How Chelsea went from record £60m profit to £96m loss in one year

Chelsea recorded an after tax loss of £96m ($126.3m exchange rate 1.31) for 2018/19. This is a swing of £156m from the previous 12 months when the club generated a record profit of £60m. 

Under the ownership of Roman Abramovich, Chelsea incurred sizable losses in the early years while enjoying great success on the pitch. Between 2004 and 2013 Chelsea lost over £670m and only recorded a profit in one year - 2011/12 £1m.

From 2014 to 2018 the club essentially broke even with 3 profitable years vs. 2 loss producing years.

So, what caused such a dramatic swing and pushed Chelsea back into the red? Here are 5 reasons.

Turnover

Turnover was flat.

What was gained in terms of commercial revenue was given back in reductions in matchday receipts and broadcast revenue.

Profit on Player Sales

£60.5m is a substantial profit from the sale of players but it was only about half of what Chelsea generated the year before - £113m. 

The 2018/19 profit of £60.5m brings Chelsea’s total profit on player sales to £450m over the last decade. Selling players at a profit has been a key part of the Chelsea business plan and without that money Chelsea would have hemorrhaged a massive amount of money.  

Exceptional Costs

If it happens again and again, is it really exceptional? In 2017/18, Chelsea paid out £6m to buy back “certain retail and licensing rights” - not for the first time. For 2018/19, the amount increased to £26.6m and this time it was another old favorite - paying off a coach and his staff.

It cost £26.6m in termination and legal costs to part with Antonio Conte and his staff. According to the Daily Telegraph this brings termination costs in the Abramovich era to around £90m. 

Amortization

Chelsea hasn’t just been selling players over the least few years but they’ve been buying as well - albeit somewhat restricted last summer due to a transfer ban. Transfer and agent fees are amortized over the life of a players contract so the profit and loss statements take hits over the lifespan of the contract.

Chelsea’s amortization costs have nearly doubled from 2016/17 (£88.5m) to 2018/19 (£167.6m) with the increase year-to-year from 2017/18 £44m.

Big fees paid for Kepa Arrizabalaga (Athletic Bilbao), Christian Pulisic (Borussia Dortmund), and Jorginho (Napoli) will also be absorbed in the financial statements over the next few years. 

Wages

Chelsea have historically paid wages above market rate during the Abramovich years.

There have been periods of restraint but in the last year wage costs have again hopped the fence increasing by £40m to £263m.

Although it is not clarified in the financial statements some of the increase may be down to bonus payments related to winning the Europa League. Another cost driver is the increase in non-playing staff year-to-year from 236 to 283.

Summary

The swing of £156m can be captured in 4 bullet points:

Profit on Player Sales down £52m

Exceptional cost up £20m

Amortization cost up £44m

Wages up £40m

Total £156m

Looking ahead

The most encouraging news for Chelsea supporters is on page 12. There is confirmation of owner Roman Abramovich’s continued support “for the foreseeable future” through his company Fordstam Limited via Chelsea FC plc.

The Chelsea FC plc financial report quantifies the level of support from Abramovich for 2019 as £247m - up from £69.1m in the previous year.

But how might Chelsea’s financial results look 12 months from now?

Here is a snapshot of how things might turn out:

By finishing in a similar position (4th) in the Premier League Chelsea should see an increase in TV money of at least £10m.

By qualifying for the UEFA Champions League round of 16 (playing Bayern Munich) the club has already earned more than from winning the Europa League in 2018/19. Chelsea can expect a minimum of £25m more from UEFA and substantially more should there be further progress.

Amortization costs very much depend upon what Chelsea do in this transfer window. 

We already know that signing Mateo Kovacic will add around £10m to the tab and there will be a full year of costs of Pulisic’s contract - around £6m. For every £10m spent by Chelsea in this window, it is estimated that another £1.25m will be added to Amortization costs. 

A transfer spend of £70m together with “sunk” costs may add £25m to costs.

If Chelsea can get through the rest of the year without incurring exceptional costs then the bottom line will benefit by £26m.

In the 2018/19 statements it’s noted on page 27 that subsequent to the year the club “disposed of the registration of 7 players.” This netted over £115m after fees and levies. We can’t say for sure that this is pure profit but most of it likely is. Sales in this transfer window could add to this amount and so a profit on player sales of £120m is not an unreasonable estimate.

Assuming that the balance of Turnover vs. wages and other operating costs remains around the same Chelsea has a good chance to return to a break-even position in 2020.

Note: The numbers and comparatives are for Chelsea Football Club and are slightly different than the Chelsea FC plc that includes results from peripheral activities. For example, the plc recorded an overall loss of £96.6m vs. a £96m loss from the Chelsea Football Club statements.