Football clubs need to control transfer and wage inflation

The corona crisis is a wake-up call. Football transfers and wages have become excessive. Clubs need to attract skilled players, but they must monitor costs.

Manchester United is one of the financially strong clubs. But its share slide began before the Coronavirus and is a warning signal.

HARRY Gregg, the Northern Irish footballer who died last month, is best remembered as a hero. During Manchester United’s 1958 Munich air disaster, the brave goalkeeper not only rescued Bobby Charlton and other players but also saved a pregnant mother and daughter.

What is lesser-known, is that Gregg was transferred to Manchester United just two months before the tragedy. He left Doncaster Rovers for a fee of £23,500 – a record sum for a goalkeeper at the time. That is about £547,000 ($673,000) in today’s money.

If Gregg played today, the transfer fee would be very different. The current record for a goalkeeper is €80 million ($72 million). Chelsea paid the sum to Athletic Bilbao for Spanish goalkeeper Kepa Arrizabalaga. The club negotiated a seven-year contract with Arrizabalaga and agreed to an annual salary of £7.8 million ($9.6m).

Football, of course, has become more sophisticated and powerful in the six decades since Gregg was an active player. Nevertheless, the job remains largely the same; stop the ball from going over the goal line, and apply swift and shrewd tactics to kick or pass to players with openings to attack.

A mind-boggling Transfer Record

Arrizabalaga’s eye-watering deal is well below the all-time football transfer record of €222 million ($200m).

That was for Brazilian star forward Neymar, who moved from Barcelona to Paris Saint-Germain (PSG). Neymar is reportedly earning a remarkable €550,000 a week at PSG.

Qatar Sports Investments, a branch of the state-owned Qatar Investment Authority, owns PSG. This illustrates how super-rich owners have inflated football costs.

Bank of England’s cynical view

In comparing the massive pay-outs to clubs, players and their agents, the Bank of England (BOE) wryly observed that it was purely down to supply and demand.

“The demand for talented football players is high as they increase the team’s chances of winning titles,” the BOE stated. “Clubs have to compete for the best players by offering the highest wages. If a particular club offered lower wages, other clubs would simply outbid them. If people lost interest in football, clubs would not be able to make such high profits. The demand for players would drop and so would their wages”.

Football wage inflation and the role of agents

Statista estimates that on average English Premier League top annual salaries range from Tottenham Hotspur, £5 million and Liverpool, £6.9 million to Manchester United, £7.7 million and Manchester City, £8.7 million.

Mel Stein, president of the Association of Football Agents, estimates that the average wage of an EPL footballer is around £40,000 a week, or just over £2 million a year.

Average agent commissions are around 5%, but can be higher if the deal is complicated, he explained.

Fifa – football’s world governing body – has threatened to peg commissions. But agents threaten potential legal action on the grounds of alleged restraint of trade.

Broadcasting rights help pay for growing clubs’ costs

Transfer fees and wages are sky-high because the clubs are making more money than ever.

Since the EPL was formed in 1992, broadcasting rights’ hyperinflation has soared from £241 million in the early nineties to the current £9.2 billion local and international deals.

Over and above this revenue, clubs obtain money from sponsorship, memberships, ticket sales and merchandising. Clubs with super-rich owners – such as Manchester City and PSG – can easily outbid competitors and sign the best players.

Underperforming clubs caught in a vicious circle

Deloitte’s Sports Business Group estimates that on average, EPL player expenditure is as high as 60 per cent of club revenue. This places acute financial pressure on the less-profitable clubs at the bottom of the league. Pressure worsens if they are relegated to the lower divisions.

EPL clubs’ total gross expenditure in the January 2020 transfer window was about £230 million, according to Deloitte calculations. This compares with the January 2019 total of £180 million.

The clubs spent a total of £1.6 billion on transfers during the current 2019/20 season, 16 per cent lower than the record £1.9 billion in the 2017/18 season.

Clubs pay high wages for skill and performance but are borrowing players to control costs

“Clubs have become more focused on long-term financial stability,” said Tim Bridge, a Deloitte Sports Business Group director.

Transfer strategies have become “more agile”, he added. For example, clubs are “utilising loan transfers often with an option to buy”. They are also promoting local youth talent.

The so-called “Big Five” European leagues – the EPL, Serie A (Italy), Bundesliga (Germany), La Liga (Spain) and Ligue 1 (France) spent a record of some €5.5 billion in the summer of 2019.

“The wages that clubs pay their players is the best predictor of league performance,” Deloitte noted. “Better skills command a higher price.”

© Neil Behrmann— first published in The Business Times Singapore

 For entertainment and investment ideas, take a look at Neil’s books. They can easily be found via his author page on Amazon  https://www.amazon.co.uk/Neil-Behrmann/e/B005HA9E3M  

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