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Tuesday
Jan012019

Why Kroenke CANNOT invest big money

It’s an age-old debate we’ve heard ever since Stan Kroenke joined Arsenal as owner. Why doesn’t he put his hand in his pocket and invest? This is usually accompanied by complaints that the wrong owner was brought into the club, and that Alisha Usmanov would have spent Arsenal back to competitiveness.

Although history has proved time and time again that spending money alone is not the route to competitiveness - Man Utd and Leicester being two sides of the counter coin, the plain fact is that ever since the Premier League’s Short Term Cost Controls (STCC) were enforced in 2013, Stan Kroenke would not have been able to invest super large sums of money in players even if he’d wanted to.

Why? Because Arsenal’s wage bill has been spiralling out of control for years due to Wenger/Gazidis’ horrendous mismanagement, and no matter how much is/was available to spend on players, there has been no margin to substantially increase salaries through player acquisitions without breaking STCC rules.

As explained, STCC (aka Financial Fair Play) was set up by the Premier League in 2013. It was implemented to prevent clubs spending the huge influx of TV money on player wages, thus increasing disparity throughout the Premier League. It also enabled clubs the opportunity to cap spending in a way that was fair and equitable across the board.

Note that STCC rules only apply to clubs with a wage bill above £67m. Using their previous year’s wage bill as a baseline, those clubs are prohibited from raising wages by more than £7m per annum. However, there is one caveat. The rules are directly related to broadcasting revenue. Therefore, if a club can prove the wage increase is financed by its own revenues by way of increased commercial income and match day income, they can supplement the £7m limit.

For clubs whose commercial revenues are experiencing substantial growth year-on-year, this will not make a huge difference. However, Arsenal trail miles behind their competitors. In 2016/17, for example, commercial profits only increased by £10.7m. Add that to Arsenal’s £7m limit and wages could only increase the following season by £17m per annum - less than Mesut Ozil’s annual salary.

So what’s the solution to the restrictions that STCC gives a club like Arsenal? The solution is to either drastically cut the wage bill and/or massively increase commercial revenues and match day income. However, commercial revenues have ridden alongside Wenger’s decade-long underperformance and have therefore been poor under Gazidis’ stewardship and, obviously, there’s not much room to increase match day income substantially unless supporters want to pay astronomically higher prices.

To make things worse, Arsenal’s cash flow has been hit now that the club no longer participates in the Champions League. Indeed, operating profits have tumbled 60% as a result of Arsenal’s failure to qualify for the competition, so not only is there less room to raise wages via commercial and match day income, but there’s less cash available to buy players.

The logical and only step, therefore, is to reduce the wage bill. With a much reduced wage bill, Arsenal would have the manoeuvrability to spend surplus cash balances on new players without exceeding STCC rules. Unfortunately, however, this is not what the club has been doing in recent years. In fact, despite ever-decreasing returns on the pitch, Arsenal’s wage bill has only been rising.

Take last season for example. You would think the club would have made huge ground in reducing the wage bill by releasing a number of high earners. We saw the departures of Walcott, Sanchez, Debuchy, Giroud, Oxlade-Chamberlain, Szczesny, Gabriel, Coquelin and Gibbs. Combined, this would have reduced the wage bill by around £655k p/wk.

However, Arsenal signed Aubameyang, Lacazette and Kolasinac, and panicked when signing Mkhitaryan and increasing Ozil’s wage packet from £140k to £350k p/wk. Fag packet calculations demonstrate that Arsenal’s wage bill increased by approximately £100k p/wk or £5m per annum. While these figures are not exact, it’s obvious that for as long as the wage bill keeps rising, there is virtually no wage room for the club to substantially increase spending on players.

It was the same story this summer. Perez, Akpom, Mertesacker, Cazorla and Wilshere departed, but this was offset by the signings of Sokratis, Torreira, Leno, Guendouzi and Lichtsteiner – so no substantial wage savings there, if any. That means Arsenal had no room to buy big name players with a big wage packet to match.

STCC clearly illustrates how Kroenke is handcuffed. Not that he would invest in Arsenal out of his own pocket, but even if he wanted to, Arsenal simply cannot spend their way back to competitiveness.

The club is where it is due to the unrelenting underperformance by the previous manager and CEO. Both on the pitch and off it, their decision-making has been disastrous. Wages have increased massively coinciding with ever-reducing returns both financially and on the field of play.

This is what the new board and Emery have inherited and it will take a long time to rectify. They pretty much have to start from scratch and don’t have a lot to work with - little wonder Gazidis didn’t fancy hanging round to clear up his own incompetent mess.

The starting point will be to drastically reduce Arsenal’s wage bill. The board and manager will also have to come up with creative solutions in terms of signing players. This has begun with the acquisition of Torreira, Guendouzi and Leno – not big signings, but players for the future with a normalised wage packet and resale value.

Lichtsteiner and Sokratis were inexpensive short-term stop gaps designed to shore up the defence, and Arsenal will probably need more of that going forward to help get back on track. Armed with this information, it’s now a little more understandable why reports are surfacing that any January deals will be focused around cheap older players or loan deals.

On the plus side, next summer, the new shirt sponsorship and kit deal cycle begins, alongside a separate sleeve sponsor, which alone is expected to bring in £20m. Adidas have replaced Puma as kit manufacturer, which will bring in another £20m pa. Arsenal will also have room to offload some more high earners to bring the wage bill down – notably Ramsey and contract expirees Welbeck, Cech, Monreal, Ospina and Jenkinson.

Player sales, particularly Ozil, will make a big difference towards getting Arsenal back on the straight and narrow, not only bringing in cash but further room to increase wage bill expenditure. However, make no mistake STCC reduces Kroenke’s options to seriously reinvest in Arsenal. The rules have changed the investment landscape for wealthy clubs, and if you examine the activity of all of the big PL clubs in recent years, you can clearly see how STCC has affected their player recruitment policies.

The clamour for Kroenke to reach deep into his pocket has to stop. It won’t happen and, more importantly, can’t happen. Liverpool and Spurs had to do it the hard way, and so will Arsenal. At least they provide grounds for optimism that competitiveness is within Arsenal’s reach with astute player purchases and good management. It also clearly demonstrates why Emery, or any manager, needs substantial time to get Arsenal back to where it needs to be. Anyone who believes there is a quick fix is either living in dreamland or denial.

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Arsenal Truth can be found on twitter @ https://twitter.com/trutharsenal

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Reader Comments (13)

Good article and one that I have been spouting off about as well. Everybody moans about wanting a Sugar Daddy without realizing that even if we had one, we couldn't spend like a club used to. Which is also why Emery is proving to be a shrewd investment. His experience in this sort of environment in Sevilla and Valencia will come in handy with over-performing with his hands and feet bound.

Perhaps our ropey defense is a realization from Emery that it is our weak link and our attack is the biggest strength, so the emphasis would be on utitlizing it to the best that he can manage. Either way, it certainly is a much more enjoyable season than I can remember for a long time.

January 1, 2019 | Unregistered CommenterBegeegs

I didn't know that.

Best Arsenal blog. Always spot on and knowledgeable. Super article, waiting for your match report.

January 1, 2019 | Unregistered CommenterAnonymous

Liverpool only ever got their hands on Allison, Fabinho and Virgil because they could offload Coutinho for a cool £110 mil. We will have to sacrifice one of Pierre or Laca to make sure we can reinvest in a badly needed brand new defense, but our current squad haven't really got much resale value. Who would take on Elneny, Ospina, Monreal, Mustafi, Xhaha etc. and leave a nice fat transfer fee?

Ramsey will be gone in the summer without any resale for us, so will Danny W and it seem to me we are giving away all our players for free.

January 1, 2019 | Unregistered CommenterDanish Gooner

If we can't stand the heat, stay out of the kitchen! Stop moaning about not winning things and settle for 5/6th - Arsenal have punched above their weight for years due to astute management and can do so again. We are not that bad - we won against Spurs and drew with Liverpool at home - we only need to find a GOOD DM and commanding CB, and of course good coaching!

Hire George Graham for a season as defensive adviser - drill, drill, drill some more - the Graham way!! Trouble is the mindset at Arsenal is all about attack, attack - everything geared to scoring and flowing football. Our passing is very inaccurate and risky, giving the ball away at the back and in midfield is our biggest problem. Spurs, Man C and Liverpool keep the ball until they can make a simple safe and accurate pass!

Get coaching Emery! Drill, drill, drill, stop the flashy passing and slow the the game down! Watch Man City.

January 1, 2019 | Unregistered Commenteredward

Great article. Even Herbert Chapman brought in experienced players during his early years at Arsenal. Has happened many times, e.g. I believe Joe Mercer was in his thirties when he joined Arsenal to bolster the defence after the war?

January 1, 2019 | Unregistered CommenterNigel Foster

I have a couple of questions about your conclusions. First, You stated that the STCC uses the previous year as the baseline. If potential annual salary increases are £7m plus non television profits for the prior year, there isn't any incentive to reduce the wage bill beyond the one year windfall of incoming transfer fees and reduced wages. If they don't commit that windfall to wages, the baseline will reset at a lower level the following year.

Second, you used the commercial profits from 2016/17 to conclude that Arsenal only had £17m to commit to increased wages that year, and gratuitously added that it was less than Ozil's salary. The part of Ozil's salary that has an impact on this, is his increase in salary with the most recent contract, not his total salary. That said £17m is enough to commit to two quality players at £150k per week. So as long as transfer fees aren't restricted by STCC there is no reason Kroenke can't invest in quality players.

__
AT

You're right, what was the incentive after the first year? I guess it's not about incentives but balancing the books. That's the intention of STCC. If you want to make significant additions other than what's allowable, generate more commercial income and sell players.

Note, those figures I presented were ball park estimates for that year and not indicative of what would necessarily be available to spend every year. It was reported that Arsenal came dangerously close to exceeding the cap when signing Mhkitaryan and re-signing Ozil. Besides that, now that Arsenal is a private company they don't have to divulge accounts - it will be difficult to know going forward whether there's been an increase in commercial income.

£150k per week might sound a lot, but it's not. These days that gets you 1 x Kolasinac and 1 x Lacazette with a bit of spare change. This squad needs 10 players, and a few world class ones who probably earn £250k p/wk minimum. Hence, long, slow climb back - assuming Emery is the right man.

January 2, 2019 | Unregistered CommenterNM

I can't believe the gullibility of our fanbase or maybe the desire to be special we are willing to compromise in order to feel loved. Let's face it, Kroenke for years has been making a profit off the club. Now, FFP does not state that you cannot splurge, it simply aims to keeps the books in check.

It is now easy that Kroenke can hide behind FFP forever; we haven't even been in the top 4 for how long? We still turned a profit for the umpteenth year running. We cannot keep justifying this frugality with no purpose.

The reality is, players need to be bought. It doesn't mean buying the whole team, but Arsenal spending 20 mil in a transfer window is not frugal but downright thievery. We don't deserve this and shouldn't seek to justify why Kroenke won't spend when we all know he should!

January 2, 2019 | Unregistered CommenterDtheMan

I cannot accept the argument that Kroenke is blameless for the shambles of Arsenal's transfer policy and long-running mess of handling players' contracts. Kroenke has been the majority and controlling shareholder at AFC for almost 8 years (assumed 66% ownership in April 2011).

The catastrophic transfer dealings and mishandling of players' contracts (e.g. Sanchez) happened under his ownership. Other large shareholders like Usmanov were not allowed a seat on the board. Without doubt, Wenger and Gazidis made a complete bollocks of transfers and contracts. But they only made this bollocks because Kroenke - the owner - allowed them to do it. Wenger and Gazidis were employees of Kroenke - not the other way round.

__
AT

Of course he's complicit, but most of the complaints revolve around him not supporting the board/manager financially. The fact is, he has within the self-sustaining model and he cannot invest large sums even if he wanted to.

At the end of the day, you're looking for financial support from the owner, and he gives it. Wenger was provided more than enough funds to be competitive. But Kroenke is not going to get involved with the day-to-day running of the club, and you wouldn't want him to because he knows jack shit about football.

If those he assigns bollox it all up, he cannot prevent that, but he has to act when it happens. He acted belatedly with Wenger, and we'll have to keep a close eye on things moving forward.

January 2, 2019 | Unregistered CommenterMoC

A good post. Very informative. I have two questions:

1. Man United are a commercial machine with vast sponsorship who can mitigate the effect of STCC from increased off-field revenues. However, how does this sit with Man City? You may have crunched the numbers but with the huge splurges on players and salaries they have made in recent years, is this in accordance with the rules?

2. Arsenal never would (as they always wish to maintain standards and play fairly) but what is the punishment if one is found in breach of STCC?

Thanks

__
AT

Man City have to comply with the rules like everybody else. Remember, it's the wage bill they have to focus on and transfer spend does not necessarily correlate to that.

For example, City could dump 10 high earners to reduce their wage bill but spend £500m on new players to bring it back up to where it was and still achieve equilibrium. So while they're spending a ton of money - money that most other clubs couldn't dream of, the wage bill could theoretically decrease or stay within permitted limits.

As far as I'm aware, nobody has broken the rules, and sanctions (whatever they are) will only be applied if and when somebody does.

January 2, 2019 | Unregistered Commenterosdavies

Now, this is what I call an investigative piece, not the agenda-ridden trash on Le Grove. Clear, concise and transparent. You should have a bigger audience!

January 3, 2019 | Unregistered Commenterjasongms

In light of Emery's comments today that we can't sign players outright and only on loan, how does this tie in with STCC as we would be liable for any loaned players' wages?

I understand that if Kroenke sanctioned £100m of his own money to spend now it wouldn't make much difference as we are limited by STCC but surely this applies to loaned players too?

Any thoughts would be appreciated.

__
AT

Obviously, Arsenal have to comply with STCC and only they know if they have the room to indulge the salary of any players they might look to bring in on loan - whether paying the whole wage, a percentage of it or none of it.

Unfortunately, we cannot be too specific on how much money is available as we no longer have access to the club's accounts now it has gone private. Even when we did, wage bill analysis was only ever a guesstimate - albeit a fairly accurate one.

I first reported on wage bill wastage seven years ago, and revealed the mess we would be in now as early as October 2016: http://arsenaltruth.squarespace.com/arsenal-truth/2016/10/19/gazidis-fingers-in-the-till-againarsenal-salary-cap-points-d.html

January 10, 2019 | Unregistered Commenterosdavies

At the risk of becoming very boring on this, I read this article which raises a counter-argument to your view above:

https://theshortfuse.sbnation.com/2019/1/14/18182224/arsenal-transfer-rumors-news-premier-league-wage-rules-explained

I’d be interested to hear your thoughts on this. Thanks

__
AT

I address this in a Twitter post. Quoting: "We probably have £220m", "Estimates have us around £200m", "You can do the math", "Pay me and I’ll go to the effort." "Rules are very weakly enforced and can be easily evaded." "We have plenty of players we could offload" - total unsubstantiated garbage

January 15, 2019 | Unregistered Commenterosdavies

No excuse.. Kroenke STILL NEEDS TO COFF UP..

June 1, 2019 | Unregistered CommenterJjay

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