The Celtic Business Model
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……