As the football transfer window opens across Europe, clubs are working around the clock to attract top class players and renegotiate contracts to hold onto their brightest stars. This period, sometimes known as the ‘silly season’, is a time when tens millions of pounds can exchange hands in a matter of minutes.
But a leading financial adviser has warned clubs to act with caution and rein in player wages, which are spiraling out of control and creating unsustainable businesses.
Deloitte, which provides consulting services to several Premier League clubs, just released its latest report into the state of football finances. A key finding is that the Premier League’s wages-to-revenue ratio has risen to 70 per cent for the first time.
For most of the 2000s the ratio was 60 per cent and Deloitte warns that anything above the low 60s is dangerous for the long-term viability of a business. Deloitte, itself, has a wages-to-revenue ratio of 41 per cent.
The good news is that the increased operating costs are mostly being offset by increased club revenue. At a time of flat economic growth, football’s popularity has not waned, helping the sport remain a viable product.
Premier League club revenues increased by 12 per cent to £2.3bn, which is remarkable growth when you consider that in 1991/92 the collective revenue of England’s 92 professional clubs was £263m.
Revenue growth was driven by increases in broadcasting revenue (13 per cent) and growth in commercial revenues (18 per cent). The growth in broadcast revenue for clubs is due to the distribution of money generated from TV broadcasting rights. Overseas broadcasting rights more than doubled in the past year.
Despite all of the extra money coming into football clubs, it is exorbitant player salaries that are threatening their very future.
The Premier League’s wage bill soared by 14 per cent to 1.6bn, which is equivalent to 80 per cent of the increase in revenue.
Pay rises mostly come from the ‘Big Six’ clubs, although Manchester City (who spend £174m in annual wages) and Chelsea (£191m) are the major culprits helping to drive the inflation.
Manchester City, which spent more than £100m net on transfer fees, is already under the microscope of UEFA, European football’s governing body.
From the just completed 2011/2012 season, UEFA will be monitoring club finances as part of financial fair play rules that require all clubs competing in Europe to break even. In 2015, clubs will be assessed and punished if they do not comply. At present, only eight Premier League clubs reported pre-tax profits with Manchester City reporting the largest operating loss of £82m.
In the past decade, player wages have inflated to unsustainable levels at a time when many football supporters face pay freezes or cuts. If clubs do not take responsibility for controlling player salaries, then football authorities should consider regulation to cap it.
As most companies have had to adapt to much harsher economic conditions in recent years, the football industry can no longer afford to turn a blind eye.