6 May 2016

Leicester City's Triumph: A Sign of a Bursting Bubble?

Kyle Dutton

Leicester City Football Club are the English Premier League champions. Let that sink in. This team has shattered all previously held notions about what it takes to win trophies in football. With a squad spend near the same amount as individual players in traditional elite teams, Leicester have shown that money well spent is better than spending money with abandon and hoping for the best. While the party continues, we take a look at the financial implications of this fairy tale and wonder if it is a sign of a bursting financial bubble.

 It's official! Leciester City, a small team from the English Midlands, are the new English Premier League Champions.  Image supplied by Action Images /      Matthew Childs   

It's official! Leciester City, a small team from the English Midlands, are the new English Premier League Champions. Image supplied by Action Images /  Matthew Childs 

When the Highlanders won the Super Rugby competition in 2015, one could clearly hear their mercurial flyhalf, Lima Sopoaga, shouting “No one believed us!” This stems from the fact that their team was comprised of few stars and they were subsequently written off on numerous occasions throughout the season. We tend to hear these kinds of exclamations after game upsets but it's not often that you'll hear it post a campaign victory. The Highlanders had come together as a unit and showed that team sports are about a whole lot more than your marquee signings. 

This year we’ve seen Leicester City pull off a similar feat in the English Premier League (EPL). Is this a sign that the bubble that has been created around player signings is starting to burst?

The definition of a market bubble is that it is characterised by surges in asset prices to levels significantly above the fundamental values. They are often hard to detect as market participants struggle to determine these values which have often been inflated by mass participation. The most recent example is quite obviously the sub-prime mortgage crisis in 2008 which had huge ramifications throughout world markets and economies.

But bubbles have been around for centuries. The first recorded market bubble transpired in the 1600s in what is now the Netherlands. “Tulip Mania” reportedly left thousands in economic strife and although some economists have theories as to why it can’t be considered a bubble, the fact that people were trading 12 acres for one tulip bulb reflects how ludicrous the situation became.

Over the past few decades, with the onset of professionalism and worldwide television broadcast capabilities, player salaries across most sports have increased substantially. In 1957, a top English footballer’s annual take home was £1 677 (£75 000 in today’s money), but in 2014 the average weekly salary was £31 000.

As mentioned, this has been driven by television and worldwide access to viewing sporting fixtures. The return on investment that many corporates and wealthy individuals perceive they are able to gain by investing in associations with certain teams or players has meant that spending exorbitant amounts of money has become the norm in order to achieve success.

But this constant belief that the more you spend, the better results you achieve has left many clubs and individuals bankrupt. In 2014, the Championship football league in England recorded a higher wage bill than revenue generated. That is not sustainable. Clubs are being forced to attempt to increase ticket prices, alienating and out-pricing their fans, without whom the clubs could not exist.

Enter Leicester City and Claudio Ranieri. The latter has been involved in the EPL before as manager of Chelsea FC from 2000 until 2004. This time he was tasked with the fairly difficult job of keeping Leicester from relegation, having finished 14th the previous season (preseason odds og going down were 11:4). Ranieri and the team had different ideas.

With their entire squad spend equal to the amount that Manchester City spent on Kevin de Bruyne (£54 million) and a similar amount to Norwich City who are on the verge of relegation, Leicester have shown that you don’t necessarily need to have excessively expensive marquee signings to be successful. Granted, they did spend a fair amount of money over the previous few years under new owner, Vichai Srivaddhanaprabha, but the systems put in place allowed for them to source better talent at a fraction of the cost. Leicester's wage bill has risen from £36m to £57m, but that it is still only around a quarter of Manchester United's from two seasons ago.

Comparing Leicester City to other big league winners in Europe; PSG, Juventus and Bayern Munich, they have scored fewer goals, scored fewer points and completed fewer passes but they have spent a whole lot less and spent it wisely.

And therein lies the crux of the argument: have The Foxes proved that teamwork and creating a common culture driven towards a common goal is more important than one player and his ego? It’s not a new theory but it is something that club owners and others in the upper echelons of sport seem to have forgotten.

Many coaches would rather go into a campaign with more promising youngsters than so-called big names. Motivation is never an issue with the up-and-comers and you have far fewer egos to manage. This allows a coach to build a culture where everyone is pulling towards the same goal and players realise that they will all achieve success if they play for one another and not as individuals.

Leicester City and Tottenham Hotspur (the team with the average youngest players this season) have been great examples of this, whilst teams like Chelsea and Real Madrid have struggled to achieve success both domestically and in Europe. There are numerous examples in each case of egos getting in the way of cohesion, most notably Eden Hazard and Diego Costa playing a major role in the sacking of Jose Mourinho and a comment from Cristiano Ronaldo that if the whole team were at his level, they would be on top. 

The massive amounts that players are receiving is becoming a burden on clubs, the knock on effect of which is being felt in boardrooms. Outgoing Liverpool CEO, Iain Ayre, has had to deal with upset fans as his board approved an increase in ticket prices. Surely there is scope to pay the players less and ease the burden on the multitude of fans?

The funds “saved” could be used for a myriad of other positive endeavours. Spreading the wealth amongst developing players could allow for less pressure to perform felt at a young age. Academies could be given further reign to find hidden talents and some of the money could also be spent on education, allowing players to find a vocation after football. Teaching a young star how to manage his own wealth should be one of the pillars of any high performing academy. Pay each player less and teach them how to make their money work for them rather than paying them a colossal amount only for them to squander it needlessly. This is true for all professional sports in all regions.

Regardless of that, a culture of playing for the man next to you needs to be instilled. The West Indian Cricket team is a superb example of this. They have been back and forth with their administrators regarding salaries and found themselves going into the ICC T20 World Cup with their backs against the wall. But their belief in the talent the team possesses, and the will to work for each other, saw them hold aloft not only the Men’s trophy but also the Women’s and u19 trophies.

Ultimately, there may not be a crash but more likely a rationalisation of player salaries. This will benefit everyone associated with the sports we love, from players and coaches to fans and club management. Hoping for a market to be rational goes against everything that an investor believes in, but we can only hope that it happens.

CONQA Sport is hosting our second annual Elite Sport Summit in Cape Town on 5 & 6 October 2016.