The Business of Football: The Economics Behind the Game

The Business of Football: The Economics Behind the Game

23 May 2023

Key Indicators

Index / Fund / Rate Start of Year Last week This Week % change YTD
Lunar BCI WW Flexible Fund 141.43 170.95 170.54 20.58%
JSE ALSI 73 049 77 126 77 126 5.58%
NASDAQ Composite 10 467 13 241 13 259 26.68%
S&P 500 3 840 4 282 4 299 11.95%
Prime Lending Rate 10,50% 11.75% 11.75% 11.90%
USD/ZAR 16,98 19.53 18.72 10.25%
EUR/ZAR 18,44 20.91 20.17 9.38%
Brent Crude ($’barrel) 85,95 76.24 74.98 -12.76%

Source: Iress

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The Business of Football: The Economics Behind the Game

From groceries to semiconductors to football, numerous businesses cater to the supply of goods and services for people. While some businesses offer essential products, others provide entertainment. Regardless of the nature of the goods or services, consumers need to pay for them. Sometimes these are directly, and other times these are indirectly. Football teams have a fascinating approach to generating revenue, and their expenses are also heavily skewed towards specific items.

Revenue

Football clubs earn their revenues in various ways such as: through branding rights, the transfer market (which is extremely difficult), and matchday tickets (normally a small percentage of total revenue). However, the main way of earinng an income, in football, is through leveraging their branding rights. They can do this through a number of ways:

  • Earning fees from TV rights that are negotiated by the unions to which they belong e.g. FA (Football Association), UEFA (Union of European Football Associations), and SAFA. These unions are responsible for negotiating with TV broadcasters, who in turn compensate the football clubs depending on the number of games they play in which are televised.
  • Clubs also sign deals with clothing companies like Nike, Adidas, and Puma, receiving either lump sum payments or a percentage of merchandise sales.
  • They also earn fees from advertising, either at their home stadium or as logos on their sportswear.

Within Branding rights: broadcasting rights is the biggest driver of revenue. For e.g. UEFA are set to distribute €2.032 billion to teams participating in the Champions League, Europa League, and Super Cup this season. And Manchester City, the recent Champions League winners, are expected to earn around €60 million from their Champions League campaign, alone.

Costs

Football clubs incur various costs, including salaries for staff such as players, coaches, and administrative personnel. Additionally, they are responsible for maintaining stadium infrastructure. Intangible assets (such as player contracts) also require impairment adjustments over the duration of the contract. In the case of Manchester City’s 2021/2022 season, their largest expense was wages, totalling £353 million, which accounted for 55% of their total operating expenses and encompassed all staff (including players) of the club. The second largest cost item was the impairment of intangible assets (22% of operating costs). This was primarily the re-assessment of the value of players’ contracts as their contract durations decrease over time. Some clubs, like Juventus, prefer to acquire players whose contracts are nearing expiration, avoiding the need to pay exorbitant fees to other clubs to buy the players out of their contracts.

Grander Scheme of Things

The eye-catching figures spent by football clubs on players do not provide an accurate representation of their financial size. Player salaries and transfer fees constitute a significant portion of their expenses. Despite the global broadcast of sports events and widespread fan support, football clubs do not generate as much revenue as other globally recognized businesses. For instance, during Manchester City’s 2021/2022 season, they earned £613 million in revenue and £42 million in profit. In comparison, Puma, Man City’s kit sponsor, recorded €8,456 million in revenue and €354 million in profits for their 2022 financial year.

Owners of football clubs often have deep pockets to be able to afford the investments required to make the club successful. Some do it to hopefully earn a decent return on their investments; while others, arguably, do it for ego.

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This roundup is prepared for the clients of Lunar Capital (Pty) Ltd. This roundup does not constitute financial advice and is generated for information purposes only.
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www.eastwave.co.za) on investing and the markets.

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