Untold Arsenal: Arsenal News. Supporting the Lord Wenger in all he does » The operating loss to end all operating losses. How Chelsea totally lost it

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The finances of the Premier League by Phil Gregory

Part 2:  Chelsea

Introduction:

This is part of a growing series of articles on the economics and finances of clubs in the Premier League.  If you haven’t already, I’d recommend you read the financial review I did of Arsenal here as in that I explained all of the terms and measures I’ll be talking about here.

And so, without further ado:

The playing staff

Since the departure of Mourinho, the club have consistently come in with around 83-85 points with a slight improvement in 09-10 to 86 points netting them the title this year. Chelsea have an old side, but they haven’t been getting any younger over the last few years, so unless the free-transfer departures hit them hard (unlikely, they were bit-part players) they will weigh in with around the same number of points for the coming season.

Turnover

The first thing that strikes me when I look at Chelsea’s accounts is the lack of breakdown of turnover from Matchday, Commercial or TV money.

This lack of transparency cannot be a good thing, and only limits analysis of the club. Turnover however has risen substantially, up to £190million in the 07-08 season, the most recent available from the club. This is an impressive figure, the third highest in the Premier League after Arsenal and Manchester United, especially impressive if you consider  the size of Stamford Bridge is only 42,000.

Undoubtedly this was driven by success on the pitch helping them collect fans both abroad and in England,  while pre season tours to the Far East and the USA  are not done for the sporting benefits. With the club’s TV takings fairly similar to Arsenal and Manchester United, we can see that they must be doing very well in commercial and matchday revenues, given they are keeping pace with United and us despite having a significantly smaller ground.

Reading between the lines, whether the club can expect further growth in turnover is questionable; an important question given they currently make a large loss. Without a figure in the accounts for their commercial revenue there’s not much to go on there so I can’t comment on their prospects in that regard.

Neither do I have a figure for matchday revenues, though there is some scope for analysis given we have attendance figures. The club’s  ability to boost matchday revenues is wholly dependent on to what extent the fans are willing to absorb ticket price increases.

Interestingly while season ticket prices have been frozen for the past four years, they have increased the prices this year by on average 8.5%. Their chief executive Ron Gourlay said in a statement that it was related to the UEFA proposals for financial fair play, so he’s either looking for a scapegoat for the fans to blame or the club are genuinely having to work hard to meet the criteria.

With attendances over 98% of capacity, it’s easy to see why the club are raising prices: anyone who doesn’t want to pay the extra will likely be replaced by someone who will. As long as attendances don’t fall by more than the 8.5% average price increase, matchday revenues will rise overall.

Plans for a new stadium are just talk at this moment in time so apart from further ticket price rises, the only real scope for boosting revenues would be through selling the naming rights for Stamford Bridge. This is unlikely to be a popular move and despite being another good revenue stream it won’t be enough on it’s own to change the current loss-making state of Chelsea.

Wages

The wage figures certainly make interesting reading. Wages grew by almost 30% between 06-07 and 08-09, a massive increase considering the relative low-key player acquisitions.

This led to them spending an enormous £1.89million on wages per league point gained in the 07-08 season. A partial explanation for this massive increase is the £23million pay-off to various coaches and staff that were dismissed during their  managerial turmoil in the period. Giving them the benefit of the doubt, the wage bill (assuming nobody is sacked  in the future) (stop laughing) would have been £137million, or a still-significant increase of 12%. In the accounts, they referred to these wage severance packages as “exceptional items”, but looking at the trend since Mourinho’s departure, they seem to be the rule rather than the exception.

The club may point to rising turnover (up from £165million to £190million) as a reason not to be worried by wage growth but we know better. Wages as a percentage of turnover rose from 73.9% to 84.5%, so wage growth is greater than revenue growth. That’s certainly a reason to worry: a figure of around 60% is generally perceived to be the upper limit beyond which a club is being reckless, so Chelsea have successfully moved into the realm of total insanity.

And that’s to say nothing of the fact that wages  could  rise a lot more than turnover in both the short and long terms. Given the age of the squad and what I perceive to be a lack of depth in a few positions since their free transfer departures, they are likely to need to strengthen in order to challenge next season which will only increase the wage bill, while there are the previously highlighted difficulties in regards to susbtantial long-term turnover growth.

Amortisation (writing down transfer fees over time)

Chelsea’s amortisation figure is on the decrease, falling from £65million to £57million which makes sense given their recent frugality in the transfer market with the total profit (you read that right) from player sales during the period 06-08 coming to around £30million.

If Chelsea want to be competitive in the coming years, expect this trend to be reversed. Given the release of in particular Ballack and Cole on frees,  the clubs first team is a little lighter, and is not getting any younger. Perhaps the highly expensive youth time set-up will start to reap some dividends, but this too seems unlikely with Slovakian Miroslav Stoch sold off despite an impressive loan spell with Steve McClaren’s FC Twente.

Call me old-fashioned, but if one wideman leaves on a free, and a younger player in the same position has an impressive spell in a title-winning side, you surely give the prospect a chance?

Bringing this back to amortisation, if Chelsea  want to raise the bar, they are going to have to spend and reverse much of the good work they have done in cutting expenditure recently. Can they manage it with the Financial Fair Play measures looming on he horizon? Over to you Chelsea FC.

The Operating Loss to end all operating losses

Finally, the operating loss was an eye-watering £58million or 40% of their entire turnover which should underline nicely the sheer size of that deficit. What was Greece’s budget deficit as a percentage of GDP (which is the country equivalent of turnover), 12-14%? I rest my case!

Fundamentally, the issue with Chelsea is financial doping. A club has money pumped into it to improve the squad at the cost of financial stability. The fans love it as long as the owner doesn’t walk away, but can an institution as old and improtant to the community as a football club be allowed to be the plaything of a billionaire? I’m undecided of what the solution is here, and hope to see some food for thought in the comments below.

Next up: Manchester United

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