The Ashley Affair by David Donnelly
By David Donnelly
Tuesday 19 Apr 2011 08:46:00
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The football club you own has just been relegated from the lucrative Premier League, the wage bill is out of control, debt is spiralling and there is revolt within the playing staff. It is time to re-evaluate your business model and restructure operations. You ask yourself “What is our biggest expenditure? What cost control measures do we need to implement?” Ashley it is time to address that wage bill!

As soon as Newcastle United had been relegated, Ashley had a huge decision to make. Did he cut his losses and sell the club; or restructure, develop and implement a new business model that would see the club bounce back to the Premier League at the first attempt thus minimising any potential loss that would be incurred.

A simple rule for running a successful business is that if your expenditure is greater than your income then a loss is made, if your income is higher than your expenditure then you make a profit – hardly rocket science. The club was already in a poor financial position after years of mismanagement, therefore the drop down to the Championship had a huge effect on revenue. The club relies on television, match day and commercial revenue. In the season of relegation the club was still listed in the top 20 European clubs based on revenue.

Sky’s near monopoly on premier league football broadcast rights has seen television revenue grow exponentially over time, therefore it is not surprising that the club relied heavily on it. Although supported by the Premier League parachute payments after relegation, the club experienced a £23m drop in television revenue. Match day revenue also decreased with relegation, supporters are less loyal to an unsuccessful football team especially when there is an unpopular owner still at the helm. A fall in attendance means a fall in match day revenue. The third main revenue source is commercial, Adidas were disposed of as kit sponsors, there could be 2 reasons for that, firstly Puma came in with more money or Adidas wanted to reduce its sponsorship deal as there is less exposure in the Championship than the Premiership.

Prior to relegation 83% of the club’s revenue was spent on wages, a massive percentage that affects the ability of the club to run efficiently and allow for financing strategic development and sustainability. Footballer’s wages are astronomically high, therefore it is essential for any football club to have a wage structure in place (unless of course you are Man City!) in order to control spiralling costs and ensure that the club can be financially sustainable.

The previous business model implemented by Freddy Shepherd was unsustainable and led the club to the brink of financial collapse. Shepherd once said that he had to pay over the top wages in order to recruit talent good enough for Newcastle to compete. Albert Luque was given £85,000 a week! And it is exactly that type of mismanagement that left our club in financial ruin when Ashley took over. At the time of the club’s relegation to the Championship the wage bill was running at £71.1m, the sixth highest in the Premier League. Without Premier League television revenue, reduced match day income and astronomical wages, there would have to be big changes in order to starve off the realistic threat of administration.

I believe that Ashley made the right business decision to reduce wages as much as possible but not to the detriment of on field performance. An all out fire sale could have potentially seen the club miss out on promotion back to the Premier League and find itself in a similar position to Southampton or Charlton. Getting the right balance between reducing wages and retaining a sufficient number of key players was imperative to the success of this strategy. Another good decision was employing Chris Hughton; he already knew the nucleus of the squad and came at an exceptionally low cost compared to experienced managers. As it transpired the strategy was executed exactly as planned and after one season the club was back in the lucrative Premier League.

Next issue I will look at the procurement strategy that was implemented during the summer transfer window and whether the existing business model based on youth development and scouting of untapped talent would be sufficient to ensure that the club cemented its position in the Premier League.



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