By James Dailey
A frequent expression of frustration about Celtic’s commitment level, or lack thereof, during the January transfer window includes something about the “£30-40 million in cash” the Club are “sitting on.” My goal in this piece is not to justify or argue for what Mr. Lawwell and the board are doing, but to hopefully provide some context to increase understanding.
Celtic Business Cycle
Celtic are often lumped in with other premiere football brands such as Manchester United and Juventus, but when it comes to analyzing the Club’s business, revenue volatility is much more pronounced. This is a product of two significant variables: Champions League qualification uncertainty and very low relative revenue for broadcasting rights – both domestically and internationally.
The broadcasting rights are effectively locked in for the next five years, so that issue is not likely to change significantly barring some sort of fundamental restructuring of Celtic – e.g. an Atlantic League. However, the annual odyssey to try and qualify for the Champions League is not going away for the time being, and this introduces about £18+ million in revenue uncertainty per annum. Effectively, failing to qualify for the Champions League is like a “recession” for Celtic, as it is about 25% of what I will call “Core Revenue.”
By comparison, elite brands from the Big 5 leagues receive so much broadcast-related revenue that the impact of the Champions League revenue is diluted significantly, even as most are nearly assured qualification due to dominance in their leagues. For perspective, Celtic miss out on about 5x’s their domestic broadcast revenue by missing the Champions League, while Manchester United miss out on about 10%, or about 1/50th of the impact!
Endowment Model
I understand and appreciate the frustration amongst supporters regarding what they view as the Board’s stinginess with financial resources. There are many factors which I think are worthy of consideration when trying to conduct an objective analysis of the Board’s strategy and potential criticisms.
Firstly, it is vital to recognize the distinct legal requirements of the Club being structured as a PLC, which means that the Directors have a fiduciary duty to the “Company.” How the “Company” is defined is subject to opinion amongst people, but I would argue it is most clearly not “on field success in Europe.”
Domestic dominance while meeting the Club’s role and commitments within the community is likely the Board’s focus, as is directed by the PLC structure. Within this context, I believe the Board is pursuing a strategic plan which makes far more sense, even as I agree with many long running criticisms regarding investment in scouting, a Director of Football role, etc. This model focuses on concepts like Return on Invested Capital (ROIC) and make Celtic a relatively attractive Club with regards to how investors’ collective investment is treated.
I reference an “Endowment Model” to provide a framework for thinking about player development and what many believe to be a very high cash balance. I see these two, along with the potential for a hotel, the Esports business, etc., as being comparable to asset pools managed by institutions such as Pension and Sovereign Wealth Funds. Effectively, the idea is to manage “assets” in a way to provide reliable cash flow on an annual basis to meet a liability – in Celtic’s case it is to smooth out revenue volatility driven by its “business cycle,” while also sustaining a higher payroll figure through that volatility.
Transfer fees get a lot of the headlines, but it is the wage structure of the Club which has become the biggest competitive challenge. As if one reviews the 12 years of commercial results since 2008, revenues from Stadium Operations finally eclipsed the 2008 level in 2018 – this suggests little to no pricing power, despite the widely discussed issue of ticket prices. Merchandising revenues have been similarly stagnant – again little pricing power. Media revenues are the only reasonable “lever” for growth, which specifically means Champions League qualification, but as stated, this is not a reliable revenue stream.
The top 6 average wage bill for the English Championship was £54 million for 2018 – a figure which is sure to have gone up again in 2019. Wage inflation across Europe’s biggest leagues are fueled by mega-TV contracts of £3 billion for the EPL, and near or over £1 billion for the other “Big 5.” This places Celtic’s and Scotland’s sub £30 million annual figure into perspective, especially compared to the £120 million per year deal the EFL signed in 2018. Is it a reasonable or prudent financial path for fiduciaries to try and compete directly with this massive inflation? I would argue the clear answer is “No”.
For perspective, the 2019 wage bill of £56.1 million was approximately 67% of revenue, which compares to the 12 year average of 59%. Without additional sources of revenue, the Board may have to pursue some combination of players sales and/or salary reductions in order to right-size expenses when results slump. Certainly, player sales will and should be part of this plan, but the ability to time those sales based upon optimizing revenue and balancing on-field priorities is valuable. This is where the cash reserves come into play, in my opinion.
The £30+ million in current cash reserves provides a valuable cushion in order to do things like retain Ntcham and/or Edouard rather than sell at depressed or suboptimal prices, or to take the risk of exercising Sinclair’s option in trying to sell him (not so good on this one). The ability to spend £9 million to buy and then keep Edouard this season and allow him to blossom as a player may result in £20+ million in additional revenue versus what we may have received had we had to sell him this past summer to fill a “financial hole.” Could we have kept Van Dijk for another season and realized £20+ million had we had a more secure financial position at the time? Obviously, multiple issues factor into whether players stay or want to leave, but removing the requirement to HAVE to sell for financial reasons is extremely valuable.
Summary
Celtic’s finances are excellent within the context of the domestic market and associated broadcast revenues. Those finances could be improved by becoming a more proficient Club at developing and selling players, which has already started to occur, but also has benefited by building up the financial cushion in order to optimize revenues. The “waves” of transfers which appear to have begun under Nick Hammond is extremely promising if it is part of a strategic shift by the Club. I think Mr. Lawwell is correct in stating that Celtic’s position is different than an Ajax due to the pressure of 10 in a row and winning the league every season, as a focus on developing young players introduces more risk to on-field results. The addition of new lines of revenue, such as Esports, along with the building of a cash cushion, should help reduce risks of maintaining a higher wage bill and retaining talented players longer before selling at higher values. Of course, this is a all based upon my supposition that these decisions have been strategic and part of a plan, which may not be the case. However, the retention of Hammond and the investment in younger players such as Frimpong, Afolabi, and O’Connor give me hope that a more modern plan and model is being implemented.
How about that analytics department……
Fantastic article, and so well written. I have said for a long long time, Peter Lawwell without doubt, the top club CEO in the country, as you say, without the guaranteed media money that elsewhere enjoys, we need a cash in hand cushion to cover eventualities. Transfer fees and wages have spiralled out of the reach of revenue self generating clubs.
Brilliant, like all articles under this banner. I often wonder what kind of state the personal finances of those who criticise PL are in…but of course spending other people’s money is easy – remember the state our nationalised industries used to be in.
Whilst saying all that, I believe we made a big mistake in not signing a centre-back in January – this was NL’s call – let’s hope we don’t live to regret it.
A fair & honest assessment James Daily as regards to present day football Financial World we are in the TV Money we get here in Scotland is peanuts when you compare it not just too England but the rest of
Europe as well so that is disadvantage non level playing field number one now disadvantage non level playing field two is players wages we can’t afford nor compete against Clubs nowadays who can afford to
pay players £70,000 + per week for example Bristol City can afford to pay that average amount to their
players due to the TV Money they get & that’s a English Championship Club this is what we are up against
because in the Transfer Auction (Bidding) Over Priced Market we are in nowadays not only are we in a bidding scenario to try & sign a new player we also have to take their weekly wage packet into account
in other words their so called Agent is trying to get their Clients the biggest weekly wage packet available & footballers nowadays are more mercenaries than being loyal to one Club they will say that
this is due to a footballers career being short which is a fair point however the money they make playing
football nowadays financially sets them up for the rest of their lifes in other words they can Retire after
there short career without having too financially worry @ all yes nice work if one can get it so this is also a business disadvantage nowadays while trying to compete in this type of Enviroment which is not easy @ all due to our financial restrains of being based/located in Scotland however James you are correct in saying we need to cut our cloth accordingly by getting rid of the players who will not get regular appearances in our First Team in other words surplus to requirement asap to reduce our wage bill which is the most expensive by a Country mile in Scotland this matter has to be addressed asap put it this way
any Business that one Operates if one is forking out more than what they are taking in then said finances will go into Debt in the red so too speak which is not a sensible way to do business & does not make sense which is a fact nowadays so we need to box clever financially & use what we have @ our disposal wisely & we have to carry out thorough research when it comes to signing new players in other words not wasting money in failures to make the grade expectations @ our Club is high so there is no room for regular failure which is no good as for selling on our best assets/players we should not let these loads of money Clubs come sniffing around trying to get our best players on the fly/cheap for example & according to Sly Sports TV 25 Million pounds nowadays is nothing Virgil Van Dyke went from Souhampton too Liverpool for 75 Million a few years ago now lets be honest here if I personally was going to sell say Odsonne Edouard I would not want him to go for anything less than that amount 75 Mil
in fact I would be looking for more like 85 Mil for example & taking into consideration that it takes time & thorough research to find good players has to be taking into consideration here so we should not let our best players go on the cheap if these so called strapped for cash Clubs coming sniffing around they should pay the going Market Rate that is a “No Brainer” after all we are operating a Business as well
not a Gift Shop caprice/understand as the Italian folk would say now lets move onto European Football
I being a regular Season Card holder & shares holder & pools agent with our Club I personally look @ European Footy as a bonus now lets be honest here @ present we are on Europa League Level due to
our Financial constraints as for the Champions League when we do manage to qualify we normally get put into Pot Four & we come up against Clubs who have better finances & resources than us & it becomes a struggle to see European footy beyond Christmas now we all know there is a huge carrot on a stick here of 40 Mil nowadys to reach said competition the incentive is there however it’s no fun watching our Club getting gubbed by the above mentioned set up Clubs & struggling to have European Footy beyond Christmas that’s if we manage to get into the Group Stages which is not easy considering we end up playing either Clubs who are well into their domestic league Season or Clubs who have better
finances & resources or Clubs who are well organised so said qualifing routes into the CL Group Stages
is riddled with banana skins that’s for sure so we need a huge slice of Lady luck so to speak yeah like a Cat who has nine lives I will not even mention Ronny Dialer first attampt which was a disaster what’s happened in the past should remain in the past so as you can see what I’ve mentioned above their is all sorts of difficulties in reaching the CL Group Stages which Business wise really does have to be taking
into careful consideration that’s for sure also has it ever crossed everyones mind that UEFA do not want us there with the mentioned hurdles which are placed in our way along with our Country’s population &
TV Coverage Scotland population is say nearly 5.5 Million & one takes into consideration for example England – Spain – Italy – Germany – France populations which are far bigger the so called Champions League is not really a “Champions League” because a whole of Clubs who automatically get into the
Group Stages have not necessarily won the League they are in the Season previously before so therefore
the so called CL should be named back to the European Cup so these are the obstacles we as a Club face each Season in trying to get into said European Cup which is not fair nor are we on the same level playing field in more ways than one that is why the Europa League is our realistic level in which we can achieve on a regular basis & our financial yearly budget should be set accordingly like not operating beyond our means anyway I will no doubt come back to this debate along with my comments on the Atlantic League & other matters associated with our Club go the Bhoys & laters Folks 🙂 🙂
Great article.
IMO fans underestimate just how much risk the club took in signing Julien and Edouard. Either of them being duds and us lacking CL revenue could cause us to need to retrench on spending. Prices like Klimala and Ntcham are probably at the tip of safe risk taking given size and stability of revenue sources.
We’ve got to be sellers at a good mark up (Dembele, Tierney, etc) or player wage and buying budget shrinks a lot. 10iar is huge…but if Edouard continues performing like he has and we are offered big money (say £30m) I think we need to take it this summer. Not to do so risks so much.
9iar and 10iar cannot be bought – its beyond our budget. Rangers are significantly inferior as a business and a playing staff to Celtic but they’ve only got to be better than the other 10 teams to be ‘fierce’ opposition. If they stay in this position then they will win 1 in 3 or 4 league titles. They’ve finally worked that out although poor decisions by King and board could mean that failing to win league this season creates another financial crisis at Rangers and some hard cloth cutting.
The business management of PL, Dermot, etc is very under appreciated.
Makes sense to me.
The CL money was always risky. Even under MON with a team good enough to reach the EL final, we failed in 2003 to qualify. Each qualifying round is equivalent of a cup tie as in winner takes all.
So as prudent folk the world over do , they “salt” goods away to see them through the winter troughs. The side benefits of choice of when to spend are a bonus, but having player assets of £20 plus million shows how important player recruitment and development is and that is a skill set of its own
As I said, makes sense.
You are damn tooting Auldheid as regards to how important player recruitment & development is
& it certainly is a skill set of its own we need to look @ players who will settle in asap & be part of the first team asap not squad players that turn out to be no use & a waste of money & time so thorough research needs to be carried out as well before any purchase is made because we don’t want nor need players who are @ other Clubs surplus to requirement that is no use @ all & a waste of good money & time.
I would also like to see us really make strides in strengthening our Defence instead of going with a make shift defence set up that gets found out against Teams like Cluig & Copenhagen this Season we should be overcoming these smaller Clubs instead of being mugged by them which is no good either that is why we need to seriously look @ strengthening our Defence its a no Brainer MON for exanple proved that any team who are difficult to beet/overcome has a strong Defence that is not easly shoved off the ball & does not make silly mistakes by being too casual solid Defenders pick up players & clear their lines & if in doubt they put the ball out of play & are not careless as well & they don’t grapple with opposition players either & are not afraid to put in a well timed tackle these matters should be addressed in their Training Sessions
in other words to make our Defence more solid instead of being like a Bomb Scare approach which is useless & leaves us like suspect @ the back which is no use either & can cost us dearly in Key Matches so the important emphasise in recruitment @ present should be in Defence after all we already have plenty of midfield & forward players to choose from