Where is the growth coming from?
Revenue growth is so important to any business regardless of whether they’re at the top of their particular industry or market, or as I like to believe Everton should be, a challenger organisation with a view to dominating the market in future years.
The question for the Everton Board is how do we achieve revenue growth when there appears to be limits on our 3 main income streams, broadcasting, matchday and commercial?
Mr Moshiri said in 2017 we can’t be a museum, but we must become self-sustaining. How do we square that particular circle without growth?
To date, Moshiri has invested £250 million into the club, clearing debt and spending (at least until last summer) in a largely unstructured and ineffective manner on players, managers and coaching staff.
Wrong doctors & wrong medicine
I suspect he felt the initial capital injections were rather like an adrenalin shot designed to stir the moribund patient short-term to a recovery phase and a more structured development beyond. Undoubtedly that primary phase lasted longer and was more expensive than expected. Continuing the medical analogy, the wrong doctors were administering the wrong medicine at least until Brands and then Silva were persuaded to join.
Whilst they’ve made the playing side of the club unrecognisable in the short period they’ve been in charge, how sustainable is not only the recovery but the prospects for growth, becoming the challenger and then becoming a dominant force once more?
Now, through the capital injections described, we have an improving squad, an improving manager and a recognised industry leader as a Director of Football. But the question that needs asking is how do we kick on from where we are now? How from a financial perspective do we grow to fund the stability and prospects that Brands and Silva have given a tantalising glimpse of?
We cannot rely upon continued capital injections from Moshiri to fund our on-field activities directly. His focus must turn to investing in the stadium and other future income producing capital projects, not just funding the playing side from his own pockets. Let’s not forget the future Capex requirement is huge and almost immediate, anticipated at a further £200 million.
Of course, player trading is always an option, and indeed it could be argued that with the sale of Stones, Lukaku and even a cut price Barkley that card has already been played. But if the objective is to grow the squad, retention of the likes of Pickford, Richarlison, Gueye, Lookman etc is a must, as is the acquisition of Gomes and Zouma. Whilst there’s always movement of players, we should only allow ourselves to trade valuable assets in all but the most exceptional circumstances.
In a short interview with Forbes, Peter Moore, Liverpool FC CEO talked of being creatively destructive. That’s an economic concept derived from the work of Karl Marx by an economist called Schumpeter. For Everton it essentially means when you’ve had a business model established for a period of time, if you don’t look to evolve and develop the model you get overtaken. I believe that neatly sums up our recent and increasingly more distant past.
When was the last time Everton was creatively destructive? Our business model has largely remained the same for the best part of 20 years despite the capital injections provided by Moshiri in the last near 3 years. We rely upon broadcasting revenues, an increasingly reduced contribution from match day income, outsourced and largely fixed value commercial partnerships and almost minimal sponsorship activities beyond shirt front, shirt sleeve and Finch Farm naming rights.
Many argue that the model is fine given the size of broadcasting revenues. Indeed, it was highlighted at our last AGM in a positive way. I beg to differ. Broadcasting revenues are driven by success on the pitch. They are the rewards for excellence elsewhere in the business. They are not a gift that guarantees future success. To achieve the highest broadcasting revenues, we must include regular European football, preferably Champions league. I.E, you require success on the pitch first.
This, albeit frankly obvious, statement has passed successive boards by. Broadcasting revenues at mid-table levels are a subsidy and most business that rely upon subsidies are the least efficient and successful. Our past CEO used to claim privately that it was the number of games broadcast on Sky that mattered not having retailing opportunities across America and Asia. I wonder has that belief changed within the club yet?
Matchday income is stymied for two reasons. Firstly, the obvious one, Goodison Park – packed to the rafters every week despite offering the worst facilities and sight lines of any major stadium in England. Secondly is the conscious decision to aggressively discount season ticket prices to various concessionary groups, whilst holding prices for regular season ticket holders. I understand the logic and particularly the moral commitment to affordability for large segments of the fan base. However, the question must be raised as to whether the policy is consistent with and helpful to the objective of being a challenger and then a dominant force?
Not only does the decision impact current cash flow, it implies a continued favourable (in fan terms) pricing policy at Bramley-Moore. I’ve argued and will continue to do so that premium seating (hospitality and executive) should provide more than 50% of the future revenues from Bramley-Moore, but I do believe there has to be a discussion between fans and club as to the implications of continuing the current pricing policies.
New income sources?
Of the current income streams that leaves commercial and sponsorship income. As is widely known the current shirt manufacture and merchandising/distribution deals are up for renewal in May of next year. The absence of news to date suggests the same supplier/distributor arrangements will be rolled over.
The teams above us, the self-styled “Big 6” have taken advantage of their high profiles and negotiated deals way in excess of the £6 million or so we receive annually from Umbro. Spurs now benefit from a £30 million pa deal with Nike. That would suggest Everton could expect £12-15 million in any new deal. However, it is questionable whether Umbro have such global marketing budgets and ambitions to support such a cost to them. Spurs are taking advantage of Nike’s global marketing budget and their belief that association with Spurs promotes and enhances the Nike brand.
Thousands of words have been written about Fanatics (formerly Kitbag) and the difficulties that arise from the current outsourced relationship. It seems obvious, but assuming the relationship continues the negotiated offering must be more akin to that offered to any of the other 9 Premier League clubs that use this company. Surely it is possible to buy an Everton shirt in a retailer of choice and to have the full range of kit and merchandise available in all markets online? As a result, better terms can be offered to Everton?
I suppose the whole of our commercial activities, partnerships and relationships boil down to the simple fact, do we have the confidence, the self-awareness to promote ourselves globally rather than parochially?
If the answer is yes, do we have the people, the resources, infra-structure and plan to go out, promote the Everton name in key markets be they America, Africa or Asia?
From the outside, looking in, the answer would be no we don’t appear to have this currently. The first point to start is bringing people into the business at a senior level who know how to grow a business globally, who have the skills and contacts to generate income from known markets and sectors.
We are currently spending much more than we are earning and that’s likely to continue. Brands will no doubt trim the squad further, completing the removal of the deadwood, but we still need more and better players to cover certain positions which is costly.
As described above, unless our form becomes so good that we have regular European football and preferably Champions League, the only source of additional income in the next 5 years or so comes from turning around our commercial performance, creating a new business model, moving away from the dependency on broadcasting revenues.
Whilst in public the focus has been on Bramley-Moore, the most pressing issue internally for the club must be how to grow our revenues. We can’t afford to wait for the new stadium, we must improve our commercial performance in the meantime.
It will be fascinating to see this addressed at our next AGM. Will creative destruction be on the agenda?
Categories: Everton finances