Despite their victory over Lille last weekend, Olympique Lyonnais’ start to the season has been far from convincing with manager Claude Puel reportedly being given three games to save his job. Coming off the back of two seasons where Lyon finished “only” second and third in Ligue 1, questions have been asked about whether Puel is the right man to take the team forward. Although this would have represented success for almost any other club in France, the end of domestic league dominance must have felt like failure to those supporters whose team won the League an unprecedented seven years in a row from 2002.
In fact, Lyon’s rise from relative obscurity to become the leading club in France by some distance is an amazing story. When Jean-Michel Aulas, a local software entrepreneur, bought the club in 1987, they were languishing in the second division, deeply in debt, and, in the new owner’s words, burdened with “no history and a public largely uninterested in football.” Two decades later, their finances have been revived and they are one of only four clubs to have qualified for the Champions League eleven years in a row (the others being Real Madrid, Manchester United and Arsenal), culminating in an appearance in the semi-finals last season for the first time ever.
"Jean-Michel Aulas - happy days"
This incredible transformation has not been as a result of a wealthy benefactor pumping money into the club (like Chelsea), nor is it down to a lengthy managerial dynasty (like Manchester United or Arsenal), but is the result of an exemplary strategic plan from the chairman and CEO, Monsieur Jean-Michel Aulas, which he kindly explained in the last management report, “In the first phase, from the club's purchase in 1987 until 1998, the priority was on advancing to Ligue 1 and consistent results in league play. In the second phase, beginning in 1999 when Pathé purchased a stake and lasting until 2010, the objective was to keep the club in Ligue 1's top three, and thereby take part in European championships. These objectives have been fully achieved.”
The long-term aspect of the plan has been a key element of Lyon’s improvement, as they have grown gradually. In a country famous among other things for the Tour de France, Aulas opted for a cycling analogy, “Each year we set as an objective to have progression. It’s like a cyclist: you can overtake the people just ahead of you,” though he later embraced four wheels, saying that he wants Lyon to become “the ultimate Formula 1 car, capable of shifting through the gears to cope with all types of road.”
While Aulas has received his fair share of criticism for running the club as if it were a business, his theme is that there is a virtuous circle in football: over time the more money a club makes, the more matches it will win, and the more matches it wins, the more money it will make.
Indeed, Lyon have been profitable for many years, though they suffered a large loss of €36 million in 2010 for the first time since 2004. The deficit would actually have been even higher without an €18 million tax credit, as the club reported a loss before tax of €54 million. This is somewhat of an aberration for Lyon, whose pre-tax profits had averaged an impressive €23 million in the previous four years.
Aulas has described the results as a “blip”, pointing to the generic problems facing football clubs in France, but the main reason for the changing fortunes at Lyon is obvious, as the profit made on player sales was tiny in 2010, compared to the customary €40 million or so achieved in the past few years. If this trend had continued, Lyon would once again have reported a profit in their latest accounts.
Player trading has played an important role in Lyon’s financial success with transfer fees making up a significant portion of the club’s revenue every year except the last, when the profit from player sales only reached a paltry €3 million, as no big transfer was made in the period. In the previous four years, the sale of players generated enormous proceeds of €220 million, resulting in considerable capital gains of €164 million.
"Benzema - good example of Lyon's strategy"
This is part of what the club describes as an “innovative business model”, whereby Aulas has excelled at acquiring players and selling them on for exuberant fees to more renowned clubs abroad. The list of his hugely profitable transfers is almost endless, including Mahamadou Diarra and Karim Benzema to Real Madrid, Michael Essien and Florent Malouda to Chelsea, Eric Abidal to Barcelona and Tiago Mendes to Juventus.
His skill in negotiating large transfer fees won him the grudging admiration of Sir Alex Ferguson, when the great Scot was asked about Benzema possibly moving to United, “Lyon’s president is a sharp man. He sold Essien for €38 million, Diarra for €26 million, Malouda for €19 million, Abidal for €16 million. And I congratulate him for that.”
The profits on such sales have been boosted by an increasing number of the players being sold coming up through Lyon’s training academy. In 2009 over 70% of the sales proceeds came from players trained at the academy, most notably Benzema whose transfer was alone worth €35 million. This has been assisted by the club investing €5 million in state-of-the-art training facilities, which were completed in 2008, with graduates such as Hatem Ben Arfa and Loïc Rémy being other prominent examples of the young talent graduating from the academy.
"You're having a Ben Arfa"
One of the main objectives given to Claude Puel was to smooth the transition of the young players trained at the academy into the first team and this strategy is starting to pay off with the emergence of the likes of Gonalons, Pied, Grenier and Lacazette. However, there has been a quid pro quo on the player trading, as the club has also decided to increase the stability of the squad compared with the past in order to facilitate the integration of the youth team exports with more experienced players.
Nevertheless, Lyon’s ascent has been in large part down to their ability to play the transfer market better than any other club in Europe, which was recognised by Simon Kuper and Stefan Szymanski in their thought-provoking book “Soccernomics”, where they dedicated an entire section to Lyon’s transfer market rules. These are essentially an extension of Aulas’ winning theme that was outlined above, owing more than a little to the “Moneyball” theories of Billy Beane, the legendary general manager of the Oakland Athletics baseball team.
The thinking goes like this: If you buy good players for less than they are worth, you will win more games. You will then have more money to buy better players for less than they are worth. The better players will win more matches and that will attract more fans (and thus more money).
"A lot on Puel's mind"
Lyon’s “magnificent seven” tips and tricks for the transfer market are as follows:
1. Exploit the inefficiencies of the transfer market. This means adopting an unsentimental approach whereby you sell any player if a club offers more than he is worth. As Aulas said, “Every international at Lyon is untransferable – until the offer surpasses by far the amount we had expected.”
2. Transfers should be decided by people who are at the club for the long-term. This means that Lyon’s transfers are decided by a group consisting of Aulas, the technical director, Bernard Lacombe, and whoever happens to be the current coach. As Emmanuel Hembert, head of the London sports practice of management consultants AT Kearney, explained, “A big secret of a successful club is stability. In Lyon, the stability is not with the coach, but with the sports director, Lacombe.” Lyon understand that the coach is only a “temp” better than most, as their seven consecutive titles were gained with four different coaches (Jacques Santini, Paul Le Guen, Gérard Houllier and Alain Perrin), while Lacombe has been at the club for over 20 years.
3. The best time to buy a player is when he is in his early twenties. Aulas explained, “We buy young players with potential who are considered the best in their country, between 20 and 22 years old. “ The theory is that the players are old enough to be nearly fully formed, but too young to be expensive stars. The other added benefit is that relative unknowns accept modest salaries.
"Bernard Lacombe - Lyon legend"
4. Try not to buy centre forwards. This is the most over-priced position in the transfer market in marked contrast to goalkeepers, who deliver most “bang for your buck”. In this way, the homegrown Benzema was given his opportunity and thrived on the responsibility, before making bundles for the club.
5. Replace your best players before you sell them. This avoids a panic purchase or a lengthy transitional period. This policy meant that Aulas could happily let Essien to go to Chelsea when they turned up with a wheelbarrow full of cash.
6. Buy Brazilians. Lyon have been very adept at securing footballers from Brazil, with former players including future internationals Edmilson, Juninho and Fred, while the current squad boasts Cris and Michel Bastos. The trick here was to send one of their past captains, Marcelo, to Brazil to act as an exclusive agent.
7. Help your foreign signings settle in. It is difficult to move to another country, but Lyon employ people to help their players relocate, find somewhere to live, learn French, open bank accounts and generally cope with homesickness. This sounds obvious, but many clubs did not provide such services a short while back.
Up until recently, this has proved to be extremely lucrative business for Lyon with net receipts of €21 million in the four years up to 2009 as purchases of €199 million were more than compensated by sales of €220 million. In that period, player trading generated an almost unbelievable €164 million profit. This was epitomised in the summer of 2009 when Benzema’s sale was the fourth highest in that window, though it was somewhat overshadowed by the megabucks splashed out on Ronaldo, Ibrahimovic and Kaka.
However, everything changed last season, when Lyon suddenly started to act more like Real Madrid by spending €96 million on recruiting six new players (Lisandro Lopez, Michel Bastos, Aly Cissokho, Bafetimbi Gomis, Dejan Lovren and Jimmy Briand), while only recouping €14 million, largely from the transfers of Kader Keita to Galatasaray, Fabio Grosso to Juventus and Anthony Mounier to Nice. This is a huge outlay for a club with an annual turnover of less than €150 million.
This trend continued this summer, when only Olympique Marseille came anywhere near to Lyon’s €24 million net spend in France, which included €22 million on the new glamour boy of French football, Yoann Gourcuff. All of a sudden, Aulas has loosened the purse strings and Lyon have become the big spenders.
"Lisandro - part of last summer's spending spree"
So why change the habits of a lifetime? This seemed to make no sense, especially when the policy had been working so well. Apparently, this is all about making the jump to the next level. The board explained the modified approach in the 2009 management report, “We decided to invest in experienced players in order to close the gap with the major European clubs”, as they saw an opportunity to close the disparity as other clubs were suffering more from the economic recession, given Lyon’s undoubted financial strength.
To an extent, this has not been such a bad move, if you consider the progress to last season’s Champions League semi-final, but it’s unlikely to be a permanent change in the long-term strategy, as the most recent management report re-affirmed the club’s commitment to its tried-and-trusted business model, “The trading target for 2010/11 will be to re-establish a significant excess of player registration sales over purchases.”
Whether this is as straightforward as it was a few years ago is open to debate, as the unfavourable economic conditions have definitely slowed down the transfer market with this summer’s spending in Europe’s top five leagues nearly 40% less than in the summer of 2009. OK, it is true that this may have been impacted by the World Cup starting at the same time that the transfer window opened, but there is little doubt that clubs have been hit by the financial downturn, so they now think twice about making expensive new acquisitions.
Having said that, Lyon’s focus on the transfer market remains laser sharp. This is confirmed by the club’s management report explicitly listing the market value of its players as €208 million (source – Transfermarkt), implying a potential capital gain of €74 million, after the book value is deducted. As this figure does not include an estimate for their younger players, they contend that the total value for the team is more like €220 million, which would suggest a capital gain of €86 million. It is extremely rare that clubs draw attention to this unrealised gain in their accounts, which only underlines the importance of player trading to Lyon’s strategy.
This is further highlighted when you look at the revenue from Lyon’s core business, which last year amounted to just €146 million. Not terrible by any means, but a long way behind Europe’s leading clubs, which is where they aspire to be. Lyon are the best placed French club in Deloittes Money League, based on 2008/09 results, which is one place ahead of their rivals Olympique Marseille.
However, the top Spanish and English clubs enjoy far higher revenue, while the German and Italian clubs also earn much more. Real Madrid and Barcelona generate almost three times as much revenue, while Manchester United earn more than twice as much and even a relatively unsuccessful team like Hamburg have a turnover higher than Lyon. There’s effectively a €50 million shortfall against the next tier of clubs (around €200 million turnover), which to date Lyon have traditionally made up by astute wheeler dealing in the transfer market.
This is abundantly clear when you examine Lyon’s revenue growth over the last five years – or I should say lack of growth. Their revenue has only grown 14% from €128 million in 2006 to last year’s €146 million and almost all of that growth came back in 2007. Although revenue did increase 5% this year, this was only after a steep decline in 2009. Over the same five-year period, expenses have risen by 52% from €133 million to €202 million. That’s a huge financial challenge right there and the only solution to date has been for the club to buy and sell its way out of trouble.
The importance of player trading can be seen very well in the above graph. If profit on player sales is considered as “revenue”, its contribution has been notable in the past few years, often double the money received from gate receipts. However, when that well dries up, as it did in 2010, the effect is evident and immediate.
However, broadcasting is still the largest revenue source with €78 million contributing over half of Lyon’s revenue. This is not the highest reliance on television money in the Money League, but it’s probably still a little too high for comfort. Revenue from the LFP (Ligue de Football Professionnel) and FFF (Féderation Française de Football) amounts to €49 million, while distributions from UEFA for the Champions League are worth €29 million.
Like every other club in Europe, Lyon’s broadcasting revenue is miles behind Real Madrid and Barcelona, whose ability to negotiate individual deals (for the time being at least) gives them astonishing TV revenue around €160 million, but it’s also at least €20 million behind other teams in their peer group. It’s difficult to see this situation changing any time soon (or ever), as it was touch and go whether the current French deal would even be as much as the previous one. In the end, the French TV rights were granted to Canal Plus and Orange under a four-year contract from 2008 to 2102 in a deal worth €668 million per season, which was slightly higher than the old agreement.
"Toulalan - younger than he looks"
The money is allocated as a mixture of fixed and variable components. The fixed element comprises 50% of the total media rights and is distributed equally among all Ligue 1 clubs, while the remaining 50% is distributed based on performance and media profile. This is fairly complex, so 28% is based on league position (23% for the current season and 5% for performance over the last five seasons); 19% is based on the number of games broadcast (14% for the current season and 5% for performance over the last five seasons); and 3% is intriguingly based on attacking play (“le challenge de l’offensive”).
Much of the €10 million increase in TV revenue was down to Lyon’s successful run in the Champions League with UEFA’s distribution growing from €24 million to €29 million. These payments are a combination of performance (how far the team progresses) and a variable share of the TV pool. The latter is partly dependent on the relative importance of the French TV market, but also importantly how many French clubs take part in the Champions League. For example, Lyon estimated that if only two French clubs had qualified for the group stages in 2009 (instead of three), their revenue would have been €4 million higher.
Although Aulas has argued that failure to qualify for the Champions League would not be a damaging blow to Lyon’s finances, as they have plenty of money saved for a rainy day, he has also admitted that the club’s annual budget is built on the assumption of a “podium finish” in Ligue 1 and reaching the quarter-finals in the Champions League. Over the last three years, Lyon has earned an average of €27 million a season from Europe’s premier tournament, which could potentially be even higher in the future, as UEFA’s new three-year contract for 2009 to 2012 is up 34%. Given these figures, I would argue that the Champions League is very important to Lyon – about 20% of total revenue, in fact.
"Hugo Lloris - brilliant orange"
In contrast to television, commercial revenue fell 13% (or €6 million) to €43 million in 2010, the second year in a row that it declined, following a €10 million decrease in 2009 from the high point of €59 million. Again, although this might be pretty good for a French club, it’s still not competitive on the international stage.
In fact, revenue from sponsorship and advertising was down sharply this year. This was partly due to the recession afflicting all industries, but in fairness Lyon were also impacted by a couple of exceptional factors specific to them: the repeated postponement of the French online gaming law meant that new sponsor BetClic was not authorised to place advertising on players’ shirts; and the club made a once-off €4 million payment to Umbro as compensation for the early termination of their contract to supply kit.
The decrease in commercial revenue in 2009 was similarly influenced by once-off movements, with the previous year being boosted by a €3.5 million signing fee from Sodexo for the catering contract and €1.8 million in prize money from Lyon’s victory at the Peace Cup in South Korea. In addition, the club’s restaurant business was outsourced and its brasserie discontinued, leading to a €1.3 reduction.
"Bastos keeps his eye on the ball"
However, the club do expect commercial revenue to “rise substantially thanks to new contracts”. Lyon has signed a ten-year agreement with Adidas as their exclusive kit manufacturer, starting from July 2010, with the supplier paying a basic fee plus royalties based on product sales. Merchandising revenue is likely to increase, both in France and especially abroad, on account of Adidas’ extensive distribution network. The contract could generate gross revenue between €80 million and €100 million depending on results on the pitch.
As Mangas Gaming has now been awarded a licence to operate in France, the BetClic brand can finally appear on players’ shirts in domestic football. This is a four-year deal worth €5-7 million per annum, which runs from 2009 to 2013 and replaces the long-standing agreement with Accor and Renault Trucks.
In September 2007, Lyon signed a contract with Sportfive, valid for ten years from the delivery of the new stadium, whereby Sportfive will have exclusive use of all marketing, hospitality and media rights belonging to the club. In return, Lyon receive a €28 million signing fee upfront, which is paid in four annual installments of €7 million between December 2007 and December 2010. By the way, this is the same company that has put into place a similar funding arrangement for Juventus’ new stadium.
Finally, the club has ambitious plans to grow its brand internationally through the establishment of soccer schools outside France in Northern Africa, the Far East, India, the Middle East and the USA. This will help cement the idea of Lyon as a club known for training and developing elite players.
Thanks to Lyon’s tremendous performance in the Champions League, match day revenue rose €2 million to €25 million, but this remains one of the lowest in the Money League. In fact, only three teams in the top twenty have lower revenue from this stream: Borussia Dortmund, Roma and Juventus. This is obviously constrained by the smallish capacity of their ground, the Stade de Gerland, which only holds 40,500, though the average attendance is even lower at 35,600, which means a capacity utilisation of 88%.
Despite this failure to fill the existing ground, the club has planned a new 60,000 stadium, which is due to be completed in December 2013, as this should provide a significant uplift to their revenue. In the shareholders’ meeting in December 2009, the board specifically drew attention to the impact of the Emirates Stadium on Arsenal’s match day income, which has more than doubled to around €110 million since the move.
This is because the Emirates is a more modern and commercially orientated stadium. In the same way, Lyon’s project aims not only to increase ticketing revenue significantly, partly through more corporate boxes, but also to develop ancillary revenue from a leisure centre, hotels, restaurants, offices, a shopping centre, including a dedicated OL store for merchandising, and potentially naming rights.
"Here's to future days"
The club’s initial estimates of the investment required were between €250 and €300 million, but this has reportedly risen to around €350 million. The presentation to shareholders claims that this will be 100% privately funded via “innovative financing” with very limited impact on the taxpayer, but there are reports that €180 million of public money will be used, presumably to improve transport links.
Although there has been some opposition to the new stadium, the project has been boosted by the awarding of the Euro 2016 tournament to France. The proposed stadium is one of the 12 on the short-list and should benefit from a new law that is to be introduced with the aim of enabling France to honour its commitments to UEFA, which will accelerate planning procedures.
On the cost side, the wage bill rose by a staggering 17% to €112 million, though this was explained as being primarily due to performance-related bonuses for advancing so far in the Champions League. This is the same issue that has caused Barcelona so many financial problems over the last couple of years. To be fair, French clubs are hampered by what Aulas wryly calls “Europe’s most developed tax system.”
Even so, it is clear that the wages have grown too far, evidenced by the wages to turnover ratio of 76%, which is higher than UEFA’s recommended maximum limit of 70%. This ratio has been on a steady upwards trend over the last few years from a respectable 59% in 2006.
In the management report, the board explicitly states that it “has set itself the target of significantly reducing the payroll over the next two periods, as other French clubs seem to be doing.” This does not seem to be an idle boast, as they have already offloaded many high-earning players this summer, including former captain Sidney Govou, Mathieu Bodmer, Jean-Alain Boumsong and Frederic Piquionne. These sales might not have brought in much money, but they will go a long way to reducing the wages to a more sustainable level, cutting around €12 million from the annual cost base.
The trend in player amortisation, namely the annual cost of writing down the cost of buying new players, also reflects the modified approach to the transfer market. In the three years between 2006 and 2008, it hardly changed at all, rising slightly from €24 million to €26 million. However, in the last two years it has grown to €43 million “as a consequence of the club’s substantial investments,” increasing by €9 million (a chunky 26%) this year alone. This is still much lower than those sides that have spent really big in the transfer market, such as Manchester City €83 million, Barcelona €71 million, Real Madrid €64 million and Chelsea €57 million. Furthermore, if Lyon’s board carries out the plans that it has announced, then it might well have maxed out at this level.
It should be clearly stated that in spite of this significant player investment, the club maintains that it still has a “sound financial structure with surplus cash” with the summary report for June 2010 stating that the club has positive net cash of €15 million.
Unfortunately, we don’t have any more details behind this, but we know from last year’s annual report that the club had net cash of €62 million in June 2009, so the recent player purchases must have had some effect, as the net cash has dropped by €47 million in the last 12 months. Looking at those 2009 figures, Lyon had very little financial debt at that stage with only €42 million of bank loans, which were more than covered by €104 million of cash.
We should note en passant that the club also owed €36 million to other football clubs a year ago, though this was completely offset by €62 million owed to them by other clubs, leaving a net football surplus of €27 million. So, last year’s analysis showed that Lyon had a net surplus of €89 million per UEFA’s definition, which is very impressive. This year’s figures will not have been quite as good as that, but they must still be very healthy indeed.
In addition, the club has shareholders’ equity of €131 million, which has given it sufficient robustness to pursue its ambitious growth policy. To put this into context, Lyon’s equity represents 44% of the total equity of French football clubs. Much of this is derived from the club’s successful flotation in 2007 on Euronext Paris, after a change in French law permitted sports clubs to float on the stock exchange, which raised €91 million.
Lyon’s board directors own the majority of these shares with Aulas himself having the largest stake (34%) through his holding company ICMI, followed by Pathé and OJEJ (24%), companies controlled by Jérôme Seydoux, and a further 7% held by other board members. However, the percentage of voting rights held is even higher, amounting to around 76%: ICMI 42%, Pathé and OJEJ 29%, other board members 5%.
"The only way is up"
Even with this stability, the club has plans to further strengthen its financial capacity, maybe to help raise funds for the new stadium. First, the board will subscribe to a €40 million capital increase for one of the group’s subsidiaries, OL SASP, through a partial incorporation of its shareholder loan and, on top of that, the club will issue €25 million in bonds or similar securities that could give deferred access to share capital.
The club’s presentation to shareholders concluded that theirs was “an exemplary business model.” Although that might sound a little bombastic, there’s no doubt that the model has proven itself over several years, though it’s fair to say that it has been severely tested by recent events. Having achieved the first two phases of Olympique Lyonnais’ grand plan, Aulas now talks of a “new phase of development” which will use the new stadium project to “pursue our objective of moving the club to a higher plane.” The ultimate objective, written down for all to see, is to “win a European Cup before 2016.”
Aulas once said that it is only a matter of time before his team wins the Champions League. If they managed to do that, with all the financial disadvantages they have compared to the traditional leading clubs, then they truly would be the Kings of Lyon. Is it likely? Who knows, but stranger things have happened.
