How Newcastle United Has Been Exploited For The Gain Of Sports Direct

This article was originally written for the summer 2014 edition of True Faith.  Subscribe here.

Now I’ve got a bairn I don’t tend to spend Sunday morning’s in bed overcoming a hangover any more.  I’m up at half five with Rastamouse on the telly.  The extra 5 hours of waking life this provides leads me to do some strange things I would never have done previously. Don’t think badly of me, but I have read the Sports Direct Accounts for 2013.  All 92 pages.

It’s the sort of mind numbing task most Newcastle fans would probably be interested in hearing about, if it revealed anything about the club, but not actually something anyone would want to do themselves.  So, here’s what my intrepid investigation on your behalf has found.

Nowt.

You wouldn’t believe it, but at no point do they explain how Mike Ashley is a pathogen infecting Newcastle United for the benefit of his company.  There’s only one mention of the club at all, which states that it has purchased £498,000 of goods from Sports Direct (this increased to £841,000 in the more recent NUFC accounts).  

Hardly the smoking gun to confirm what we all think.

There are however excerpts that will aggravate any Newcastle fan who has looked at one of the ubiquitous Sports Direct signs in St James’ Park, and given a rueful sigh.  There is a consistent message drummed into the reader about areas of growth and how they’re to be exploited.  
Developing brand awareness is a key factor in ensuring a sustainable future and the appropriate level of investment in advertising and technology is an important component towards achieving this

Our position as the consumer champion, offering an unmatched range of products at the best available prices is now reaching more countries as we continue to expand internationally.

The board’s aim to expand further into Europe has been a key strategic driver for a number of years which has proved extremely successful.

International Retail revenue grew 20%.

Our (website’s) monthly unique visitors have risen 50% on FY12.  Online revenue continues to be an area of significant growth and the Group continue to look at opportunities to develop this revenue stream further.

Huge growth in International  revenue (remember, every single Newcastle game is shown internationally, not just the Sky & BT Sport games) and even larger increases in website popularity (SportsDirect.com@SJP), these have been and continue to be the key drivers for Sports Direct. Any company that has expanded so successfully in these areas would normally have invested heavily in promotion across the new territories.  Unfortunately, the accounts give no details as to how much exactly Sports Direct have spent on publicity. The only mention of it is to say

Expenditure on advertising and promotional activities is recognised as an expense as incurred.

I had to move on from the accounts to find any information about that.  A Marketing Week article from February says that, remarkably, Sports Direct are making these large strides without any increase in marketing spend whatsoever.  

Sports Direct says it is on course to hit its full-year profit target without increased investment in marketing, margin and inventory.

The retailer says that while it could increase investment in marketing to boost growth, it will hit its full-year profit target without doing so. It’s gross profit for the 13 weeks increased 14.6 per cent.

While Sports Direct does invest in price, it spends relatively little on advertising.

No-one would claim that Sports Direct’s expansion is built entirely on the back of advertising purloined from Newcastle United, however it is obvious that the worldwide audience that tune into Premier League football are offering a significant contribution to the growth of the company.   In 2011, Sir John Hall stated this was the rationale for Ashley when he made the initial approach to buy the club

They wanted to market their sports goods in the Far East and would use the club to help do this.

This plan is paying dividends in a massive way, but how has it impacted Newcastle United? Only one argument is offered as to the commercial benefit this situation offers the club. It was articulated at the Fan Forum in February.

The Club suggested that while it is always proactively looking to attract new commercial partners and to sell that advertising space, in the current climate it could not command a sum for that space anywhere close to the £129m invested into the club interest free by the owner.

Every single word of this explanation is a lie.

It is debunked entirely by what is written in the Sports Direct Accounts and what Marketing Week and John Hall have said in the quotes above.  The free advertising was the aim of the purchasing the club, it is paying off in a big way and will continue to do so as long as Mike Ashley remains as owner.

The £129m loan amount is referred to as an investment.  Nobody that pays for advertising is ever considered an investor though, they are buying a service and receive none of that payment back.  Emirates will not be repaid any of the £150m they have paid to sponsor Arsenal for 5 years (£30m a season).  Mike Ashley’s £129m has been used to justify 7 years of publicity so far (£18m a season), will keep him advertising for years to come and we assume will then be paid back to him in full.

Ashley would like us to believe that the quid pro quo element comes from two words, “interst free”.

The board explained that the owner's position is clear and that the Club is not attempting to hide it. To add context, it was explained that the Club's debt cost £8m in interest alone every year before Mike Ashley purchased the club.

This context should not go unquestioned.  The club’s figure for interest payments here is exaggerated.  Almost every year prior to Ashley’s arrival Interest was payable at £4.5m a year.  In the year prior to Ashley’s arrival this grew by £3m to £7.5m.  Also, every other billionaire that owns a club that had any debt has not only stopped interest payments, they have converted their loans into equity, effectively wiping out the debt at their clubs.  Abramovich at Chelsea (£340m), Mansour at man City (£305m), Al Fayed at Fulham (£212m), Lerner at Villa (£90m),  Short at Sunderland (£69m), Leibherr at Southampton (£38m) etc.  None of these advertise their other companies for free or hold their loans over the club as a stick to beat them.  They write off the loans and maximise the financial performance of the club.  

To give Ashley as much benefit of the doubt as possible, we can accept that interest could be charged, that the club save somewhere between £4.5m and £8m given that it is not.  It is also true that the amount is in excess of the income Newcastle could reasonably expect to receive by selling the space to any other company at the moment.  Had Newcastle kept up with Spurs and Liverpool these past  few years, perhaps we could have attracted larger sums, but what makes Newcastle the host to Sport’s Direct’s parasite is that the club’s association with them, the stadium renaming, relegation, the toxic relationship between owner and fans is what has cheapened the brand to the degree that we now compete financially with Stoke and Southampton rather than Liverpool and Spurs.

The true commercial cost to Newcastle of associating with Sports Direct is seen in the drop in commercial revenue of the club which still shows little possibility of recovering to pre-existing levels any time soon.


Updated Table for 2014.  2013 figure was £10m less as quoted below.
Current commercial income remains £2m less

£10m every year less than prior to relegation.  However the board try to spin the interest free loan, the difference in commercial income received would have covered that interest easily with millions left over spare.  It’s this fact that means, even if the interest were the £8m the club claim, we would have had better earnings had we continued to pay that interest and maintained our commercial standing and brand attractiveness in the game.  Man U pay £70m a year in interest because they can afford to as a commercial behemoth.

It can also be seen that every other club in the league (relegated no more than once, like NUFC) over Ashley’s time has not just maintained commercial income but grown it.  So the recession or factors other clubs deal with cannot be blamed.

Having chased Kevin Keegan out of the club in 2008, Mike Ashley said

Don't get me wrong. I did not buy Newcastle to make money. I bought Newcastle because I love football.

If only it were true.  We can see from the football Alan Pardew plays, with Ashley’s blessing, that it’s not the aesthetics of the beautiful game that appeal to him.  Ashley loves profit, he has implemented a structure to maximise revenue for Sports Direct at minimum cost for the company and himself. They are a leech on the club sucking the life from it, placing their own global retail ambitions above Newcastle’s ambition for silverware.

Sources
https://docs.google.com/document/d/1hbsGCv5kAWPS3bT1WnpLj7gtsWBphwsTrvau4YyRm38/edit?usp=sharing
http://www.theguardian.com/football/2014/mar/03/aston-villa-football-finances

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