Tuesday, November 16, 2010

Why Ajax Are No Longer Dutch Masters

For football fans of a certain age, the name Ajax resonates with history, bringing back memories of the early 70s when the famous club from Amsterdam won the European Cup three years in a row, displaying a brand of “total football” that also inspired the Dutch national team in its dazzling run to two World Cup finals.

Guided by the prodigious talents of the legendary Johan Cruyff and ably supported by the likes of Ruud Krol, Johan Neeskens and Arie Haan, Ajax established themselves as one of the foremost clubs in European football with the distinctive white shirts with the vertical red band down the front becoming the epitome of “cool”. It wasn’t just the fact that they won so much, but the striking manner of their victories, as they exhibited a unique blend of individual creativity and progressive tactics.

Although Ajax have never quite regained those dizzy heights, Louis van Gaal’s young side, featuring the precocious skills of Clarence Seedorf, Edgar Davids, Patrick Kluivert, Marc Overmars and the de Boer twins, did reach the European Cup final two years in succession in the mid-90s, winning the trophy in 1995 by beating Milan 1-0 with a late goal from Kluivert.

In fact, Ajax are the most successful Dutch football club of all time, not just in the various domestic competitions, but also in Europe. They have won the Eredivisie (the national league) a record 29 times and the Dutch cup 18 times, while they are one of only three clubs (Barcelona and Juventus are the others) to have won all three European trophies: the European Cup (now the Champions League) on four occasions, and the UEFA Cup and Cup Winners’ Cup once each. In short, this is a team with impeccable pedigree.

"The one and only"

However, that was then, this is now and Ajax’s star has been on the wane for many years. The cold, hard facts are that they have only won the Eredivisie twice in the last 12 years, the most recent occasion being way back in the 2003/04 season, while PSV Eindhoven have won the league seven times in the same period. Before this year, the last time that Ajax qualified for the Champions League group stage was 2005/06, when they reached the last 16. Their best performance in Europe in the last decade came when they reached the quarter finals in 2002/03.

This decline has not just hurt the club’s professional pride, but has also damaged them financially, as they have been running a Champions League budget without actually managing to qualify for the competition. Like all Dutch clubs, Ajax suffer from very low television money and a high wage bill, so their operating strategy is based on two uncertain factors: (a) playing in the lucrative Champions League; and (b) making money from player sales.

That is why it was so important that the club qualified for this year’s Champions League, which they managed to achieve with hard-fought victories over PAOK Salonika and Dynamo Kiev, an impressive feat, given that their preparations were disrupted by the late return of key players who participated in the latter stage of the World Cup in South Africa.

That said, Ajax’s financial performance is even more dependent on the extent to which they are able to make profitable transfers, which traditionally has been a significant revenue stream. In the six years up to 2008, the club generated a net surplus of €76 million in the transfer market, but there has been a dramatic change recently, so that the last two years’ activities have resulted in a net spend of €6 million. They have actually reduced their spending, but the striking difference is that Ajax have stopped selling their best players, retaining them in the hope that this will give the team a better chance of honours.

From a financial perspective, this is a gamble, as there is no guarantee of success, but it may partly be in response to strong criticism in the Amsterdam press after prolific striker Klaas-Jan Huntelaar was sold to Real Madrid in the January 2009 transfer window, when the club was lambasted as being little more than a “trading company”.

In a way, the change in policy is understandable, if you consider the team that Ajax could field from players that they have sold in the last few years, including Wesley Sneijder, Rafael van der Vaart, Zlatan Ibrahimovic, Ryan Babel, Nigel de Jong, Thomas Vermaelen, Steven Pienaar, Christian Chivu and Maxwell. That’s an amazing list of talent, but necessity is the mother of invention and, as we shall see later, these sales were essential for the club’s financial well-being.

On the other hand, Ajax’s forays into the transfer market for new players have not always worked out so well. In truth, they have bought some spectacular flops, such as Dennis Rommedahl, Kenneth Perez, Albert Luque and Kennedy, so much so that an internal management report published in 2008 said that the club had not bought a single player in the previous five years that had improved the team.

"The running man"

While the club may not be particularly good at buying players, it does have a worldwide reputation for developing them. As an example, 19 of the players who participated in the 2010 World Cup spent time at the club’s training complex De Toekomst, while the “special one” himself, Jose Mourinho, ascribed Wesley Sneijder’s qualities to the fact that he was coached in Amsterdam, “Ajax players have excellent technical skills, thanks to the club’s youth programme.”

Ajax’s golden years were based on a highly successful youth policy, which has been a crucial part of the club’s wider strategy, namely developing young players, progressing them through the club structure into the first team, and then transferring them for large fees that help sustain the club’s finances. This production line has produced countless internationals over the years, but the key point is that as one great player was sold, another one would step up to replace him, so when the sublime Marco van Basten was sold to Milan in 1987, Dennis Bergkamp was ready to fill his boots – and importantly the team kept winning.

"We've got Dennis Bergkamp"

However, it’s fair to say that Ajax’s youth system is not shining quite as brightly as it did before, partly due to the influence of the 1995 Bosman ruling, which allowed professional players in the European Union to move freely to another club at the end of their contract and removed the restrictions on the numbers of foreigners that a team could field. This judgment hit Ajax especially hard with the majority of the team that was victorious in the 1995 European Cup leaving for small fees or no money at all, e.g. Kluivert, Davids, Reiziger and Bogarde went to Milan for the grand total of €2 million.

The main problem with Bosman for a club like Ajax is that it makes them doubt the wisdom of investing in youth, as young players can simply leave the club for nothing at the end of their contract. The alternative is to offer the player a longer contract on higher wages, so that if another team comes in for him, it has to pay a reasonable transfer fee, but the quid pro quo of this approach is that it increases the club’s cost base. Even this does not always work, as some players will refuse to extend their contract, accepting a lower salary for a couple of years in order to go to a bigger club for free at the end of their current deal.

In response to the damage caused by Bosman, Ajax decided to go public in 1998 (they are still the only Dutch club listed on a stock exchange), which raised €113 million. However, in a strange way, this only made matters worse, as this sudden influx of funds tempted the club to try to buy instant success via ready-made players from elsewhere, instead of following their tried-and-trusted in-house development strategy, and most of the funds have now been frittered away.

"Houston, we have a problem"

Possibly the worst example of this came during Marco van Basten’s unhappy managerial reign in 2008, when “San Marco” spent an enormous amount of money for no discernible success. Although idolised by Ajax fans for his performances as a player, his brief stay as manager was an altogether different story. Even though he had never before been in charge of recruitment, the board foolishly decided to give him carte blanche in the transfer market and he proceeded to make a series of disastrous buys that served only to eat into the club’s limited financial reserves.

He almost doubled the previous Dutch transfer record when he splashed out €16 million on Serbian striker Miralem Sulejmani, who is the very definition of the term “one season wonder”. Indeed, Ajax tried to loan him to West Ham this summer, but the move collapsed when he failed to secure a work permit. Other big money purchases that failed to set the pulse racing included Argentinian forward Dario Cvitanic, who cost €7 million, but was loaned to Mexican side Pachuca just over a year later; and midfielder Ismail Aissati, who was bought for €4 million, but has also been loaned out (to Vitesse).

In fact, few of van Basten’s hapless acquisitions ended up playing many times for Ajax. All they did was help to wreck the club’s balance sheet. Let’s take another look at the Sulejmani transfer, which cost about 25% of the club’s annual turnover. To put that into context, it would be like Manchester United spending £70 million on a new player. As Sir Alex would no doubt say, that doesn’t exactly represent good value.

The importance of player trading to Ajax is immediately apparent when you look at the club’s profit and loss account over the years. In essence, the club has only been profitable when it has sold its most important assets, namely its best players. The last time the club made a profit (€8 million) was in 2008, when the figures were boosted by €48 million profit on player sales (mainly Sneijder, Babel and Heitinga). Similarly, a small profit of €3 million in 2005 was reported on the back of €16 million profit from player sales (mainly Ibrahimovic and van der Vaart).

What is of concern is that large profits on player trading no longer appear to be enough to cover the operating shortfall, so €29m from player sales in 2009 could not prevent a €3 million loss that year. This is because in the last five years revenue growth has virtually stalled, while costs have grown by nearly a third, most of which occurred in 2008 with a €20 million (26%) jump.

This means that there is a significant deficit at the operating level of €33 million. Even if we exclude the non-cash player amortisation, as some analysts do, the club still made an operating loss of €13 million. In fact, the last time that the club reported a cash operating profit was in 2006.

Equally worrying is that the 2010 post-tax loss of €23 million represents a steep increase over the previous year’s loss of €3 million, and would have been even worse without a €4 million tax credit. This once again highlights the value of player sales, as there were hardly any made last year. In relative terms, a €23 million loss on revenue of €69 million is hideous. To demonstrate how scary that is, if we were to apply the same proportion to Real Madrid, that would imply a loss of €114 million for Los Merengues.

Ajax’s biggest challenge comes from their low revenue. In the 15 years since Deloittes started their annual Money League, based on football clubs’ revenue, Ajax have only featured once and that was many years ago. In fairness, the Money League is only likely to see any representatives from outside the Big Five European leagues (England, Spain, Germany, Italy and France) in exceptional circumstances, as there is such a notable difference in revenue, e.g. Real Madrid, Barcelona and Manchester United generate over five times as much revenue as Ajax. That may be a spurious comparison, but what really emphasises Ajax’s problem is the comparison with the Premier League, when you have to go down to teams like Stoke City to find a comparable level of income.

Nevertheless, Ajax’s revenue of €69 million is still the highest in the Netherlands - €17 million more than PSV Eindhoven’s €52 million. The problem, of course, is that revenue growth is restricted by the relatively small Dutch market (population 16 million), which is a drop in the ocean compared to their larger neighbours, e.g. Germany (population 82 million).

Despite these limitations, Ajax targeted revenue growth of “5 to 6% per annum” in their 2006 annual report. Clearly, this has not been achieved. In fact, the 2010 revenue is actually €5 million lower than 2006, mainly due to the lack of Champions League revenue. This can be seen in the above graph, which also visibly demonstrates yet again how the results are influenced by profit on player sales, especially in 2008.

Looking at Ajax’s revenue mix, what really hits you in the face is the extremely low television revenue of €7 million, which is feeble compared to the major leagues. If we compare that with the clubs that earn most from broadcasting income in those leagues, we can see that it’s less than 5% of Real Madrid’s TV revenue, but it’s also miles behind the others. Although many top clubs are over-reliant on TV revenue, I’m sure that this is a problem that Ajax would like to have, as only 10% of their revenue is sourced from broadcasting. While other countries’ TV revenue has powered ahead, the Dutch league has been left behind. You might almost say that “video killed the Eredivisie star.”

Of course, part of this shortfall is due to Europe, as Ajax only received €1.7 million from the Europa League, while the others all earned at least €20 million from the Champions League. People don’t often appreciate the huge disparity between the two European competitions from a financial viewpoint, but it’s very clear here. As Ajax have only qualified for the Champions League twice in the last six years (back in 2004/05 and 2005/06), they have received a relative pittance from their European adventures: just €22 million in all that time. That compares to the €16 million and €26 million that the last two Dutch Champions League representatives (AZ Alkmaar and PSV Eindhoven) received in a single season.

One reason why Champions League revenue is so important is the pitiful amount of money received from the domestic TV deal, which works out at around €5 million for Ajax. Although the Eredivisie has the seventh highest TV rights deal in Europe at €300 million for the three years 2008/09 to 2010/11, this is a long way behind the largest leagues, as media values are low in such a small country. At €100 million a season, it compares very unfavourably to others: England €1.2 billion, Italy €900 million, France €700 million, Germany €400 million, Spain €500 million and Turkey €250 million. Again to put this into context, Portsmouth finished rock bottom of last season’s Premier League, but still received around €35 million, which is seven times higher than Ajax, the runners-up in the Dutch league - and the Premier League TV money will increase this season.

At least Ajax can still count on great support with average attendances of over 48,000, including 42,000 season tickets, which means that Ajax have the 13th highest crowds in Europe, according to a recent survey by the German newspaper Bild. That produced gate receipts last season of €30 million, comprising season tickets €10 million, corporate boxes and seats €9 million, domestic gate receipts €6 million and Europa League gate receipts €4 million. This is not at the same levels as clubs like Manchester United and Arsenal (both well over €100 million), but it is higher than nine clubs in the Money League top 20, which is very impressive. In fact, it represents 44% of the club’s total revenue, which is only behind one club, Arsenal.

"The spectacular Amsterdam ArenA"

Of course, this reliance on gate receipts is a double-edged sword, as there is a risk that a continued lack of success would lead to lower crowds. Having said that, attendances have actually increased by 2,000 in the last five years, so the Ajax fans have demonstrated strong loyalty, though it would be foolish to take this for granted, as crowds have declined at both Milan and Celtic, two teams whose magnificent history is also not reflected in current day performance.

Ajax are lucky enough to play in a modern stadium, the Amsterdam ArenA, whose 52,000 capacity is much higher than the homely old De Meer ground that could only accommodate 29,500 spectators, though some would argue that this move to the outskirts of the town in 1996 has led to a loss of the club’s identity. In addition, the new pitch has been awful and not conducive to attractive football, due to the retractable roof not letting in enough sunlight. It had to be changed every few weeks (much like Wembley), though the problems have been much less since an artificial lighting system was installed in 2009.

Ajax only rent the ArenA, paying just under €10 million a year for the privilege, though they do own 13% of the company (worth €5 million, having impaired the valuation by €4 million in 2006). On the other hand, they only had to provide €20 million of the funds to build the stadium, which they raised by selling the De Meer land to the city for housing development, leaving the vast majority of the money to come from the state, the local council, sponsors and individual shareholders.

Commercial revenue is at a record high at €32 million, made up of €25 million sponsorship and €7 million merchandising, which represents 46% of the club’s total revenue, a proportion only surpassed by German clubs, which are masters of the marketing game.

In 2008, Ajax signed a seven-year shirt sponsorship deal with AEGON, an insurance company, that is worth up to €12 million a season (guaranteed €10 million plus €2 million based on performance), which represents a significant increase on the €7 million previously paid by ABN AMRO. This stands up very well compared to the top sponsorship deals in the big leagues: only €8 million less than Real Madrid, the same as Milan and more than Lyon (and Champions League winners Inter, whose deal with Pirelli is worth only €9 million).

Merchandising revenue has also never been higher, though a survey by leading German sports market research company, PR Marketing, suggested that Ajax (“a big club in a small league”) could only sell 100,000 shirts a season. That might not seem too bad, until you consider that the likes of Manchester United and Real Madrid have annual sales of 1.2-1.5 million.

Clearly, commercial income is an area where Ajax would hope to grow revenue, but this will largely depend on future sporting success. Even though the club’s brand is still strong globally, it mainly owes its reputation to its past. As marketing expert Frank van den Wall Bake explained, “international credit for the Ajax brand has just about run out, so it is important for the club to do well at international level in the next couple of years.”

Despite the lack of revenue growth, Ajax have adopted a “balls out” approach to their costs, especially wages which have grown by over 50% in the last five years to €49 million. This includes €33 million for players, €8 million for coaching and medical staff and €4 million for bonus payments. Wages increased by an amazing €6 million in the last 12 months alone, due to investment in the squad, contract increases and changes in the coaching staff. Headcount has also risen for the last 2 years from 197 to 237, largely through more youth players and support staff on the commercial and admin side.

This has brought the wages to turnover ratio to 70%, up from only 49% just four years ago, which is much higher than the 60% guideline issued by the KNVB (Dutch football association). Although in absolute terms, the wage bill is not that high, it’s evidently not sustainable without Champions League football. Individual salaries are not excessive by the standards of other leagues (Maarten Stekelenburg is the top earner at Ajax with €1.75 million a year), but the total wage bill is still too much for the club’s revenue to comfortably bear. This is a common problem in Dutch football, as admitted by Frank Rutten, chief executive of the Eredivisie, “Clubs are pushing each other to madness over salaries. It’s idiocy.”

Little wonder that Ajax have promised in their latest annual report to take a critical look at their costs, including “reducing the number of players under contract”. There is little doubt that there is some dead wood to clear from the payroll, but it has proved difficult to do this, as other clubs would not meet their high wages, though a few have left this summer (including Rommedahl, Kennedy, Pantelic and Gabri), so next year’s salaries should be lower.

"Vertonghen - going the same way as Vermaelen?"

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 2005 and 2007, it fell from €16 million to €13 million. However, in 2008 it leapt to €23 million and has now settled at around €20 million. This is still considerably 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, but again it’s too high for a club with Ajax’s limited resources.

Normally, when a club reports losses year after year and does not have a wealthy benefactor to bale it out, debt levels increase and earlier this year few were surprised when there were widespread reports that the club was facing major liquidity problems. However, this was denied by Ajax finance director Jeroen Slop, who backed up his confidence by stating that the club did not need to sell players and “could afford to reject a €15 million offer for Luis Suarez.”

The accounts would seem to bear him out, as the club did not in fact have to extend borrowing facilities with the bank. Moreover, total liabilities have reduced from €64 million to €57 million, though cash balances have also fallen from €19 million to €8 million. Indeed, the liabilities figure is a little misleading, as most of this is just incurred in the normal course of doing business: accruals & deferred income €26 million, other creditors €8 million, provisions €8 million, trade creditors €7 million and tax & social security €3 million. The only bank debt that I can identify comes to under €5 million.

"El Hamdaoui flying to the Champions League"

However, that does not mean that the balance sheet is particularly robust, as the losses have instead been charged to reserves, which are now down to €39 million from the highs of €110 million in 1999. Clearly, this cannot go on for ever, so if the club does not start making profits, it will have to raise funds somewhere: going back to the market for new capital, taking on debt or bringing a new investor onboard.

Of course, it’s not only Ajax that is struggling financially in Holland. Everywhere you look, clubs are in trouble. Founder member of the Dutch league, HFC Haarlem went bankrupt last season and BV Veendam narrowly avoided the same fate. The winners of the 2009 Eredivisie, AZ Alkmaar, have been run by administrators ever since the owner’s bank was declared bankrupt, while PSV Eindhoven’s 2010 loss is almost as high as that reported by Ajax after a couple of seasons out of the Champions League. Feyenoord are also in a terrible state, not just because they were recently thrashed 10-0 by PSV, but more significantly they are one of the 13 professional clubs that have been classified as being “in serious financial difficulty” by the KNVB.

It is clear that Dutch football as a whole is enduring a structural crisis with the Eredivisie reporting a combined loss for its clubs of €31 million in 2008/09 and warning that the deficit will be even higher in 2009/10. As Henk Kesler, the KNVB president, commented with commendable understatement, “The association is aware that the situation is not exactly rosy.”

"The Night of the Hunter"

The KNVB has belatedly tried to put its house in order and in April a working party published a report with 20 recommendations, the most important of which is a pledge by clubs that they have enough cash to reach the end of the season. For the first time, the KNVB has also implemented a licencing system that punishes financial irregularities with a points deduction. Furthermore, clubs under supervision like Feyenoord have three years to get their finances in order or face losing their licence.

In order to improve matters, UEFA President Michel Platini suggested a merger between the Dutch and Belgian leagues, but most fans have given this idea a frosty reception. In any case, although such a move would increase the market size and presumably lead to more money from the sale of TV rights, it is unlikely that this would boost revenue enough to challenge the larger leagues, so this may well be a non-starter.

Ajax had already undergone their own internal soul searching in 2008, when they published the Coronel Report (named after chairman Uri Coronel), which reviewed the many years of mismanagement since the club’s flotation. Grandly entitled, “Ajax – the road to victory”, the report was extremely critical, concluding that the club’s management structure was seriously flawed, leading to lack of clarity and perennial power struggles between the coach and technical director.

The report also suggested that the appointment as coach of former Ajax players with little experience was doomed to failure, citing the examples of Jan Wouters and Danny Blind, though that did not prevent the club from repeating the mistake when they recruited van Basten.

"Stekelenburg - a safe pair of hands"

Another example of lack of managerial focus came with the decision to invest substantial funds into a series of foreign affiliates in countries like South Africa, Belgium and the USA. These have not exactly been a great success (Ajax America filed for bankruptcy), so these activities have now been scaled back, leaving only a 51% investment in Ajax Cape Town.

So what does the future hold for Ajax?

We have seen how vital qualification to the Champions League is to the club’s finances. Indeed, last year’s annual report forecast that participation in the 2010/11 tournament would improve profit by “at least €10 million”, but it could be even higher if they somehow manage to progress past the group stage. As coach Martin Jol enthused, “This is so important for Ajax and for Dutch football” – though, to be fair, he may not have been thinking about the balance sheet.

The problem is that they need to achieve this year after year, but they are no longer the dominant force in Dutch football, as the Eredivisie has become very competitive with the rise of “provincial” teams, as shown by three different winners in the last three seasons (Twente Enschede, AZ Alkmaar and PSV). In other words, qualification cannot be taken as read, even though the Netherlands do have two places available (one of which has to go through two qualifying rounds).

"Martin Jol - time to get serious"

If Ajax do not consistently reach the Champions League, then the only other option is to sell players. The club has hinted at this in the annual report, “transfers may lead to a positive net result in 2010/11,” but this will become a virtual certainty if Ajax are eliminated at the group stage. This handily concludes just before the January transfer window, when players like Uruguayan striker Luis Suarez, goalkeeper Marten Stekelenburg and defenders Jan Vertonghen and Gregory van der Wiel will inevitably once again be the subject of intense speculation.

The problem is that it is unlikely that players will command significant transfer fees in the future, owing to the double whammy of the economic recession and the impact of the UEFA Financial Fair Play Regulations. The first means that clubs do not have much money to spend, while the second requires clubs to balance their books, meaning that costly purchases (with the associated player amortisation) are to be avoided. Only this week we saw an example of this with Barcelona agreeing a deal for PSV’s Ibrahim Afellay for a low fee of around €3 million, when his price had been quoted as high as €10 million.

No, the only real solution for Ajax is to get back to their roots and once again focus on youth development. This has always been a cornerstone of the Ajax ethos, but they have dropped the ball in recent years. As the latest annual report stated, “The academy is good, but could be better.” This strategy requires investment and the club has set aside a budget of €5 million with the objective of having half of the first team squad developed at Ajax.

"Christian Eriksen - the future boy"

If this policy works, it will obviously reduce the number of players that have to be bought from outside the club, so it can make sense both from a technical and financial perspective. However, other Dutch clubs have also embraced this approach, so Ajax will have to raise their game in order to attract the best youngsters.

There is a new air of realism around Ajax’s ambitions these days. Five years ago, the club’s annual report proclaimed, “the ultimate ambition of Ajax is to win the Champions League”, but this now seems hopelessly optimistic considering their low budget and the financial gap to the major football leagues, which they have described as “unbridgeable”. That is why last summer Martin Jol considered moving away from a club that has won the European Cup four times to Fulham, a mid-table English club with a far less illustrious history.

The sad truth is that money talks, so Ajax will need to manage their limited resources better than the leading clubs in Europe to have any chance of success. They might have all the Dutch courage in the world, but will this be enough?