Real Madrid: Victims of their own financial might?
The club have earned considerable success by buying the best players in the world, but is the model sustainable?
There is no doubt in anyone’s mind that Real Madrid are one of the biggest clubs in the world. Home to of the biggest names in football Madrid have garnered a fan following rivalled by a handful of clubs in the world.
In recent years, they have spent large sums of money on players and wages but have not produced the standard of results they were expected to. But their recent success in the Champions League is encouraging signs that Perez’s plan is coming together.
Barcelona have eclipsed Real’s success on the pitch but still lag behind in terms of revenue generation and brand value. But it wasn’t always rosy at the Santiago Bernabeu. Madrid were not always a club that raked in the green.
There was a time when Real Madrid were not in a very strong financial position. In the mid-1990s, Florentino Perez ran for president of the club focusing his campaign mainly on the shortcomings of the board and their inability to improve the stability of the club.He lost that election but it was a sign of things to come at the club.
Eventually, Perez took over and ushered a new era of business and financial prosperity.
But is there something brewing behind the thick coating of glitter that surrounds this iconic football club? Los Blancos continue to spend truckloads of money and wages on players but they remain the club with the most debt in the world.
How is it one of the biggest clubs in sport continue to spend ridiculous sums of money on players when they have so much debt? Hopefully, by the end of this article, you will have some idea of how their financials work.
What makes Real Madrid the most valuable club?
Forbes once again rated Real Madrid as the most valuable club in the world. According to their report, the club are valued at $3.65 Billion making them the second most valuable sports team in the world behind the Dallas Cowboys.
Branding is a major part of their revenue. The club were not recognised as a global powerhouse with a stellar brand in the 1990s, but the arrival of Florentino Perez changed all that. Perez had a plan to sign the best players in the world fronting up record fees naming it project ‘Galacticos’.
The likes of Luis Figo, David Beckham started the trend, and now it's the likes of Gareth Bale, Cristiano Ronaldo and James Rodriguez. They came in at a high price but these signings sent the shirt sales through the roof.
Cristiano Ronaldo’s jersey is still the second most selling shirt in the world. Madrid have also made these signings with an aim to gain the lion share of the emerging markets which are currently several Asian countries.
The big names at the club have pulled in big sponsorships too. That never harms your branding. You are more likely to buy a Real Madrid jersey than a Newcastle one even though both clubs’ have the same makers i.e Addidas.
With these numbers and brand names taking to Madrid like a moth to a flame, value addition has become a breeze for the club.
How much debt are the club in?
The latest figures show the club are currently €600 million in debt. They have also gotten very crafty during their annual pressers when Perez explains the details of Real Madrid’s financial gains over the year.
As expected, not much is said about the amount of money the club owe banks and other investors. Most of the debt stems from borrowings the club has made which is not mentioned on their balance sheet downloadable from their official website.
The situation gets even more complex every year. The club’s accumulation of owed payments is always on the rise and yet they continue to spend a huge amount on transfers every season.
The reason they continue to have the ability to borrow money from banks is their brand value and TV and advertising returns, which the club use as an assurance mechanism to the banks that their money will be returned.
But Madrid are using a high-risk strategy when it comes to this pre-defined borrowing relationship. If they are not able to pay back the loan then their money from the Ad revenue goes directly to the banks.
Why Madrid persist with spending big every year?
So despite all the money they owe Madrid do not hesitate to sign every big player on the planet. But can they? For now yes they can. Their financials might seem shaky but their overall revenue is always on the rise.
Unless, all of a sudden the club fail to attract the best players and the biggest sponsors to Madrid the revenue will not stop to flow. The only aspect they have to watch out for is their debt does not become insurmountable by the revenue.
The club still owe some of the transfer fees for some of the signings they have made. But this model is not a long term solution. Madrid’s revenue is continued to be categorised as capital for further investment instead of paying off existing debt.
The Spanish government have also written off any worries of Madrid’s stability and believe they have the economic might to pay back their debts.
The bottom line
Real Madrid and Florentino Perez are well aware of their spending patterns and the long-term financial implications it might have. But for now, the fans, the board and everyone else seem to be blinded by Perez’s ability to paint an artistic picture hung in a museum only to be admired.
Madrid might even reach a point where they realize they can’t overspend on players and big flashy PR exercises, but will it happen before the cookie crumbles?