Can Nottingham Forest become self-sustainable?

June 15, 2012 8 Comments »
Can Nottingham Forest become self-sustainable?

While the talk remains focused on new owners and the ‘imminent’ (or not) takeover, Financial Fair Play means Nottingham Forest will need to become self-sustainable in the near future. Steve Wright looks how the club can make ends meet.

The first point to be made about moving to a sustainable future is that it’s not the end of the world. Nottingham Forest generated £15.2m of income in 2010/11 — that’s not an insignificant amount — and there should be a path to a future that can be both enjoyable and free from the need for continuous massive external investment.

To put the financial power of the club into context, Swansea City had a turnover in the Championship of £10.1m in 2010; the year before they secured promotion to the Premier League and they made a £0.6m profit on that turnover. Southampton in a normal Championship season without parachute payments generate similar income to Forest, Leicester City managed a little more at £16.2m in 2010, Norwich do a little better again with £18.2m when in the Championship in 2009, which maybe highlights Forest’s limited commercial potential given the outdated facilities at the City Ground. Blackpool managed promotion on a turnover of £9.4m, although they made substantial losses on that once promotion bonuses were paid out.

Meanwhile, big rivals Derby had a turnover massively boosted by parachute payments in 2009 and 2010 but in 2007, the year they were promoted to the Premier League, their turnover was £13.9m. That year they gambled on promotion with Billy Davies and won, losing £12.5m in the process. This is where they differed from Forest who gambled on a similar loss with the same manager but didn’t make it over the line to promotion.

Financial Fair Play (FFP) should have all clubs moving to something more sustainable over the next few years which will of course make it easier for Forest, as they will be solidly placed around the middle of the turnover league in the Championship — although the size and duration of parachute payments will make it difficult for clubs rooted in the Championship to compete with those relegated each year from the Premier League. To be fair though, this is a problem with the structure of the game and Forest should not behave dysfunctionally just because the game does.

The Football League is taking a lead with regard to getting a better control of finances in the game and trying to prevent the string of administrations we have seen in recent years. The right path is for Championship clubs to follow that lead rather than try to jump over it and into the profligate and debt-ridden top flight.

Summary of Accounts for 2010/11

Championship

2010/11

£000

Turnover  
Football Income

6,991

Matchday hospitality, catering and events

1,476

TV, radio and internet

5,537

Sponsorship, royalties and advertising

677

Merchandising

479

 

15,160

Expenditure
Staff costs

(16,325)

Signing on fees

(230)

Other Costs

(5,038)

 

(21,593)

Loss on operatng activities

(6,433)

Returns on investment and servicing of finance

(15)

Investment in capital assets

(1,725)

Transfer Spend  
Cash paid for purchases

(2,467)

Cash received on sales

507

Net transfer spend

(1,960)

Cash loss before financing

(10,133)

In the 2010/11 season revenue was £15.2m and the club made a cash loss of £10.1m. The main reason for this is clearly staff costs which exceed total income at £16.3m, Capital investment was also relatively high during the year at £1.7m and the club invested £2m net in transfer fees.

In order to remove the losses the club needs to raise revenues and reduce costs, with the latter probably being the easiest to achieve in the short term but the former still a key factor that must not be forgotten.

Revenues

Football income has grown in recent years and the club has a good level of support for the league it is competing in with crowds consistently over 20,000. In 2011/12, despite an awful season on and off the pitch, Forest were placed 7th in the average attendance league with 21,969. This should be a reassuring statistic when it comes to competing in the future although the club will need to work hard to retain that number.

Where the club perhaps loses out is on the commercial side of the business. The facilities at the City Ground are now outdated and the ancient Main Stand provides comical facilities for the club’s main and match sponsors. The table below shows the differences in 2009/10 between Forest’s revenues and those of Derby County. TV income is distorted by Derby’s parachute payments but Derby’s hospitality and sponsorship income is more than double that of Forest’s.

Forest

Derby

Turnover

£M

£M

Football Income

7.1

6.5

Matchday hospitality, catering and events

1.3

2.9

TV, radio and internet

4.3

16.0

Sponsorship, royalties and advertising

0.9

2.3

Merchandising

1.1

1.6

Other

0.0

0.5

 

14.7

29.8

Of course updating the facilities at the City Ground is not easy and would require a substantial capital expenditure. Although this would not be a problem from the perspective of FFP, as capital investment can be excluded from returns, it would either require personal funding from the owner or a reliance on external debt – which would then mean annual interest charges which would be included in FFP returns and reduce the club’s ability to spend in other areas.

This is one reason why the club were keen to secure a new stadium as part of England’s World Cup bid which would have secured funding without the associated costs, but with that bid failing the prospect of renewing the club’s facilities and commercial offer has receded.

From 2010/11 Forest’s merchandising income has reduced but this is because of a change in business model with the club receiving an outsourcing payment from Kitbag which amounts to a share of profit with no associated cost of sales. This reduction in income should therefore be offset by a reduction in costs and one would hope a net increase in the bottom line.

Commercial incomes are clearly an area of weakness for the club but there are mitigating factors which require substantial investment to remedy. This will be something that any future owners will need to weigh up as the cost of financing capital improvement may negate any improved income, although longer term the ground will certainly need renewing in some form if it isn’t to fall into terminal decline.

Another, albeit probably much smaller, area of income that might be worth looking into is around sponsorship and support from the local community, be that local businesses, wealthy benefactors or the general fanbase – or preferably all three. This could be particularly relevant to the club’s youth Academy, especially if that Academy is clearly and effectively placed at the heart of the club’s football strategy.

Watford run a sponsorship scheme for their academy which allows individuals and businesses to associate themselves with its work for a scale of annual subscriptions. Given the educational and community benefits of aspects of the Academy it may be possible to attract support from local businesses and also benefactors who would like to be associated with the club but do not want to take on the enormous levels of investment that Nigel Doughty did.

A further development of this could be a Nottingham Forest Foundation which builds upon the general principles of the membership scheme but reaches out to both the club’s international support and also its former players and staff. There may be a gap at the club which links it to its history and by forming a meaningful association for both fans and alumni possibilities could arise for both fundraising and promotion. This is unlikely to bring in huge sums but the club needs to be creative about how it generates income and also how it interacts with its supporters and networks with its alumni.

The most pressing concern regarding income, however, will be the impact of current uncertainty over ownership on season ticket sales. The longer that the sale of the club goes on the more likely it is that fans will not commit to the new season and this is of course a vital source of income for the club. The short-term need is to keep supporters interested and engaged during a very difficult time.

Wages

The cost base is dominated as you would expect by wages. Under Billy Davies wages grew dramatically and, although the relevant accounts are not yet due for release, we understand that they rose again to some extent under Steve McClaren with significant signings from the Premier League. Whilst other clubs have demonstrated that a lower cost base can bring success this tends to be as a result of a long period of development and improvement and Forest face a period of transition as well as they seek to change the wage structure.

Ongoing contractual commitments mean that Forest cannot just transform their wage structure overnight, it will take two years of running down existing contracts whilst trying to keep a good team spirit in a dressing room that will feature significant wage disparity as new players arrive on considerably lower deals than the those already at the club. At the same time there is likely to be a high level of player turnover as out of contract players leave, hoping for bigger deals and wealthier clubs, and the impacts of FFP bed in.

All of this change and uncertainty will make the manager’s job extremely difficult as he tries to maintain morale throughout the club but it is a task that can only be avoided by the introduction of another wealthy owner willing to put significant funds into the club. Even that might only be a delay to the inevitable as big spending in the Championship can only be sustained for so long, is no guarantee of success and is inherently destructive to other key aspects of the club, such as youth development.

In terms of where wages need to go then a minimum target looks to be about £10m a year for the wage bill, which is a reduction of £6.3m or 39% on 2010/11. That is a huge reduction but if other costs remained the same it would essentially bring the club to a break-even position on operating activities. What that means is that there is no scope for investment in either transfer fees or capital expenditure within the club’s existing turnover.

In other words the club would be looking to make a net profit on transfer fees each year, which means signings will need to be competitive, and often free, and at least one important player from the squad is likely to have to be sold each summer. That might not sound ambitious or appetising but it is the reality of life in the Championship at the present time.

For the squad it feels like this means a move back towards the Colin Calderwood approach of a smaller first team squad that does not include cover for each eventuality as Davies seemed to want but where gaps are instead filled by young players from the clubs own youth programme or short term loans from other clubs – such as that for Scott Wootton last season – should injuries strike.

It is a mindset shift for everyone at the club but there are also positives as highly paid players no longer sit frustrated on the sidelines and young players have accelerated opportunities to progress and develop.

Let’s be realistic though. It has taken Nigel Clough three-and-a-half years to get Derby to the point where they believe they have young players ready to come through their academy and make an impression on the first team and results have been decidedly mixed over that period with bottom half finishes until last season when the financial shackles were lifted a little. This is not going to be easy by any stretch of the imagination.

Other costs

Although a substantial amount of money makes up other costs, £5m in 2011, there is little sight of what these are from the accounts and therefore little comment can be made. Clearly all costs need to be controlled but without knowing what they are it is difficult to comment.

Conclusion

The key things to take away around moving to a sustainable financial position are that it can be done but the transition will be difficult, the club will need to improve the way it operates and, although it is possible to be successful and sustainable, the odds are stacked against you.

Forest have revenues that can support a Championship club if well managed but every penny will count – in a way that it never seemed to under Nigel Doughty who referred to “killing the club with kindness” in the way he supported it financially – and clubs relegated from the Premier League receive parachute payments equivalent to virtually Forest’s entire turnover.

Of course FFP should see some levelling of the playing field amongst established Championship clubs and those relegated although benefitting from higher incomes often also find themselves coping with high debts as a result of desperately trying to cling on to their top flight status.

I have said before that I believe the future for Forest lies in strong football structures that support long-term development as a club and as a result I tend to favour ownership by a local group with a range of skills and a direct association with the club who see building a club as more important than throwing money at promotion.

The current situation at Birmingham City is yet another warning against selling Forest to unknown investors promising the world, if we really needed further warnings in football. I think that Forest can be sustainable and still an attractive proposition for fans, but maybe fans need to break from the cultural norm of demanding the quick thrill of instant success and themselves focus on something deeper.

Follow Steve on Twitter: @mistrollingin and his blogs Mist Rolling in from the Trent and Reasons to Love Forest.

Image courtesy of FreeDigitalPhotos.net


  • http://twitter.com/ac_vodka AC_vodka (@ac_vodka)

    Refreshing to read some balanced analysis on the current holes in the commercials with Forest. Whoever comes in really need to sort this side of the business out rather then just ploughing money in to buy players. We need some ground up investment in facilities and some fresh ideas on raising revenues. I really like Derby`s concept of dynamic ticket pricing although it remains be be seen how this goes down and if it ends up impacting season ticket sales longer term. Not sure Groupon is the way forward mind..but some other partnerships should be considered.

  • Dale Shaynter

    Give me a billionaire and fudge FFp any day for me. I just want to see Forest on Match of day again in my life time.

    • http://mistrollingin.wordpress.com Steve Wright

      I have some sympathy with you there and the response to a rumoured Kuwaiti takeover suggest others share your view. For me though buying success is nothing to be proud of, even if there is some short term fun to be had – I might as well support Manchester City if that’s all that interests me.

  • Nick

    Player wages so far outweigh any other costs or potential income that they have to be the target of most cutting. Fortunately with every other club in the same boat it is possible for salaries across the board to fall. I can see a lot of players whose second or third contract is expired struggling to get a team as their agents won’t accept pay cuts of the magnitude required. This should also favour youth teamers.

    • http://twitter.com/ac_vodka AC_vodka (@ac_vodka)

      Yep until Sky and BT had a bidding war I thought this to be true but in theory incomes should raise again and potentially create a bigger divide between big and small regardless of FFP.

  • Steve

    Refreshing article and an eye opener in many ways. With regards to how the league is structured, I think parachute payments should go. They have done nothing but to create an “elite” group of yo-yo teams that lesser fortune championship sides cant compete with. I’m sorry, but if you get relegated from the Prem, you shouldnt be rewarded for it over other clubs. Relegation should be the punishment that it was always meant to be, not some liberal way of saying “you were’nt good enough, but here, have loads of money and then see you the season after next when you’ve finished pasting everyone in the championship”. And yes I realise that the whole concept exists for those teams who have a squad full of players on prem wages now playing in the championship. There does need to be a solution for this, but parachute payments are not it. Salary caps would be one option and then you could control the gap in wages between the prem and the championship a lot more easily, and avoid the need for unfair parachute payments. I’d like to see that addressed before any concept of FFP is looked at.

    But then again, salary cap. Thats a dirty word to most footballers, and probably to Sky bosses. The problem with football is that its good at lining its own nest, but does’nt have the luxury of evaluating its long term future, especially in regards to the way it currently behaves. In other words, the current premiership model is unsustainable, but nobody is worrying about it because they’re having too much fun spending money to care.

    I knew a whole continent of countries that thought that way once. Most of those countries are now in real financial trouble, and one of them is positively bankrupt. Most of those countries have taken it upon themselves to adjust their behaviour to suit their current circumstance.

    It seems that football is either unwilling or unable to make that same needed sacrifice, and it will go the way of the Greek nation if it continues to blunder along its current path.

    In some ways I cant wait for this to happen. When football finally crashes through the floor under mounting debts that cant be paid, then, and seemingly only then will the problems with the game be looked at seriously. Trouble is by then its too late. It’ll be like football in the 1970′s again. Low crowds, poor wages, poor football.

    You cant say this to people who work in football though. At least not those who run the games finances, and you definitely couldnt say it to a Sky boss. Sacrifice is not something that exists in the lexicon of people who “earn” millions and the vision to see how the future will go is tainted……..with a shade of green.

    …….but its not sustainable.

  • http://www.facebook.com/richard.arguile Richard Arguile

    Foreigners seem to have grasped that an EPL team is a valuable “franchise” – with huge TV revenues. If I know American sports team owners – I live in California – they would vote to do away with relegation – it destroys the value of a franchise. From this viewpoint, the EPL “sells” three new franchises every season in the form of promotion. The value of Forest to a new owner is not a break even team in the Championship but the value of an EPL franchise multiplied by the probablility of making the EPL. Even though Forest had a miserable season – they are probably only a dozen clubs in the Championship that are capable of being promoted AND staying up. Buying Forest is a gamble but one that could pay off big time if the stars aligned.

  • http://out-of-sight.weebly.com/ themainliner

    I’d rather see Forest compete in the Championship while rebuilding and aligning themselves with FFP. Do we really want to buy premotion Chelski or ManC style? Equally if it all goes wrong and the owners walk away – remember Portsmouth – will we still have a club. We almost lost the club once, to a profiligate asshat manager, I don’t want to ever see us in that mess again.

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