Introduction
Football fans around the world are aware of Barcelona's dire financial state. However, everyone is confused about how they can still sign numerous players. The term 'economic levers' has been thrown around recently without understanding its meaning.
This article will help trace back the events that started this mess, the cause of their financial problems, understand the current state of the club, analyze the different economic levers they have used, and recognize its long-term implications for Barcelona.
The Origin: 2015/16 to 2018/19
Barcelona enjoyed a lot of success between 2010/11 and 2018/19, winning 6 La Liga titles, 6 Copa Del Reys, 5 Supercopa de Espana, 2 Champions Leagues, 2 Super Cups, and 2 Club World Cups. Along with success came a lot of revenue.
Barcelona's Yearly Operating Revenue
(Source: Statista)
The former Barcelona president, Josep Bartomeu, joined on 23rd January 2014. He believed that the clubs' revenue would continue to follow its upward trajectory, which it did, until 2018/19.
With the belief that this trend would continue, he made the club take a lot of debt, hoping that this money could be invested in the team to maintain success.
Barcelona's Yearly Non-Current & Current Payables
(amounts are in thousands and in Euros)
(Non-current payables: long-term debt; Current payables: short-term debt)
In the business world, corporations take on debt to grow their company. This was the method Bartomeu tried to imply. Although, the difference is that he did not ensure the optimum allocation of the funding obtained. The corporations referred to earlier find success when they plan the issuance of the resources for productive assets. In Barcelona's case, it was used to fund heedless transfer deficits and incur high wage bills.
Yearly Net Transfer Spend Calculation
(amounts are in millions)
(Source: Transfermarkt)
Yearly Player Salaries
(Source: Capology)
The absence of organization by the Board of Directors was evident. The lack of competent scouting and a cost-inefficient transfer strategy lead to the purchase of unproductive players. Ousmane Dembele (140 million Euros), Philippe Coutinho (135 million Euros), and Antoinne Griezmann (120 million Euros), are prime examples. The poor strategies undertaken reflected their on-field achievements. From 2019/20 to 2021/22, they only managed to win a Copa del Rey. Whereas their close rival, Real Madrid, has won 2 La Liga titles, 2 Supercopa de Espana, and a Champions League trophy.
Mismanagement of funding with high debt and operating costs was the beginning of Barcelona's troubles. What came next deepened their financial woes.
The Cause: 2019/20 to 2021/22
Adopting a high debt business model is sustainable as long as an entity can maintain revenue equal to or higher than its short-term debt obligations and other operating costs. The entity also has to ensure that the primary source that generates revenue can continue to do so in the long term.
Although Barcelona struggled to win trophies on-field and had high debts and costs off-field, they were still an enormous commercial brand that could generate revenue from marketing, advertising, and broadcasting rights. This income seemed to be maintainable for the coming years due to their X-factor, Lionel Messi. Yet, their high debt business model was unsustainable. The yearly net profit margin decreased year-on-year from 2015/16 to 2018/19 because of their increasing wage bill, reckless spending on transfers, and higher overall costs.
Matters worsened when the COVID-19 pandemic shut down all football operations for a while. Barcelona's revenue suffered immensely. The biggest threat to generating majority revenue through marketing is during periods of economic uncertainties. In such times, the purchasing power of customers is low and it affects the companies that sponsor Barcelona. It is because corporations decrease their advertising and marketing budget to combat their loss in sales. In turn, it decreased Barcelona's revenue.
Other sources of income were also affected. Matchday ticket sales, broadcasting, and merchandise stores. All of which contributed to the sharp income fall of around 359 million Euros from 2018/19 to 2020/21.
The pandemic also brought other colossal amounts of changes, one that even shook the entire football world. In the summer of 2021/22, Barcelona was under a lot of pressure from La Liga to maintain their wage bill below the limit. After chaos and turmoil at the club, they had to controversially let go of their legend, Lionel Messi, as they could not renew his contract.
What felt like the start of a new era in the Catalonian club was in full effect when Xavi took over and propelled them from 9th to 2nd in the 2021/22 season.
Current State
This summer truly feels like the beginning of Barcelona's new age. With plenty of signings already through the door and more yet to come, Xavi will line up a brand new starting eleven next season. Although it may be a new period for the club, their past mistakes are still a burden to carry forward to the upcoming season.
There have been two 'economic levers' undertaken by Barcelona. We will analyze the nature of the deals and their long-term implications for the club.
The first is the transfer of 25% of their television rights to the American investment firm, Sixth Street, for 25 years. According to Forbes, this sale is worth around 667 million Euros. This deal implies that Barcelona would have to hand over 25% of its total broadcasting revenue to the investment firm for the next 25 years. Although Barcelona will receive an immediate cash injection of 667 million Euros, they could have generated more revenue in the long-term as shown below.
Barcelona is willing to lose around 40 million Euros per year for the next 25 years in broadcasting revenue to provide a stopgap for their current issues. Considering these figures are not adjusted for inflation and other factors that increase the value of broadcasting rights, Barcelona is assured to lose more than they gain from this arrangement in the long run. However, the presidential system of governance followed by the club makes the elected President think about the club's future in the short term to get re-elected.
The second lever used was the sale of a 49.9% stake in B.L.M. (Barca Licensing & Merchandising) for 200 to 300 million Euros. It implies that Barcelona will have to transfer 49.9% of its licensing and merchandising revenue until they purchase it back.
Pre-pandemic, in 2018/19, B.L.M. generated 63 million Euros in revenue. The forecasted revenue calculated will use this figure as a reference. The post-pandemic amounts have been affected due to unforeseen factors. The assumption is that revenue will not be influenced by external elements.
In 2018/19, they earned 63 million Euros from B.L.M. The maximum amount Barcelona can receive from the deal is 300 million Euros, meaning it would take around ten years for the investors to achieve break-even. Thus, from the tenth year of ownership, the investors will earn a profit on their investment. Until the club buys back the rights at an inflated value, the club will miss out on more than 31.5 million Euros yearly.
Apart from giving up sources of future revenue, there are still large amounts of unpaid debt. As reported by Sports Pro Media, "According to Sportico, if the latest proposal with Goldman Sachs goes through, Barcelona will have to pay $1.5 billion in 35 years". This will be an annual debt value of $428.5 million to the American investment bank. With rumors about a possible renovation of Spotify Camp Nou, there could be a further increase in borrowed debt.
Conclusion
Barcelona has created a complex financial maze that will be hard to escape. As short-term presidents come and go, it is hard to believe that they will work in cohesion to find solutions for the inevitable economic repercussions the club will face. The tunneled vision of Joan Laporta is alarming. Although the current mood in Barcelona is uplifting, it may not last long with the financial comet coming for them.
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