Splashing money on a striker and the SCMP

Does the SCMP penalise the smaller clubs?
Does the SCMP penalise the smaller clubs?

Bristol Rovers were in dire straits in late January 2002. It was their first-ever season in the 4th tier of English football and they were doing badly, occupying the 87th place of the 92 league clubs.

A trip to a Premier League club in the FA Cup sounded like a recipe for disaster. But Rovers’ 3-1 victory at Pride Park was to prove the showcase for a young striker whose hat-trick destroyed Derby that day. Nathan Ellington was only 20 at the time, but was heading towards twenty goals for the season in a struggling side.

At the time Wigan Athletic were hovering around mid-table in League 2, the 3rd tier. Latics had finished in the top six the previous three seasons and manager Paul Jewell had spent freely in a bid to get promotion.

In summer he had paid Dundee United £500,000 for Jason de Vos, £750,000 to Wolves for Tony Dinning and £300,000 to Watford for Peter Kennedy. He had followed that up in December with the signings of John Filan from Blackburn for £600,000 and Gary Teale from Ayr United for £275,000.

However, Latics were just not scoring enough goals. They had scored a paltry 53 in 46 league matches the previous season and desperately needed someone who could put the ball in the back of the net.

Jewell’s signing of Ellington for £1.2 million a couple of months later raised eyebrows in the English football world at the time. It was an enormous fee for a club in the third tier, with an average attendance of around 6,000, to pay to one in the tier below them. However, in the following season Ellington’s 22 goals propelled Latics to winning the division. Ellington was to go on to form that wonderful partnership with ex-Bristol Rovers teammate, Jason Roberts, that was to help Latics reach the Premier League.

It had been Wigan’s sixth season in the third tier when Ellington was signed in 2002, but just over thirteen years on Wigan Athletic are contemplating life back there. But it is a different club now than it was then and the Financial Fair Play protocol has come into play. Can Latics once again get out of the third tier, albeit within a differing economic climate?

There have been many theories put forward as to why Latics were relegated this season. But, no matter what was going off the pitch, scoring only 39 goals in 46 league games was the main contributory factor. Dave Whelan had splashed some £8 million during the summer transfer window in signing strikers Andy Delort and Oriol Riera together with Adam Forshaw and Emyr Huws, who were expected to provide some creativity in midfield.

Sadly the gamble did not come off and none of the four was to play in the second half of the season. Forshaw was sold, Huws injured and the two strikers sent back to their home countries on loan. Given the failed investment made by Whelan, will his grandson and new chairman, David Sharpe, be brave enough to follow a similar path this summer by making major investments in players?

Whelan had splashed money around in both the 2001-02 and the 2014-15 seasons in bids for promotion. However, in 2001-02 there was little hope of a return on his investment. Over two decades he was to pour around £100 million into the club with little hope of getting any of it back. Not only was getting promotion to the Premier League at a considerable financial cost to him, but he had to keep pouring money into for the club to stay there.

In 2007 following the departure of Jewell and an unfortunate spell under Chris Hutchings, Whelan brought back Steve Bruce to steady the ship. Bruce did exactly that. Hutchings had presided over six successive defeats, taking Latics into the bottom three. Bruce arrived in November and managed to steer Latics into 14th place, well clear of relegation. In the 2009-09 season that followed they finished 11th. But Bruce’s success had come at a financial cost. The result was Wilson Palacios and Emile Heskey leaving in January and Antonio Valencia in July. Nevertheless Latics had made losses of £11.2 million and £5.8 million over the two seasons with Bruce in charge.

Roberto Martinez was appointed in the summer of 2009 with the brief of slashing the wage bill, but maintaining Wigan’s Premier League status. Even before the season had begun Lee Cattermole had been sold for £3.5 million. Martinez was to guide Latics into 16th place, with the operating loss for the season cut to £4 million.

The 2010-11 saw Latics finish in 16th place once again, with a loss of £7.2 million. But in the 2011-12 season they were to turn things around financially, finishing 15th with a profit of £4.3 million. A profit of £822,000 was made the following season when they won the FA Cup but were relegated from the Premier League.

Relegation to the Championship saw the club cut its cloth according to its changed circumstances. Wages for 2013-14 were cut from around £50 million the previous season to £30 million. A profit of £2.6 million was announced.

However, profit and loss statements do not tell the full story of a club’s finances. Accountancy uses the concept of amortisation, which tends to distort the picture.  In simple terms transfer fees are spread over the term of a player’s contract.

Let’s say that Wigan paid a £2.8 million transfer fee to sign Andy Delort in 2014, who was given a four year contract. The amortised value is therefore £700,000 per year. On the accounts for this year the transfer fee would therefore appear as an amortisation of £700,000. Delort’s amortised book value after one year would therefore be £2.8 million, less £700,000, equalling £2.1 million.

Now let’s say that Delort is sold for £2.0 million after being at the club for two years. After two years his amortised book value is £1.4 million, so the accounts for 2016-17 would show a profit on the sale of £2.0 million less £1.4 million, that is £0.6 million. Let’s also say Delort’s annual salary was £1million. For that year’s accounts Latics would actually show a profit improvement of £2.3million due to lower wage costs of  £1 million, lower amortization costs of £0.7 million and the £0.6 million profit on the transfer.

The use of amortization in accounting for football club profits and losses is an art unto itself. However, the declared profits shown by Wigan Athletic in the last three years of reporting suggest that the club has been heading in the right direction. In simple terms its long-term sustainability depends on nothing less than making sure that incomings outweigh outgoings.

The higher than usual level of transfer activity and changes in wage costs over the course of the season just finished will certainly keep the club’s accountants busy. However, in layman’s terms the transfer fees received through the sales of such as James McArthur and Callum McManaman outweighed those spent.  Moreover the January sales and departures enabled the club to drastically its wage bill.

Wigan Athletic today announced its new season ticket prices, David Sharpe stating that:

Gary Caldwell and his staff will work tirelessly to get things right on the pitch, and I’m sure that our loyal supporters will support the players as they always do. We want to reward our supporters after a difficult season and by reducing prices by 5% we are demonstrating how much we appreciate the support we have received. Our fans will play a massive part in the new era of the club. Our season cards continue to be the most cost effective way of watching Wigan Athletic and remain extremely competitive compared to other clubs. We are committed to making the cost of watching football affordable to all.”

The club’s admission prices were among the lowest in the Championship division, where average attendance dropped to 12,882 from 15,176 the previous season. A further drop in attendance would appear inevitable, even if the club has a successful season. The prospective fall in attendances, together with reduced admission prices, means a significant further drop in gate receipts.

The average attendance in League 1 this year was 7,061. It was the larger city clubs – Sheffield United, Bradford City and Bristol City – who averaged over 10,000. Over their previous six seasons in the third tier Wigan Athletic averaged 5,841, with the highest yearly average of 7,287 in the promotion season 2002-03 and the lowest yearly average of 3,967 in the first season 1997-98.

With gate receipts becoming a more critical factor, Sharpe will be hoping he can maintain average attendances at least around the 8,000 mark. After their successes in the past decade in particular, Latics now have a greater fan base than before. However, he will be aware that he has to keep admission prices relatively low to compete with the local rugby club for support and not alienate fans who have loyally stuck by the club in the most horrendous of seasons that just passed.

For the next couple of years gate receipts will not be the main source of revenue, given parachute payments of £8 million per season. On the face of it Latics will have a significant financial advantage over the other 23 clubs in the division, none of whom have parachute payments. However, FFP protocols differ greatly between League 1 and the Championship. The Salary Cost Management Protocol (SCMP) system, operated in League 1, allows owners to inject funds in ways that would not be possible in the Championship.

League 1 winners Bristol City have been losing money steadily over recent years. In 2013-14 they lost £3.9m after being relegated to League 1. They had lost £12.9 million in the Championship the previous season, with big losses in the years prior to that. In January 2014 their major shareholder, Steve Lansdown, turned £35 million of debt into equity to keep the club afloat. Despite their lack of profitability they have been able to put funds into the redevelopment of their Ashton Gate ground, due to be completed in 2016-17.

In contrast Yeovil have not had that kind of financial support from their owners. Sadly they have suffered successive relegations and will play in League 2 next season. In March chairman John Fry claimed that their budget of £1.4 million was the 14th highest in League 1, the highest they had ever had in that division. They had started the season with a loss of £5 million hanging over them from the previous year in the Championship division. Fry has repeatedly stated his view that the SCMP penalises smaller clubs like his own, whose gate receipts cannot compete with those of bigger clubs.

David Sharpe continues to reiterate his desire to get immediate promotion back into the Championship.  Parachute payments notwithstanding, is he willing to give Gary Caldwell the kind of financial backing that his grandfather gave Paul Jewell more than a decade ago?

If he is then maybe we will see a young striker coming into the club who can make a difference in the way that Nathan Ellington did from 2002-2005.

 

Lessons to be learned from Middlesbrough

Steve Gibson

Steve Gibson

Wigan Athletic’s failure to win at Middlesbrough on Tuesday leaves them seven points short of the play-off zone, level on points with the north east club, but having played two games less.

“Before the game I would have taken a point” said Uwe Rosler, nevertheless disappointed with his team’s performance and their inability to play the high-tempo, high-pressing football he seeks.

But should Latics be expected to win at places like Middlesbrough? Do Wigan Athletic have any comparative advantage over a club like Boro?

Boro had been in the Premier League for 11 seasons before they were relegated in 2009. Their highest position was 7th in 2004-05 and the following season they reached the UEFA Cup Final. Founded in 1876 they have only spent two seasons outside the top two tiers of English football.

Being in the Championship has been a sobering experience for those in Rosler’s squad who have come down from the Premier League. Middlesbrough’s players must have felt the same when they came down, finishing in 11th place that year. Since then they have finished 12th, 7th and 16th.

There are a lot of big clubs in the division who are desperate to get into the Premier League. Some have been so desperate that they have thrown financial stability to the wind. However, Latics have an owner who insists on sound financial management, despite the criticisms aimed at him by some fans.

Is Dave Whelan right to run the club in such a manner?  Or should Latics go the way of so many other clubs who have dropped down from the Premier League and use their parachute payments to keep and attract the kinds of players who can get them back there?

Middlesbrough announced a pre-tax loss of £13.5m for the 12 months up to June 2012. Like Latics they have a millionaire owner – Steve Gibson – who has written off so many of their losses over recent years. In fact during that same period there were five other clubs who posted bigger losses than them. The leader was Leicester with an after-tax loss of £29.7m.

For some time now Gibson has been writing off close to £1m a month to keep Boro up where they are. With the Financial Fair Play (FFP) rules due to come into effect this clearly cannot continue. The loss announced last March was based on revenue of £18.1m, with only £4.8m coming from gate receipts.

There has been so much conjecture over the years over Wigan Athletic’s attendances. Up to this point their average league attendance has been 15,284 – down from the figure of 19,375 last year. This year they will play 23 home games, compared with 19 in the Premier League. If attendances stay at the current level the aggregate over the season will fall short of that last season. Overall match receipts for league games this season are not likely to exceed £4m.

In the last two seasons Wigan Athletic have made net profits, £4.2m announced in 2011-12 and £822,000 in 2012-13, when increased wages kept profits down. However, last year match receipts covered only around 10% total revenue of £56.4m. It is the commercial sector, dominated by the television revenues, that helped the club compete in the Premier League.

In the 2011-12 season only five clubs in the Championship made a net profit. Net losses amounted to a total of £158m, an average of £6.6m per club. Cardiff City made a loss of £30m last season in moving up from the Championship division.

Lessons learned at Middlesbrough show that a club has only been able to live beyond its means if it has had a rich benefactor. However, FFP is going to limit the ability of a club to survive in that way. Boro are an old club, with a strong fan base, but their short-term future is starting to look bleak.  It is their fifth consecutive season in the Championship, each year having made considerable losses, with promotion a dim possibility.

The dilemma for Wigan Athletic is whether to pump funds into a big bid for promotion or whether to go for financial consolidation. Maybe the compromise will be somewhere between the two extremes. The dip in commercial revenues compared with the Premier League is huge.

With a large squad and a number of players on high salaries by Championship standards Latics will have to use a significant chunk of their parachute payments to make ends meet this year. If they do not get promotion this season we might well see more of the higher wage earners move on in summer. The squad size will reduce now that they no longer have Europa League commitments.

If they stay in the Championship Wigan will have a comparative advantage over most of their rivals for a couple more years. However, each year more teams will be coming down from the Premier League with parachute payments in their pockets and the extra funding for Latics will have a finite lifetime. One only needs to look at what has happened to clubs like Middlesbrough to see what can happen.

Promotion to the Premier League is a priority for Wigan. The commercial revenues there would make it easier for them to survive financially. Rosler is going to have to look for bargains if they stay in the Championship. Given the aforementioned factors Dave Whelan will not be able to dip into his pockets in the same way he did in the past.

The balance sheet at the end of the year will make interesting reading.

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