The next victim of the credit crunch – football
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Associate Editor
David Stevenson Jul 17, 2008
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I was flicking through the Evening Standard the other day. It had all the usual headlines we're used to by now. Share prices down, food prices up, a new dollar low, credit crunch hits… but hang on a minute, that last one's on the back page. Where the sports section is.
But it's not a printing error. "Days of football's cash-crazy deals are numbered", the paper said. Now the credit crunch is about to strike football's transfer market, forcing Premier League clubs to cut back on lavish player spending, according to Arsenal chairman Peter Hill-Wood. "People need to wake up to the realities of the world and that the days of easy money have come to a pretty sudden end".
At last, it seems, one of the last bastions of economic unreality, the soccer scene, is about to get a cold shower. If ever you needed proof that the 'crunch' is going to bite a lot harder, this is it – and surely not before time…
Football’s transfer market has lost touch with the real world
I admit that I'm no football fan. I can't understand why supporters stump up so much cash to watch armies of pampered mercenaries, most of whom have absolutely no historic connection to their clubs, and display no more loyalty to their employers than hanging around the goal mouth for their next humungous pay cheque.
Maybe that's just my problem. But no one can deny the game has clearly revolved around money. Oodles of it. Chelsea are rumoured to be about to shell out up to £48m for Robinho from Real Madrid, who in turn are believed to be prepared to offer Manchester United over £65m for star striker Ronaldo. And that's just the tip of the iceberg.
It's classic top-of-the-market stuff, fuelled by residual bull market optimism. In May 2007, the Telegraph reported that: "English football stands on the threshold of an unprecedented financial boom with Premier League profits set to double by the end of next season. The explosion in wealth at the top end of the game in this country could see clubs in the Premier League enjoying combined revenues of over £1.7bn by the summer of 2008".
That hugely upbeat tone was based on TV deals set to bring in £900m a year until 2009/10. And it's caused not only the transfer market to lose touch with the real world.
Footballers' wages moved into a parallel universe ages ago. Official national pay stats for the whole of the UK - yesterday's, by the way, showed a 3.8% year-on-year rise in average earnings with or without bonuses - have never had much influence in the rarified world of soccer stars' salaries. The Premier League's wage bill topped £1bn this year, according to Deloitte's latest report in May, with the average pay packet an annual £1.1m.
And Chelsea's Frank Lampard, we hear, apparently can't manage on £140,000 a week over the next four years. That works out at mere £29m. On that score, last November Sports Minister Gerry Sutcliffe famously described the wages of leading players like the then England captain, John Terry, as "obscene". He also warned Manchester United that their ticket prices could drive ordinary fans away from football. What's more he described the position of Chelsea, who despite all the extra cash around, still managed to rack up an £80m loss, as "unsustainable".
At the time, his use of several wrong numbers rather undermined the minister's remarks. But he was on broadly the right track. For a club like Chelsea to drop £80m over 12 months in the middle of a slump might possibly be expected, but running up such a shortfall at the top of the economic cycle - things can only get worse.
Clubs won't be able to keep on ramping up their admission costs
What's more, at the time Manchester United did admit an 11% ticket price hike. Clearly, the club got away with that then. And the BBC reported in May this year that season ticket prices for the coming season have risen 7%.
But there's no way that clubs will to be able to keep on ramping up their admission costs at more than twice the rate of inflation, as "soaring prices and high property costs are placing the biggest squeeze on disposable incomes in well over a decade", according to Anne Robinson at uSwitch.com.
And the flip side of the Deloitte report highlighted the staggering size of the English game's debt mountain, which had climbed to almost £2.5bn by summer 2007. Again, that may be less of a worry when everything's going well. But the goalposts are just about to be moved.
"There's an awful lot of talk about big transfers and major demands of players, but in the UK and Europe money isn't quite as easy to obtain as it used to be", says Peter Hill-Wood to Arsenal.com. That means "a lot of stories from agents may not actually come to fruition. There's a lot of talk but not a lot of action".
Yet it's his next comment that really heads home: "In the long run you must run a football club on a sensible commercial basis. A lot of the figures being bandied around today don't make commercial sense to us… people are prepared to do what can be construed as very silly things".
We may yet see a few more 'very silly things'. Until, that is, the cost of servicing all that debt begins to bite. And new loans are becoming harder to get, with the Bank of England confirming this month that it sees "further reductions in credit availability" going forward.
Last week I described how NASCAR, American stock car racing which is almost seen as a national symbol, is starting to suffer from the soaring cost of fuel and the squeeze on its fans' incomes.
Football may until now have held similar sway in the UK. But watch out. It won't be too long before soccer headlines are full of tales of unsold tickets, declining transfer prices and falling wages. And what price the next set of TV deals? Then all the uber-bullish talk will turn out to be a load of hot air.
In fact, the downswing may already have kicked off. Luminar, Britain's biggest nightclub chain, yesterday reported a "sharp decline" in clubgoers. Fewer footballers, perhaps…?
Turning to the wider markets…
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The FTSE 100 fell 21 points to 5,150, having fallen as low as 5,071 at one point. Commodity stocks were hit by falling oil and metal prices, but the fall in oil prices boosted stocks such as British Airways and Carnival.
Over in Europe, the French CAC 40 rose 51 points to 4,112, while the German Xetra Dax gained 73 points to end the day at 6,155.
US stocks rallied sharply as oil prices dived, and San Francisco-based bank Wells Fargo posted better-than-expected results. The Dow Jones Industrial Average climbed 276 points to hit 11,239. The wider S&P 500 jumped 30 points to 1,245, while the tech-heavy Nasdaq Composite gained 69 points to close at 2,284.
Overnight the Japanese market made gains amid the better sentiment in the US. The Nikkei 225 gained 127 points to close at 12,887.
Brent spot was still falling this morning, trading at $133.84, while in New York crude traded at $134.19. Spot gold had slipped to $963 an ounce. Silver was trading at $18.82, and Platinum was at $1,946.
In the forex markets this morning, sterling was trading against the US dollar at 1.9999 and against the euro at 1.2612. The dollar was trading at 0.6308 against the euro and 105.44 against the Japanese yen.
In the UK this morning, baby products retailer Mothercare said that sales had risen 21% in its first financial quarter, helped by its takeover of the Early Learning Centre toy shops, and growth overseas. Same-store sales in the UK were up 1% in the 15 weeks to July 11th, slower than the 2.9% growth seen in the fourth quarter. The group aims to expand further in Turkey, Russia and India.
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