The COVID-19 crisis has impacted most sectors and the football industry is no exception. For competition to resume safely, clearance of a number of logistical hurdles is required and it is clear that fixtures will be played behind closed doors for the foreseeable future. This will put many football clubs across the football pyramid in an extremely challenging economic situation.
Given the perceived wealth in football, it is all too easy to assume that football can throw money at the problems it faces. However, the running cost of being competitive is significant and this means that many clubs, including globally recognisable Premier League clubs, are having to think fast to tackle the combined impacts of the current suspension of fixtures and a prolonged period of uncertainty over future revenues.
When football does return, it is hoped that clubs will have the security of being able to retain advanced broadcast incomes and earn residual incomes for the season. However, full stadia and the return of key match-day income streams this season is implausible, and there is a growing consensus that this will continue into next season.
This will inevitably impact Premier League clubs, albeit they are mitigated to an extent by the fact that often 80%+ of their income is from broadcasters and not footfall driven. Harder hit will be the Championship, where broadcasting income is often less than 30% of total revenue, and FL1, FL2 and Women’s football, where it can be less than 10%.
What does this mean for football clubs?
The challenge for football clubs will be familiar to a lot of businesses right now; how to preserve cash, stay engaged with customers, and get the business ready for the post-lockdown transition period?
Football clubs may choose to utilise the financial levers and government initiatives that businesses in other sectors may use, but some of these are less relevant or bring with them their own problems. For example:
- At the elite level, public and media sentiment over the furloughing of non-playing staff has been quite apparent, and many clubs have chosen not access the scheme. Further down the football pyramid though, it was inevitable that clubs would need to utilise the government funding to manage their current financial situation;
- Furloughing players themselves – which in theory would yield the biggest cost saving – is not viable for clubs, but wage deferrals have been discussed and may be agreed at many clubs. However, clubs are aware that deferrals simply pass the problem further down the line. Deferrals give clubs some short-term relief but reimbursements will, for most, need to be made before revenues return to full pre-COVID-19 levels. It is understood that many European clubs’ players have agreed to wage cuts, and this may still be a course of action pursued by English clubs;
- Many clubs own their grounds and facilities, and therefore do not have money set aside for rent that could be reallocated were landlords to accommodate rent holidays;
- When it comes to working capital management – a mitigation most “normal” businesses would consider as a matter of course - many clubs are reticent about deferring supplier payments or pulling debtor receipts forward when it would be to the detriment of the local partners and fans that they rely upon;
- Turning to the banks for interest payment holidays would be viable, if clubs had unfettered access to debt in the first place. Government support mechanisms haven’t necessarily improved the funding landscape for clubs either. Loans need to meet stringent eligibility criteria and clubs need to be demonstrably commercially viable, which is not always the picture that historical financials present;
- Tax ‘time to pay’ arrangement and business rates reliefs are of course important, and have been largely utilised, but many clubs aren’t able to benefit fully. For example, the seasonality and phasing of incomes such as player sales and season tickets may mean that a VAT deferral isn’t coming at the most effective time for clubs.
In aggregate, the impact of the COVID-19 crisis is somewhat sector specific on account of exaggerated uncertainties. On the one hand, without a significant medical intervention, such as a readily available vaccine, mass-spectator events seem inconceivable in the short to medium-term. On the other hand, resumption of media incomes will provide urgent relief to football clubs, but even this is time-critical when competitions need to be concluded for broadcasting obligations to be fulfilled.
Notwithstanding the revenue considerations, football faces constraints in being able to meaningfully reduce costs when player contracts are, for many legal and commercial reasons, less flexible than spectators might expect. Further, the COVID-19 crisis has struck at a time of year when clubs’ cash reserves are seasonally low (between broadcast income tranches and in advance of season ticket and sponsorship renewals), which has left many with limited cash headroom.
On top of this, given the nature of the business model, much of the season’s income (including broadcasting, sponsorship and season tickets) has already been received up-front, but not yet earned. Only with some other form of value offering will key stakeholders – also feeling the pinch and/or pressure from shareholders – not want financial compensation for lost exposure. Many may also be weighing up their non-essential expenditure for future seasons, which points to reduced demand throughout that timeframe.
So what can clubs do?
It is worth remembering that clubs are in the business of competition and entertainment, the cost of which is significant. Clubs are under pressure from their many stakeholders to spend what they earn to stay competitive and win matches, and insightful budgeting and forecasting (in normal times anyway) allows them to do this with a relatively small contingency (allowing for promotion and relegation deltas of course). This has left many in a position without a pool of reserves built up that they can fall back on.
There are some clubs that will, of course, be able to rely on wealthy owners to provide cash injections and underwrite losses in this period. However, for many clubs, surviving this period will require a new financial game-plan. For some it will also require a run of very good form when then season resumes.
Football clubs need to work within the constraints they have and draw on the vast experience of their executives. Some mitigating actions may include:
- Rebuilding a robust business plan, including carefully planned and stress-tested financial forecasts which are flexible to the various options/scenarios ahead. This is essential, not only for immediate strategy, but for giving confidence to shareholders, lenders, governing bodies and other stakeholders who may have a role in ensuring the business is sustainable for the foreseeable future;
- Demonstrating a commitment from shareholders themselves. Auditors and the leagues may come to rely on this as statutory financial reporting and Profitability & Sustainability submission requirements come to pass;
- Scenario planning for the transfer window. Depending on liquidity in the market, selling players for their perceived fair market value may well be challenging and therefore not realise the cash contribution clubs had previously hoped for;
- Monetising the fan base in the new post-COVID world (fan zones, live feeds, drive-in-movie style broadcasts, etc). At the very least, clubs need to accelerate strategies to diversify their income streams. E-sports is an area very much in the spotlight at the moment.
- Value offerings for those broadcasters, sponsors and fans who have paid in advance for this season. Clubs need to deliver alternative value for money during a phased reintroduction, as well as in the intervening period. If games are to be played behind closed doors, broadcasters would arguably value the opportunity to broadcast all games if offered to them - there is certainly demand from spectators, and season ticket holders will appreciate tailored packages from their clubs;
- Ensuring general tax affairs are in order.HMRC have been systematically reviewing football clubs for some time and clubs will want to safeguard against unforeseen tax liabilities when ‘normal’ activities resume;
- Persisting with applications for government lending schemes. While banks’ own eligibility criteria makes applying for conventional bank loans difficult for football clubs, CBILS or CLBILS are not completely out of the question. Applications are considered on a case by case basis, and clubs are well advised to seek appropriate financial advice to ensure that, where possible, applications demonstrate adherence to government mandated eligibility criteria. Applicants need to act quickly. Government backed lending schemes are available at the moment, but may not be further down the line (perhaps when clubs need it most).
And what next?
While clubs are understandably focused on the immediate issues that they face, the impact of COVID-19 are likely to be felt long after competitive fixtures resume, and the landscape is ever-evolving. As incomes return, reliefs will fall away and whatever cost deferrals have been achieved will soon come to maturity.
Furthermore, without securing agreements for more prolonged reductions in costs, outgoings will return to historical levels quickly, whereas revenue streams may be depressed for a longer period.
Football’s ability to find its equilibrium has been tested before and will be tested now.
At the moment, clubs will have a keen focus on the short-term, most likely managing cash week-to-week or even day-to-day. With more clarity on what the return to football looks like expected over the coming days and weeks, there may be an opportunity to narrow down the scenarios and plan further ahead. However, football executives should be prepared to play to their strengths and be agile and innovative. Football clubs thrive by balancing the needs of their many stakeholders and delivering a premium product. Fundamentally, the ability to apply these principles to future seasons will be key to ongoing success.
We will be garnering further feedback from clubs about their strategies and priorities over the coming months ahead of our 2020 Annual Survey of Football Finance Directors. Our findings will be released late summer 2020.
View our COVID-19 Hub