Liverpool and Spurs Wins Are a Victory for Caution
(Bloomberg Opinion) -- Two Champions League semi-finals. Two English soccer teams overturning a 3-0 deficit to reach the final of Europe’s elite club tournament. One unorthodox approach to the sport’s finances.
On Tuesday, Liverpool beat Barcelona 4-0, reversing a 3-0 first-leg defeat. On Wednesday, it was Tottenham Hotspur’s turn, staging a second half comeback to secure a 3-2 victory on the night against Ajax. That brought the tally over two legs to 3-3, giving Spurs passage to the final round by dint of the team’s superior away goals tally.
The two sides’ success flies in the face of one of the sport’s conventions. Rather than racing to outspend their rivals and secure the best players, their strategies have been characterized by the shrewd allocation of capital and steady team-building.
English teams have more financial firepower than most of their continental rivals, given their larger broadcast royalties. But they also have a famous ability to spend it all. Alan Sugar, Tottenham’s former owner, once labelled it the “prune juice effect” – no matter how much money soccer clubs make, they will spend it all on players. “It goes in one end and out the other,” he told the BBC in 2015.
Liverpool and Spurs have been far more circumspect. In the nine years since the Fenway Sports Group acquired Liverpool for 300 million pounds ($390 million), the owner of the Boston Red Sox baseball team has instilled a rigorous balance sheet discipline. Its net outlay on new players has remained relatively flat, even as revenue has more than doubled.
The team has become adept at knowing which players to sell and how to reinvest the proceeds, as Barcelona now knows all too well. Its purchase of Brazilian midfielder Philippe Coutinho from Liverpool last season boosted the English team’s fiscal 2018 transfer proceeds to 105 million pounds. Those funds offset the acquisitions of star defender Virgil van Dijk and goalkeeper Alisson Becker, whose dominant displays on Tuesday night helped put the Spanish club out of the tournament.
Tottenham has been even more frugal. While Liverpool spent a net average of 42 million pounds each year on player transfers since becoming part of FSG in 2010, the London side spent just 3.9 million pounds. And while both teams have ensured their wage bills grew at a slower pace than sales in the period, Tottenham has done so more successfully, reducing it from 56% of revenue in 2011 to 39% in 2018.
Compare that to Liverpool’s archrival, Manchester United, which was knocked out of the Champions League at the quarter-final stage. Wage spending has outpaced sales growth, and net transfer outlay averaged 78 million pounds a year, almost double that of Liverpool.
This is not to say financial profligacy is necessarily a losing strategy. Bankrolled by an Emirati royal, Manchester City, the reigning English champion and current Premier League leader, has paid more than twice as much on transfers as Liverpool and Tottenham combined – net expenditure was about 838 million pounds over eight years. That’s made it easier to build a large squad that can compete in multiple tournaments. Still, it was knocked out of the Champions League by Tottenham, and has been battling Liverpool for the domestic trophy.
Tottenham’s extreme thriftiness has a particular motivation – the need to fund a new stadium. That’s seen its net financial liabilities soar more than fivefold since 2011. It therefore needs to preserve cash to fund lending costs for the ground, which opened just last month. The hope is that a bigger, more modern arena will generate more recurring matchday revenue which can ultimately be reinvested in the playing squad, and make success sustainable.
It’s not going to be a quick or a certain result. The significant investment has so far left it with a smaller squad which has made it harder to compete for the Premier League. Liverpool ruled out a new stadium a few years ago, and that decision seems to have paid off. It would have required significant debt, which would have curtailed spending on the playing squad. However, the decision could limit the potential for recurring revenue, making the club’s finances more vulnerable to downturns in performance.
What it shows is that splashing out isn’t a precondition for winning. Fans have every right to acclaim the teams’ success on the pitch. The owners deserve plaudits for their acumen off it.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.
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