Never in their wildest dreams could Norwich City supporters have imagined the riches-to-rags and back again roller coaster that they have been on for the past decade. The 12th place finish in the 2011-12 Premier League tops off an incredible three seasons which saw Norwich starting at the bottom of League 1 and winning two successive promotions to find their way to the top of the English pyramid. The top flight is not new territory for the club, the Canaries actually have a long history of making successful runs at greatness only to have their wings clipped by economic reality and then to bounce back again. This tenacity is what makes them one of the greatest underdog stories currently in the English Association.
Here I will look at the finances of the club from 2002-03 to 2010-11. Norwich’s recent trajectory has been determined by two major events: the pursuit and hangover from the Premier League and the hiring of Paul Lambert. The cycle of overgrowth, collapse, and renewal is a pattern that will crop up in every financial (and sporting) category when we talk about Norwich.
The revenue picture has been inconsistent given Norwich’s history but there has been growth over the entire period with revenues increasing by £10m to £23m (+77%) from 2002-03 to 2010-11. Revenues peaked at £37.4m (68% over the previous year) when the club was promoted to the Premier League in 2004-05. Revenue growth for the year came from an increase of £800k in sponsorship agreements, £3.6m in higher matchday revenues, and a whopping £19m more in league and TV payments.
Unfortunately the club was relegated in the same year cutting off the vital TV money that would have made for a much different story today. Revenue dropped the next two years and the slide accelerated after the Premier League parachute payments expired. Revenue dropped to £16.7m in League One but surprisingly this was due mainly to a loss of league income rather than a substantial loss of matchday support or sponsorships. The next season saw immediate recovery as the club was on the beginning of its rocket ride back to the Premier League. In 2010-11 revenue growth was helped by a return to a more lucrative TV market and bonuses for outstanding performances in League One and the Championship. Sponsorships and matchday revenues also recovered significant ground.
Breakdown of Norwich’s revenue by contribution:
Matchday is revenue from ticket receipts and sales made on game days. Matchday money has been the largest revenue category in 8 of the 9 last seasons and contributed an average 52% of total revenues. In 2010-11 matchday revenue was at a record £12.5m.
Let’s look deeper at the source of matchday income. Starting from an average of 20,352 supporters per game in 2002-03 attendances spiked to 24,350 in Norwich’s 2004-05 Premier League season. Surprisingly relegation and a slide in performance did not sap supporter fervor, in fact attendances grew to 24,755 as the club slid into League 1 and grew again to 25,386 as the club rebounded to the championship the next year.
Whereas in the case of Wigan declining attendances directly drove declines in gate and match-day revenues, with Norwich attendances have remained steady throughout the period and revenues have declined. In the ‘worst’ years of 2007 and 2010 revenue fell 6.8% and 4.3% respectively compared to the previous years. In 2007 there was a marginal decrease of 1.8% in attendances and in 2010 attendances actually rose suggesting that lower ticket and concession prices are the driver.
If we look at the number of matches played and the average matchday take per match this holds up:
Norwich actually played the more matches in 2007 (30) and 2010 (31) compared to other years but made less money per match.
A club plays a set number of home matches (19) per season, as such potential for match revenue growth from the league is limited to increases in seating capacity, higher ticket prices, or matchday sales. Generally, success in cup competitions creates more home matches and progress into later rounds increases the potential rewards per match as attendances swell n a favorable performance in the. However, with Norwich’s relatively consistent performances in the FA and Carling cups growth is not easy. Since 2003 Norwich has averaged 4 cup matches a season, usually performing better in the League Cup compared to the FA Cup. The most successful year (2007-08) saw 7 cup matches played through a run to the 3th round of the League Cup and a loss to Chelsea in the 5th round of the FA Cup. Similarly in 2009-10 Norwich made a run at the Johnstone’s Paint Trophy (FA League Trophy) fighting till the semi-finals before losing out to Southampton. The cup runs did not have significant impact on matchdays because of a combination of much reduced interest and prize moneys in the competition.
League is revenues derived from TV/broadcasting, league, and cup performance or participation bonuses. League money saw a one time jolt of £19m from the Premier League, rising to 54% of Norwich’s revenue. Following relegation Norwich received approximately £12m in parachute payments over two years which kept league revenues at a 35% contribution rate. After the lifeline was cut however league money quickly declined in importance falling as low as £1.6m during the club’s time in League One.
Commercial includes revenues from shirt, stadium, program etc. sponsorship and commercial deals. Commercial intake has held relatively steady with an average intake of £4m per year or an average of 20% of Norwich’s revenues. As with the other categories there was a spike in 2004-05 but revenues quickly fell back. From peak (2004-05) to trough (2008-09) revenue slid by 33%, it has since recovered to £4.3m.
Norwich’s shirt has seen a number of sponsors over the past 9 years from Digital Phone Company (yes that is the name), Proton/Lotus Cars, and Flybe.com each having the shirt for about 3 years. The most recent deal with insurance writer Aviva started in the 2008-09 season and has realized great value with the double promotion to the EPL. The deal was just extended by 4 more years to the end of the 2015–16 season.(wiki)
Other is unremarkable consisting mainly of revenue from a subsidiary which provides security at matches and other events held at the stadium.
Norwich’s expenses have grown over the period with total operating expenses rising from £19.7m to £22.8m in 2010-11. Costs peaked at £28.3m in the 2004-05 season.
Norwich has consistently maintained a low (at least compared to Wigan) wage budget with a wage to revenue ratio averaging 56%. Wages/revenue peaked at 61.1% in the 2007-08 season and has since dropped off to 53.2% for 2010-11.
Staff count at Carrow Road has followed the by now familiar pattern of growth during the Premier League year followed by decline in the lean years that followed. Since the 2006 high of 214 employee count has fallen to 181 in 2010-11. Cuts in ‘Other’ (administrative and operational) staff has accounted for much of the decrease, with 30 positions cut from the peak. But it is important to note that in the worst year (2009) playing staff was cut sharply below the historical level of 73 players/coaches to 63 leaving personnel severely depleted.
Norwich has accrued losses in 6 of the last 9 seasons:
The 2004-05 promotion season saw the highest profit of the period (£7.6m), profit declined in the following seasons as relegation followed and parachute payments declined. Net Losses peaked in 2009-10 at -£5.7m as reduced league payments from the relegation to League 1 and reduced ticket prices produced a one-two punch to the bottom line.
Looking at operating income with player trading results removed reveals a loss, but one which has been improving since 2008-09. As at many clubs, profit from the player transfer business is used to mitigate losses from regular club operations. Following the EPL year there were substantial player sales for the next three seasons which contributed to an average of 2m a year to operating income. 2009 marked the beginning of a new investment cycle.
From last available accounts the club had accrued losses of £m, of which £65.1m was covered by new debt borrowings.
Since 2002-03 the Canaries have spent £26.1m on incoming players, while taking in £13.1m from outgoing players for a net spend of £13m. Net transfer spending has averaged £6m per year and 6.1% of revenue between 2003 and 2011.
However the average spend figure smoothes out what a rougher (and more interesting) story of Norwich’s activity in the transfer market. Norwich’s history with managers is fractured due to much turmoil in recent years: Nigel Worthington, Peter Grant, Glenn Roeder, Bryan Gunn, Paul Lambert.
Nigel Worthington was brought in during the 2000-01 season and secured the Canaries second run in the top-flight in his third season in charge. A net investment of £1.9m in 2003-04 was enough to push Norwich into the top flight the next season. In 2004-05 Worthington targeted top flight survival and spent optimistically resulting in Norwich’s highest net spend of the period at £5.5m. Unfortunately the investment did not pay off as the club struggled through the season and suffered relegation on the final day. The following seasons saw a drop in player investment as key players departed, most notably striker Dean Ashton, and similar quality was not brought in. Worthington was terminated by the club early in the 2006-07 season.
During the push for the Premier League Worthington had spent almost £8m net on improving the squad, in his final two seasons a little more than £100k was spent on players.
Peter Grant was in charge for the 2006-07 season but really only had control of summer spending for the 2007-08 season. The trend of selling talent without replacements continued as reflected in a net spend of -£314k. The slide in squad morale showed in the results and Grant resigned early into 2007-08 to be replaced by former Newcastle manager Glenn Roeder. Like his predecessor, Roeder had limited time to make an impact with the squad under his control for only two transfer windows. Results under Roeder improved enough to allow Norwich to survive but the decimation of the squad continued as released players were replaced with loans and a paltry £295k was spent bringing talent in. Cracks were running deep already and Roeder was dismissed in January of the 2008-09 season. Former Scottish footballer Bryan Gunn was brought in but unable to save Norwich from relegation to League One and was quickly dismissed after Norwich’s 1-7 defeat at the hands of Colchester, the worst result in the club’s 107 year history. Gunn spent £875k bringing in players, a sum that represented the most significant investment the squad had seen in over four seasons. Gunn’s results may have been poor but perhaps his transfer of a player who would be the club’s most valuable asset for the next three seasons makes up for it: Grant Holt
Following the humbling defeat the owners turned right around and hired the man who was responsible for it. Paul Lambert achieved promotion back to the Championship in his first season with little to no activity in the January window of 2009-10 and was immediately given funds to invest. In his second season Lambert spent £4.4m bringing players in which paid immediate dividends as he achieved an astounding back-to-back promotion to the Premier League.
As squad size and quality was reduced in the aftermath of the Premier League debacle wages fell. They have since rebounded to Championship levels.
DEBT AND FINANCING
Norwich has total liabilities of £m. Of these £20.9m are loans, debt, and security obligations. £2m in bank revolvers, £11.2m long term notes from banks, £6.2m interest free from the Delias, and £1.6m from other sources.
Loan Notes Norwich’s primary funding source are two loan notes of £7.5m, the first was extended in the 2002-03 season and the second in the 2003-04 season to fund expansion of the ground. The notes are secured by revenues generated by the stadium including season ticket and matchday income and are due to be repaid in full in 2018. Due to strong attendances and matchday revenues the club has been able to pay down the notes without much problem and the there was 11.2m outstanding at the end of 2010-11.
Bank Debt is a revolving credit facility which has no set term limit and a variable interest rate, it behaves much like a consumer credit card. Use of the revolver peaked at £6.5m Worthington’s Premier League season and has been drawn down considerably to £2.0m in 2010-11, whether this drop was caused by the club or the bank is unknown.
Related loans are sums which have been extended to the club by the owners and have favorable terms and/or interest rates. This category has been relatively small until the past three seasons. In September 2008 owners Delia Smith and Michael Wynn-Jones injected more capital into the club in the form of personal loans increasing the balance of Other Loans to £5.8m. As of 2011 additional funds were added to increase the interest free portion of the club’s capital to £6.2m.
There are three main parties which have extended Norwich interest free financing. Delia Smith and Michael Wynn Jones have loaned £2.1m. Michael Foulger has loaned £1.4m repayable on the earlier of either August 31, 2012, promotion to the Premier League, or Smith and Wynn Jones owning less than 30% of the club. Andrew and Sharon Turner have loaned £2.5m repayable on the earlier of either May 18, 2017, promotion to the EPL, or Smith and Wynn Jones owning less than 50% of the club. All loans are repayable pending satisfaction of conditions related to indebtedness and security on the club’s revolving loan with the Bank of Scotland.
Cost of Capital
Interest on revolving bank debt and loan notes is the only financing cost. Total interest payments peaked at £1.7m in 2007-08 and have fallen to £1.3m in the most recent year.
In 2002-03 Norwich were paying a leisurely 3.4% rate on £7.8m in loans. Indebtedness and financing rate jumped to 8.5% the next season as new loan notes were issued. each with interest rates of 7.67% and 7.24%,
As the loan notes were issued at fixed rates all of Norwich’s funding cost volatility comes from the revolving bank debt. You can see on the chart how the rate for bank debt has moved much more dramatically compared to everything else. In 2003-04 bank rates were 10.7%, they dropped to 7.5% during the Premier League year and after because of increased revenues and parachute payments. However the financial crisis quickly killed any benefit and at the peak in the 2007-09 seasons debt cost spiked to the 12.7% level.
The related party loans are all interest free, because of this ‘soft loans’ the club’s cost of capital is lower than it would be if financed at market rates. If Norwich had to finance similar debt levels at market rates they would be paying £2.0m rather than £1.3m in interest annually.
Norwich are one of the best rags-to-riches stories of recent years and their current upswing looks set to continue for a bit longer. In the worst case the club has one more year in the Premier League and four years of (now improved) parachute payments to bank on. The club is comparatively less dependent on League and TV revenues because of its strong supporter base and commercial revenues, as such the Premier League money is a bonus.
A wage bill likely to still be below average also contributes to a lean club which has room to grow and make moves to cement a decade of performance.
Norwich still depend on the financial security and interest of rich owners, although less so compared to others. Paying down debts and moving the club toward self-financing should be a priority and the bonanza from the EPL should be directed toward that end. But the real challenge for the near term is what to do without Paul Lambert. It is likely that without Lambert the club would be closer to League Two rather than the Premier League so supporters are right to worry about his departure. New manager Chris Hughton is talented but whether the squad fits his style and vice versa is a completely different matter and much depends on his ablility to maintain the performance levels of his predecessor. Norwich have been here before, the challenge is to break the cycle this time.
On the financial side there is little that needs tinkering, by most everyone’s ruler Norwich have done astoundingly well for themselves. The club has overperformed on a small wage budget well tailored to fit the current economic means of the club. Further careful investment in the playing squad and expansion of the stadium will ensure that revenue is flowing into Carrow Road long into the future. Sustained performance and long term commitment from the owners rather than any wholesale change is what will win the day for the Canaries and hopefully avoid roller coaster rides in the future.