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Friday, June 8, 2012

Fans Demand to Know Why Kit Deals Leave Everton Begging

In recent years Evertonians have often been accused of being apathetic so it’s encouraging to see such a tremendous response to our latest article on kit supply contracts; possibly the largest response we’ve ever received, our mailbox was bursting with questions, support, disbelief and anger at what COULD be the latest in a long line of commercial fiascos under Bill Kenwright.

We’ll state it once again, KEIOC aren't against outsourcing in principle, but we feel justified in questioning the scope of Everton's ten year deal with Kitbag; was it really all that it was heralded? We believe that questions, regarding just what type of deal the club has actually signed up to, need answering and in this follow-up article we outline the reasons.

Looking at accounts, the revenue clubs generate from their brand is sometimes difficult to segregate into its various elements. Firstly there’s the money obtained from the shirt sponsor, then there’s money obtained from the sale of merchandise and finally, and clearly of increasing importance in this era of Financial Fair Play, there are supply agreements with kit manufacturers in which clubs are contracted to wear specific brands of kit in return for an agreed amount of money. To further complicate matters all of these elements can be either separate or some can be combined.

Shirt Sponsorship deals have been around since the late 1970’s. Everton’s current shirt sponsor is Chang and can amount to £4m a season. Well publicised agreements include Liverpool's £25m from Standard Chartered bank, Man Utd £20m from AON, Aston Villa £8m from Genting whilst West Brom receive £1.5m from Zoopla, Fulham £4m from FxPro and Newcastle will received £10m from Virgin Money.

Merchandise Sales revenue is more difficult to determine as usually only the total commercial income is revealed in clubs accounts. One club that does itemise this is Spurs, last year receiving £10m from merchandise sales. Following repeated losses, Everton outsourced this income stream in 2007 and their current outsourcing partner, Kitbag, pay Everton up to £3m per annum to control every aspect of our merchandise operation. For Everton this was an ideal solution, no need to invest in a complete overhaul of the commercial operation, no need to run a series of shops or operate an e-commerce website, no staff, no stock, in fact no costs whatsoever and best of all the payment goes straight to the bottom line, it’s pure profit.

Kit Supply deals recently became the primary focus for premiership clubs as they attempt to maximise revenue opportunities. As with all these arrangements the three reasons for entering into sponsorship agreements are awareness, image and sales. With new deals such as Liverpool’s £25m Warrior agreement setting the standard it’s a safe assumption that these deals, which had a total value of £90m in the premiership last season, are set to increase dramatically as clubs such as Manchester United look for significant increases and the likes of Tottenham close deals which double their revenue from £5m to £10m as did Manchester City with their forthcoming £12m a season deal with Nike, commencing in 2013, which will only add to their £46m increase in commercial activity since 2007.

Financial Fair Play [FFP] regulations are designed to make clubs self-sufficient through a combination of commercial development and the delivery of revenue producing infrastructure. Stadium development can be costly, slow and disappointing, as Chelsea has just discovered, and which was also seen at Kirkby when as little as an additional £6m contribution a season would have been generated from a somewhat optimistic average attendance forecast of 47,000. It’s therefore understandable why Premiership clubs have placed such a strong emphasis on commercial development in a bid to increase revenue and levels of profitability.

Since outsourcing their retail and catering operations Everton’s total commercial income has seen a £5m improvement over the last five years; in 2007 it was £7m, 2008 £9m, 2009 £9m, 2010 £10m and £12m in 2011. By comparison Aston Villa has seen an £11m increase [£6m in 2007, £11m in 2008, £12m in 2009, £14m in 2010 and £17m in 2011] and Tottenham Hotspur a £20m increase since 2006 whilst Liverpool, despite something of a financial and footballing odyssey in recent years, has seen their commercial revenues increase by £34m [£43m in 2007, £51m 2008, £60m in 2009, £62m in 2010 and £77m in 2011] with at least an additional £13m to come from their Warrior kit supply deal in 2012, which will astonishingly take their commercial income alone past Everton’s total turnover.

A further complication in understanding which figures are being presented arises with the complexity of some of these deals. For example, Liverpool’s prior kit deal with Adidas included control of all non-branded merchandise, that is to say products outside the kit range, and they were unable to open club stores wherever they chose; now this is not the case. Their new deal does not include these restrictions and they’re targeting additional commercial turnover of £50m per annum over the course of the six year deal, not just the £25m from Warrior. Another example is Manchester United’s deal with Nike, under the terms of United’s existing deal the club grant the sportswear company exclusive rights to sponsor and manufacture their kit, sell their merchandise and operate United’s existing retail operations in return for £23.5m. In addition to this deal with Nike Kitbag run their online store as they do the complete retail operations of Aston Villa and Manchester City.

The growth of these kit supply deals and the importance given to them, by both clubs and manufacturers, cannot be underestimated. Last season major kit manufacturers including Umbro, Puma, Nike, Le Coq Sportif, Kappa and Adidas spent over £260m on securing supply deals with clubs in the major European football leagues – the Premier League, La Liga, Serie A, Bundesliga and Ligue 1 – a figure that will be eclipsed in coming years as clubs realise the value of their brand and these manufacturers strive to associate their brand particularly with Premiership clubs. Adidas and Nike account for a massive 44% of the total spend on these supply deals yet remarkably Everton received nothing when they recently switched suppliers from Le Coq Sportif to Nike; nothing in an era where their peers in the premiership are receiving record deals, nothing in an era when the manufacturers are spending hundreds of millions with clubs to secure these deals, nothing in the era of outsourcing our business to Kitbag.

KEIOC don’t have a problem with outsourcing in principle; if profitably running two shops and a website is beyond your capability then accepting a fixed fee and being left to concentrate on your core business is obviously the best strategy to adopt. The reality is retailing is fraught with difficulty and represents a specialist area of operation where costs, and economic factors often outside your control, erode your profitability considerably. Sales in the UK marketplace for instance where down by 5% last year.

Everton's fans and shareholders were led to believe that the Kitbag deal consisted of running the retail operation which had previously haemorrhaged money and required urgent attention by 2006. We were told that the ten year £32m deal related to the operation of the shops and the online business. We’re concerned over Kitbags actual role in Everton’s kit supply agreement and we're concerned over what the £7m sponsorship, advertising and merchandising revenue figure in Everton's accounts is comprised of.

We would like to ask the board some pertinent questions on this subject; for example, have we forfeited the right to negotiate an independent kit supply agreement over to Kitbag as part of the ten year deal? Why, in an era of multi-million pound deals, have Everton received nothing from one of the world’s major kit manufacturers who are one of the leading proponents of making payments to secure kit supply agreements? Are Kitbag in effect in receipt of these manufacturers’ payments, making Everton’s ten year agreement effectively self-financing for Kitbag thereby making them the recipients of all revenue from the clubs retail operations? If this is not the case why has the Everton brand been so dramatically undersold in terms of the kit supply agreement?

As fans and shareholders ourselves we’d like to ask the board these questions, we'd like to but of course we can’t; we can't because in 2008 chairman Bill Kenwright sanctioned the cessation of annual general meetings due to not wanting to answer difficult questions and later, being bored with questions that highlighted the indecisive nature of his board, he now answers nothing. All we get is we have no money; is it any wonder?
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