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Costs and main revenue sources of the successful football club

Introduction

Football is one of the most popular sports in the modern world. Modern football differs from the game of the early twentieth century in that it is no longer just a sports competition, but a real industry. With its constant commercialization, it appears to be a quite profitable business and a lot of investors look at it as a profitable asset. Football clubs make tremendous money and certain club’s budgets exceed budgets of some developing countries. For example, Real Madrid in 2017 announced 800 million dollar revenues (Deloitte, 2017), while at the same time budget of Suriname was 546 million dollars, or Bhutan 650 million dollars respectively (Budgets of the countries of the world on one chart: who earns the most?, 2017).

Big football clubs, known in the industry and followed by the large fan community are brands and like any enterprise, they have different ways and vision how to reach their business and sports goals. In this essay attempt to compare and analyze the main revenues of two major La Liga football clubs Real Madrid and FC Barcelona will be conducted.

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The analysis and comparison will be based on the Deloitte Money league reports as well as the annual reports of each club for the period from 2010 to 2018 sports season with the help of several web sources. Attempt to answer questions such as how well were the revenues managed and were they maximized and which club has more effective management and what are the reasons for that will be provided.

Costs and main revenue sources of the successful football club

At first, it is ought to understand and identify what are the main revenue sources of any football club and how does it make money in order to have a competitive balance and advantage among other teams.

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Decent efforts are required to make football club function smoothly and in a profitable way. The costs are high and wise management and strategic thinking is essential for success. Clubs should spend money on wages of players, managers, and scouts. Large cash amounts are required to ensure successful transfers of players. Also, a big chunk of clubs’ income is spent on the renovation and amortization of the stadium and the training complex as well as medical facilities improvement. Although significant funds are spent on clubs advertising, corporate social responsibility programs, marketing, and even charity. Thus to ensure sufficiency of funds for highlighted expenses club ought to have multiple revenue streams. (“How do football clubs make money?, 2016”). According to Thomas (2015) and Deloitte Football money league reports, it is possible to determine that revenues come from different sources and they could be split into three main groups. They are – commercial, broadcast rights, matchday. Different clubs operate differently and have an unequal amount of revenue sources. However, these three categories could be noticed in any clubs’ financial report.

TV broadcasting rights

The core, one of the biggest and the most important source of revenue for modern football clubs is TV broadcasting rights sales. Before, in 1990s digitalization and innovation were not in place, and TV rights were not observed as profitable assets. However, it changed quite fast in a few years. So the idea is that foreign countries buy this rights to broadcast live games of certain division or league. According to Deloitte reports (2015-2018), the richest and the wealthiest league in European football in regard to TV rights revenues was and still is the English Premier League. The League received in total more than 5.14 billion euro in TV rights sales in 2015 which is the record number (BBC, 2015). At the same time, La Liga got only 1.5 billion dollars in TV rights for the 2014 – 2015 season. (Deloitte, 2015) Compare to England this number is three times smaller. All revenues are shared between all clubs of the league. However, in certain leagues, the %age of a share is unequal. For example in La Liga Real Madrid and Barcelona used to take 38 % of total TV broadcast revenues and the rest 62 % is shared between other 18 La Liga clubs. (reference for LALIGA TV rights) It is ought to mention that along with the high profits and tremendous amounts of money being operated in one sport in England it raises questions concerning competition between sports and content provided by broadcasters. Also, exclusivity of broadcasting rights for one sport could exclude new media markets and deprive access of the major public to the diversified sports coverage (Evens & Lefever, 2011).

Matchday

Next important category of clubs’ revenue is Matchday. The show and feelings that fans, spectators and tourists get during the match are the driving factors for them to visit matches of the favorite club in person. According to the club’ performance, more matches played in certain cups and leagues bring more money. Profit is generated from the sale of gate receipts and seasonal tickets, membership and other related to the match sales. There are several important aspects that influence on matchday revenue such as, stadium size, how it is being used, local population and local fan community, where is the stadium located and how well it is reachable by fans and spectators. Well, usually stadium size is hard to adjust and if so it requests decent cash influx for such reconstruction. After the stadium is fully adjusted the maximum revenue potential is achieved (Thomas, 2015). Another way to achieve matchday takings beside increasing stadium capacity is to increase ticket prices. However, this strategy should not be aggressive in order to avoid fan attendance refusal and reduction of fan community in general due to unaffordable prices. The key is optimizing ticketing strategy and creating different packages for fans and spectators, selling season tickets to fans which will guarantee revenue upfront, inflate ticket prices for occasional visitors and rival fans. Also to increase gains from the stadium to optimize its usage by renting for different events.

Commercial and others

Commercial revenue usually is understood as money earned from sponsorship contracts, merchandising sales, and digital content that club creates and stadium tours. Sales from sponsorship rights and rents of locations are usually referred to the logos of businesses willing to promote their brand that match with the club brand. It increases their own brand awareness and sales respectively. Logos are placed on the jerseys, training kits, facilities, banners on the stadium and training centers. Amounts of money received from sponsorship deals are huge and these figures are most significant in this revenue category.

Merchandise sales are mainly referred to the products or services directed to the customers (fans etc.) or trading partners via retail or wholesales stores with the club and/or player brand affixed to the product. They may be sold through on-site stores at the stadium, overseas, online and via franchises. This is also a significant share of the club’ revenue portfolio. For example, Neymar transfer in 2018 cost 222 million euro for PSG to buy him. Due to the fact that news and media highlighted this deal PSG in the next week returned that money in jersey sales with his name. The same situation happened back in 2010, exactly one year after Cristiano Ronaldo moved to the Spanish club, a Spanish daily newspaper published a report that sales of Jersey to Cristiano Ronaldo allowed the club to recover the amount spent on his return from Manchester United.

Digital and other sources are also important for the club as its digital footprint in social media have increased attention from more and more fans all over the world.

Real Madrid indicators and comparison with FC Zenith

For the past five consecutive years, Real Madrid shows quite impressive results in performance on the pitch as well as financial management and sustainability. Winning the UEFA Champions league and ranking 3rd in La Liga resulted in high attention of the spectators all over the world and made the club to be the first to earn more than 200 million euros in the broadcast.

According to the Deloitte report in 2013/14 season, its total revenue was 549.5 million euros. With 42 % of commercial revenue which is 231.5 million euro, 21 % or 113.8 million eur in matchday revenue and 37 % or 204.2 million euros in broadcasting revenue respectively. This figure shows that the revenue portfolio of Real Madrid was already diversified with a slight shift to the commercial revenues and according to report matchday revenue fell due to the planned redevelopment of their stadium. Switching to the numbers of 2018 according to clubs’ annual report it is possible to notice that overall revenue increased by almost 198 million euros and totaled almost 748 million eur which comprises growth of 36 %. Whereas match day revenue totaled to 275 million eur commercial revenue 295 million euros and broadcasting revenue was 178.4 million eur It is obvious that constant growth of the clubs’ revenues proves the efficiency of management and maximization of net profit. So the revenue profile stays almost the same compared to 2014 numbers which signal us about well-diversified revenue portfolio. Net debt of the club on June 30, 2018, was -107 million euro. This means that the club has a positive cash flow of 107 million euro and actually represents net liquidity. It is “the sum of cash and cash equivalents and receivables from transfers, exceeds the amounts payable on investments, bank borrowings, and advances”.(Real Madrid report 2018) The Club managed to have negative net debt for the third year in a row, The improvement in net liquidity compared was 97 million, the largest debt reduction achieved by the Club in the last 15 years (Real Madrid report 2018)

Now it is necessary to switch to some numbers of FC Zenith Most of the clubs’ main income is sponsorship money in Russian Football Premier League. It is clear that in this situation, the club is trying not to advertise their income. Therefore, it is almost impossible to find the latest data. For the comparison reasons reports for 2015/2016 season of FC Zenith and Real Madrid will be used due to unavailability of recent data of FC Zenith. At the end of the season 2015/16 St. Petersburg Zenith was in the Deloitte report. However, it is noticeable that there is a great difference between these two clubs in the way how they are managed and the difference in their revenue portfolio is huge. Using Real Madrid diversified revenue portfolio as a benchmark we can compare these two clubs and get the following results. Commercial revenue at that time was 145.8 million euro which comprised 74 % of total revenues. Matchday 10.3 million which equals 5 % and broadcast – 40.4 m and equals to 21 %. As it is possible to notice

Conclusion

Having looked at and compared financial statements of Real Madrid and FC Zenith St. Petersburg, it’s clear that money poorly managed in FC Zenith. Lack of sustainable income sources and contingent revenue portfolio where sponsorship money revenues prevail above all puts this club in financial risks. Best way to reduce this impact is to develop Russian Football Premier League industry in general. Using the benchmark of Real Madrid it is possible to maximize and create new revenue sources for future sustainability and profits. Madridэs focus on smart investments in players and branding has allowed them to re-balance their cash flow and drastically decrease their debt and debt to revenue ratio. This fact provided growth in revenue and they managed to keep this negative debt indicator for three consecutive years. Madrid is now basically self-sustaining which means revenue is higher than losses and expenses while FC Zenith striving to survive among top 30 richest clubs in Deloitte money league.

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Costs and main revenue sources of the successful football club. (2019, Dec 06). Retrieved from http://studymoose.com/costs-and-main-revenue-sources-of-the-successful-football-club-essay

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