Arsenal players react to a late second and decisive goal against Olympiacos in the Europa League. … [+]
Arsenal fans took to social media on Saturday to glory in Watford’s 3-0 win over Liverpool. The result ensured that Arsenal’s undefeated season of 2003/04 would not be equaled and it also stopped Liverpool’s unbeaten run at 44 top-flight games – 5 short of Arsenal’s record.
However, it was a bit like celebrating finding a cherry on a turd.
Arsenal had a horrendous week. Knocked out of the Europa League by Olympiakos on Thursday, and late on Friday the financial results for Arsenal Holdings Limited were posted.
You might remember that at the start of December Arsenal posted results showing an after tax loss of £19m. Much was made in the papers and on blogs that Arsenal’s match day receipts had dropped by an incredible £30m – from £99m to £69m.
But as was explained in this article, it was too early to jump to conclusions. The document made public in December was for Arsenal Football Club rather than Arsenal Holdings and the financial performance of the latter is regarded as a better gauge of the entities performance.
What’s more, the notes to the Arsenal Football Club report specified that the drop of match day receipts was just a timing issue between subsidiaries, rather than a real reduction in revenue.
But as it turned out the performance of Arsenal Holdings wasn’t any better; in fact it was worse. Although the £30m in match day revenue found a way home, costs were even higher and Arsenal Holdings posted an after tax loss of £27m.
A year ago Arsenal Holdings posted an after tax profit of £56.5m – a stunning £84m reversal.
It’s Arsenal’s first loss since 2002, so, what happened?
Arsenal’s decline can be captured in a just a few metrics.
Add up the change column and you arrive at £83.8m – within a whisker of the actual £83.6m reversal.
- Turnover increased slightly but still lagged behind the record £423m from 2016/17. Commercial, Broadcasting and Player Loans all increased slightly while Match Day receipts dropped by £2.7m.
- Development of the old Highbury site and the surrounding area has generated more than £50m in profits (2017/18 £5.5m) over the last decade but it looks like the halcyon days are over. Revenue and costs were little more than pocket change.
- Profit from the sale of players, together with property development has turned red ink into black 7 times in the previous ten years. But a drop of £108m was a significant contributor to Arsenal’s year-on-year slide.
- Wages went down…..or did they? Included in the 2017/18 wage costs were exceptional costs of £16.8m; in 2018/19 the number was £3.2m. If you exclude the exceptional costs then wages actually increased from £223.8m to £231.7m. The wage ratio (excluding exceptional costs) went from 57.7% to 58.8%.
- Amortization increased by £3.9m although Arsenal’s summer 2019 spend will push the number beyond £90m in 2019/20.
- Impairment charges are taken – or reversed – when a player or another asset’s value changes from book value. I will leave it at that!
- Depreciation – as exciting a topic as you might expect.
- Other expenses from 2017/18 included property costs of £9.4m. The remaining expenses dropped by £1.2m
- Finance charges is another category impacted by an “exceptional” cost in 2017/18. Otherwise costs year-to-year would have been pretty much the same.
- One silver lining is that a loss can often trigger a tax refund and that’s the case here. Arsenal paid £13.7m on a profit of £70.2m in 2018; for 2019 Her Majesty’s Tax Collector has sent Arsenal £5.1m – a turnaround of nearly £19m.
Arsenal’s profitability since 2002 has been build on three pillars:
- Qualifying for the Champions League
- Profit from Property Development
- Profit from the sale of players
However, the pillars have been shaken and are no longer stable.
The Champions League has given way to the Europa League with a resulting drop in revenue. Property Development turned into a very tidy sideline for a decade or so, but it has run its course.
Last but not least, Arsenal, after a house cleaning in 2017/18 has been trying to strengthen the squad rather than selling players.
However, it is clear that Arsenal cannot outrun the cold financial reality. Arsenal need a new business and financial model and quickly.
It looks ominous for Arsenal.
Missing out on Champions League money over the last two years – and this season – has cost Arsenal in excess of £130m. Now, there is the distinct possibility that Arsenal will miss out on the Europa League in 2020/21.
The loss to Olympiakos in the round of 32 means that Arsenal will see a reduction of at least £8m in UEFA prize money from last season. Missing out completely in 20/21 will see an additional reduction of over £25m.
Add to that the strong possibility of less money from the Premier League as they slip down the table, and the words “financial crisis” isn’t hyperbole.
Selling players is the only viable short to medium term option if the team is looking to mitigate at least some of the red ink, let alone balance the books.