Last Friday, Derby County announced that they have filed a notice of intention to appoint administrators to take control of the club due to their dire financial situation. In a statement the club’s Board of Directors issued, they claimed the following:
“Because the COVID-19 pandemic has had a severe impact on the revenues and profits of all of (sic) its businesses, the Club has been unable to service its day-to-day financial obligations. The directors had no choice but to make the tough decision to take this action and protect the Club.
The irony is that the Club’s financial forecasts show the emergence of a financially sustainable picture. Absent the COVID-19 pandemic, we undoubtedly would have been able to trade through.
However, the impact of COVID-19 pandemic and the unpredictability it has created represents too much of a strain. As the COVID-19 pandemic and lock down tightened their grip, the Club’s revenues and cash flow took a circa £20 million hit. This season, COVID-19 has continued to have a negative effect on the Club’s revenues.
The COVID-19 lockdown also meant that we were unable to have face-to-face meetings with a number of potential purchasers who could not visit the stadium or training ground. A planned sale of the club and stadium that was due to close in January 2020 collapsed when the EFL was coerced into challenging the Stadium Sale transaction, a charge that would be dismissed some 9 months later. The ongoing litigation and charges in regard to the P&S regulations and the protracted timetable for this to reach a resolution, added further uncertainty and made negotiations challenging.
These issues also led the EFL to preclude the Club from drawing down circa £8.3 million of financial assistance, as was made available to all other Championship clubs in respect of settling PAYE liabilities, further aggravating our cash flow and ability to meet our financial obligations. Even today, we await the EFL’s response in these matters. This response is important to the Club, its supporters and also to any prospective purchaser of the Club.”
In summary, in the above statement, Derby County’s board of directors blamed COVID-19, as well as the English Football League (EFL) for ending up in this state. However, do these claims completely stand up to scrutiny?
Firstly, it is right to point out that the COVID-19 pandemic has severely impacted upon most, if not all, football clubs from a financial standpoint and it would be unwise to suggest otherwise. This is since matches from March 2020 prior to this season were all being played behind closed doors, thus depriving clubs of gate money – which is even more crucial the lower down the pyramid one goes. Furthermore, player wages, which represents a fixed cost, still had to be paid in full and is a club’s most significant outgoing. Therefore, yes, it is fair to point out that COVID-19 has adversely impacted all clubs quite significantly as revenues took a hit whilst expenses largely remained at the same level or could not be reduced so easily.
However, it must be stressed that out of 92 professional football clubs in England’s top four divisions, only Derby County are currently in administration (Wigan Athletic did enter administration back in July of 2020 but were taken over in March of this year). Therefore, if it really was COVID-19 that forced Derby County into administration, why is no other club currently in administration?
To provide some background to this whole story, one must note that Mel Morris assumed full control/ownership of Derby County back in September of 2015. In the three seasons prior to his takeover (2012/13, 2013/14 and 2014/15), Derby made a combined total of £57.1m in revenue. In the 3 seasons of Morris’ stewardship (2015/16, 2016/17 and 2017/18), Derby County’s combined total for revenue was £80.7m. Therefore, with respect to revenue, an average increase in revenue of roughly £8m a season (total of £23.6m, which represents an increase of 41% from 2012-15) should be commended.
On the other hand, though, the combined total for wages in the 3 years prior to Morris’ takeover was £50.2m. In the 3 seasons under Morris’ stewardship, the combined total wage bill was £122.1m. That represents a total increase of just under £72m. Therefore, one can see that wages have increased at a considerably faster pace than revenue. In fact, between 2012-15, the wages to turnover ratio was around 88%. This ratio for the 3-year period 2015-18 was at a ridiculously high 151%, meaning that for every £100 the club was earning in revenue, the club was spending £151 in wages alone – and that is before taking into account other expenses!
How on earth was this ever going to be a sustainable approach? Furthermore, it must be stressed that all this took place prior to the onset of the COVID-19 pandemic. Therefore, it was evident that Derby’s spending was unsustainable even before COVID-19, and hence the argument that COVID-19 led Derby County to being placed into administration is rather weak. Although COVID-19 evidently did not help the situation, it was clear that the club were spending at unsustainable high levels before that, and COVID-19 rapidly exposed this deficiency.
Also, because of such unsustainable spending, combined operating losses increased to £97m in the three-year period Morris was in control of the club, up £70m on the three seasons prior to that – and all this was before COVID-19. Therefore, this increase in operating losses further highlights why the argument that COVID-19 led to administration is weak.
One would ask: what reasons were behind Morris’ unsustainable spending at Derby? Although all the reasons cannot be certainly identified, promotion to the Premier League surely must have been one of the reasons, if not the main reason behind this. One must remember that promotion to the Premier League is extremely lucrative and is worth around £170m in increased revenue – which is a big increase on revenue earned in the Championship and thus it is the dream for all English football clubs to reach the Premier League. Therefore, one could understand why Morris tried to spend big to strengthen the squad to be able to achieve promotion to the Premier League, hoping that the club would achieve the goal of promotion and offset such increased spending through vastly increased revenues. However, his gamble evidently failed (in part due to some poor recruitment decisions, and the amount of managers the club hired and fired will surely not have helped matters) and as a result the club has ended up racking up massive debts and on the verge of going bust.
Further to that, it is worth stressing that the 2018/19 season was prior to the COVID-19 pandemic, and yet accounts for that season, which should have been filed on 31st March 2020 at Companies’ House (although this deadline was extended to 30th June by the government in March of 2020 because of COVID-19) were not. If Derby were in a healthy/solid enough financial state, why would they not publish their accounts? This lack of transparency is most certainly not indicative of a company in a healthy financial state. It must be emphasised once again that these accounts relate to a season before the pandemic, and on evidence of the fact that these accounts have not even been published – a year and a half after they were due – then the club must have been having deep financial problems even before COVID-19 and thus the argument that COVID-19 caused the club to end up in administration is not exactly strengthened here, either.
Also, in January 2020, as can be seen above, Her Majesty’s Revenue and Customs (HMRC) issued a winding-up petition against Derby County. The HMRC, refers to the UK’s tax, payments and customs authority which is responsible for collecting the money taxpayers are meant to pay. It is not usual for the HMRC to issue a winding-up petition against a company unless said company is in significant financial difficulty. Therefore, one would sensibly think that at this point Derby were already in significant financial difficulty – and once again, it should be emphasised that this was before COVID-19 kicked in. Also, wages were paid late at the end of December 2019 – which is certainly not indicative of a company who was in a healthy financial state back then and this was before COVID-19. Therefore, these two points further make Morris’ argument that it was COVID-19 that pushed the club into administration weaker.
In conclusion, one can say that, whilst the COVID-19 pandemic did have a significant negative impact upon the club’s finances, the club had been badly mismanaged in the years prior to the pandemic and COVID-19 just accelerated problems that were bound to end up occurring anyway. Therefore, having considered all the above points, Morris’ argument that COVID-19 led Derby County to entering administration is not a particularly strong one and the main reason, in reality, was bad mismanagement of the club. (Credits go to football finance expert Kieran Maguire for the figures about Derby County's revenue, wages and operating losses)