Bids for Man Utd put industry under spotlight

Competitiveness between football clubs, says Stefan Szymanski of Tanaka Business School, leads to more business risk, leaving few clubs with the confidence to invest considerably for future profit.

Reuters UK
FEATURE-Bids for Man Utd put industry under spotlight
Wed Feb 23, 2005 1:00 AM GMT
 
London, Feb 23 (Reuters) - United States entrepreneur Malcolm Glazer's repeated bids for Manchester United highlight the club's financial success in a sector where a missed penalty can cost millions and sky-high wages hamper profitability. Profitable and debt-free, the 15-times English Premier League champions have succeeded where many other publicly listed clubs have failed: pleasing fans with trophies and shareholders with cash. "Football clubs do not control their destiny. It's a battle they fight out with competitors...and shares react according to the outcome in the park on a Saturday," said David Glen, a partner at PriceWaterhouseCoopers."Manchester United is an exception to this rule at the moment."

The world's richest soccer club made a 27.9-million-pound ($52.9-million) pretax profit in 2004. That might seem low compared to other mid-cap firms but a look at rival clubs helps to paint a rosy picture of the Red Devils. Premier League leaders Chelsea reported an annual 88-million-pound pretax loss in January, and Newcastle United posted a 3.4-percent drop in annual pretax profit to 4.2 million pounds after a missed penalty denied them a Champions League spot. Germany's former European champions Borussia Dortmund, who posted a 67.6-million-euro ($88.3-million) pretax loss in 2004, said last week financial problems were threatening their existence.
BECKHAM APPEAL

So why are Manchester United successful? One reason, analysts say, was the exploitation of the club's global brand during the 1990s, with players such as David Beckham among the squad, allowing them to tap into Asian markets through pre-season tours and sales of club products.

"Manchester United have built a global brand over the last 50 years. This gave them various income resources from commercial activities," said Peter Ashworth, analyst at brokerage Charles Stanley.Boosting commercial and television revenues had helped the club to run a debt-free business, which remained the key difference between them and their rivals, Ashworth said.

The turnaround for the club came with a spending spree that brought players such as Eric Cantona and Paul Ince who helped the team to clinch the Premier League title in 1993, their first in a quarter of century.

Chelsea want to emulate that success: spending some 250 million pounds under the ownership of Russian billionaire Roman Abramovich in the hope that silverware will help them to break even in 2010. In soccer, though, investment does not necessarily mean profit.Heavy spending sent Leeds United to the Champions League semi-finals in 2001. But debts exceeding 100 million pounds forced the club to sell all their big-name players -- the first step on a road that led them to the second division.

GREATER RISK

The introduction of the European Champions League and the English Premier League meant that clubs needed to invest more to garner the lion's share of television revenues. Such competitiveness, says Stefan Szymanski, economics professor at the Tanaka business school, leads to more business risk, leaving few clubs with the confidence to invest considerably for future profits.

"One of the things that erodes profit is competition, and it arises in soccer because of relegation and promotion," said Szymanski, co-author of a book entitled "Winners and Losers: the Business Strategy of Football."

"In the NFL (American national football league) if you are having a bad season you give up (investing) because there is no relegation, but a soccer club can't afford this because it can lead to relegation, which is disastrous."

Arsenal, who are listed on the London third-tier share market Ofex, are learning the trick, patiently building up on-field success to develop a global brand and increase popularity.

The Gunners, who have won three Premier League titles since the 1997/98 season, signed a 100-million-pound sponsorship deal with Emirates Airlines in October and are planning a move to a 60,000-seat stadium to cash in on better attendance.

If more clubs followed United's path and made more money going into new markets to invest more in new players and grounds, how much profit would be left for everyone to share?

Not much, said Szymanski, adding: "The competitive process could erode their advantage, which means that the one who had the advantage stops making money."