Monday, January 21, 2013

Whiffing on Risk

Since the start of the 2011-2012 season, Arsenal CEO Ivan Gazidis has regularly and famously said the club has "kept some powder dry," and the cash on the balance sheet shows it. There's most likely about £75 million available for player acquisitions and new salaries right now, if you set aside a good chunk of the club's £154 million cash position (at May 2012) for debt service and a Champions League contingency fund. The new five-year, £150 million shirt and stadium sponsorship deal with Emirates Airlines will add another £30 million to the pot in the coming summer.

That creates a 2013 transfer kitty of more than £100 million, which supporters can reasonably expect to be deployed, given the obvious shortcomings and poor form of the current team. (Read the January postings of the 7amkickoff blog for insightful analysis of where the club should be adding.) 


A single-minded focus on personnel risk


Gazidis says a lot of things, and to pick out the image of the dry powder might unfairly characterize the club's thinking. But it's an image that sticks for several reasons:
  1. The club has not brought in new players whose fees have exceeded those of players sold by the club, having registered profits on player sales, since at least 2007 (source: The Swiss Ramble)
  2. Prior to this month's re-signing of Theo Walcott, the club has sold marquee players rather than exceed the existing wage ceiling
  3. The highest reported transfer fee in the history of the club is the £14.5 million for Andrei Arshavin in 2009 (per Arsenal Report's Transfer Centre)
  4. Manager Arsène Wenger's statements, such as "We are open to strengthening the team, but the difficulty is to find what strengthens us," indicate skittishness about incoming transfer activity
This evidence in word and in deed suggests that the club's leadership considers the failures of new signings to be a primary risk to be mitigated. It's not difficult to understand this position given the long need of the club to pay off the burdensome aspect of the stadium debt and the transfer flops of Marouane Chamakh, Sebastien Squillaci, and Park Chu-Yung.

The problem is that the club's leadership has elevated the risk of personnel mistakes to a level of strategic priority. Often it seems like the only priority.


Ignoring the damage


In the process of focusing on the possibility of acquiring poor individual performers, which I would consider a tactical business risk, the club is now running a risk that is much more damaging--the risk to the Arsenal brand.

The Arsenal brand has been 125 years, or at least 85 years, in the making. Certainly beginning in the Herbert Chapman tenure in the 1930s, the club has worked to establish its brand as a distinctive and successful balance of sensible and innovative, of English and cosmopolitan, of street smarts and class. The most visible manifestations of this brand have been the exciting playing styles at the peaks of the Chapman and Wenger eras.

That's all being jeopardized by the approach to transfers and the near obsession with ensuring the precise value of new playing personnel.

As a result, a growing--and unfortunately not unfounded--perception of the club is emerging: It's stubborn and doddering, a full turn from the image hard-earned and well promoted over the years. When's Triangle blog recently published a Downton Abbey-to-EPL converter, Arsenal was equated with Robert Crawley, the Earl of Grantham, who is "electing to remain stuck in his ways as the modern world passes him by."

The history of brands indicates it's difficult to reverse the fundamental perceptions of a brand once they've been turned in a negative direction. The examples of Toyota, whose massive vehicle recall damaged its reputation of quality, and the Susan J. Komen Foundation, whose public split with Planned Parenthood called its focus on women's health into question, should serve as cautionary tales. Perhaps more to the point, Sony has stood still while such rivals as Apple, Panasonic, and Microsoft have usurped its prime positions in the laptop, television, and video game markets, respectively.


Where the pain will come


As has been the case with Sony's gradual decline, don't expect a single event to signal the downward shift of the Arsenal brand. Instead, each disappointing transfer period, followed by a stretch of subpar performance on the pitch, will represent a step in the worrisome direction. Eventually, the trend will show up in the club's finances, as sponsors drive harder bargains and ticket sales lag.

I was admittedly much more concerned about the potential damage before the new Emirates sponsorship deal was announced. Still, the positive effects of that agreement could be wiped out by weakening match-day revenue, failure to secure secondary and regional sponsorships, and prolonged absence from the Champions League.

As Arseblog wrote on 9 January, "How long before that [a combination of high prices, under-performance and refusal to invest] has a knock-on effect on revenue in other ways, such as sponsorships, advertising, endorsements and so on? Do you want to pay for a pitchside ad running in front of swathes of empty seats?" 

Here's hoping that majority owner Stan Kroenke, Gazidis, and their colleagues recognize the risk before the effects hit the finances. By then, it'll be too late.

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