FINANCIAL EL CLáSICO

Who is triumphing off the pitch?

El Clásico is one of the most iconic rivalries in football and it features two of the most successful and popular clubs in the sport: Real Madrid CF and FC Barcelona. The first official meeting between the two teams took place on February 17, 1929, and since then, it has become one of the most highly anticipated matches of the football calendar. Thus, it will be a truly special occasion for the fans when the two clubs play each other three times in a short period of time, starting with the first leg of the Copa del Rey semi-final on 2nd March.

However, the context of one of the fiercest clashes in European football has taken a turn recently. Real and Bar?a are trying to maintain their status at the top of the game in the face of financial and sporting challenges coming mostly from the English Premier League and, although their financial situation is significantly different, both clubs are investing in stadium projects, are tapping into their youth systems, while are also joining forces and playing a leading role in the European Super League project.

The Ant and the Cricket?

La Fontaine's fable "The Ant and the Cricket" could have been the title of the story of the Spanish giants’ last few years: while Real Madrid closed the past 10 financial years with a profit, FC Barcelona have been facing significant financial difficulties.

More specifically, in the past three seasons (2019/20 – 2021/22) Real Madrid CF had a much better financial performance compared to FC Barcelona, with a total profit after tax of EUR 14 million, while Barcelona faced significant losses totaling EUR 481 million.

In order to offset such losses and comply with La Liga's financial fair play regulations, FC Barcelona last summer sold 25% of their domestic television rights to Sixth Street, a US investment firm, for a period of 25 years. This was agreed upon through two separate deals that collectively raised over €500 million. In addition, the club sold a 49% stake in Bar?a Studios, raising an additional €200 million through two distinct transactions. The club has already accounted for a profit of EUR 266 million on the selling of the first 10% of the media rights to Sixth Street as extraordinary income during financial year 2021/22, which was crucial in reporting a net profit at the end of the season. To further boost their finances, FC Barcelona also signed a long-term sponsorship agreement with music streaming giant, Spotify in March 2022. This agreement also included the first ever naming rights deal for the iconic and historic Camp Nou stadium.

Meanwhile, Real Madrid have reached a EUR 360 million agreement in 2022 with Sixth Street to develop new businesses at the Santiago Bernabéu stadium, a partnership that included Legends, a premium experiences company that caters to sports and live venue organizations. The club has already accounted for an extraordinary income of EUR 316 million from this deal during the 2021/22 financial year, which made it possible to remain profitable after tax.

The fact that the club has managed to stay in the black during this period heavily impacted by the pandemic is not only remarkable compared to their domestic rivals, but also to the entire football landscape as only a handful of clubs have managed to avoid losses.

An international competition for income

Between 2017/18 and 2019/20, the two Spanish giants have been leading the way in terms of total operating revenues among top European football clubs. However, the 2020/21 season saw a shift in this trend, with Real Madrid CF generating only the second-highest total operating revenue after Manchester City FC, and FC Barcelona falling to the 4th place in the rankings. Additionally, in 2021/22 the Catalans have also fallen behind the likes of Liverpool FC, Manchester United FC, and Paris Saint-Germain FC, only placing 7th. This indicates that FC Barcelona's previously dominant role has diminished following the pandemic years.

Broadcasting revenues, which are heavily influenced by participation in UEFA competitions, have played a significant role in the financial success of both clubs over the past six seasons analyzed. Real Madrid CF earned EUR 1.6 billion from broadcasting revenues, primarily due to their successful UCL campaigns, while FC Barcelona earned EUR 1.5 billion. This is in line with broadcasting income generated by English Premier League clubs (Manchester City and Liverpool – EUR 1.6 billion, Manchester United – EUR 1.4 billion) despite a large difference in domestic league broadcasting deals in the EPL’s favor. The fact that Real Madrid have barely recorded higher income from this stream than Manchester United, even though the latter have competed only in the UEL in two seasons and had a significantly worse overall UCL record, is clear evidence of the competitive advantage EPL clubs have compared to their peers.??

In terms of commercial income, the two clubs continue to be among the best due to being major commercial brands and true media and entertainment companies. Both clubs have secured massive kit supplier sponsorships, with Real Madrid CF receiving a whopping EUR 120 million per year from Adidas and FC Barcelona receiving EUR 105 million per year from Nike. On top of this, both clubs also receive EUR 70 million per year from their main shirt sponsors, Emirates Airline and Spotify (the latter including stadium naming rights), respectively. However, clubs have started to catch-up as Manchester City FC have secured a better main shirt sponsor deal with Etihad Airways, receiving EUR 79 million per year (also including stadium naming rights).?

Regarding matchday income generation, Revenue Per Event Per Available Seat (RevPEPAS) is a valuable metric to measure stadium performance, as it takes into account matchday revenue, total number of home games played, as well as stadium capacity.

Looking at the last season before the pandemic (2018/19), the two clubs have performed relatively well in this regard, as Real Madrid placed 3rd while Barcelona placed 6th. Aiming at further exploiting stadium performance, both clubs are currently in the process of renovating their stadia, as we will explain in the following sections.

Transfer policy and the importance of the 2023 summer transfer market

Barcelona have faced significant financial difficulties in recent years, which is as a result of a combination of factors, including the COVID-19 pandemic and declining on-field performances. However, one of the main reasons contributing to the current situation has been the club's high wage bill: they have consistently spent at least 70% of total revenue on wages, reaching 88% in the 2020/21 financial year. In addition, Bar?a have spent large sums of money on players who failed to deliver on the pitch, leading to unsustainable spending and mounting debt.

Real Madrid CF's transfer policy has undergone a significant shift since the 2019/20 season, which saw the club make some costly mistakes in the transfer market. The most notable of these was the signing of Eden Hazard for EUR 115 million, who has failed to live up to expectations since. Another poor investment was Luka Jovi?, who was bought for EUR 63 million and left on a free transfer to ACF Fiorentina in 2022.

Despite these missteps, Real Madrid CF have managed to maintain a positive transfer balance since the 2020/21 season. The club’s financial decision-making during the pandemic was key in achieving this, along with a change in transfer policy. Indeed, Real Madrid have started to focus on buying young talent for a reasonable fee (e.g., Eduardo Camavinga cost the club a reported EUR 35 million), avoiding transfer battles with other big clubs, and looking for out-of-contract elite players (e.g., David Alaba and Antonio Rüdiger).

In terms of transfer balance, the club shows the smallest investment among clubs selected for comparison since the 2018/19 season (EUR -84 million). The second lowest on the list is FC Bayern München with EUR -154 million, while Barcelona's transfer balance has also been in the negative territory, standing at a EUR -221 million. ?

Both clubs are set to face important decisions in the upcoming 2023 summer transfer window, although from different perspectives. Real Madrid are already operating with a relatively thin squad and the contracts of several players are set to expire at the end of the season. Additionally, with key players like Benzema, Kroos, and Modri? getting older, the club will need to start planning for their eventual replacements.

Meanwhile, Barcelona are struggling with financial constraints. According to LaLiga president Javier Tebas, the club needs to reduce their wage bill by approximately EUR 200 million in the coming season, which may result in selling some key players this summer.

Same strategy to stay on top

As of now, both clubs are still competing with the best; however, the analyzed trends show the increasing competition from the English Premier League and other top European clubs. As such, the Spanish giants must carefully plan their future in order to keep pace with their rivals, and they seem to be seeking a similar strategy to do so.

In order to strengthen their matchday and stadium income, both clubs have pursued venue upgrade projects. Real Madrid CF's timing was particularly “fortunate”, as they began their renovation during the pandemic and were able to partially open their stadium after the “closed stadia era”, minimizing the loss of ticketing revenue. In contrast, FC Barcelona's renovation process for the Camp Nou will not begin until June 2023, and during the 2023/24 season the club will play at Barcelona's Olympic stadium (Estadi Olímpic Lluís Companys), which has a seating capacity of only 55,000 compared to Camp Nou’s 99,000. The plan is for FC Barcelona to return to the new Camp Nou for the 2024/25 season, at reduced 50% capacity while the renovation is ongoing.

La Masia and La Fábrica, the youth academies of FC Barcelona and Real Madrid CF, respectively, have been significant contributors to their success in recent years, and remain key in keeping up the pace with competitors. Both clubs have produced several promising players: some have made it into their first teams, while others were eventually sold to other clubs for a profit. FC Barcelona's legendary team, which featured homegrown players such as Messi, Xavi, and Iniesta, will be hard to emulate anytime soon. However, the club continues to seek out talented youngsters for the first team. While there is currently less star power from the academy than before, players such as Gavi, Alejandro Balde, Ansu Fati, Eric García, and Sergi Roberto seem poised to establish themselves as regular starters in the team. Real Madrid CF have pursued a different talent development strategy in recent years, with a primary focus on selling players from their academy. The club has generated EUR 330.5 million in income from youth player sales over the past 8 years. In the most recent summer transfer window of 2022, they earned EUR 15 million from the departures of Borja Mayoral (to Getafe CF for EUR 10 million), Miguel Gutiérrez (to Girona FC for EUR 4 million), and Víctor Chust (to Cádiz CF for EUR 1 million).

Furthermore, claiming an unfair regulation of the football pyramid at continental level, and looking for a revamp of the ecosystem which could allow football clubs to play a more central role in the organization of tournaments and distribution of resources, both Real Madrid CF and FC Barcelona are taking a leading role in the European Super League initiative, alongside Juventus FC.

Conclusion

A month ago, FC Barcelona have managed to win their first trophy under Xavi. In addition to winning the Spanish Super Cup, they are also leading LaLiga and have progressed to the semi-finals of the Copa del Rey. The only disappointing element of the season so far, however, was a major one: elimination from the Champions League – following a trend of lackluster performances on the European stage in recent years – and demotion to Europa League. Despite keeping its status of top club, FC Barcelona may struggle to maintain their position in the years to come, due to increased global competition and financial challenges. The club has been forced to shift its strategy to address these challenges, while attempting to keep their current team together and manage their wage bill.

Meanwhile, Real Madrid CF have been performing remarkably in Europe, with an impressive record of winning 5 of the last 10 Champions League trophies and becoming FIFA Club World Cup champion two weeks ago. They have also progressed to the semi-finals of the Copa del Rey and are still competing in the Champions League this season, however, they are struggling to keep pace with Barcelona in the LaLiga. On the other hand, despite the pandemic and growing international competition, Real Madrid have been able to overcome financial and sporting challenges. However, they face the inevitable task of rebuilding their squad starting from the upcoming summer transfer window, and the Mbappé transfer saga revealed the difficulties they might face in the transfer market.

While decision makers and fans alike are looking forward to the long-term future of such historic clubs, the next 40 days shall be about the on-pitch rivalry and the magical moments these two teams usually produce.?