. Whilst these accounts are not likely to be very detailed, they will help add depth to the study, and will demonstrate the actual financial situation the club is in as well as help contextualise the possible additional revenue streams the club is able to generate. As such, this section will represent the case study part of the study, whilst being driven and directed by the results of the survey discussed above. This will enable the provision of additional depth, through an in depth look at the actual accounts of a non league football club. This will help provide the ideal balance of breadth and depth.
In addition, the collection of data from two distinct sources, the internal survey of staff and the financial results intended for external use, will help create a more accurate and independent triangulation between the various results, as well as a better analysis of the factors underlying them. This cross sectional data collection and analysis is critical in facilitating the use of both quantitative and qualitative analysis, as discussed above, and will help to further increase the value and the academic impact of this dissertation. However, given that commercial sustainability is not a concept which can be easily described through simple quantitative data, the qualitative part of the report is likely to be more important when attempting to determine the factors which underlie the commercial success and sustainability of non league football clubs.
Regarding the sample size, it was necessary to find a balance between the need to have a large sample size, and the need to maintain a manageable quantity of data, as well as to fit all of the data collection and analysis in what is a very short period of time. As such, it was decided to collect data from just ten selected non league football clubs. These clubs are Ashford Town FC, Bromley FC, Burscough FC, Chatham Town FC, Corinthians FC, Croydon Athletic FC, Dartford FC, Ebbsfleet United FC, Whitstable FC and AFC Wim. These clubs have been selected as they were most responsive to initial attempts to contact them, and are also within reasonably close geographic proximity thus making the collection of data somewhat simpler. As such, they also represent teams from a fairly close geographic area, and thus should be affected by similar factors and economic effects. When carrying out questionnaires with the clubs, no club requested complete anonymity, and indeed all expresses an interest in seeing the final results of the study to see if it would be of use to them in determining how to best improve their business performance and sustainability. As each questionnaire is relatively straightforward, it was decided to only use one questionnaire for each club, to keep the data set simple and consistent.
In order to analyse the qualitative data which is produced from the surveys, it will be necessary to use a research strategy to interpret and validate the data. Positivism has been selected as the research strategy for this piece because, of the four main research philosophies, or paradigms, which can be used to guide and interpret qualitative research, positivism is the one which is most concerned with the facts, rather than the impressions arising from the research (Saunders et al, 2007). This makes positivism ideal for analysing the subject of health and safety in the oil industry, as this can be an emotive and important issue for many workers in the oil industry, as has been shown in the literature review. As such, it will be necessary to avoid forming impressions when carrying out the research, and particularly when analysing the results of the questionnaires. Positivism can help avoid such subjectivity by ensuring that the researcher takes a scientific approach to the research, and minimises the impact of impressions and judgements. Indeed, positivism is based in the original work of Comte, who argued that knowledge can only even be relative, and hence will always be affected by the method used to gather it (Sellars, 1939). This implies that any attempt to interpret the motivations of a respondent in a research project will be affected by the method of data collection, and thus will be blurred. As such, the researcher should concentrate solely on the observed facts, rather than attempting to contextualise or rationalise their observations.
However, the main disadvantage of positivism is that, simply be observing or recording an event, such as someone’s views on health and safety, can tend to influence the motivations of the subject, and hence their responses. As a researcher using a positivist paradigm cannot speculate on any potential changes in motivation, this may mean that the actions observed will not be wholly consistent with the actual behaviour in the absence of observation. For example, if a senior manager at an oil company were asked their opinion about health and safety legislation, they may give a different answer to their true opinion of the subject, as they may feel that their public persona needs to be displayed in a certain way. This can hopefully be avoided, to a certain degree, in the questionnaires by not revealing the overall purpose of the survey; assuring the respondent of neutrality; and ensuring that the questionnaire is as neutral as possible. This is based on the argument that if the subject is unaware of what their responses will be used for, they will be less likely to change their behaviour accordingly.
Caldwell (1980) also argues that the face that positivism is based on observations, and not on the fundamental motivations behind said observations, means that it is incompatible with financial and economic viewpoints. This is because economics is based on the study of people’s motivations and decisions in situations where everyone is seen as either a buyer or supplier, and hence everyone acts according to a motivation. For example, when asked if they would prefer additional health and safety legislation, oil executives would naturally answer no, as the cost of compliance would decrease their profits. This occurs because the oil executive’s salary depends on their financial performance, hence they are motivated to avoid anything which may have a negative effect on said performance. Whilst this incompatibility and bias has not been empirically proven; Caldwell (1980, p. 53) argues that it has “been sufficiently robust to cause many contemporary analysts to turn to alternative approaches”. This implies that such factors need to be addressed when constructing the questionnaires, and that questions which will have an innate connection to, or dependence or, economic and financial factors should be avoided. This implies that, as discussed above, the financial impacts of the health and safety legislation will need to be studied as a secondary priority.
The history of professional football and commercialism
Wray (1982) argues that the late nineteenth century, when significant riches were brought into the UK by the Industrial Revolution and during the Victorian era, was the start of true commercialisation of sport in the UK. This assessment is based on a study of the economics of the gate receipts taken by the football industry in Scotland between 1890 and 1914. This analysis showed that, not only were some entrepreneurs looking to profit from football by commercialising its, but others were looking to do so with the aim of winning more matches, tournaments and hence glory and status. Indeed, whilst the majority of the companies involving themselves in sports such as cycling and horse racing were simply looking to use the sport to create wealth for themselves and their shareholders, the majority of football clubs in Scotland were converted to business principles purely to enhance sporting success. As such, conventional profit and shareholder utility maximisation goals arguably applied much more to other sports than to football, where supporter utility maximisation took precedence. However, Wray (1982) also claims that there was a significant focus on supporter and team utility in other team sports such as cricket, and this was again due to the motives behind the owners, directors and shareholders in many cricket teams. It appears that the British affinity with sports such as football and cricket meant that they developed with the aim of satisfying the fans, whilst the other sports, with less of a spectator following, developed more with the aim of providing financial returns.
In addition, the drive towards commercialisation, and in an attempt to assure competitive success, Wilders (1976) reported that, in 1976, all the 92 clubs in the English League, except for Nottingham Forest, had become limited liability companies. This allowed the owners to spend large amounts of money; with no fear of debtors looking to their personal funds should the club fail to break even. In addition, of those companies, more than half the boards of directors held enough shares to make it virtually impossible for the other shareholders to outvote them on any matter. In particular, in 1967, Wilders (1976) reported that there were 22 clubs where the chairman and board of directors owned more than half of the shares; and a further 55 where the board of directors owned over 25 per cent of the shares. In addition to this, in more than a third of said clubs approval was required by the board of directors if anyone wished to sell their shares. As such, the distribution of shares changed very little as the game commercialised, and the clubs continued to be run for the benefit of the directors and chairman, with ordinary shareholders having very little say in the running of the clubs or the returns they earned on their investment.
Sloan (1969) also argues that football’s commercial development was driven largely by the significant non financial advantages and disadvantages of being employed as a professional footballer. The main argument appears to be that playing football is a source of great enjoyment for a significant number of people, as witnessed by the thousands of amateur and non league sides which pay without any financial reward. As such, football tends to give players a degree of satisfaction which few other jobs provide, as well as potentially allowing the best players to become national celebrities, with associated additional income and exposure from activities such as writing books; commenting on other footballers performances; and advertising various products and services. In addition, during the initial development of the sport, clubs tended to provide players with houses let at below market rents, as well as giving them significant freedom outside of training and match days. In addition, the fact that the season only covers around nine months of the year, excluding internationals, means that players tend to have significant amounts of free time during the summer break, and even when training they often have several hours free each day. This is countered by the fact that players require a high degree of fitness, and will often need to be away from home for several nights if their schedule demands it. However, Sloan (1969) concludes that football seems to confer more advantages to players than disadvantages, which has helped to raise the profile of professional and semi professional football, and thus contribute to the number of players, and hence number of clubs, in the modern game (Sloan, 1969). This obviously places pressure on the market, with it being difficult and expensive for supporters to follow more than one club, hence making it difficult for smaller clubs to attract supporters.
However, countering this is the fact that, since early on in the evolution of the English Football League, the transfer system acted to restrict the movement of labour, to an extent that is rarely seen in other industries. The rules of the transfer system state that any player who wishes to appear for a league club must be employed by that club, in the case of professional players, and must be registered with the Football League, as well as the English Football Association. As such, the only way a player may move between clubs is if both clubs and both ruling bodies approve the transfer. As such, this procedure requires both clubs, the player, the Football League and the FA to consent, effectively giving clubs monopolies over the services of their players for the duration of their fixed length contracts. This is a situation which would not be accepted in other industries, and has regularly been compared with trading slaves, with players often having very little say in where their club makes them move (BBC, 2008). Indeed, the fact that transfers almost always involve the payment of a fee by the club who the player is joining further enhances the slave trade connotations. As such, whereas most businesses would attempt to attract new employees by offering higher wages or better working conditions, football clubs are forced to offer high wages, better working conditions, and pay a large fee to the club from which they source the new player. Given that the fees have risen from £1,000 in 1905, £10,000 in 1928, £100,000 in 1961, and into the tens of millions by the present day, it is clear that the increased demand for the best players is forcing clubs to devote ever more funds to transfer fees and wages, particularly when bidding against other clubs to secure the best players (Sloane, 1969).
However, in spite of the multi million pound deals which they have been charged with sourcing and carrying out, Wilders (1976) reported that the majority of managers still tended not to have any form of formal training. Indeed, in Wilders’ (1976) survey of 28 English League managers, 16 managers claimed that they would have benefitted from some sort of business and financial course when carrying out their duties and developing their careers. Wilders (1976) claims that this is not the most surprising aspect, the most surprising aspect is that twelve of the managers surveyed believed that they did not need any formal training, and that their experience as a player would be sufficient to help them discharge their managerial responsibilities. However, this belief that playing experience alone provides sufficient training and skills for the demands of football management is arguably one of the reasons why so many clubs have failed to develop as businesses: the skills of professional footballers do not tend to include financial and business dealings, or the need to balance budgets. Indeed, the results of the survey indicated a general belief that the majority of football managers knew about the footballing side of their job, but generally knew very little about the need to manage the financial side of the business. As such, the general belief that the best footballers tend to make the best managers has not necessarily been borne out, with many of the best managers having been mediocre footballers at best. In fact, Wilder (1976) claims that the technical gifts needed to make a footballer can often hinder the effective management of clubs.
The rise of commercialisation
Whilst commercialisation has been a significant trend in the football industry in the UK for the past few years, its only since the 1980s that football in the UK, and the whole of Europe, has truly developed as a major commercial industry. This is evidenced by the fact that, in 1986 the 22 First Division clubs in England had a combined annual turnover of £50 million, however in 2007 Manchester United managed to generate over four times that figure, as did the majority of clubs in the Premier League (Deloitte, 2007). Since the 1980s, the rise of more commercial television channels, including Sky television, and the ability to transmit matches around the world means that football has enjoyed a continuous economic boom that has led to football becoming a major business. Indeed, Inglis (1988) claims that football has increasingly become more ‘gentrified’, being transformed from what was essentially a working class pastime into a source of entertainment for the middle classes. In addition to the increase in the value of broadcasting revenues, stadiums have improved in quality and merchandising has become more developed and professionally managed. Indeed, even in 1988, Inglis (1988) demonstrated that there were significant disparities in revenue and profits between the teams in different leagues and even across the same league.
Hoehn and Szymanski (1998) argue that television has been one of the most significant developments in the rapid commercialisation of UK football, and European football in general. This is because, whilst broadcasting rights for league matches were worth just a few million dollars in the 1960s, by the 1990s this figure had reached the hundreds of millions, with the development of satellite and cable services, coupled with pay per view services, allowing for better price discrimination than ever before. Indeed, in 1997 the overall value of the league TV contracts across the UK, Italy, Spain, Germany and France reached a combined value of $1 billion for the first time ever, and has continued growing ever since (Hoehn and Szymanski, 1998). However, even at this stage, TV income only represented around 15% of the revenue of top UK clubs such as Manchester United, who generated more money from gate receipts, from merchandising, and from catering and conferences. However, since then the total value of the commercial broadcast rights has risen to make up around 30% of Manchester United’s total revenue, and allowed the top teams to dominate the game.
However, even before the television and broadcasting boom, football clubs had used their growing popularity to cash in via the financial markets. This was largely driven by Manchester United’s successful flotation in 1991, which was seen as one of the reasons the club was to attain such dominance over the following two decades. As such, by 1998 twenty three clubs, within the Premier League and the wider football industry, had listed themselves on either the London Stock Exchange or on the Alternative Investment Market (Hoehn and Szymanski, 1998). This was used as a model for other clubs, with Lazio and Ajax Amsterdam announcing their own floatation in the summer of 1998. Flotation has required clubs to undertake significant organisational restructuring, which has begun to push good business principles to the fore again; however they still take a back seat to the requirement for sporting success. As such, floatation became seen as a way to secure finance for the purchase of top players in order to advance the club’s progress and secure higher gate receipts and broadcasting revenue, rather than as a way to sustainably expand and finance the business.
In more recent years, the finance and broadcasting aspects of the game have come together, leading to an increasing trend towards media companies buying up major clubs. This trend was arguably begun in the 1980s, with Silvio Berlusconi buying AC Milan in 1986. This was followed by Canal Plus purchasing Paris Saint-Germain in the early 1990s, and BSkyB making a bid of £625 million for Manchester United in 1998 (Hoehn and Szymanski, 1998). This trend was expected to lead to the formation of a European Superleague, which Silvio Berlusconi proposed as early as 1988 with the aim being to broadcast games between the top sides every week, thus massively boosting the broadcasting value of football. Indeed, this arguably just another attempt to develop the commercial aspect of the game to the benefit of the clubs, by attempting to prevent the various football leagues from selling and dividing up broadcasting rights and revenues collectively. However, development such as the Bosman ruling by the European court, which allows out of contract players with EU citizenship to move clubs for no fee at the end of their contract, have acted to control the power of the clubs to some extent.
Balancing financial and performance factors
As can be seen above, it is clear that many clubs spend significant amounts of money in the aim of achieving increased success, in the hope that said success will generate increased revenues to help cover the prior spending. However, Szymanski (1998) argues that there is little concrete evidence to suggest that improved performance on the pitch necessarily leads to improved financial situations. Indeed, a detailed study of the pre tax profits of forty UK football clubs revealed that, when a club improves its performance in the league, this improvement is as likely to result in a drop in profits as it is to cause a rise. Similarly, when league performance deteriorates, there is no greater probability that profits will fall. This indicates that there is no systematic relationship between the league performance of a football club and its profitability, something which is still witnessed when the change in profits in one year is compared to the club’s performance in the previous year or the following year.
This arguably makes the case of sustained success stories like Manchester United even more interesting from a business perspective. Manchester United is cited by Szymanski and Kuypers (1999) as being one of the very few football clubs to achieve sustained success and sustained profitability over the same period of time. In contrast, many of Manchester United’s rivals have either required significant financial support, such as Chelsea, or to take on significant financial liabilities such as Arsenal for the Emirates Stadium or Leeds around the turn of the century. The fact that Manchester United is in the minority, as a club which manages to achieve financial success and on pitch success at the same time may seem strange. However, it makes more sense when considering that Szymanski’s (1998) definition of financial success is of the total level of profits generated by the club.
As profit is the difference between revenues and costs, it provides for a clearer picture, and understanding, of the factors which drive the relationship between on pitch success and financial performance. On the one hand, improving the level of performance of a team will likely result in better league performance, as more fans are attracted, more prize money is won, and the club can claim a greater share of broadcasting revenues. However, in order to achieve this increased success, and hence boost the revenue, a club needs better players. In order to attract these players, the club needs to spend more on transfer fees and on wages. Indeed, even if a club succeeds in performing well without spending much money on players, the players will expect bonuses and salary increases as a reward for their success. As such, whilst higher performance levels will lead to higher revenues, a fact remarked upon by Deloitte (2007), they will not necessarily lead to higher profits.
The two fundamental relationships between wages and profits are supported by Szymanski’s (1998) data. This shows that, as club performance improves, club revenues also grow through increased attendance and sponsorship, higher ticket prices and merchandising revenues, and greater levels of TV income. Indeed, league performance was found to account for82% of the observed revenue variations between clubs in the 1996/97 season. A similar relationship was seen for the performance of clubs: higher wage expenditures by clubs tended to lead to higher league positions in future, with wage expenditure levels being dominated by the amount spent on player wages.
Szymanski and Kuypers (1999) argue that these relationships are as fundamental to sport as they are to all markets. Clubs with better players are like companies with better products: they will generally do better than clubs with poorer players. However, within this market there is also a well developed market for the players themselves, assisted by agents who ensure that their player receives wages equal to their performance and value to the team. As a result, increased levels of wage expenditure tend to lead to improved performance; and improved performance by players and the team as a whole tends to lead to increased wage demands. In addition to this, there is a well developed market for success. As football, especially at the highest level, becomes more visible in the public eye, fans and sponsors become more ‘fair weather’: attracted to teams performing well and managing to succeed in their competitions. Szymanski and Kuypers (1999) claim that the amount of media attention focused on the football industry means that it is very close to being a perfectly competitive market, particularly given that there is no significant attempt to redistribute income to the poorer clubs. As a result, the clubs all depend on each other for matches, as well as depending on strong rivalries to attract supporters to big games and local derbies. However, at the same time, clubs compete strongly with each other not only on the pitch, but also in the battle for the most supporters and the best players. In addition, unlike some sports such as baseball and basketball in the United States, there is very little mechanism to redistribute income towards underperforming clubs, or to create a balanced competition. As such, the bigger clubs cannot look to simply extract profits from their success, they must continue to reinvest in their team and facilities to avoid being overtaken by their opponents and falling into a downward spiral (Szymanski, 1998).
Hawkes (1998) takes a different look at the phenomenon, claiming that the need to balance on pitch performance with financial performance is creating significant ethical considerations for football teams and the industry as a whole. This is because the increased financial stakes which are beginning to dominate the game, such as rich private owners, run the risk of damaging the social responsibilities clubs have to their supporters. This friction can be most notably observed in the takeover of Manchester United by Malcolm Glazer, where Glazer referred to the club as a “franchise”, and many supporters protested and deserted the club as a result of his takeover (The Sunday Times, 2005). Whilst Hawkes (1998) recognises that there is a strong case for owners and shareholders being rewarded for funding football clubs, there is a risk that if fans believe they are being exploited for commercial gain they will desert the club in large numbers, potentially removing the most important, and arguably the only source of revenue for clubs. If a club has no fans it will sell no merchandise and no one will watch it on TV. As such, in order for football clubs to truly manage themselves professionally, profitably and sustainably, they need to be aware of the ethics and demands of their operations.
The demands and focus of modern football clubs
Since the 1980s, researchers and writers have demonstrates that the demands and focus of modern football clubs have had to shift constantly in order to ensure their continued survival. One of the most pervasive of these accounts come from Sloane (1983), who described the financial crisis which rocked football in the 1980s, forcing many clubs to seriously rethink how they had spent in the pursuit of glory and how they ran the business side of their clubs. Indeed, even recently Kemp (2008) reported on how both Manchester United and Chelsea, who are among the top ten richest football clubs in the world (Deloitte, 2007), saw the 2008 Champions League Final as being as much an opportunity to build and strengthen their global brands as it was a chance to win a major trophy. Of course, in spite of the significant commercial considerations which surround all modern football decisions, the social and cultural demands of the fans: for continued success no matter what the cost, can often override financial stability (Nikolychuk and Sturgess, 2007). However, incidents such as Leeds United’s fall down the table and Malcolm Glazer’s debt based takeover of Manchester United have led to an increasing awareness among fans about the dangers of overspending and the need to be financially sustainable on a long term basis.
In spite of this, there is still a culture amongst many owners of football clubs to see their club as more of a luxury good, where money needs to be spent in order to achieve the on pitch glory and adulation of the fans, instead of something to be run as a sustainable business (Zuber et al, 2005). This is perhaps demonstrated most strongly by the case of Chelsea, where the billionaire owner Roman Abramovich has spent over £500 million in five years, and the club does not plan to break even until 2010 (Kelso, 2008). Whilst some major clubs, such as Manchester United and Arsenal, can potentially compete with this level of investment, with their professional management and marketing teams helping to balance the financial and sporting side of the business, non league clubs will often find it difficult to achieve both aims, or to attract sponsors and fans away from the major clubs. This is supported by Emery and Weed (2006) who claim that the money is skewed so strongly towards the top division that only clubs in the Premier League can hope to maintain a reasonably high level of spending. Other clubs are often left to fight for their survival, financially unable to attract the best players, and thus unable to challenge the power of the big Premier League clubs.
Indeed, as discussed above, even the massive financial rewards available within the Premier League do not guarantee financial stability, with four out of the twenty Premier league clubs reporting an operating lost in the 2005 / 2006 season (Deloitte, 2007). As such, whilst some of the clubs in the Premier League have benefitted from rich owners, and this has enabled clubs such as Chelsea to rapidly achieve success, it is arguable that clubs outside the top division will not be able to improve, or even survive, without significant outside financial support. Indeed, McNally (1998) argued that, in the six years since the Premier League was formed, only Blackburn Rovers and Newcastle United managed to obtain promotion to the top division and establish themselves as serious contenders in said league. The reason for their success is cited as the extravagant levels of financial backing they received from wealthy owners Jack Walker and Sir John Hall, which enabled them to compete on level terms with the incumbents, although they have not been able to sustain their initial success.
As a result of situations such as this, De Heij et al (2006) claim that it is almost impossible for football clubs to take independent strategic business actions with the aim of improving their financial situation. This is because not only is there strong pressure for the majority of strategic decisions to be focused on improving on pitch performance, but it is also difficult to compete with the spending levels of teams such as Chelsea, with multi billionaire backers. However, whilst football clubs are being placed under increasing financial pressure, due to the demands of the fans and the high level of competition, Buraimo et al (2006) claim that there are still numerous opportunities that clubs can take when looking to increase their revenues and level of sustainability, largely through diversifying their business models to include catering, events and conferences whilst the stadium and other facilities are not being used for matches. This is supported by Ozawa et al (2004) and Hamil et al (2004), who claim that the main problem facing football clubs is not the high level of competition, but the fact that there is very little financial management or corporate governance, and what there is tends to be nowhere near as high quality as the levels in other businesses.
However, whilst diversifying revenue sources can help a club to improve its financial situation, the majority of revenue for the majority of clubs continues to come from gate receipts. Forrest et al (2002) challenges the traditional perspective that the demand for watching professional football tends to be highly inelastic and price insensitive. The demand, and hence attendances, had previously been assumed to be highly inelastic, due to the lack of substitutes and the unwillingness of supporters to switch allegiance to another club. However, by assessing elasticity based on the overall costs paid by spectators, including ticket costs, travel costs and ancillary costs, Forrest et al (2002) found that the demand for tickets, and hence the total gate receipts, tended to be much more elastic than previously reported. This indicates that clubs need to carefully pursue a pricing policy oriented towards profit maximisation, and should carefully track attendances and gate receipts to ensure that they obtain the maximum revenue over the season.
However, in a complementary study, Forrest and Simmons (2002) assessed the extent to which the level of attendances at English Football League matches was a function of the amount of uncertainty generated by the potential outcome and the relative strengths of the two competing teams. This is based on the hypothesis that people are more likely to pay to see a match when the outcome in uncertain, as this will generate more excitement than a match where one side is likely to dominate the other. The results of this study indicate that the overall level of attendance at matches was positively related to the quality of the teams contesting the match, and negatively related to the perceived relative probabilities of a win for either team. In other words, when the probability of one team winning is high, attendances will tend to be lower as spectators will perceive the game as being less exciting to watch. However, Forrest and Simmons (2002) also found that, whilst supporters tended to favour matches where the outcome was not certain, this did not necessarily correspond to both teams being equal strength. In fact, supporters were more likely to watch games where the home team was seen as being the underdog, to see if the home advantage could help to cause an upset (Forrest and Simmons, 2002). This helps explain why many lower league and non league clubs have massively increased attendances when they are drawn at home in cups against teams from higher divisions.
In addition, Falter and Perignon (2000) argue that, whilst TV and merchandising revenues have begun to reduce the importance of gate receipts for many clubs, gate receipts still have an important role to play in supporting all income streams for a football club. This is because many TV broadcasters do not like showing football matches where there are lots of empty seats in the ground, and the majority of merchandising is often done at the stadium itself. As such, the level of gate receipts for a team will help determine the level of broadcasting interest and the level of merchandising revenue. As such, Falter and Perignon (2000) conducted a detailed study into all the factors which help determine the attendances of football matches. Their model demonstrated that, whilst football specific factors played a significant part in determining attendance levels, the local socio economic factors played a part, as did marketing and incentives.
In particular, there was a strong negative relationship between wage levels and the total attendance of lower league clubs, however high levels of unemployment acted to boost attendance levels. This indicates that lower league and non league football is still largely a sport for the working classes, as well as providing entertainment for unemployed people who are not able to benefit from the social interactions associated with employment. In addition, qualities such as the club’s budget, average goals per game and last score have significant impacts on boosting attendance, as they imply the team will be more exciting to watch. However, in addition to this clubs were able to boost their attendance by engaging in formal marketing and promotional activities and incentives, such as having a family day, or children get in free with their parents. Falter and Perignon (2000) claim that the use of such management tools indicates that sporting events do have connections to traditional business and marketing activities, however the broad reach of their study makes it difficult to draw any significant conclusions around the quantitative effects of the factors identified.
The move back towards private ownership of football clubs
Since the 1990s and early 2000s, when a significant proportion of European football clubs listed on the stock exchange, their stocks tended to fare poorly. Tomlinson (2004) cites the example of Juventus, which is one of most famous and successful teams in the world, as being a particularly poor stock market performer: its market value fell by 50% in the two years following its flotation in 2002. Even Manchester United, as one of the richest clubs in the world, saw its shares fall back to close to their 1991 issues price following a lack of on pitch success in 2004. However, between 1999 and 2004, Manchester United still managed to increase its revenues by 50%, and by a further 33% from 2004 to 2007, with pre tax profits passing the £40 million mark (Deloitte, 2007). However, Tomlinson (2004) reported that in spite of Manchester United's massive and growing global fan base, combined with high levels of success on the field, the club failed to increase its profits significantly from their 1999 level. This is arguably because the club has failed to take full advantage of the various business and sponsorship opportunities available to it, and its levels of spending are limited by shareholders, thus making it difficult to guarantee continued success. These are two of the key factors which led Malcolm Glazer to take over Manchester United in 2005: the untapped potential of the business, and the spending constraints making it difficult to compete with the then free spending Chelsea.
However, as has been noted above, private ownership of football clubs is not always a profitable venture, making them unattractive for traditional private owners such as hedge funds or private equity. As such, these owners prefer to support other takeover attempts, such as when Malcolm Glazer purchased Manchester United and two hedge funds: Perry Capital and Oz Management invested in the company's preferred securities (MacFadyen and Davis, 2008). Not only does this takeover demonstrate the structure of many football deals, it also shows why profit focused investors, including institutional shareholders, often have little interest in being involved in the running of a football club. The reason is, as discussed above, the difficulties balancing the needs of the fans and local community with the need to make reasonable profits. Indeed, when the Glazers took over Manchester United, they were forced to specifically state that their ownership of the club would focus on putting the fans and the success of the club ahead of taking profits, citing their previous takeover of the Tampa Bay Buccaneers in the United States as evidence of their commitment to developing the sporting performance of the club (MacFadyen and Davis, 2008).
Indeed, the trend towards private ownership is arguably being driven by the fact that the amount of money needed to sign the best players is increasingly putting off stock market and institutional investors. Indeed, in 2004, in an attempt to make up for missing out on the league title the previous season, Manchester United spent around £25 million on Wayne Rooney. Whilst Rooney had a significant and positive impact on the United team, the club had to spend almost their entire profits for the previous season on just one purchase (Tomlinson, 2004). This indicates the level of spending and commitment needed to maintain a position at the top of English football, or simply football in general, a level which is usually impossible for all but the richest clubs to match.
Manchester United: a notable example of sustained success
Manchester United has been mentioned several times throughout this piece as one of, if not the only, modern club to have achieved sustained success whilst maintaining a strong financial performance. As such, Manchester United has been chosen as the case study for this dissertation. Whilst Manchester United is perhaps not the best financial example for struggling non league clubs, the fact that there is a significant amount of data and literature around the club means that its success can be analysed in a much more detailed way. However, Manchester United was not always the financial giant it is today, entering the league in 1892, and coming to the brink of bankruptcy just ten years later. Ironically, the club was saved by the investment of a wealthy local brewer, J. H. Davies, who was arguably one of the first rich private owners of a football club. Davies’ main ambition was to turn United into a major football club, and one which would enjoy sustained long term success. As part of this, Davies invested strongly in the then new stadium at Old Trafford, turning it into one of the largest and most important stadia in the country, and possibly the most important stadium outside London. As such, the club was able to attract a large number of fans, as well as benefiting from hosting FA Cup matches and other major matches requiring a neutral ground (Crick and Smith, 1989)
As a result of Davies’ massive investment, United became one of the richest clubs in the league; however the source of this money was controversial, with the club being censured by the FA in 1910 due to misrepresentations in its financial accounts. In spite of these issues, the club managed to win the First Division Championship twice, in 1908 and 1911, as well as the FA Cup in 1909. However, from 1911 until 1948, the club failed to win any major trophies or titles, and was relegated on several occasions. In addition, Old Trafford was badly damaged in the Second World War, as a result of German bombing raids, meaning that the club needed to rebuild both its team and its stadium. However, the appointment of Matt Busby as manager helped the team to achieve success again, winning the FA Cup in 1948 and coming second in the First Division three times. This success allowed the club to rebuild Old Trafford to a much higher standard, enabling the club to win the League in 1952, 1956 and 1957, and hence to achieve sustained success and a high level of following (Szymanski, 1998).
This success was interrupted by the Munich air disaster in 1958, which left many of the most important players on the United team dead or seriously injured. However, United managed to emerge from this disaster, rebuild their team, and win another two league titles and the European Cup in the 1960s. This resurgence from near disaster arguably helped galvanise the club and their supporters to see Manchester United as more than simply a football club (Szymanski and Kuypers, 1999). After Busby retired in 1971, Manchester United experienced twenty years with little success on the field, with their close rivals Liverpool winning 11 League titles, three FA Cups, four European Cups and two UEFA Cups. However, in spite of Manchester United not winning a single League title of European trophy from 1971 to 1991, Manchester United managed to remain the best supported club in England in terms of league attendances. Such loyal and sustained support, even in the absence of any major trophies and in the shadow of their local rivals, helped Manchester United remain prominent and keep itself financially afloat (Crick and Smith, 1989).
This phenomenon can be partly attributed to Manchester United’s philosophy of trying to play very attractive attacking football, in spite of their lack of success with such. Not only is this type of football more exciting for spectators to watch, but it also makes the results of matches more uncertain, thus boosting attendances as discussed above. However, this factor on its own does not account for how Manchester United managed to remain so successful. In fact, Szymanski and Kuypers (1999) argue that Manchester United’s success is most likely due to the fact that the club has pursued strong contemporary management practices, including building and maintaining a distinctive brand, similar to companies like Coca-Cola. As such, whilst Manchester United is competing in a market which is very crowded, with arguably superficially similar types of products, the club has established a brand image which its fans rely on, and which they promote to their friends and family. As such, in exactly the same way that Coca-Cola was traditionally able to attract more customers and sell its products at a higher price than its rivals, Manchester United has been able to attract more fans (Szymanski and Kuypers, 1999).
As such, in spite of Manchester United performing at a lower level than its major rivals, including Liverpool and Everton, the club was still able to attract more supporters, and hence customers. This is because, as Kotler and Keller (2006) claim, when a market is very competitive, with lots of similar products and little to distinguish them, consumers will make rational choices based on their perceptions of brand image, even if other brands can be argued to represent better value for money. Similarly, in football, when choosing who to support an uninformed and previously neutral supporter is likely to choose the team with the strongest brand, rather than compare each team for relative success and utility. Were there an objective scale on which clubs and matches could be judged, supporters might choose to see a different team based on their expectations of performance. However, without such information, supporters will simply choose the team with the visible brand and track record of playing attractive football. Whilst Liverpool may have had the better track record in the 1970s and 1980s, they did not have Manchester United’s reputation for being a major club and playing as attractive and exciting football (dell 'Osso and Szymanski, 1991).
As a result of this, Manchester United was able to sustain its revenue and expenditure throughout the 1970s and 1980s, whilst clubs with a weaker brand and lower market profile might have collapsed. As such, even through the club went 25 years without winning a championship, from 1967 to 1992, it was still able to spend significant amounts on transfers, as well as pay the wages demanded by the top players. However, following this long period without winning any league titles, Manchester United’s brand had begun to tarnish, and the club was running the risk of losing supporters unless it managed to achieve sustained success within the next few years. At the time, Manchester United was largely under the control of the Edwards family, following Louis Edwards friendship with Matt Busby, which led to Edwards becoming Chairman of the club in an attempt to support Busby’s vision for United. However, Edwards was not satisfied with
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