Chelsea FC was the first club to report profit before tax of all the EPL clubs that have released their 2020 financial statements. Is this a coincidence or is the London club doing something(s) others aren't? Given the club's long-held reputation of expensive player acqusitions and costly managerial sackings, the story at Chelsea is interesting. Let's dive in!
To provide some context, Chelsea's 2020 profit of £35.6m is impressive as the 2019 average for all EPL clubs was a loss of £12.6m and £13.3m profit for top-6 clubs (2019).
EPL clubs lost revenue because matches were played behind closed doors due to Covid-19, but were still obliged to fulfil their contractual obligations to players, hence the wide-spread losses (below, we analyse revenue and wages). Chelsea's high attrition rate business model (sale of players) and the serendipitous FIFA imposed transfer ban are responsible for the profit.
The composition of Chelsea's revenue has remained constant over the years, with ~45% of total revenue accounted for by broadcast. Covid-19 is responsible for the 9% and 18% fall in broadcast and matchday revenue in 2020.
Chelsea qualified for and played in the UCL as opposed to when the club played in the UEL the previous year – even though Chelsea won the UEL in 2019, the prize money doesn't compare with getting the money from UCL group stage participation. Nonetheless, there is room for improvement on Chelsea's matchday revenue which ranks 5th in the EPL, given that the club is situated in London.
It is important to note that Stamford Bridge's capacity of 42,000 is the lowest of the top-6 clubs. The club has made moves to build a 60,000 capacity stadium but is yet to receive an approval from the authorities. Chelsea is "only" losing 15% of revenue from matchday because fans are yet to be allowed back in stadiums; "Only" because clubs like Arsenal and Manchester United are losing 25% and 18% respectively.
Now to commercial revenue. Chelsea is yet to maximise its past successes and brand potential. At £170m ( £10m fall from 2019), Chelsea's 2020 commercial revenue is only £9m ahead of Tottenham, who are yet to win a trophy in 13 years. Of course, on-field success is not the only factor that determines commercial revenue, but the point is more revenue can be earned from the brand.
Similar to other clubs, Chelsea's wages have consistently increased. At £283m (£2m less than 2019), Eden Hazard's wages did not significantly reduce the club's wages – the signing of Pulisic and sale of other players had a net effect which decreased wages (The wages of players signed in the summer of 2020 are not included in these figures).
Compared to other clubs, Chelsea's wage bill is relatively low, especially in light of the club winning the most trophies (11) by an EPL club in the past decade.
However, Chelsea is spending the highest percentage of their revenue on wages among the top-6 clubs. Before 2011, the rate was worse and only improved post-2011, the year UEFA introduced Financial Fair Play (FFP) regulations – resulting in a scale-down of its wage structure to avoid sanctions.
If Chelsea's revenue and wages-to-revenue rate are not as impressive as other top-6 clubs that have reported losses due to Covid-19, how has the club done it? *drum roll* introducing Chelsea's Board Director in charge of transfers, who is regarded as the most powerful woman in football, Maria Granovskaia.
Maria and Chelsea's recruitment model
Transfer fees spent on players acquisitions for a team in which the term "Sugar Daddy" found it's placed in football, is bound to be record-breaking. In Roman Abramovich's first year as Chelsea owner, the club broke the £100m mark for transfer fees.
Of the top-6 clubs, Chelsea ranks 3rd over the past 15 years on net transfers fees, even though they've paid the most. The jury is still out on the performances of some of the incoming players who have, arguably, not justified the huge fees paid. The receipts from transfers are the trick and are where Maria's brilliance comes in. Asides from Eden Hazard, Chelsea haven't sold any "world-class player" but have received substantial transfer fees for the sale of fringe, squad and first-team players. For example, Chelsea sold Juan Mata (£47m), David Luiz (£45m), Lukaku (£31m), Andre Schurrle (£29m), Ramirez (£25m), Oscar (£60m), Nemanja Matic (£40m), Nathan Ake (£22m), Ola Aina (£9m), Pasalic (£14m), Thorgan Hazard (£15m), and Papy Djilobodji (£9m), to name a few. When the years of sale, comparative quality and the number of appearances for the first-team are factored in, it becomes clear that Maria drives a hard bargain.
Another factor, which deserves its analysis, is the price paid for some of these players. Eden Hazard was purchased for £32m and sold for £104m after performing exemplarily for seven years. Lukaku was signed for £13m and sold for £32m in 2014 after starting only ten times in the EPL during his 4-year stay.
It is no surprise that Chelsea's profit from the sale of players is ranked highest in EPL and is 13% of their traditional sources of revenue (commercial, broadcast, and matchday). The club sold Eden Hazard in the summer of 2019 and had to endure a FIFA transfer ban which prevented the club from signing players until the summer of 2020.
Even though Chelsea could not replace Hazard and add other players to their squad, they qualified for the UCL and still finished 3rd in the EPL. The signings of Havertz, Mendy, Chilwell, Sarr, Ziyech totalling £199m will be recognised in the 2021 account – Only Werner's transfer was recognised in the 2020 statements.
Cost of termination
It would be ludicrous to end a post on Chelsea's finances without speaking to termination costs. In 15 years Chelsea has paid sacked managers and their teams £110m in compensation for early contract termination. Jose Mourinho's team top the chart having received £31.3m for two different sackings. Similarly, Chelsea has paid £92m for early termination of kit sponsorship deals (Umbro and Adidas).
Roman's proclivity to sack managers receives criticism; however, his leadership style has earned the club 16 trophies in 18 years. Perhaps if the club hadn't pulled the trigger, some of those managers could have gone on to win more trophies. That's a counterfactual that we can't know for certain.
Financial doping is a term in European football that refers to a club receiving money from a wealthy owner (Sugar Daddy) to finance its operations; FFP was introduced to curb such practices. Nonetheless, Chelsea has modified its operations, hasn't been sanctioned for breaching FFP and is less reliant on its owner's money.
Nonetheless, Chelsea's total debt of £1.7bn is the highest in the EPL and arguably, the world. Most of the debt is money owed to Roman Abramovich. He is unlikely to make a repayment request any time soon despite the friction experienced over a UK visa application.
Chelsea's mastering of player sales and the serendipitous transfer ban are responsible for profit reported. Before FFP, Chelsea built their brand (though inadequately), playing in the UCL, competing for the EPL title (increase broadcast and matchday revenue) and had a strong squad to trade with; thus, the restriction of Roman's investment in the club hasn't significantly affected the club's rise. With the appointment of Thomas Tuchel, maybe, just maybe, Chelsea might have found a manager that would achieve instant and sustained success and prevent huge termination costs. Only time would tell.
Written by Bolaji Alabi