The Decision Making Process Behind the Choice of Emirates Stadium (Il processo decisionale alla base...

8/11/2019 The Decision Making Process Behind the Choice of Emirates Stadium (Il processo decisionale alla base della scelta

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Universit della Svizzera Italiana, Lugano

Faculty of Economics

The Decision Making Process

Behind the Choice of

Emirates Stadium

Masters dissertation

Authors: Gianluca Allevi

Andrea DellOlio

Supervisor: Prof. Balazs Kovacs

Second Reader: Prof. Nikolaus Beck

Academic Year: 2013/2014

Submission Date: 12thof June 2014


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Victory through harmony

(Arsenal F.C. Motto)

Our aim is to be a leading European club

and once we get into the new stadium,

we will be in that position.

It is very income-generous to us.

(Keith Edelman Finanaging Director Arsenal F.C from 2000 to 2008)


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3.2 NEW HIGHBURY STADIUM: COST, EVALUATION OF REVENUES,

PROBABILITIESANDFUTUREESTIMATIONS 94

3.3 DECISIONTREES 98

3.3.1 First Scenario: Standard Decision Tree 98

3.3.2 Second Scenario: Refocus Of The Strategy To The Top 101

3.3.3 Third Scenario: Clubs Financial Troubles 103

CONCLUSIONS 105

REFERENCES 107

APPENDICES 110


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FIGURES, TABLES AND GRAPHS

FIGURES

Figure 1Porters Value Chain Analysis 34

Figure 2:Arsenals BCG Matrix 36

Figure 3: Revenue distribution by country (2009/10 season) 50

Figure 4: Key Stadium data of the top European Clubs ranked by stadium capacity

(season 2010/11) 51

Figure 5: Ownership map of stadiums in Europe in 2010 52

Figure 6:Revenue generation in the top European clubs stadium (2009/2010) 53

Figure 7:Development costs in recently built stadium 55

Figure 8: Highbury and Emirates Map 58

Figure 9: Emirates Mendelows power/interest matrix 69

Figure 10: First Scenario: Standard Decision Tree 100

Figure 11: Second Scenario: Refocus of Strategy to the Top 102

Figure 12: Third Scenario: Arsenals Financial Troubles 104

TABLES

Table 1: Revenues and Wages of Five Major Leagues 18

Table 2: Property segment from 2002/2003 to 2009/2010 64

Table 3:Revenues from Match-day Tickets 74

Table 4: Revenues from Match-day Tickets 83

Table 5:Ratio between Differential Revenues and Constructions Investment 84

Table 6:Emirates Season Attendances, 2006-2013 89

Table 7: Emirates Season Attendances and Main Drivers, 2006-2013 90

Table 8: Emirates Capacity, Annual Increase in Price, and Champions League

Qualifications Probability 91

Table 9: Estimation of High and Low Attendances Probabilities with or without

Champions League 92

Table 10:Emirates Forecasted Revenues until 2031 93


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Table 11:New Highbury Estimation of Season Attendances and Main Drivers, 2006-

2013 95

Table 12:New Highburys Forecasted Revenues until 2031 96

Table 13: Juventus Stadium Data, Ratios, and Probabilities. 97

Table 14:Arsenal F.C. Income Statement 110

Table 15:Arsenal F.C.Balance Sheet 111

Table 16:Arsenal F.C. Cash Flow 112

Table 17:Estimated Revenues per Match 113

Table 18:Emirates Forecasted Revenues until 2031 (Second Scenario) 114

Table 19:New Highburys Forecasted Revenues until 2031 (Second Scenario) 115

Table 20:Emirates Forecasted Revenues until 2031 (Third Scenario) 116

Table 21:New Highburys Forecasted Revenues until 2031 (Third Scenario) 117

GRAPHS

Graph 1. Revenues trend 2011-2013 39

Graph 2: Profits trend 2011-2013 41

Graph 3: EBIT trend 2011-2013 42

Graph 4: Current and Quick Ratio 43

Graph 5:Debtor Collection Period; Stock Holding Period, Creditor Collection

Period, and Working Capital Cycle. 44

Graph 6: Operating Cash Flow 46

Graph 7: Free Cash Flow 47

Graph 8: Financing Cash Flow 47

Graph 9: Property segment from 2002/2003 to 2009/2010 64Graph 10: Revenues from Match-day Tickets 75

Graph 11: Revenues from Match-day Tickets 83


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ACKNOWLEDGEMENTS

For us, this thesis is not a conclusion, but a starting point. The road to the

achievement of this goal has been hard and, often, uphill. We have been through

many difficult moments. For this reason, we would like to thank the people who have

always believed in us and accompanied us through this arduous, but wonderful

experience.

First of all, I would like to thank my travel mate, Dello, with whom I had an

amazing time, full of both fun and work. A classmate who became a brother.

Then, I would like to thank our relator, Professor Balazs Kovacs, who has been

always willing and ready to help us when we needed, both during the assembling of

this thesis and during his academic courses. A special thank also to Professor, and

Director of the Master of Management, Nikolaus Beck, who has kindly agreed to act

as second reader for our thesis.

A great thank to my parents, Daniele and Arianna; my sisters, Giada and Chiara; my

eight nephews, Rebecca, Blu, Anthea, Mos, Penelope, Ludovica, Agnese and

Virginia; my brothers in law, Andrea e Simone and my grandmothers, Nonna Marisa

and Nonna Chicca. They have always been able to give me comfort during those

times of troubles, by supporting me and helping me to never give up.

I would like to thank also Bordi, Nespo, Cielo, Michi and Jack, who are not just

classmates for me, but real friends, who have always been able to give me moments

of joy and happiness. Thank also to our University Fooball Team, Hajduk

Bancariellese.

Finally, but not least, I would like to thank the friends of a lifetime, those with whom

I share passions and fun, those that will not leave me ever. Thanks to Giulia, Gila,

Teino, Neno, Beppe, Teo, Mile, Cappa, Satu, Falco and Pech.

Gianluca


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First of all I would like to thank the person who shared this journey with me and

with whom I am proud to end my academic path, Gianluca. I will never forget all

these days spent together at work, which contributed to the development of our great

friendship that will bind us forever.

I would like to express my special appreciation and thanks to my relator, Professor

Kovacs. Without his guidance and consistent support this thesis would not have been

possible. I am most grateful to Professor Beck, for his extreme kindness and

willingness to act as a second reader and for his teachings, which have been very

useful in the drafting of this paper.

I am deeply grateful to my parents, Enzo and Rosanna, for their endless love,

support and encouragement throughout my life. Thank you for giving me the strength

to reach for the stars and chase my dreams.

I would like to express my gratitude to my Grandfather Riccardo. Even if you are no

longer with me, thank you, because in your own way you taught me many things.

Words cannot express how grateful I am to my girlfriend Giulia. Thanks for being

always next to me. Your support and contribution have been crucial. You are my

tornado, but also my shore.

To my classmates, Miky, Bordi, Cielo, Nespo, Jack, Liuk and all the guys of the

Hajduk Bancariellese, thanks for the fun and support. This two amazing years and

the victory of two tournaments are memories that I will carry with me forever.

Finally but not least, I am most grateful to the friends with whom I travelled through

life: Treka, Liuk, Passa, Dani, Silvi, Ele, Gian, Dea, Diego, Pitt, Franci and Fuga.

They have always supported me and helped me to strive towards my goal.

Andrea


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ABSTRACT

This research deals with the choice, made by Arsenal F.C., of building a new stadium

in a different area from where its home ground was. Our aim is to understand if, from

a financial perspective, this was the best decision that the Club could take or if the

reconstruction of a new structure on the same foundations of the old Highbury

Stadium would have been a better alternative. To make the analysis easier, we are

going to pretend that a new stadium has been built in the same place of the old one,

with the name of New Highbury. Concerning this scenario, we are going to make a

useful comparison with the new Juventus Stadium, which was built in the same

area of the old Delle Alpi. The research question we aim to answer is the

following:

Is the choice of building the new stadium in a new area, transforming the old one in

apartments, the best solution? Or the best decision would be the reconstruction of

the new stadium on the same foundations of the old Highbury?

In order to understand the underlying strategy of Arsenal as a whole, we start with a

Managerial and Financial Analysis. As a matter of fact, our aim is to identify which

choice would be better, with respect to the research question, according to the

strategy used. Thanks to these analyses, we can say that Arsenals strategy is long-

term oriented and it is a solid and healthy club.

The core of the thesis is represented by the data analysis and the forecasts of the

Emirates Stadium, which has a capacity of 60.335 seats, and the potential New

Highbury Stadium, with a maximum capacity of 48.000 seats. Through the use of

TreePlan Excel Tool, we developed three different scenarios in order to answer to

our initial purpose. The first scenario is the Standard one, in which we took into

consideration the actual strategy utilized by Arsenal. The results of this scenario

seem to indicate that the choice of building the new stadium in a different area was

the right one. The second situation that we simulated is about a possible refocusing

towards the top in strategy, by following the Manchester Uniteds model, and the


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result is the same as the previous one. Thus, building the Emirates has proven to be

the best solution. The last scenario concerns a possible financial crisis of the Club,

which would force Arsenal to downsize its goals. In this case the outcome would be

the opposite and the New Highbury Stadium would have been the better alternative.

Nevertheless, as long as the important financial virtues of the Club are concerned,

the latter option seems unlikely to happen. Thus it could be concluded that the

Emirates choice was the right one.


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PREFACE

We have always been fascinated by football and this great passion moved us to be

involved not only on the field, but also concerning the managerial, economics and

financial issues connected to it. As we both feel the strong desire and dream to work

in this world, we therefore decided to attend a course of Sport Management, some

months ago, during which the idea of writing this Master Thesis born. We hope that

this could be the starting point for our future career development.

Nowadays in this business, one of the biggest challenges that each club can face is

the Financial Fair Play. A way to overturn this situation could be to build an owned

stadium.

The reason why we chose Arsenal F.C. derives from the fact that the new Emirates

Stadium was one of the first stadiums thought not only as the place to play, but also

as a commercial hub, where supporters are provided with a range of additional

facilities, such as restaurants, coffees, an official store, a commercial center and a

team museum. It is our view that all these amenities are used as a way to involve not

only football fans, but also families and women. This is the only means to make a

stadium a profitable investment.

Arsenal F.C. is proactive in this situation; in fact the last economic performances

show how the revenues are enhanced from an innovative management of the assets

of the Club, like a stadium seen as a resource.


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INTRODUCTION

Arsenal Football Club is one of the strongest teams in the English Premier League

and it is also recognized as one of the most important clubs all over the world. It was

founded in 1886 by some workers of the Royal Arsenal in Woolwich, a district in

southeast London, with the name of Dial Square, but during the years the name was

changed in Woolwich Arsenal. After the bankruptcy in 1913 Henry Norris bought

the Club and he decided to rename it Arsenal F.C.1.

Arsenal F.C is one of the oldest football teams in the world. As a consequence, its

trophy cabinet increased over the time up to win a great number of honours. Arsenal

Holdings plc is the company, which controls Arsenal F.C. Arsenal Holdings plc has

a total of 62.219 shares in issues that are owned by KSE UK Inc. (wholly owned by

Stan Kroenke) for 66,85% and by RED and WHITE SECURITIES LTD for

30.02%2.

We chose to analyze the Arsenals situation because it was one of the first clubs to

build a modern stadium, which is thought to produce income, and thus, it is

revenues-oriented. The pathway, used to meet the research questionand mentioned

in the Preface, begins with the managerial and financial overviews of Arsenal F.C.,

in order to better understand the overall situation of the Club. The subsequent stage

consists in an outline of the European stadiums context, to introduce the core of the

thesis, which is the Emirates Stadium and the decision making process.

In the first chapter we examine Arsenal from the managerial and financial point of

view. The framework of this part involves the English Football Industry Porters

Five Forces Analysis, the Arsenals strategy in comparison with its main domestic

competitors, the Arsenals SWOT Analysis compared with the one of Manchester

United, the Arsenals Value Chain Analysis and BCG Matrix. The second section

1Arsenal Website, www.arsenal.com/history/laying-the-foundations/laying-the-foundations-overview. Accessed, 27 February 2014

2Arsenal, Website, www.arsenal.com/the-club/corporate-info/the-arsenal-board. Accessed 27 February 2014


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deals with the financial analysis of the Club with Manchester United taken as a

benchmark.

The second chapter regards the description of the situation of the European stadiums,

useful to survey the main drivers of introits deriving from match-day. Subsequently,

we deepen the Arsenals context, firstly focusing on the move from the old Highbury

to the new Emirates Stadium and then describing carefully every Emirates feature,

such as its construction and its opening, its design, the transport, the benefits, the

stakeholders and the financing. We also include a Financial Evaluation, considering

both the direct and the indirect impact. Finally, we briefly analyze the Juventus

Stadium case in order to have a benchmark for the potential New Highbury Stadium,

which could have had similar characteristics.

The third chapter represents the essence of the issue and refers to the decision

making process, the data collection, the analysis and estimations (revenues, costs,

probabilities and projections) of the Emirates and the New Highbury. These data are

critical to build our decision tree by using the TreePlan Excel Tool. We develop

three scenarios that help us to find some potential answers to the research question,

trying to determine whether the Arsenals choice of building the Emirates has been

the right one.


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1 ARSENALS OVERVIEW

1.1ARSENAL F.C. MANAGERIAL ANALYSIS

We chose to start our managerial analysis from the study of the English Football

Industry. As mentioned by a Deloittes analysis, the Premier League Clubs revenue

are increasing up to 25% for the season 2013-2014, after a record of 2,5 billion in

2012-2013 (Deloitte, 2013: 7). As Dane Jones, a partner in the Sports Business

Group at Deloitte, observed:

Despite operating in a challenging economic environment, English club football's profile,

exposure and increasingly global interest have continued to drive revenue growth for the top

clubs" (Deloitte, 2013).

Premier Leagues revenues come from different kind of sources that are:

Match day, which accounts for 23%;

Broadcast, which accounts for 50%;

Commercial, which accounts for 27%.

An additional number of Financial Fair Play rules have also been inserted into the

Premier League, independently from those created by UEFA. These rules have been

developed with the purpose to focus on the respect of the costs to avoid an excessive

debt3. Table 1 shows the revenues and the wages, in euros, for the top 5 European

Leagues in the season 2011-2012:

#BBC Website, http://www.bbc.com/news/business-22766638. Accessed 1 March 2014


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Premier League, England 2,9 bln 2 bln (70% of revenues)

Bundesliga, Germany 1,9 bln 1 bln(51% of revenues)

La Liga, Spain 1,8 bln 1,1 bln (60% of revenues)

Serie A, Italy 1,6 bln 1,2 bln (75% of revenues)Ligue 1, France 1,1 bln 0,8 bln (74% of revenues)

Table 1: Revenues and Wages of the Five Major Leagues

Source: Deloitte Analysis, 2013

The most important requirement for the Financial Fair Play Regulation is the

UEFAs own break-even requirement, that will be applied for the first time to the

financial results of 2013-2014. In 2011-2012 the German Bundesliga and the Premier

League, has been the only two European Leagues to produce a positive operating

profit. The total operating profit of Premier League is 98 million, while the one of

the German Bundesliga 154 million. There are only 8 clubs in Premier League able

to generate a net profit4.

1.1.1 English Football Industry Porters Five Forces Analysis

An effective tool that can be used to make a more specific analysis of the industry is

the Porters Five Forces Analysis. We chose this framework in order to better

understand the competitive intensity and attractiveness of the English Football

Industry. In this way, we could find some possible strategies, which can make the

business more profitable.

Bargaining Power of Suppliers

The players themselves are the most important part of a football club. A football club

should be able to develop a team composed by a well-balanced roster of goalkeepers,

defenders, midfielders and forwards. Basically, a football team has several ways of

choosing its players. One of these possibilities is to purchase a player with the

$BBC Website, http://www.bbc.com/news/business-22766638. Accessed 1 March 2014


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desired features from another club (in the UK or worldwide). This option is very

expensive, due to the fact that with the contract in force the club should pay an

unreasonable fee to convince the other club to sell the player. The second and more

profitable way consists into creating a youth sector with a huge investment in young

talent and scouting. Therefore, the club acquires young football players for lower

costs and has the chance to train them to become possible future champions. Arsenal

F.C. is at the forefront in this policy.

To conclude, the Bargaining Power of Suppliers could be both high and low,

depending on the strategy chosen by the football club that looks for human capital.

Bargaining Power of Buyers

Concerning the customers, we can divide them into different categories. As far as

profits are concerned, sponsors and Television Companies are the most important, as

they provide a high stream of revenues that allow the clubs to buy top players. In

return, football teams have to guarantee to the sponsoring brand a great visibility, for

example by wearing its logo on the football jerseys or giving its name at a stadium.

As we see it, clubs should try to tie the sponsor to them with long-term contracts in

order to gain more money. With regard to the Television Companies, teams have to

ensure them the TV rights so that they broadcast day matches.

Considering the revenues, also the supporters should be considered as potential

purchasers, as they could buy tickets for the games or for stadium and museum tours,

football jerseys and additional facilities that can be found across the stadium or in the

eventual official stores. Each club should be able to create a loyal bond with the fans,

making them changing from being only occasional supporters to season ticket

holders.


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Given this evidence, it can be seen that the Bargaining Power of Buyers depends on

the brand of the club. The stronger the brand is, the lower is the bargaining power of

the buyers.

Threat Of New Entrants

Nowadays, entering in this industry could be extremely hard. This is mainly due to

high initial capital requirements, some government policies (such as taxation) and the

economies of scales (in terms of catchment area).

Regarding the initial capital requirements, we have to consider that major clubs need

large stadiums and new top players. Considering this, setting up a football club out of

nothing that is able to be competitive from the start seems to be impossible and this

is the reason why we have not taken into consideration this choice. As a matter of

fact, the richest tycoons are more inclined to buy teams that are not yet renowned,

but are established since a lot of time and have high potentialities of growing. In

order to reduce the stadiums costs, the new owner could build the new house in a

region far away from the city, in a non-metropolitan area. The main trouble stands in

the fact that supporters are not likely to accept this situation and, thus, the choice of

the location becomes very critical.

Also the government policies could affect the profitability of an investment in a

football team. This is principally due to the difference in taxation between different

countries. For example, Spanish clubs take advantage from the fiscal law that allows

them to pay high wages without weighing it down with a high taxation.

Concerning the economies of scales, they refer to the catchment area that means the

number of potential supporters who can follow the club, granting additional profits to

the team. In order to explain this issue in a better way, we decided to focus the

attention on the French case. Recently, two tycoons acquired PSG and Monaco. As

we all know, Paris is the biggest city in France and thus has a greater number of


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potential supporters in comparison to Monaco. For this reason, in terms of

merchandising and revenues from tickets, PSG is without any doubts more

profitable.

In conclusion, we could assume that the Entry Barriers are very high and this implies

that only few rich people can enter and be part of this world, thus the Threat of New

Entrants is very low.

Threat Of Substitute Products

First of all, we need to clarify that we are going to consider the match-day as the

main product that clubs can offer. Indeed, the only way to gain direct revenues for a

football club is selling the tickets to watch a match live. However, not all the

supporters are willing to pay the tickets fees, since they may not afford it or they

live too far away from the stadiums. If these fans do not want to lose the match, they

can watch it on the TV or on their mobile phones, tablets and PCs. This could be

considered as an advantage for the clubs, as broadcasters pay them the TV rights,

which grant additional revenues. Nonetheless, the problem for the teams is that in

this way a substitute product comes into the market, taking away a certain part of

direct revenues deriving from tickets.

The evidence seems to indicate that the Threat of Substitute Products is medium,

because on one hand TVs guarantee a high quality service by offering an excellent

view of the match, with also connections on the field edge and on the locker rooms.

However, on the other hand, the stadium gives to the supporter a particular feeling

that is definitely that cannot be experienced from the sofa.


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Rivalry Among Existing Firms

As we are analyzing the situation from the economic perspective, our study will

focus on the revenues produced by the loyalty of supporters that results into the

selling of tickets and merchandising. Rivals are the clubs that compete in the Premier

League and in the European Cups.

Supporters loyalty usually is very strong. Indeed, we suppose that if a person is fan

of certain team, he would not change it with another and, thus, rarely he would go to

watch another team playing. However, there are some exceptional reasons why

people may change their cheering, such as their moving to another area of the

country, excessive tickets prices and a low performance of the beloved team.

As a result, the Rivalry among Existing Firms could be enhanced, for the reasons we

mentioned above, it should be considered relatively low.

To summarize our Porters Five Forces Analysis on the English Football Industry,

we demonstrated that the Barriers to Entry are very high and, consequently, it is not

easy for new firms to penetrate the market. Nonetheless, with the right investments

and approaches, this industry could be very attractive. The best strategies that a firm

can pursue, in order to gain many profits and be competitive, are: focusing on young

talents and selling them when they reach the top; increasing match-day revenues and

signing the best sponsorship deals.

1.1.2 Arsenal F.C. and Main Domestic Competitors Strategy

In this section our aim is to describe the most important strategies of Arsenal and its

main domestic Competitors, which are Manchester United F.C., Manchester City

F.C., Chelsea F.C.. We are going to show them with respect to five different drivers:

Manager, Academy, Acquisition, Investment Strategy, and Stadium. The analysis

will focus on a comparison between Arsenals strategy and its Competitors in


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relation to each single driver. We will consider only Competitors with a crucial

feature concerning the driver analyzed.

Manager

Arsne Wenger is a French football manager, in charge at Arsenal F.C. since 1996.

The policy of Arsenal F.C. was trying to entrust the team to the right manager for a

long period of time, in order to provide continuity by focusing on the long-term.

Through to this decision, the Club put an exceptional authority in the hand of this

person, supporting him completely and fully. The reason that stands behind this

choice is due to the fact that Arsne uses an intellectual approach combined with

statistical tools in order to develop a sparkling game that has always been

appreciated by supporters. He is very skilled to develop abilities of youth players5.

Manchester United has always had the same philosophy of Arsenal. In fact, its

legendary former manager Sir Alex Ferguson has been in charge for 26 years until

season 2012/2013. His incredible self-confidence and resolution led the United to

win 28 trophies. He was also very careful to the academy and he had great

motivational and tactical skills. In particular, he was very good at managing players

expectations, lifting them up6.

Chelsea F.C., in contrast, has never had this mindset, but it has always depended on

the whims of its owner, Roman Abramovich, who was obsessed with the dream of

winning the UEFA Champions League. His short-term orientation brought him to

choose Jos Mourinho as Chelseas manager. Mourinho, differently from Wenger

and Ferguson, is very eccentric and squeezes the most out of his players. Moreover,

he is not very focused on discovering and training new young talents.

5Bleacher Report Website,www.bleacherreport.com/articles/368521-the-arsenal-football-club-conundrum. Accessed 4 March

2014

6Goal Website, www.goal.com/en/news/9/england/2013/09/11/4254424/sir-alex-ferguson-details-the-strategy-behind-26-years-

of. Accessed 4 March 2014


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The strategy of Arsenal is very similar to the one of Manchester United, but there are

some differences in the overall Clubs policies, which make the sports performance

of MU better. Nevertheless, Wengers approach has always perfectly reflected the

Arsenal Clubs philosophy, as he develops young talents and sells them at very high

prices when they reach the top.

Academy

Arsenal F.C. has always invested many resources in order to establish an excellent

youth players academy. First of all, the Club built advanced sport facilities, which

enables the youth players to train in the best conditions. Besides, the Team hired a

large networks of scouts with the intent of finding the most talented players all

around the world. Arsne Wenger continuously monitors the youth academy and

personally selects those who are ready for the first team7.

Manchester United uses the same strategy. As a matter of fact, it is the English club

that produces the highest number of players within the Europes top five leagues.

Thus, the focus on the youth academy of the MU is very significant, with 24 of its

academy athletes currently playing in the major European leagues. This is the great

result of the work made by both the Manager and the Club during the years. We can

compare this achievement with the Arsenals one, which, with 20 players, is the

second Club in England, with respect to this specific ranking8.

Analyzing Manchester City and Chelseas situation, it appears evident that they are

placed far behind Arsenal and United, as their policies do not really involve the

develop of young players. This context is very likely to produce a critical

competitive disadvantage, in the long-term.

'Arsenal Website, www.arsenal.com/academy. Accessed 4 March 2014

(Give Me Sport Website, www.givemesport.com/259483-manchester-united-best-youth-academy-in-england. Accessed 4

March 2014


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Acquisition

Concerning the acquisition process, Arsenal F.C. established its first team by

purchasing young professional players, but not yet famous, in order to make them

future champions, and, as we explained above, selecting the best talented players

from the youth academy.

Uniteds strategy is slightly different. It has certainly a great focus on the most

talented young athletes, but at the same time it mixed them with expensive purchases

of important and experienced players. This approach makes the good but unripe

players able to grow alongside of great champions and then replace them, without

being sold to other teams.

The policies of City and Chelsea, also in this case, are very different from the ones

implemented by Arsenal and United, as they are characterized by reckless

investments on already established players and without a well-defined technical

project. This attitude is proved by the huge amount of money expended in the

transfer campaign, which cost respectively !115 million for City and !78 million for

Chelsea9.

Investment Strategy

As mentioned before, according to Arsenal policy, the young players are sold when

they are at the highest level of their career and not when they are in decline, to earn

the maximum capital gain. Furthermore, we can say that this Club can very

effectively manage its distribution channel like its official stores, which sell the

merchandise of the team. In addition, Arsenal F.C. is also very smart in attracting the

most profitable sponsors (i.e. Fly Emirates and recently Puma)10.

)Calcio Serie A 1 Website, www.calcio-seriea1.blogspot.ch/2013/09/calciomercato-soldi-spesi-campagna-acquisti.html.

Accessed 4 March 2014

*+Arsenal Website, www.arsenal.com/the-club/sponsors-partners. Accessed 4 March 2014


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Concerning Manchester United, its main aim seems to be increasing the income and

the profits by extending the business a global level through the expansion of the

portfolio of sponsors, the intense focus on retail and merchandising and the

exploitation of the new opportunities offered on the Internet, mobiles and social

media. Another purpose is to create a complex strategy to raise its share of TV

rights11

. This strategy is more profitable than Arsenals one, even if they are similar,

because the brand equity and awareness of MU is higher.

Manchester City and Chelsea, instead, focused their investment policy on the

purchasing of players, whereas sponsorships come mainly from the sources related to

the ownerships (Roman Abramovich and Mansour bin Zayed Al Nahyan).

Stadium

Before 2006, Arsenal F.C.s home was the Highbury Stadium, since 1913. The

new Emirates Stadium was inaugurated just in 2006. The investment for the new

stadium cost 470 million and it was financed mainly by three kinds of sources:

The transfer of the naming rights of the stadium to the airline company

Emirates (about 150 million);

A long-term bank loan (expiration in 2031) for 260 million;

Revenues deriving from the real estate site of Highbury Square (680

apartments) for the remainder.

The building of the Emirates doubled Arsenal F.C.s revenues deriving from the

stadium for some different reasons:

Increasing of available seating, from 38.500 to 60.335, with a fill rate of

91%;

**Manchester United Website, http://ir.manutd.com/phoenix.zhtml?c=133303&p=irol-newsArticle&ID=1736054&highlight=.

Accessed 4 March 2014


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Increasing of the tickets costs, the highest between all the clubs of the

Premier League (this strategy can be pursued thanks to the extremely long

waiting list, which is about 37.000 persons every year);

The creation of 9.000 premium seats that represent 35% of stadiums

revenues themselves;

A very strong increase of the amount and quality of the services offered

within the stadium (catering, merchandising, stores and commercial center).

The Emirates is the second largest stadium in Premier League and one of the most

advanced stadiums in the world. It is provided with 450 HD LCD screens. Moreover,

in order to allow supporters to fully enjoy the wide range of services the stadiums

gates open 90 minutes before the match-day. It is also used as conference center or

for concerts. It has also been selected as the location for the Rugby World Cup in

201512.

A similar strategy about the stadium was implemented by Manchester City, through

the development of City of Manchester Stadium (named also Etihad Stadium). This

is the fifth largest stadium in Premier League, with a capacity of 47.805 seats. It is a

very modern stadium, which produces huge revenues. Besides, its development costs

were much lower than Emirates (112.000.000)13, due to its lower capacity and the

lower costs of real estate in Manchester compared to London. Manchester City and

Arsenal are the only two clubs in Premier League, which grant the naming rights of

their stadiums. Indeed, City earns an amount of 18,23 million per year through

them. However, this sponsorship generated many suspicions since it could be

conceived as a way to circumvent the Financial Fair Play, as the pockets of thesponsor firms and those of the owner of the Club are the same14.

*"Tifoso Bilanciato Website, www.tifosobilanciato.it/2012/01/29/stadi-di-calcio-lemirates-stadium-ed-il-suo-impatto-

sullarsenal-un-perfetto-case-study/. Accessed 4 March 2014

*#Wikipedia Website, www.en.wikipedia.org/wiki/City_of_Manchester_Stadium. Accessed 4 March 2014

*$Calcio e Finanza Website, www.calcioefinanza.it/naming-right-suggli-stadi-della-premier-possibili-incassi-per-oltre-60-

milioni/. Accessed 4 March 2014


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Conversely Manchester United, although it owns the Old Trafford that is a very

important stadium, does not grant any naming right. The reason stands in the fact that

the historical image of this Stadium would lead to potential lower income for the

sponsorship firm15. The Old Trafford is the greater stadium of the whole Premier

League with a capacity of 75.731 seats. It was built in 1909, but several

modernizations made throughout the years converted it into a very up-to-date

stadium16.

On this basis it may be inferred that the Arsenal strategy is well-structured and

balanced, very similar to the policy of Manchester United from many perspectives.

Nonetheless, although Arsenal is more focused on long-term and financial stability,

if really wants to boost its sport performances, it should try to emulate even more the

model pursued by the United, especially retaining its best players and increasing its

brand awareness.

1.1.3 Arsenals SWOT Analysis: a Comparison with Manchester

United

In the Strategy Analysis section we determined that a possible Arsenals future

approach could be a leap in quality upward. For this reason, we developed a SWOT

analysis of Arsenal in comparison with Manchester United, since this Club may be

its touchstone if Arsenal really feels the need for reaching this goal. We chose this

kind of analysis as it allows us to examine in depth strengths, weaknesses,

opportunities and threats, and develop different smart approaches in order to gain a

competitive advantage. We are now going to analyze in detail these four elements.

*%Calcio e Finanza Website, www.calcioefinanza.it/naming-right-suggli-stadi-della-premier-possibili-incassi-per-oltre-60-

milioni/. Accessed 4 March 2014

*&Wikipedia Website, www.en.wikipedia.org/wiki/Old_Trafford. Accessed 4 March 2014


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Arsenals Strengths

An important strength of Arsenal is its developed brand name that is very strong in

England and all over the world thanks to the fact that the Club was able to strengthen

it through marketing and merchandising. Concerning this perspective, the

construction of the Emirates Stadium, which is one of the most advanced stadiums in

the world, was particularly critical, as it enhanced the brand equity of the Club and

strengthened its supporters loyalty, not only in England but also in the rest of the

world. Therefore, the plant contributed to attract very important sponsor firms, such

as first of all Emirates Airline, but also Huawei, Nike and Puma starting from the

next season. This aim was also achieved through the great ability of a stable and

competent management in managing sponsors, which granted also a financial

stability in the short and long-term, with almost always-positive free cash flows.

Manchester Uniteds Strengths

The greatest strength of Manchester United is its extremely high brand awareness,

together with its incredible global recognition, which attracts a wide number of

sponsoring firms. As a matter of facts, the company concluded some agreements

with Audi, Nike, AON, AIG, Sharp, Vodafone, Airtel and Turkish Airlines. This is

also due to its superb marketing strategy, its global presence and its ability to

merchandise its products. Manchester United used this strategy in order to create a

strong brand loyalty between its supporters, which is supported by the fact of being

the most successful English football club. Its wonderful history is reflected by its

fantastic stadium, which is another strength of MU.

Arsenals Weaknesses

As long as weaknesses are concerned, we want to claim that the match-day tickets

are too expensive, the most high-priced of the Premier League. According to us, this


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policy is not fair at all, since the Team did not win any trophy during the last years

and its supporters are not stimulated by the strategy implemented by Arsenal

management, which is selling champions focusing on new young players. Moreover,

in order to finance the investments in the new stadium, the Club was forced to sign

long-term contracts with sponsors, penalizing commercial revenues. In this sense,

new trends are oriented towards the searching of new private investors and it is

emphasized by the fact that English football market reached the maturity phase.

Manchester Uniteds Weaknesses

Actually, Manchester United has not many weaknesses, but some of them are

fundamental. First of all, the Club faces the same problem as Arsenal, which is the

saturated football market. Nevertheless, the financial distress is the most serious

issue, because of the very high level of net debt, which in 2011/2012 was

366.000.00017. According to the Financial Times, in 2012 the Glazer Family, the

owners of Manchester United, had difficulties to refinance its debt18

. Moreover,

Bloomberg sustains that the MU has to face a big challenge, which is represented by

the high wages19.

Arsenals Opportunities

There are several opportunities that Arsenal can pursue. First of all, there are new

emergent football markets, such as China, India and United States, in which the

penetration could be very profitable. This purpose could be achieved also through an

increase in marketing and advertising campaign, in order to reach not only new

domestic supporters, but also to create loyalty in the farther countries. Concerning

*'The Guardian Website, www.theguardian.com/news/datablog/2013/apr/18/premier-league-club-accounts-debt. Accessed 7

March 2014

*(Financial Time Website, www.ft.com/intl/cms/s/0/65b68d60-ff1b-11de-a677-00144feab49a.html#axzz33Taut66e. Accessed

7 March 2014

*)Bloomberg Website, www.bloomberg.com/quote/MANU:US. Accessed 7 March 2014


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football segment, an important chance is represented by the creation of satellite

teams, which would be extremely useful to better develop the youngest and most

talented players. Furthermore, this strategy could help Arsenal to create coalitions

with other European important teams, in order to have preferential channels during

the negotiation periods. Besides, also the UEFA Financial Fair Play could be

conceived as a great opportunity, due to the fact that Arsenal has a strong financial

position compared to its main competitors.

Manchester Uniteds Opportunities

Generally, MUs opportunities are very similar to the Arsenals ones, especially

regarding the penetration of new emergent markets and the coalitions with other

clubs. Probably, an extremely important chance could be represented by the potential

expansion of its brand equity through more advertising and visibility. We cannot

assume the same in the matter of UEFA Financial Fair Play, as its debt position it is

not as strong as the one of Arsenal.

Arsenals Threats

There are some critical threats that Arsenal has to deal with. First of all, the Firms

strategy, which consists of selling the best players, could lead to a failure in reaching

the qualification in the Champions League and to a loss of interest from its

supporters. Nonetheless, the generational turnover in the Arsenal management could

put the leadership of the Club in the hands of less competent people, which may led

to future problems regarding the management of the players and the budget in an

efficient way. All these factors, combined with a challenging and dynamic

environment, could raise the possibility of financial risk.


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Manchester Uniteds Threats

The threats that Manchester United has to face are, in a certain way, different from

the ones of Arsenal, as MU competes with the richest clubs in the world, in order to

buy out the best players. The high level of the competition contributes to raise the

players transfer fees, and, thus, the financial debt, in which the Club incurs. The

increase in fees is accompanied by an increase in wages for all the other players,

which could lead to some problems between them and the management.

Through this SWOT analysis, we had demonstrated that the strategy implemented by

Arsenal is oriented towards the right direction, especially with respect to the

Financial Fair Play, which could be an important driver to exploit for the future

competitive advantage and to increase its stream of revenues. These profits may

derive from the new Stadium, but also from a careful policy of player management

which allows the Club to maintain a relatively restrained salary cap by focusing on

young and talented players and selling them at very high prices when they are at the

top of their careers. Furthermore, Arsenal can leverage on marketing and advertising

campaigns, by strengthening the brand awareness and increasing the brand equity.

However, a possible future development could involve a refocusing upwards in the

strategy about the sports performance. In order to make this scenario achievable, a

feasible solution may be to emulate the Manchester Uniteds model, which means

the retaining of the best players, the increase of the brand equity and being

competitive to the top levels. Nevertheless, to achieve this aim the Club should take

care of the financial position by finding additional sources of revenues, which are no

longer provided by player trading. For instance, they could come from the Stadium

or from new summer tournaments in emerging markets. In order to deeply

understand some possible future strategies we developed them in a crossed SWOT.


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Internal

External

Strengths Weaknesses

Opportunities

Penetrate new emerging

football markets (India, China

and USA) in order to

strengthen the Brand Name to

marketing and merchandising.

Financial stability in short and

long-term joint with positive

free cash flow and high quality

resources in order to fit with

UEFA Financial Fair play.

Importance of Emirates in

order to build a new supporter

base.

Stable and competent

management could allow the

creation of a long-term

coalition with other important

European clubs.

Penetrating new markets in

order to search better sponsors

given the great ability of the

club in managing them.

Increasing marketing and

advertising in order to support the

club strategy of high tickets cost.

Entering in new emerging markets

in order to overcome the maturity

stage faced by the English football

market, and at the same time

searching new private investors.

Fighting the tendency to not win

trophies and the club strategy to sell

its champions creating satelliteteams in order to improve the best

young players.

Signing long-term contract,

covering the investment in the new

stadium, in order to fit with UEFA

Financial Fair Play regulation.

Threats

Facing the challenging and

dynamic environment thanks

to the strong Brand Name

developed through

merchandising and marketing.

Strong revenues deriving from

the advanced Emirates

Stadium and from the ability

in managing sponsors can be

used in order to avoid the

financial risk due to the long-

term loan.

Relying on the high

supporters loyalty in order to

avoid to stop watching

matches although the selling

of the most important players.

Financial and management

stability, and the almost

always positive free cash

flows are important drivers in

order to avoid future problems

in to managing players and

budget, facing a challenging

and dynamic environment due

also to the financial risk.

Trying to win trophies and

qualifying to UEFA ChampionsLeague in order to avoid the

financial impact on the performance

of the Club.

Searching new ways to grow in the

English football market in order to

face the challenging and dynamic

environment.

Trying to focus on very strong new

young talents in order to overcome

the problem of selling the best and

most important players, risking not

qualifying to UEFA Champions

League.

Searching new private investors inorder to avoid future problems for

management, financial risk and

challenging and dynamic

environment.


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1.1.4 Arsenals Porters Value Chain Analysis

Now that we have developed some of the possible strategies that Arsenal could

implement, we would like to focus on another decision support tool, the Porters

Value Chain. This is a chain of activities, divided in primary and support activities,

which the Club performs in order to create and distribute its products (Michael

Porter, 1985).

Figure 1Porters Value Chain Analysis

Source: Manage 12 Website

Primary Activities

Inbound Logistics: it refers to the purchasing of players and the hiring and

training of the Clubs staff.

Operations: it concerns the creation of a direct TV Channel specifically for

the Club, which is named Arsenal TV. Furthermore, it includes the

establishment of a Membership Club that can also be as a Credit Card, in

order to connect also the financial activities.


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Outbound Logistics: it consists of Official Stores where Supporters can buy

Arsenal F.C.s gadgets. In this primary activity are involved both the selling

of the day and the season tickets.

Marketing and Sales: the main way to promote the Club through the

supporters is to create a brand image, through which their loyalty is

strengthened. Other fundamental points are: merchandising, the selling of TV

rights and the attraction of new and profitable sponsors.

Service: All the facilities offered by the Emirates Stadium (i.e. restaurants,

coffees, the commercial center and the Premium Service) are connected to

this activity. Another important service is the official website, where all the

official communications are written.

SUPPORT ACTIVITIES

Firm Infrastructure: there are two kinds of infrastructures: the Emirates

Stadium and the new luxury apartments arisen out of the old Highbury.

Human Resources Management: the two main sources for this category are

represented by the creation of a network of talent scouts around the world and

by the employment of expert managers, such as Arsne Wenger, who are able

to identify and acquiring the right players.Another fundamental source is the

youth players academy.

Technology: the selling of official gadgets is extended also to the web

through the Clubs official website, which exploits the new trend of e-

commerce. A statistical analysis of each match is also published online.

Procurement: is the ways in which are managed all the operations connected

to acquisitions of players, merchandising and sponsorships.

It is clear therefore that the Firm Infrastructure and the Human Resources

Management are the most critical activities, as they lead to sustainability of the

business in the long run. Consequently, the Stadium and the managerial abilities to

recruit and retain the best resources are important sources of revenues. As well as


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Marketing and Sales, since it may increase the brand equity and the money deriving

from TV rights.

1.1.5 Arsenals BCG Matrix

BCG Matrix is a strategic planning tool, which could be useful to study the business

opportunities in term of Relative Market Share and Market Growth Rate(Henderson,

Bruce D., 1968). In our analysis, we are not going not consider the product lines, but

we will focus on geographical markets: England, Asia, India and America.

Figure 2:Arsenals BCG Matrix

Source: Manage 12 Website and Personal Elaboration

England

In this moment the core market is the UK, which contributes for the 95%(Arsenal

Holdings plc, 2013) of the total revenues, including day-match, membership,

sponsorship and TV rights. Therefore, the English Market is the more profitable one,

which is sustaining the entire society, as the market share is very high. Nevertheless,


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it is a relatively mature market with a very low growth, due to the fact that it has an

established customer basis with low chance of change (supporters loyalty).

Asia

The Asian market is potentially the best one to penetrate, as its growth rate is the

highest. In this market the Arsenals position is very strong, due to the creation of

coalitions with some important Asian companies, such as Bodog, which operates in

the online gaming. This partnership has been arranged during the Asian pre-season

tour to Indonesia, Vietnam and Japan made by the Club in 201320. These features

make the increase in market share with a great Asian fan base and popularity post-

tour possible. Asia represents a strategically important region, since it gives the

opportunity to develop marketing initiatives and consumer promotions, by seeing the

team playing and by providing a further engagement for future perspectives.

India

The current population of India in 2014 is estimated to be 1.27 billion 21. Therefore,

thanks to the fact that a wealthy target audience pertaining to the middle class is

becoming increasingly interested in football, this industry has a great potential of

growth. The opportunities in this market are represented by the potential commercial

partnership with local companies, the chance to improve the Indian football and

strengthen the image of the Club through the Corporate Social Responsibility.

20

Arsenal Website, www.arsenal.com/news/news-archive/club-welcomes-bodog-as-official-partner. Accessed 11 March 201421India Online Website, www.indiaonlinepages.com/population/india-current-population.html. Accessed 11 March 2014


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The USA

The growth of the American market is fairly low, since the American customers are

keener on other sports: NBA, MLB, NFL and NHL. For this reason, the Major

League Soccer (MLS) is not really popular. Nevertheless, there are some ways that

may be used to enhance the number of the supporters, such as through pre-season

tournaments and Clubs megastores in the major cities.

Concluding the Arsenals BCG Matrix analysis, we can assume that the crucial

market is the England one, as it represents the most important source of revenues

with the greatest part of market share. However, we had demonstrated that the best

market opportunities can be exploited in Asia, since this area has a very high Market

Growth Rate, through partnerships and pre-season tournaments, which could be used

to increase supporters fan base.

1.1.6 Managerial Analysis Conclusions

At the end of this managerial analysis we can draw some conclusions. First of all, we

can affirm that Arsenal F.C. owns some critical assets, such as Management and the

Emirates Stadium, which in the long-term can lead to a competitive advantage. As a

matter of fact, its strategy is focused on the long-term, with financial solidity, and on

the development of young talented players, trying, at the same time, to remain

competitive on the field. Another central point is the exploitation of new

opportunities, such as emerging markets and a significant attention on marketing and

advertising in order to increase the supporters fan base and the brand equity.


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1.2 ARSENAL F.C. FINANCIAL ANALYSIS

In this section we are going to focus on the financial evaluation of Arsenal Holdings

plc, which is, as we mentioned above, the holding of Arsenal Football Club. There

are two main segments in which the holding operates: the football business and the

property segment (associated with the sales of the flats and the apartments of

Highbury Square, Drayton Park and Queensland Road). Even in this case, we found

necessary to perform a comparison with Manchester United. An important premise

we have to state is that Manchester United plc has not a property segment, but only a

football one. The aim of this analysis is to understand how strong and solid the

financial health of Arsenal is, with respect to the milestone of the English football.

1.2.1 Profitability Analysis

We are going to start from the Profitability Analysis, taking in consideration

Revenues and Profits before Taxes and Interests of Arsenal and Manchester United

from 2011 to 2013.

Graph 1: Revenues trend 2011-2013

Source: Annual Reports Arsenal Holdings plc, 2011-2013, and Manchester United plc, 2011-2013

-

50.000.000

100.000.000

150.000.000

200.000.000

250.000.000

300.000.000

350.000.000

400.000.000

2011 2012 2013

Arsenal vs. MU's Revenues

Arsenal's Revenues

Manchester United's

Revenues


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Graph 1 reveals that the revenues had a variable trend both for Arsenal and

Manchester United, due to the different impacts of the main drivers of income.

Concerning Arsenal, from 2011 to 2012 revenues had decreased, as the level of sales

activity in the property business was reduced, with Highbury Square almost

completely sold. The group commercial capabilities were enhanced in the recent

year, thanks to the huge investments of the owners, but the revenues deriving from

the commercial activities in 2012 were not enough to cover the decline into the

property segment. Whereas in 2013 the growth in the commercial revenues increased

and, at the same time, the property segment had a revival thanks to the construction

of new buildings, such as the three towers of market residential accommodations in

the northeast section of Queensland Road. For these reasons the total Group

Turnover raised from 243.013.000 in 2012 to 280.374.000 in 2013(Arsenal

Holdings plc, 2013).

Manchester Uniteds revenues were very high with 363.189.000 (Manchester

United plc, 2013) in 2013. The decrease of income from 2011 to 2012 was mainly

due to broadcasting and match-day revenues, whose decline exceeded the increase in

commercial revenues. The increase from 2012 to 2013 derived almost entirely from

the commercial boom, about 30% (Manchester United plc, 2013) of change from

the previous year (thanks to several new sponsorship partners).

By comparing the two clubs, it appears evident that Manchester Uniteds revenues

were higher than Arsenals one. As a matter of fact, although Arsenals revenues

were enhanced by the property segment, Manchester United could rely on a huge

brand awareness, which can attract much more sponsors.


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Graph 2: Profits trend 2011-2013

Source: Annual Reports Arsenal Holdings plc, 2011-2013

Graph 2 shows the EBIT of the Group for financial years 2011, 2012 and 2013. The

Blue bar represents the profit before interests and taxes, the red one the EBIT

without player trading and the green one the EBIT except the disposals of player

registrations.

As we can observe, the nature of the profits has dramatically changed in the last

years. As a matter of fact, in 2011, the influence of the property segment was very

high, involving the final phase of the sale of the apartments in Highbury Square. In

this year the player trading, which concerns all the income deriving from selling

players, the amortization of them and the costs of player registrations, had a negative

impact on the profit. This was due to the fact that increasing revenues deriving from

commercial and broadcasting partnership were not enough to cover the huge amount

of wage costs. Neither the profits of disposals coming from the player registrations,

which regard the transfer income of the sold players, were able to overcome these

expenses.

From 2012, the profits of the firm became more dependent on the player trading, in

particular on the profits deriving from disposals of player registrations. In fact, the

transfer window strictly influenced the increased profit before interests and taxes

-40.000.000

-30.000.000

-20.000.000

-10.000.000

-

10.000.000

20.000.000

30.000.000

40.000.000

50.000.000

60.000.000

2011 2012 2013

Arsenal's Profits Trend 2011-2013

Profits before taxes/

interests

Without player trading

Without disposal of

player registration


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with the major contributions coming from the sale of Cesc Fabregas, Samir Nasri and

Gael Clichy. This income made the Club able to cover the considerable increase in

the wage costs and the shortage of revenues deriving from property segment.

From the Chart is evident that in 2013 profits decreased. The main reasons stand in

the fact that the profit on disposals of player registrations (46.986.000) was lower

than the previous year (65.456.000)(Arsenal Holdings plc, 2013). Furthermore, the

costs of the player contracts were increased. The major contribution derived from the

transfer out of Robin Van Persie and Alex Song. In this year, the wages rose by

7,70% (Arsenal Holdings plc, 2013) and also the other operating expenses are

extremely large, representing a great share of total revenues. An important issue is

that the player trading did not deeply affect the profits, since, as we stated before, the

property segment had a new development. Nevertheless, EBIT is still positive, thus

profitability is a strength of the Club.

Graph 3: EBIT trend 2011-2013

Source: Annual Reports Arsenal Holdings plc 2011-2013, and Manchester United plc, 2011-2013

Considering MU, as you can see from Graph 3, EBIT sharply decreased, due to the

huge growth of operating expenses, especially in football player and staff

compensation. Instead, in 2013, the boost in commercial revenues was able to

-

10.000.000

20.000.000

30.000.000

40.000.000

50.000.000

60.000.000

70.000.000

2011 2012 2013

Arsenal vs. MU's Profits

Arsenal's Profits before

Taxes and Interests

Manchester United's

Profits before Taxes and

Interests


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compensate for this increase in costs. In general, during the contemplated period, we

can assume that Manchester Uniteds profits were higher than the Arsenals ones,

with the exception of 2012. As a matter of fact, in this year, Arsenal had an

extraordinary income due to some of its best players selling.

It must therefore be recognised that MU has a higher capacity to produce income,

although its costs are massive. The main reason of this ability is the awareness of the

club, which allows to generate an incredible stream of commercial revenues. On the

contrary, Arsenal is strictly dependent on the player trading, which granted a less

stable stream of revenues, as well as income deriving from the property segment.

1.2.2 Liquidity and Efficiency Analysis

We are going to undertake the Liquidity Analysis for both Arsenal and Manchester

United, in order to measure the availability of cash to repay the debts. We are going

to make the Efficiency Analysis only for Arsenal, to highlight the property segment,

which Manchester United does not have.

Graph 4: Current and Quick Ratio

Source: Annual Report Arsenal Holdings plc 2011-2013, and Manchester United plc 2011-2013

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

1,8

2

2011 2012 2013

Arsenal vs. MU's Current and Quick Ratio

Arsenal's Current Ratio

Arsenal's Quick Ratio

Manchester United's

Current Ratio

Manchester United's

Quick Ratio


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The Current Ratio measures ability of the company to pay short-term obligations

with short-term assets22. You can notice that this ratio is greater than 1 for Arsenal,

in all the three years that we analyzed, thus Arsenal Holdings plc had enough

liquidity to meet its current debt and its capital expenses. These results could be

reached also without taking into account their inventories. Therefore, we calculated

also the Quick Ratio, whose trend is illustrated in Graph 4. As you can see, also this

ratio is greater than 1. The values of the Current Ratio and the Quick Ratio did not

diverge too much; therefore, this demonstrates that the company is not dependent in

their inventories.

Manchester Uniteds situation was different. As a matter of fact, the Current Ratio

and the Quick Ratio were very low, smaller than 1. This means that Manchester

United had problems covering its short-term liabilities with cash. These values were

very similar and the explanation for this could be that MU does not have a property

segment and, thus, has a very small inventory.

Concluding, we can assert that Arsenal, in contrast to United, being able to cover its

debts, is always more cautious in the short-term.

Graph 5: Debtor Collection Period; Stock Holding Period, Creditor Collection Period, and Working Capital Cycle.

Source: Annual Report Arsenal Holdings plc 2011-2013

22Investopedia Website, www.investopedia.com/terms/c/currenratio.asp. Accessed 14 March 2014

0

10

20

30

40

50

60

70

80

DCP SHP CCP WCC

DCP, SHP, CCP and WCC

2011

2012

2013


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The Working Capital Cycle (WCC) measures the amount of time between the

moment in which a business starts to invest and the moment in which the business

get paid23

. Arsenal Holdings plc was not able to manage efficiently the cash flows.

As a matter of fact, WCC is quite high. In 2011 and 2012, this is mainly due to the

Stock Holding Period (SHP), that is an index, which measures the average time that

an item is on stock24

. The main part of the stocks consists of the property segment. In

2013, SHP dropped dramatically, as almost every property of Highbury Square had

been sold. In spite of this, WCC in 2013 was not reduced. This is due to the Debtor

Collection Period (DCP) that increased fivefold from 2011. DCP is an index that

measures the average time taken to collect trade debts25. The reasons of this growth

stand in the fact that clubs, which buy players from Arsenal F.C., are not able to pay

them in a short range of time. The Concerning Creditor Collection Period (CCP)26

,

which is the average time taken to pay off trade creditors, is relatively low because

Arsenal Holdings plc is quite fast in its payment. Nevertheless, in general, the trend

is negative and the Club is losing efficiency.

1.2.3

Cash Flow Analysis

A Cash Flow Analysis is needed as it describes the movement of the money in a

specific business during a certain period of time. It could be an important driver in

order to understand the long-term capacity to invest of the Clubs. Even in this case,

we decided to make a comparison between Arsenal and Manchester United.

23Divestopedia Website, www.divestopedia.com/definitio/1234/working-capital-cycle-wcc. Accessed 14 March 2014

24Investopedia Website, www.investopedia.com/terms/h/holdingperiod.asp. Accessed 14 March 2014

25Investopedia Website, www.en.wikipedia.org/wiki/Debtor_collection_period. Accessed 14 March 2014

26Wiki Answers Website, www.wiki.answers.com/Q/What_is_Creditors_Collection_Period?#slide=3. Accessed 14 March

2014


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Graph 6: Operating Cash Flow

Source: Annual Reports Arsenal Holdings plc, 2011-2013, and Manchester United plc, 2011-2013

You can notice from Graph 6 that Arsenals Operating Cash Flow is always positive,

thus there is enough cash-in, in order to cover cash outlays in the long run. The

reduction in 2012 was mainly due to the lack of sales in the property segment.

Whereas, in 2013 there was an increase. The principal reason of this growth lies in

the sales of the new buildings in the northeast section of Queensland Road. Property

segment plays a crucial role in the Arsenal ability to repay its liabilities.

Manchester Uniteds Operating Cash Flow from 2012 had a continuous increase due

mainly to the Commercial revenues that were primarily sponsorship firms, thus

money in. Manchester United was able to recover from the difficulties faced in 2011.

However, Arsenals position was more stable from the financial point of view.

-60.000.000

-40.000.000

-20.000.000

-

20.000.000

40.000.000

60.000.000

80.000.000

2011 2012 2013

Arsenal vs. MU's Operating CF

Arsenal's Operating Cash

Flow

Manchester United's

Operating Cash Flow


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Graph 7: Free Cash Flow


The Arsenals trend of Free Cash Flow follows the one of Operating Cash Flow, with

a strong decrease in 2012 (first negative FCF since 2004), and an increase in 2013.

Manchester United was very good into reduce damage, with a very little amount of

loss in 2013.

Graph 8: Financing Cash Flow


Concerning Financing Arsenals Cash Flow is almost constant and negative in all the

three years. The drop in Cash Flows in the last years is affecting the current capacity

-80.000.000

-60.000.000

-40.000.000

-20.000.000

-

20.000.000

40.000.000

60.000.000

2011 2012 2013

Arsenal vs. MU's Free CF

Arsenal's Free Cash

Flow

Manchester United's Free

Cash Flow

-50.000.000

-40.000.000

-30.000.000

-20.000.000

-10.000.000

-

10.000.000

20.000.000

30.000.000

40.000.000

50.000.000

60.000.000

2011 2012 2013

Arsenal vs. MU's Financing CF

Arsenal Financing Cash

Flow

Manchester United's

Financing Cash Flow


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to invest. Manchester Uniteds Financing Cash Flow in 2012 was negative due to the

repurchasing of senior secured notes in open market transaction and the payment of

dividends.

However, in general, Arsenal Holding plc has a strong financial position with

positive Cash Flows in order to cover liabilities, but it should develop new future

strategies in order not to comprise its future ability to invest. In contrast, Manchester

United has not the same solidity although it is trying to recover from this situation.

1.2.4

Arsenals Possible Future Prospect and Conclusion

Arsenal is becoming more influenced from the football segment, because the great

part of the apartments in Highbury Square is already sold. Nevertheless the property

segment is, however, critical. In fact the development of new constructions in the

surrounding area could lead to a further increase of revenues. Moreover, in order to

remain in a competitive position Arsenal has to manage in a smart way the

broadcasting and commercial revenues. In this direction Emirates and Arsenal F.C.

recently announced a new partnerships deal (150 million) for 5 years. They

renewed also the naming right agreement of the Stadium that will be called Emirates

Stadium until 2028. Concerning the technical sponsor Arsenal F.C. signed Puma as

replacement kit supplier for Nike with a 150 million five-years kit deal (the largest

in Premier League History).

The new FIFA Financial Fair Play regulation could strengthen the Clubs

competitive position, because it is a healthy society from the financial point of view

as opposed to other important Football Clubs (i.e. Manchester United). The main

risks stand in:

The sports performance of the team, concerning especially the participation

in the UEFA Champions League (granting visibility and huge revenues);


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The new football trend of private investors investing a lot of money into

clubs, increasing acquisition costs of players and wages. However, Financial

Fair Play regulation is going to mitigate this risk.

Concluding, we can say that, in the long-term, Arsenal has a good potential derived

from its financial solidity and strong bases for the development of enlightened future

strategies. However, a refocus in strategy toward the top, through the retaining of its

best players should be handled with some care. In fact, although could lead to better

sports performances, may also result into a position of financial distress that would

produce the opposite outcome. These are the basis on which we have decided to

develop the last two scenarios of the Decision Making Analysis.


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2 THE WAY TO EMIRATES STADIUM

Football business is a growing industry, even if it is now reaching the maturity phase.

The success of the clubs has attracted fans and sponsors, but, at the same time, it

created new challenges (i.e. the increased costs of players acquisitions, wages and

financial pressure due to the new FIFAs rules). For these reasons, the clubs have to

search new opportunities, in order to gain additional revenues. In this regard, a

critical role could be played by an owned stadium.

2.1 OVERVIEW OF EUROPEAN STADIUMS

As we mentioned in the first chapter, there are only few clubs, which have the power

to control the football market. 10% of clubs gain about 70% of the total income

(KPMG, 2011: 6). These clubs belong to the top-five leagues in Europe: Premier

League (England), Bundesliga (Germany), Liga (Spain), Serie A (Italy), and Ligue 1

(France). The main reason of this feature stands in the dimension and consumer

power of these countries.

Figure 3: Revenue distribution by country (2009/10 season)

Source: UEFA, KPMG Analysis, 2011

There are three sources of revenue: match-day revenues, broadcasting revenues and

other sources, such as the commercial one. Looking at Figure 3, we can assume that,


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on average, 21% of the incomes of the big-five leagues are generated by the match-

day revenues. In general, this data are highly influenced by the quality of the

stadiums. Therefore, the building of an up-to-date stadium is a crucial factor for a

team, which should choose the right strategy in order to satisfy the market needs with

the correct size and design.

Figure 4: Key Stadium data of the top European Clubs ranked by stadium capacity (season 2010/11)

(1) Manchester Uniteds stadium was rebuilt after being bombed during the WWII.

(2) Hamburger SVs stadium was rebuilt in 1998 at the same location where the previous one stood.

(3) In 2010/2011 Juventus F.C. the Stadio Olimpico as a temporary home whilst building the new 41.000-seat stadium.

Source: Clubs Homepages, KPMG Analysis, 2011

The field performance is deeply influenced by the financial one and a stadium is a

significant element if the club wants to have a competitive advantage over the others.

As a matter of facts, the old stadiums are not developed with the right features to

generate profits, since evidences demonstrate that the construction of a new owned

stadium, with modern design and facilities, improves the chance for the clubs to gain

money(KPMG, 2011: 10).


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Figure 5: Ownership map of stadiums in Europe in 2010

Source: UEFA, KPMG Analysis, 2011

At this moment, the majority of the stadiums ownership in Europe is held by public

entities, although the new sectors trend goes towards privatization. Therefore, the

most important clubs are trying to build their own stadium to retain all the revenues

deriving from the match-days. These top clubs manage this asset through

professionals, producing very huge revenues in comparison with the ones that do not

own a stadium.


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Figure 6:Revenue generation in the top European clubs stadium (2009/2010)

Source: Deloitte Football Money League 2011, KPMG Analysis, 2011

Figure 6 reveals that there are several clubs that are able to gain a greater share of

their total revenues from the match-day than others. They are successful in affecting

the prices of the tickets, the sponsorship policy and the sport performance. Arsenal

F.C. is the first ranked team, as it generates 42% of its income from match-day. This

result is strongly dependent on the construction of the Emirates Stadium. As a matter

of fact, the ownership structure of the stadium, the performance of the club, the size,

age and the design of the structure are critical factors in terms of revenues generation

(KPMG, 2011: 12).

The analysis in Figure 6 shows that there is an opposite trend between English,

German and Spanish clubs, which usually have the ownership of their stadiums. On

the other hand, Italian and French clubs do not possess the stadiums and, as a result,

they gain less money. Stadiums owned by private entities, produce more income

mainly because they have been built recently, so the clubs focused more on the

business needs. In contrast, the ones owned by public entities are extremely old and

designed without taking into account the current needs of the market, but tailored for

specific events (Olympic Games). New stadiums should be thought by calibrating the


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right capacity and utilization in order to fill them, but also keeping high the ticket

price.

The English Premier League and the German Bundesliga have an extremely high

capacity utilization (relatively 92% and 88%). As we already mentioned, the quality

of a stadium is critical to attract supporters and not only for the performance of the

team on the field. In contrast, the Italian Serie A, in spite of a very high quality of the

played football, has a very low utilization rate (61%), due to the fact that the

stadiums are obsolete(KPMG, 2011: 15). The main features to built a modern

stadium, which can grant the generation of further income, are: all covered seats, a

corporate box, a loge box, premium seating, exclusive corporate tier, restaurants and

bars, high-end catering, official stores, museum, hotels and a retractable roof. As a

matter of fact, there are some rules, for reasons concerning safety and security, which

require that all the supporters have to be seated. Moreover, the presence of premium

seats grants higher ticket prices and restaurants, bars, stores and the museums lead to

additional revenues. Furthermore, there is a strong source of commercial

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