Arsenal’s financials: it’s all about the wage bill « Untold Arsenal: Arsenal News. 800,000 visits last month
By Phil Gregory
Arsenal’s latest numbers are out and, while I won’t write up an extensive analysis of them here (I’m sure the excellent Swiss Ramble will do that much better than I would), I will pick out a couple of things that I think are the key things to note going forwards.
Starting off, the clear question on most peoples’ lips is “where does the money go?” Last summer we sold Nasri and Fabregas for big money, over £50m, and despite substantial outlays on the likes of Mertesacker, Arteta and Santos, we ended the window with a transfer surplus. We saw a similar situation this year: early on we splashed the cash on Giroud and Podoloski, but then that was more than covered by the departures of Van Persie and Song, so another profit was had over the window. Indeed since he was at the club, Arsene has roughly turned an overall profit on transfer dealings.
Given Arsenal football club is generally pretty profitable, you’d expect that we could afford to spend a little more in the transfer market and be able to bankroll the net spends that some fans argue would propel us to the “next level”.
Part of the reason for this is that Wenger tends to work very effectively in the transfer market: he buys good players cheaply, sells others at prices he can replace them for half of and then there are the likes of Wilshere and Gibbs coming through the academy which don’t cost a penny of transfers.
The likes of Koscielny and Vermaelen came in for very reasonable fees considering they are now seen as amongst the top defenders in the league – set piece defending against Chelsea aside – while Mertesacker’s start to this season has silenced some of the doubters who unfairly formed opinions on him based on his early games when he was still settling into the team and country. Certainly then, it is fair to say Wenger’s net transfer spends are low partly because he plays the market better than anyone out there.
The other side of the story though, is wages: Arsenal effectively subsidise their wage bill with the profits of the transfer dealing. The sweet spot for wages relative to turnover is 40-50%, as a club operating in this area can still generate a profit to cycle back into the club via transfer fees.
As long as your transfer buys don’t boost the wage bill too much, such a model is sustainable: the club’s business generates a profit, the profit becomes the transfer fund (boosted by any sales) and as long as wages don’t rise by more than revenue growth, you’ll have roughly the same level of profit to give you a new, sustainable transfer kitty.
Most readers will have picked out the key flaw in the above system: “as long as wages don’t rise by more than revenue growth”. This is the problem for football generally: clubs are fighting for the same pool of talent, everyone wants to win and improve their sides, so players’ wages spiral up as there are numerous bidders with more money than sense.
As more cash flows into the game, the problem of wage inflation becomes worse; first Sky’s money swept the game and boosted revenues and subsequently, player salaries. Since 2005 however, the Premier League has had clubs that can offer higher and higher wages without the equivalent rise in their revenues. First Chelsea came, then City entered the arena and the result has been huge wage inflation, a situation that will only get worse given this summer’s spending by PSG. As these clubs raise the bar, other players start revising their expectations and before you know it Wayne Rooney is on £200k a week.
This brings us back to the Arsenal. We want a self-sustaining model and, for such a model, the ideal would be to be operating in that wages being 40-50% of turnover. Yet the story for Arsenal has been of wages steadily creeping up relative to turnover: from 46% in 2009 to the now 60% for the 2011-12 period.
This is a serious watershed : some argue that 60% is the recommended upper limit for wages to turnover, though others take a slight less conservative figure of 70%. Either way, the story is clear: Arsenal’s transfer spending isn’t high because our wage spending is rising rapidly.
What’s most interesting is that the last time Arsenal let the wages creep up in such a dramatic fashion (to 65%), was prior to moving to the Emirates. In a nutshell, the club sensibly decided to let wages rise relative to turnover to keep top talent, knowing that the finances would right themselves once we moved into the Emirates.
What that suggests to me is that the club is doing something similar again; we’re letting the wages creep up in anticipation of future revenue gains though this time it is the commercial side of things. Sure, the 60% figure of the most recent results isn’t quite at the level of 2006′s 65%, but given the commercial revenues won’t be rising for another couple of years, further wage growth relative to turnover seems inevitable and, depending on exactly when the commercial revenues come in, we could see the ratio hitting 65-70% before the commercial payday comes in.
The question of how much money this commercial bonanza will bring in is an important one. In terms of global appeal, there is no reason Arsenal won’t be able to command a shirt deal not far off the likes of United and Liverpool, while the latest thing seems to be training kit sponsorship deals. Originally, the feeling was that the replacement stadium sponsor wouldn’t pay much more than the current Emirates deal based on concern than people would simply refer to the stadium as the Emirates out of habit but let’s be honest, who refers to the “City of Manchester” stadium anymore?
Whether this new influx of revenue will actually make much difference to the club depends on how philosophical you are. The club aren’t out to make money for shareholders like a normal company, as bottom line profits are recycled back into the club (shareholders do not take dividends), so the boost to revenue is going to go first and foremost on wages when contracts come up for renewal and then on transfers.
This is all well and good; it will consolidate Arsenal ahead of virtually all European clubs in terms of revenue, and allow us to compete on wages with all teams apart from those with wealthy backers or clubs like United that are simply rolling in dosh.
It’ll probably cement Arsenal in the top four and mean that the likes of Liverpool, Spurs, Everton and Newcastle are left simply praying that City or Chelsea’s backers up sticks and leave, Malaga style. Aside from that scenario, there is no realistic way clubs without external backers will be able to deal with the financial clout of the top clubs with their record commercial revenues, big stadiums and Champions League revenue.
In terms of trophies, it’ll be an interesting one. Financially, Arsenal will still be below the likes spending power of Barca, United, City and Bayern (etc), but on the domestic scene we will have few rivals who can realistically compete for that top four spot, unless they get a manager that can out-Arsene Arsene in the transfer window, and overcome revenue disadvantages with much greater efficiency in the transfer market.
Clearly the current squad’s depth suggests that Arsenal will be in a position to challenge on all fronts but given we’ll still be offering lower wages than the likes of Chelsea, City and United, there will still be question marks whether we will be able to secure the top talent and retain our stars as we have struggled to in recent times. That naturally has implications for us in terms of the league title.
So there you have it: significant wage growth that may offer an interesting insight into the club’s optimism regarding commercial revenue. The picture is not as positive as it may seem in terms of competing with the top sides – we will still be at a financial disadvantage – but it will allow us to pull away from other sides in the league and crucially, remain profitable and free of the whims of an external owner.
I’ll do a follow-up to this article based around why the self-sustaining model is the way to go. No promises on when it will be here as the new job is keeping me busy, but I’ll aim for the weekend.
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