Corporate profile: United all over the world
Manchester United's management, boosted by last season's treble victory, has masterminded British sport's most successful marketing and merchandising enterprise at home. Now there's all to play for around the globe
Wednesday 28 July 1999
When Manchester United kicks off the new domestic football season in Sunday's Charity Shield against Arsenal at Wembley, to an uneducated eye the team may just look like 11 grown men on a pitch. But the match will once again focus attention on the club that has turned itself into one of the most marketable commodities in sport. The Man Utd brand has become a moneymaking machine in red shirts and Adidas boots, a wannabe global megabrand. With international expansion now a major part of the game plan, its business horizons extend far beyond the gates of Old Trafford.
The power of the brand to sell was underlined this summer, supposedly the off-peak time for British football. United has rarely been out of the newspapers. We have seen the "wedding of the year" of United star player David Beckham and "Posh Spice" Victoria Adams. There was the controversial decision pulling United out of the FA Cup to participate in the World Club championship in Brazil. Takeover talk has resurfaced as a consortium of rich individuals manoevered to buy part of chief executive Martin Edwards' stake in the club. And, earlier this month, a Red Wave of United support swept East Asia as the club played Shanghai and Hong Kong.
The team's momentum has become self-perpetuating. After winning the treble last season (the premiership title, the FA Cup and the European Champions' League) the club will secure more TV coverage than any other UK side. Early stages of the European Champions' League are worth pounds 5m alone. Success breeds success and United can afford to scour the world for the best players andalso attract the cream of British youth.
The key questions for United the club and the publicly quoted company is how far can they take that brand and how resilient it is. One issue will be decided today when the Restrictive Practices Court rules on whether the Premier League has been acting as a cartel in negotiating collectively with BSkyB over the sale of television rights to Premier League games. A ban on collective negotiating would be bad news for the smaller clubs but a boon for United. As the dominant force in the UK game, it would be able to secure vast sums for its TV rights. But it is the resilience of the brand that is perhaps the most important issue and often the most ignored. The harsh truth is that this is a brand which has yet to be properly tested. The central criticism of publicly quoted football clubs has always been that commercial success - and therefore the share price - is wholly dependent on success on the pitch. Falter there and financial performance will surely follow. After winning the Premier League five times in the past seven years United has enjoyed an unprecedented winning streak. The shares have duly soared by a factor of 16 since the club floated on the stock market in 1992.
But that dominance is recent. In the 1970s and 1980s Liverpool was soaring. When the Anfield side was winning everything in sight, United was suffering a barren run, failing to win the UK championship for 26 years until the 1993 season. Before the European Cup victory this May the team last lifted that trophy in 1968.
"It is fair to say the brand has not been tested in the modern environment," says Bruce Jones, United's stockbroker at Merrill Lynch. But he believes the club's support is more loyal and more broadly based than that of many rivals. Nick Batram, a football analyst at stockbroker Greig Middleton, points to the huge surge in United's merchandise sales in the past seven years and asks: "If they hadn't enjoyed that run of success how would those sales have performed? We don't know." Yet there are historic reasons why the United name carries such resonance. The Munich air disaster of 1958, which cut a swathe through a gifted young team, left a deep scar. The subsequent renaissance under Sir Matt Busby together with a buccaneering style was epitomised by the skill of legends such as George Best and Bobby Charlton. But United's board must take credit for capitalising on the commercial opportunities the footballing success of the 1990s has offered. It is a role the board has grown into. In his earlier days, some might have questioned the commercial acumen of the club chairman Martin Edwards. This, after all, was the man who in the 1980s agreed to sell United to entrepreneur Michael Knighton for just pounds 20m, only for the deal to collapse due to funding problems. Last year BSkyB tabled a pounds 623m takeover bid that was blocked by the Government.
But Mr Edwards and his team have exploited the United legend impressively. Mr Batram says: "The management has done a good job developing the commercial side of the club." He says Mr Edwards, who chairs the club and is chief executive of the publicly quoted company, has allowed other directors more decision-making power than many football chairmen would tolerate. "It sounds a cliche but it has been a team effort," Mr Batram says.
Crucial to United's financial success - which has seen sales double in five years and profits before transfer fees almost treble - has been its expansion on several fronts. Only pounds 30m of United's pounds 87m turnover last year came from the traditional area of gate receipts and programme sales. Revenue from TV rights soared by a third to pounds 16m and merchandise sales topped pounds 24m.
On the pitch, the Old Trafford stadium is being expanded to take 65,000, an increase of 10,000, and the Theatre of Dreams museum and Red Cafe are being constantly upgraded. Off the pitch the launch of Manchester United International two years ago is a key plank in taking the United brand worldwide. United has signed franchise deals to open United shops and Red Cafes in places such as Singapore and Dubai.
The club's recent tour of East Asia was designed to boost local interest in the club and lay the foundations for taking United to the Chinese masses. The club has already said it will tour the Far East once every two years to maintain support.
That is a bold aim. The size of the Chinese market is certainly a mouth- watering prospect for the Old Trafford accountants. With a population of 1.2 billion and a booming interest in football it is a market ripe for exploitation. But critics say United will struggle against the persistent problem of branded goods counterfeiting in Asia. Others say interest in football may be transient and most Chinese people do not have the money to buy replica kits at pounds 30-plus. One Chinese fan said: "When I buy a normal shirt I don't pay very much, so why should I pay a fortune when it says United? In China you can just make a shirt and print on it whatever you like."
There are other markets United could target. One is the United States where interest in football is has been boosted by the country's recent victory in the Women's World Cup. Australia, with its large ex-pat community and Scandinavia could also be promising.
Media revenue is also a rich seam to mine. United's TV fees jumped last year, boosted by its treble-winning exploit. The club will pocket a minimum pounds 5m from the Champions' League this year even if it is knocked out at the first stage of league games. The club has also set up Manchester United Television (MUTV), a joint venture with Granada and BSkyB. The cable TV channel broadcasts United news and features from 6pm to midnight seven days a week. Then there is the Internet. United joined the host of free Internet service providers a fortnight ago when it launched Manufree.net, aimed at increasing ticket and merchandise sales.
All this might make United shares - priced at 33 times prospective earnings - seem relatively cheap. But there are potential clouds on the horizon. One is spiralling wages which could push the club's cost base out of control. Wages already account for 30 per cent of total costs. And the push by club captain Roy Keane for a new contract which would pay him pounds 40,000 a week, compared to the team average of pounds 20,000 to pounds 25,000, would test an agreement that all United players should be on comparable terms until 2002. Another is spiralling transfer fees. United showed a pounds 15m deficit on player trading last year after spending pounds 10.5m on defender Jaap Stam and pounds 12.6m on Aston Villa's striker, Dwight Yorke. With some players now commanding fees of pounds 20m-plus, the risks of a poor purchase are soaring.
A third issue is management succession. United's glory run has been masterminded by Sir Alex Ferguson, manager since 1986. But he says he intends to retire at the end of his contract in June 2002. And the one-time heir apparent Brian Kidd has succeeded only in guiding Blackburn Rovers to relegation since leaving Old Trafford last year. United's ability to pick the right man will be crucial.
Another issue likely to be resolved soon is Mr Edwards' stake in the club. He has said he wants to succeed Professor Sir Roland Smith as chairman of the plc and admits it would be sensible to reduce his 14 per cent holding in the club. "There is an argument that says there is nothing wrong in having a stake but that maybe 14 per cent is too high," he has said.
United has developed such momentum it would take a major setback to halt it. They have successfully exploited their brand at home - the challenge will be to draw a similar enthusiasm from away fans.
Rise of the Reds
1878: The carriage and wagon works dining committee of the Lancashire and Yorkshire Railway Company formed Newton Heath Cricket and Football Club
1902: Manchester United formed after Newton Heath goes bankrupt
1926: The team slumps to a record 0-7 defeat by Blackburn Rovers
1958: Munich air disaster. Manager Matt Busby builds a new team of stars, including Bobby Charlton and George Best (left)
1968: Manchester United win the European cup
1986: Alex Ferguson appointed manager
1991: Club floats on the London Stock Exchange
1993: United wins the Premier League for the first time in 26 years, with stars such as Eric Cantona (right)
1995: Record victory 9-0 over Ipswich Town
1998: pounds 623m BSkyB bid
1999: Wins treble, including first European Cup victory since 1968. Government blocks bid
Market capitalisation: pounds 550m
Turnover in 1998: pounds 87.8m
Profits before transfer fees in 1998: pounds 29.6m. Profits after transfer fees in 1998: pounds 14m
Main businesses: Manchester United has established itself as the UK's most successful club after winning the UK premier league five times in the past seven years. Last season was its best, with an unprecedented treble - the League, FA Cup and European's Champions' League. United has been developing its Old Trafford ground to include a "Theatre of Dreams" museum, a "Red Cafe" and a hotel.
Key executives: Professor Sir Roland Smith, chairman. Martin Edwards, chief executive.
Wage bill: pounds 24.3m
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