The Forthcoming Recession – An update

Just over a week or so ago I wrote that there was an impending crisis heading towards football. I had noted that while much of the discussion is around scheduling difficulties, at some point moving forward the reality of the impending financial crisis would overtake this. Sponsorships, gate receipts, and TV revenues will be down and this will spark a situation where less money is in the system. In any orthodox reading of an economic situation the consequence is a decline in prices. My estimate was that cautiously sides may lose around 30% of their turnover. Such a decline will undoubtedly cause a reduction in prices and necessitate a wholly different approach for all clubs trying to deal with the crisis.

What we have witnessed in the last week or more should be enough to amplify, not reduce fears of the football community. In this tweet;

Football pundit and club owner Gary Neville was scathing of the approach being adopted at the top of football. The response is too self centred, too slow and ultimately being handled “terribly”. The alarming part of this analysis is that to me, he is only really talking about the tip of the iceberg. If we cannot handle the difficulties in scheduling, it does not bode well for the far greater questions that will then be posed.

In truth there seems to have been an arrogance in some quarters, that “football is a different game” or words to that affect are often trotted out as a defence of footballs lack of planning. In some quarters these are empty words, or blind faith but are also a product of an industry that has enjoyed remarkable success over the last 30 years in creating an enormous bull market (ie the product has grown substantially). However, confidence and appreciation of what has gone before can soon become foolhardy arrogance in a markedly different situation.

In the previous article I focused upon the 2008 crash and the impact on the PL’s transfer spend. Without re-hashing the arguments it was noted that there was a 40% reduction in spend over a 2 year period and a recovery took 7 years to return to the pre-crash levels. The other blip in the last 30 years came as a result of the 2002 crash of ITV digital (affecting sides from the 2^nd tier downwards). This again saw a 40+% reduction in spending and again took 5 years to increase beyond the point it was the before the collapse. The likelihood is this particular recession may be more targeted than 2008 at the sectors impacting football (retail, sportswear and TV) and also a potentially greater than the reduction of funds to a comparable degree to the 2002 ITV digital collapse. The likelihood is a reduction of a similar may be a best case scenario for the PL.

The last few days seem to suggest pressure is beginning to build upon PL clubs. The Health Secretary’s Matt Hancocks dig at footballers seems to have cemented something of a siege mentality around the sport. It is completely reasonable for those around football to point out that it is the governments responsibility to provide funds to the NHS, and over the last 10 years they have completely failed to provide the funding required. However there is also a legitimate point that businesses who have employed paid upwards of £10million per year shouldn’t be utilizing government schemes aimed at struggling businesses while they continue to commit to those salaries.

The problem goes deeper than just the situation regarding furloughing staff though. Without a wage reduction scheme I would estimate most of the clubs will be at (at least) 80% of their turnover going on wages and several will be over 100%. If some agreement is not arrived at between players and wages it may well be that some clubs have to start a process of panic selling to offload players, and other clubs lower down the chain may not be able to stay in business. The risk is, that without an initial agreement to reduce wages the market may cause a level a level panic to rush through the system. In general, controlled, structured and organized reductions are often much safer ways to deal with difficulties than allowing a market in flux and free fall to dictate prices. If I was advising players, I would say, that a 12 month reduction in wages (to be reviewed) may allow clubs to adjust to the terrain in a manner that keeps people in jobs.

In truth I sense certain clubs are coming to terms with the new situation that is emerging. While I wouldn’t read too much into Mike Ashley choosing to utilize government funds, it has to come as some surprise both Spurs and Liverpool are. The damage to the brands of such a move, in a context where football has been highlighted in a national address could be enormous. Both Spurs and Liverpool who have displayed strong capability and understanding of building successful brands must surely be aware of this. Both clubs are amongst the most profitable and sustainable currently in the league. This feels like a miserly move, and to the untrained eye a move that acknowledges a concern at what is to follow. If either club were certain this would pass, and we would go back to normal reasonably quickly, it’s hard to see such a decision even being considered.

While the PL is the richest in the world, there is another way of viewing this- that in a situation we face it is the most exposed. It has the most to lose, if TV revenues, sponsorships and gate receipts are dramatically hit by deflationary pressure. Our top 5 teams who take the largest share of both TV revenue (including being topped up by European money) and sponsorships are the most exposed within the league to any collapse that may happen. For Spurs, just outside of it, they also have substantial repayments due on a ground who’s costs spiraled given it as built in London, and depending on the length of time for the fix they agreed the likelihood of much higher borrowing costs. This is before you even consider the impact on investment portfolio’s, particularly based in America (and New York) by the time this crisis is over.

When you begin to look more closely you begin to realize that the PL itself is to some degree built upon foundations that are shaky. While it would be unfair to describe it as a Ponzi scheme there are certain perceptions that only work if the market keeps growing. Most of the clubs focus upon buying younger players, holding them for 2-3 years into a 50 year contract and ultimately being able to sell them on for a higher figure when it comes to selling. To some degree you hope to employ a coach who improves players, but in truth much of this is based upon the enormous inflationary pressures that existed within football. The year on year inflationary rise across the PL is around the 14% (as an average) over a 30 year period. The same player you buy for 10 million pounds in year 1 is worth nearly £15million by year 3. Clubs have offered increasingly large and longer contracts to people on the assumption that this rise can continue indefinitely.  What we now face is a period where a depreciation will come and the hope will be it is not a full scale reverse of a wider trend.

The obvious concern I have for football is that you have implied values given to players that are essentially meaningless. In a world where footballers cannot play, they have no value. In a world where there is substantially less money in the system, their value decreases sharply, yet many clubs have a business model based upon them going up in value. Ensuring that a sharp initial remains just that ought to be a priority, and it doesn’t become a stack of cards falling down on top of one another.

One part of this, as I indicated previously is to look at FFP again. The uncomfortable truth is that wealthy donors provided a substantial degree of liquidity following the two major blips in the 30 year growth market. The spending fell from 2001/2-2002/3 from £530million to £300million. Chelsea under Abramovich would spend £150m the following 2 seasons (and over £80m for the two seasons following that). Given Chelsea were on the brink of bankruptcy it is not unreasonable to assume none of those funds would have been spent without his arrival (and there may have been bad debt in the system). Without his input the total spend in 2003/4 would have not been a steady recover to £390m but another further decline of to £240m spent and we’d have likely been going back to the mid to late 90’s in terms of amounts of money being able to be spent. It’s not wholly unreasonable to suggest that Abramovich’s injection of finance saved the PL as we know it when it was teetering, and allowed clubs to eventually work their way back to spending.

Likewise you see a similar dynamic with Manchester City following the 2008 financial crisis. The summer before the crisis saw £840m spent, yet within 2 years this had dropped to £530million. In those 2 years, Manchester City had spent £132 and £165m. If this spending was not made, footballs spend would have collapsed not just to pre 2008 levels but also to pre 2004 levels of spending.

It goes without saying, that the astute decision to increase spending in a “bear” market proved an astute move for both Chelsea and Manchester City. Chelsea would go on to win 5 titles and 1 champions league in the following 12 years. Manchester City have won 4 titles over the last 11 years. However it also helped to maintain the primacy of English football in 2 difficult moments. In both cases there are no guarantees that without the input into the game, whether the decline would have just been a 2 or 3 year decline in spending or something more severe and long term. 

Without revisiting FFP and avoiding preventing a similar explosion of funds into the English game it again suggests a short term decline may become something more severe. The key question will obviously be from the continent, given how much further ahead the PL is in terms of finance and funds available, is it in their interests to not facilitate a substantial depression in spending with the English game?

For Everton, there is a template to success that has been provided by both Chelsea and Manchester City. Neither were as well set as Everton arguably are now to make a jump at the top end of the table. In an inflationary market, Moshiri’s money hasn’t had the dynamic and qualitative difference it may have potentially made. However in a crisis of funds available, and falling prices similar investments could have a new and greater significance. While it appears a morose way of viewing the crisis, there is certainly one reading which states the more severe and less well prepared other clubs are, the greater the opportunity afforded to Everton.

What is clear though is this situation is a dynamic one, and will move forward greatly over time. It will likely be a series of events that will need revisiting periodically as the summer goes on.