News Analysis: Premier clubs feel the pressure

Merchandise sales have slumped while transfer fees and players' wages have soared. Football clubs are at a crossroads

NEWCASTLE UNITED, the Premier League football club, yesterday added to the gloom surrounding the sector when it revealed that a slump in merchandise sales had caused a steep fall in first-half profits.

Leeds Sporting, the owner of Leeds United, a rival team, provided another reminder of the financial strain engulfing many football clubs with a warning that players' transfer fees and wage demands were growing at "unsustainable" levels.

The two companies' comments follow a similar downbeat statement by Manchester United, the UK's largest and richest club, and point to a widespread malaise among the providers of the country's favourite form of mass entertainment.

The clubs' woes come at a crucial time for the football industry, as the Government prepares to announce its decision on the pounds 620m bid for Manchester United by BSkyB, the satellite television group part-owned by Rupert Murdoch.

The financial reporting of publicly quoted teams has also been transformed by a shake-up in the accounting treatment of players' transfers, which, according to some clubs, clouds results figures and penalises home-grown talent. In different ways, the BSkyB bid and the financial changes are set to have a serious impact on the future of the football industry.

After years of soaraway growth, fuelled by lucrative television deals, stock market flotations and the sport's ever-increasing popularity, football clubs are at a crossroads.

On one hand, the attempted takeover of Manchester United has raised the prospects of multi-million pound links with media and leisure companies, which could replenish the clubs' coffers and fund their ambitious development plans.

On the other hand, the financial pressure on clubs is piling up, as wage bills soar and the traditional revenue-earners such as merchandise and gate receipts dry up.

As Vinay Bedi, a director at the stockbroker Wise Speke says: " Next year will be crucial in the management of football clubs. The increasing challenges faced by clubs will separate the men from the boys."

Newcastle is a case in point. On the face of it, the club, which was rocked by several boardroom shake-ups last year, should be one of the financial high-flyers in the sector. It is spending pounds 42m to increase its stadium capacity from 36,000 to 51,000. Moreover, it is almost certain to be bought by the cable group NTL, which has an option on over 50 per cent of the shares, if the Government approves the Manchester United bid.

However, yesterday it reported that operating profit in the first half nearly halved to pounds 5.7m, largely due to a near 40 per cent fall in the sales of replica shirts. Industry experts believe that part of the slide in merchandise sales was caused by the disparaging remarks on its fans made by Douglas Hall and Freddy Shepherd, two of its directors.

The finance director, Les Wheatley, denied that the "Toon Army", Newcastle's fanatical supporters, had been alienated by the comments and pointed to a general downturn in the retail sector. Whatever the reason, a fall in a key money-spinner such as shirt sales means that football companies have to look elsewhere to raise revenue for their development plans and, more importantly, their wage bills. Since the 1995 Bosman ruling allowing players to move on free transfers when out of contract, transfer fees and salaries have ballooned.

Manchester United provided a graphic example of the problem on Tuesday when it said that it had to increase ticket prices by 14 per cent to meet its stars' wage demands.

Leeds is taking a different route. The Yorkshire club managed almost to double interim profits to pounds 3.36m, partly because wage costs were limited to a 6 per cent rise.

However, Peter Ridsdale, the chairman, yesterday warned the industry over excess pay. "[Wages] must not be allowed to continue to grow at levels that are unsustainable when compared to the income growth from the customer base," he said.

The club's managing director Jeremy Fenn believes that increasing prices is only a short-term solution to the problem. That is why Leeds Sporting has chosen to look for revenue outside football, transforming itself into a property developer and financial adviser.

In Mr Fenn's view, Leeds' future funds will come from a pounds 65m retail and leisure complex to be built near the stadium. The club is also lending its brand to a travel agency and to a financial services operation.