Arsenal’s financials: it’s all about the wage bill

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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20 Replies to “Arsenal’s financials: it’s all about the wage bill”

  1. I have just gone back over the two previous articles which I had missed – Sorry, this is wildly ‘off topic’, I want to just say that you are doing a fantastic job with the ref reviews. I will also repeat that I believe this is how they should review themsleves – honestly and openly. From a personal observation, I think the reviews had an influence on some games this season, and it will come as no surprise if your new data backs this up?
    As to the above article, it makes better sense than the glib comments that Arsenal are ‘a selling club’?
    The big question will be can we keep our talented young players if/when they get more established. Silverware will help of course.
    Great job, cheers

  2. So long as you differentiate between ‘self-sustaining’ and ‘fan-funded models’ I look forward to your article.

    If the shareholders put £100m in as equity and don’t expect a dividend, that is self-sustaining and also fine for the FFP rules.

    Remember the TV money coming in too with the increased BT/Sky deal, that will help the wages/revenue ratio.

  3. Without being an authority on finances, I leave that to those who know, I question two things. The selecton of players and the contracts they are offered. Make a mistake in either or both of these areas and the result is that dreaded word `deadwood`.

  4. Not wishing to nitpick, Phil, but why should our current shirt deal be less advantageous than Liverpool’s?

  5. The wage bill may be creeping up as you suggest. But the problem being is that players of lesser ability are being paid too much money. We have players like Diaby on wages that do not merit their overall contribution to the team. The club have got to start offering realistic wages based on how good a player is. Not throwing money at a squad player who will only make the team occasionally. Also the club should not bank on future revenues. If we are not successful on the pitch, who will be prepared to sponsor the team?

  6. @nicky:

    Swissramble actually has quite an extensive article called “Arsenal finances – 21 questions”. Leaving the details aside, the reason for Arsenal’s revenue gap compared to other top clubs is that when we built the Emirates we had to secure long-term deals to cover our debt. The deals were considered good/very good at that time, but that was 7 years ago, and things escalated dramaticaly since then.

  7. The other key point to make about wages is that they have been shown in the past to correlate almost exactly with league position. That’s why Liverpool sacked Dalgleish and why Chelsea took so long to confirm Di Matteo as manager (despite winning the Champions League). They both under performed badly on the wages v EPL position equation.
    Wenger over performs each and every year and, as the proportion of American owned clubs increases (they only understand the stats – see Moneyball) this performance will be seen as more and more valuable.
    Based on that long term historical analysis Arsenals increasing wage bill (and it’s position relative to that of other clubs who need to hold theirs in check in order to accord with FFP) should lead to Arsenal moving closer and closer to the top of the league at seasons end.
    But that all depends on the past being replicated in the future and on FFP having the effect that Arsenal hope it does.

  8. Thanks for this article Phil.

    It gives a clearer insight in some things. some people just shout: 30M profit (or whatever the correct amount)??? SPEND IT!!!

    Wish it was that simple. It surely isn’t. (Zenit scenario, FFP,…)

    Once the profit is spend on one player and imagine he fails there is nothing left. So I sure back the board on being very careful with the way they spend the money.

  9. Stuart,
    so we should by now offer Wilshere a new contract of 10.000£ a week. After all he hasn’t made the team for more than a year.

    I know you will now say that this should not be the case for Wilshere…but do you feel you know more about the players than the manager and the training staff?

    You name Diaby, you could also have named Van Persie. Both have had times when thy only made the squad on occasions.

    The fact that the French manager waited very long to see if Diaby would be fit to take to the Euro2012 is telling me that the managers know a bit more than we do. Just imagine the French team would have taken Diaby to the Euro2012 with him only playing less than 90 mins over the whole season!

    It is not that simple. You could declare Diaby deadwood. But another one could declare Wilshere deadwood. Or RVP, or Ramsey, or Vermaelen, Mertesacker..

    We would end up with all the players on 10.000 a week but I think none of the names I mentioned would be around any more.

  10. CB – your equity point is an interesting one and a big talking point from the AST/Red and White side of the debate. I’ll look at it in the article, no doubt.

    nicky – it’s a fair point, but Liverpool’s commercial operation is great – they make an absolute mint out if it. It’s basically a question of history and brand – I imagine we will overtake pretty soon unless they sort out their performance on the pitch and get back into the CL. In the short term though, I thought a conservative bet would be anticipating a deal near, but slightly less than that of the market leaders

  11. @nicky

    It would seem natural. However, as pointed out in the comments above, the reality is more complex than any of us imagines. Yes, we have outperformed teams like Liver?ool and Chel$ea for the past seasons, however imho Arsenal’s strength is in the business proposition more than brand value, for now. That’s where trophies are helpful, as their immediate consequence is exposure. They are not easy to get though, in this world skewed by sugar daddies, so increasing our worldwide visibility step by step is pretty much the only alternative left. It’s down to the commercials and marketing team now to exercise their creativity and bring more cash to the budget. I am confident that it can be done, but easy to say, from my outsider non-professional perspective. I’m sure this would be a very interesting question to ask Mr. Gazidis at his next fans’ meeting.

  12. Phil, I am so pleased you have obtained a new job, more suitable for your talents.

    IMVHO, the advance information is too sparse for my liking!

    You overlook the fact that, as at 31st May 2006, the monthly average number of employees was 312, as at 31st May 2011 the number had risen to 454. As the football season had ended, we can ignore the temporaries. At this stage, we do not know the monthly average number of employees for 31st May 2012.

    I have a spreadsheet for the Profit and Loss for The Arsenal, to show the differences for the pre-Emirates and current mid-Emirates.

    The Finance Review from Stuart Wisely, is far more knowledgeable than anything written by the self-styled “experts” on The Arsenal finances. Phil, if you will take a tip from me – Stuart Wiseley is well-named.

    A significant omission is obvious at the moment, compared to the last two printed issues of the Annual Financial Report.

  13. Quick question; at what wage/revenue ratio can teams buy trophies? ManC must have secured their title with 100% or more ratio, right?!

  14. I’d love to see players at Arsenal (and other top clubs) ranked by a cost per minute played ratio. Not that this would really tell us anything useful, but it would be fascinating to look at.

    Unfortunately this is an impossible ratio to actually calculate… we don’t ever really know what individual player’s wages are. There are rumors and reports in the media, but nothing is ever truly made public.

  15. notoverthehill – you make a good due diligence point. I didnt pick that up as I was writing out a quick article pre Sunday lunch so focused more on simply the wage numbers as opposed to going through the document with a fine tooth comb. As I said in the article, there are many who can do that better than I – I’m a big picture guy.

    I think you overstate the importance of the broader employee numbers though. They will definitely have an impact, and some of them will be the not badly at all paid new commercial staff since Gazidis came in, but I’m sure a simple bit of calculation will show that the big driver of the wage figure is the players, I’d wage 95%+ of the figure.

    A player earning 10k a week gets just over half a million a year – there won’t be many in our commercial team on that sort of money, and a couple of 10k/week additions will barely dent the financials.

    The growth in the wage figures is driven much more by the squad – we have the likes of Chamakh not even getting a start in the Carling Cup! Arshavin playing in the Carling cup where five years ago it would be an 18 year old. That’s testament to our squad depth but that comes with a price tag.

  16. docbrody – while not quite on those lines, I am planning to put together a data set of estimated Arsenal wages (with quality control coming from the excellent Untold commenters) and then see how that number compares to our actual wage bill.

    For all the talk of wage structure, we don’t half seem to spend a fair bit on wages!

  17. Phil, let us wait until we have the hard core figures with the printed version.

    I have pointed out to a certain professor at the University of Michigan, that his “plus 90% of the wages go to the players”, simply does not make any mathematical sense!

    BTW, Duff and Phelps have confirmed that for voting purposes HMRC claim is for — £98,426,217.22.

    The Arsenal were of course, up to the ears in Employee Benefit Trusts!

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