4 factors that will affect the football transfer market in a post-coronavirus world
- This article looks into the factors that will impact the football transfer market after the coronavirus crisis.
- The way a football club operates in a transfer market will completely change after the pandemic.
Astronomical fees are dished out on the transfer of football players every year. These fees have seen an annual growth rate of 17% since 2010, with the summer transfer window of 2019 having raked in a record £6 billion in fees spent. For perspective, third world countries like Bhutan and Liberia have a combined GDP of less than £6 billion. Such is the high worth placed upon a football player’s transfer rights.
With the pandemic raging and showing feeble signs of curtailing, player valuations have been slashed by 10 to 20 percent by the market participants. It is, therefore, safe to assume that the era of extravagant spending and unsustainable player valuations is coming to a standstill.
It all started with Neymar’s record transfer from Barcelona to Paris Saint-Germain for a record £198 million. Following the transfer was a flurry of big-money moves across Europe's top five leagues. Kylian Mbappe, Philippe Coutinho and Antoine Griezmann were some of the signings that represented a knock-on effect of the Brazilian’s transfer, with their fees bloated out of proportion.
With football clubs now short of cash as a result of money being pulled out of the game, the transfer market is facing a looming recession. This article aims to address the four factors which will lead to a collapse in transfer fees and player valuations.
#1 Financial Fair Play (FFP) Regulations
The FFP Regulations stipulates that a football club cannot spend more than they earn, thus limiting the chance of financial problems and uncertain survival.
Earnings would comprise of commercial revenue, broadcasting revenue, match-day revenue and money from the sale of players. Meanwhile, expenses would comprise of wages, purchase of players, finance costs and dividends. The interesting thing to point out here is that money spent on infrastructure, training facilities and youth development would not be included.
The regulations appear to be a clear encouragement for clubs to develop and nurture home-grown talents who have zero cost of acquisition rather than shelling out millions of pounds to poach established players from other clubs.
With the COVID-19 pandemic currently affecting clubs monetarily, it would be financially feasible for them to invest more in their youth players rather than spend a higher sum on transfers. This would be solving a dual purpose of complying with FFP regulations as well as conserving some well-needed cash. The by-product of this would be a drop in transfer fees due to more supply and less demand.
#2 Owner’s wealth and source of wealth
When facing a dire future, a football club would normally fall back on its owners to bail it out. The ownership model is primarily of two types:
- Majority Shareholding Structure - Chelsea, Manchester Utd and Manchester City are clubs owned by a single large shareholder/shareholder group who makes all the decisions.
- Fan-owned Structure - Borussia Dortmund, Athletic Bilbao, FC Barcelona, and Bayern Munich are owned jointly by thousands of fans as well as shareholders.
It is, therefore, easy for Roman Abramovich to pump in a huge sum of money into Chelsea to help the club during testing times. The same is not the case for Athletic Bilbao or Borussia Dortmund. They would instead have to hold a board meeting, vote on a potential fundraiser and then convince its shareholders to donate some of their hard-earned money to the club.
The billionaires may not have a problem with loosening their purse strings, but clubs owned by entities who are comparatively not as rich would be sweating at the prospect of investing more money during these uncertain times.
Meanwhile, owners of Premier League clubs like Bournemouth, Burnley, Norwich City, Watford and Sheffield United have a net worth in the gamut of £24 million to £96 million. With less chance of a capital injection from their respective owners, these clubs are short of liquidity. This results in them becoming 'selling clubs', ultimately bowing to the financial superiority of the richer 'buying clubs'. A decrease in player valuation and transfer fees from 'selling clubs' is, therefore, bound to occur.
The next factor which comes into play is the source of the owner’s wealth. The plunging demand for oil would be a cause of concern for owners of Manchester City, PSG and Chelsea who have minted money in the industry in the past.
For instance, Brighton & Hove Albion who carry a substantial amount of debt on their books have an owner- Tony Bloom- who has accumulated wealth via gambling and real estate investments. The future of both his sources certainly look bleak, thereby affecting the club indirectly.
#3 Balance sheet quality of football clubs
All businesses aim to maximise their assets and minimise their liabilities, thus increasing their funds. Football clubs aim to do the same.
A football club has a large amount of its money tied up in debt payments, with transfer-related instalments set to be in a weaker position.
A club with free cash to spend and no debt or transfer payments to make would be at a comparative advantage, asserting the notion of “cash is king”.
Manchester City and PSG, that are funded by their wealthy Middle Eastern owners, do not have to pay the regular interest and debt payments, thereby freeing up their cash to acquire players.
Meanwhile, Manchester United may be a club with a huge amount of debt on their books but they have got a revenue stream that tides over their debt payments.
Tottenham Hostpur, Inter Milan, Atletico Madrid are also clubs with huge debt ranging from £348 million to £438 million. These clubs would be at a comparative disadvantage.
Thus, the pendulum will swing towards the cash-rich clubs who can take advantage by acquiring players at cut-prices from cash-poor clubs.
#4 Balance between cost and cost recovery
A player’s transfer fee is a function of the estimated benefits which will be gained by the purchasing club. It is recouped by the purchasing club by winning trophies, prize money, sale of jerseys and image rights.
An often-mistaken notion that makes rounds on social media is that the sale of player jerseys will recoup the transfer sum paid for the player. This is inaccurate because the jersey sponsor, like Nike or Adidas, makes the money off shirt sales with the football club getting a paltry 7-8% commission.
With cost recovery options like sale of image rights and jerseys lessening in the near future, it would not make sense to invest money that has a meek chance of generating a return.
The above factors all point towards a single situation: the drastic decrease in transfer fees. Gone are the days when mid-table clubs like Everton, West Ham and Newcastle shelled out £30 million to £40 million on obscure players with one good season under their belts. It will be a long time before transfer fees rise again, with the growth dependent upon the recovery of the global economy.
Valuations of players like Jadon Sancho, Harry Kane, and Paul Pogba have all taken a hit amid the crisis, and the domino effect will certainly affect other players who are offered up in the transfer market.
The prudent approach in this scenario is to develop youth players, promote internal recruiting and strengthen the academies.
Paying high transfer fees in a recession, would only raise eyebrows and have a negative social impact on any club during a time when people are struggling to survive.
Now is, therefore, the time to build the next La Masia rather than poach players and exert financial might on the weak.