Arsenal’s Financial Report and the Economic Crisis

Arsenal have released their financial results for the six months prior last November 30, and they offer an interesting look at the ways in which the global recession may be affecting the world’s top soccer clubs. The essential story is that Arsenal continued to make a lot of money—their pre-tax profits of £24.5 million were actually up from £20 million during the equivalent period last year, though most of the improvement can be accounted for by an extra Carling Cup game and a 2.8% rise in ticket prices—but saw some erosion around the edges, particularly in areas less directly connected with what they charmingly call their “core business.”

From the chairman’s statement in the report:

So far the impact of the recession on the financial results of our football business has been relatively minor and, crucially, match attendances at Emirates Stadium have continued to be at sell-out levels. We are, however, selling fewer stadium tours and our retail sales numbers are static rather than showing growth on previous year performance.

They’re not seeing any drop in attendance levels despite the increased ticket prices, but the shirts-and-dog-food-bowls part of their business is flat—turnover of £7.9 million compared to £7.8 million during the same period last year.

More worryingly for Arsenal, their turn as property developers isn’t going particularly well: the Highbury Square apartments, built on the site of the club’s old stadium, are selling more slowly than expected, and many people who intend to buy (according to the club) are in limbo due to the tightening of the mortgage system:

Highbury Square apartment completions are running below the level projected in our original development plan and whilst disappointing this is a direct consequence of the very challenging conditions in the property and mortgage finance markets. The number of sales contracts which have actually failed and been rescinded remains very low – in single figures. However, we have a backlog of purchasers who still intend to complete but await confirmation of mortgages as a result of both the tightening of mortgage availability and the increased deposit required. These delayed completions are coming through albeit relatively slowly.

The major reason this is worrying is that the club is sitting on a £133.5 million bank loan that was taken to finance the Highbury development, and which was intended to be repaid entirely from the proceeds of the apartments once they were completed, with most of the remaining profits transferred to the football side of the business. If apartment sales don’t generate enough to meet the loan payments—and Arsenal have already announced that they won’t meet their own repayment expectations—then there’s a chance that money will be taken out of the football side of the business in order to keep up with the debts incurred by the property scheme. That’s a terrible scenario for fans of a club that’s already running the risk of missing out on Champions League revenue next year, and while Arsenal insist that there’s no chance of it happening, it’s a little hard to follow their logic. Here’s Ivan Gazidis, the club’s new chief executive, earlier this month:

We never based the budgets for the club on anything that happens at Highbury and the two are ring fenced from each other.

Obviously it is a situation we have got to monitor very closely, but it is not something that will affect the club negatively.

It is possible, if it generates profit, that it will affect the club positively, but that is not revenue which we have got in our books that if we don’t get we would be in trouble – that would simply be icing on top of the cake.

It’s nice to use the term “ring fenced”—reassuring, even. But there’s a kind of wishful thinking in this explanation—the Highbury estates can only help us, they can never hurt us—that says absolutely nothing about how the club intends to repay that £133.5 million if the credit crisis continues and it struggles to sell the Highbury apartments.

It’s hard to say how closely Arsenal’s financial situation resembles that of other top clubs in the midst of the global recession. Certainly not every club made the decision to move into real estate at precisely the moment when the floor turned to air in the market. But the bigger picture of lively fan engagement and generally strong returns combined with some outlying stagnation feels true to the moment.

Of course, Arsenal’s financial report goes out of its way to emphasize the recession and to make it seem as though its results were achieved under uniformly adverse conditions, but in reality only about half the six-month period from June-November last year took place after the banks started failing. The next set of results will presumably tell us much more about what football can expect if the global downturn continues.