Blockbuster, Toys R' Us… Manchester United? Business world shows no company is too big to fail

The Red Devils’ post-Ferguson dip became a slump, and that became the new normality – business history has shown that it is tough to stop the rot

The business world is littered with stories of historically huge companies disappearing from the radar from a position of total dominance – from Blockbuster failing to see off the disruptive challenge of Netflix or Toys R’ Us shuttering stores as Amazon and other online retailers took over.

Nothing is guaranteed in the money world. For example, some 88 per cent of the Fortune 500 companies in 1955 are not there today. If Manchester United fail to turn around their ongoing slump, there is every chance they too could be heading ever downward.

Because what those companies and others have in common is the kind of mistakes United have been making since the Glazers took over and Sir Alex Ferguson left.

A misplaced confidence, arrogance even, that the success tap would continue to flow no matter what they did given their market superiority.

An inability to adequately recognise or see off the threat of disruptors, which in United’s case would be clubs like Manchester City, Chelsea and Liverpool.

A doubling down on the old way of doing things in a vastly-changed environment. No prizes for guessing that United did exactly this by appointing Ferguson disciple Ole Gunnar Solskjaer as manager.

Vijay Govindarajan is a professor at Dartmouth Tuck School of Business. He has a book called “The Three-Box Solution: A Strategy for Leading Innovation” as a guide for companies.

The first box is all about managing the present, the second destroying the past and the third creating the future. United – by this rudimentary health check – are doing none well.

They are not managing the present, keeping the show on the road essentially. Their playing staff is performing poorly. They are paying the biggest wages of any Premier League team and finished sixth. That upends the trend where – usually – the team spending the most on wages finishes top of the league.

Moreover, the recruitment strategies are non-existent at worst and malfunctioning at best. Where technical directors at other clubs are finalising summer deals, United are yet to appoint a technical director.

Add in the mishmash of players currently on the books – a consequence of a litany of botched managerial appointments – and you’ll quickly realise that nothing whatsoever on the playing front is up to scratch.

Secondly, instead of destroying the past, Manchester United seem hellbent on dredging it up. What Ferguson achieved is impossible to emulate; there is no template that those coming in his wake can follow.

But that hasn’t stopped United from embarking on an errant path. The appointment of Solskjaer as manager – a position for which he had neither the experience nor expertise – was a hark-back to the glory days. But the methods of the past are no longer applicable. The club – collectively – have got to forget, not remember, what made them successful in the past.

Govindarajan, in an article for Harvard Business Review, said businesses must “escape the traps of the past by … abandoning practices, ideas, and attitudes that have lost relevance in a changed environment.” The appointments of Solskjaer and Mike Phelan are the absolute antithesis of that.

And as for creating the future? Shaping the environment? Heading off challenges? Innovating? Coming up with a new plan for winning? You be the judge of that.

On a purely football level there is no great overarching project at United you can point to and say things will improve because of this identity. They are living hand-to-mouth, stylistically, philosophically, strategically and tactically.

Thursday’s third-quarter financial report contained details of the club’s revenues for the first three months of 2019. United missed their revenue targets by around £4.8 million ($6.1m) but still posted £152m for the period covered ($194m), which represented an increase of 3.4 per cent year-on-year.

Increased broadcast revenues played their part in topping up United’s results. They reached the quarter-finals of the Champions League – where they were defeated by Barcelona.

But if Marcus Rashford had not secured their last-16 victory over Paris Saint-Germain in the most fortuitous of circumstances, there is a good chance they would not have posted an uplift at all.

Go back to Paul Pogba’s late goal against Juventus in the group stages – which more or less kept them alive – and you would be able to see that those broadcast revenues are by no means a sure thing for a team as ordinary as United.

“Broadcasting revenue for the quarter was £53.8m, an increase of £4.4m, or 8.9%, over the prior year quarter, primarily due to the new UEFA Champions League broadcasting rights agreement and playing one additional Premier League game,” the club said in a statement.

But there will be no share of the €2 billion (£1.75bn/$2.25bn) broadcast revenue pot in the Champions League next season. United will be in the Europa League where participation fees and prizes are worth much less.

Some other takeaways were that United’s commercial revenues are unchanged, which is a synonym for stagnant.

That sum was £66.6m ($85.2m) with matchday revenue accounting for about half – £31.7m ($40.5m). That represented an increase of £600,000 compared to the previous year. Or – in other words – just over a week’s wages for Alexis Sanchez.

Crucially, United also revealed that total operating expenses were up 5.7% over the past year and now come in at £144m ($184m).

Employee benefit expenses meanwhile were up 12.9% to £85m ($109m), “primarily due to investment in the first team playing squad”. This is where the warning lights should start to flash. United are spending significantly more money but are no better for it. And that wage bill is only going to grow as they attempt to spend their way back to the top.

Elsewhere, net debt is up to £301m ($385m), an increase of £400,000, where they are still servicing the debts taken on as a result of the Glazers’ leveraged takeover in 2005.

Commenting on the results, executive vice-chair Ed Woodward said: “After a turbulent season, everyone at Manchester United is focused on building towards the success that this great club expects and our fans deserve.

“Preparations for the new season are under way and the underlying strength of our business will allow us to support the manager and his team as we look to the future.”

That is easier said than done and there are signs of trouble on the horizon.

One of the strings to Woodward’s bow has been the number of commercial deals he’s cut, that have helped safeguard against United’s increasingly poor and unrewarding performances on the field.

They haven’t missed the fees associated with winning – or even competing in – the Champions League or the Premier League as much as some other clubs might have. But those deals will have their limits too.

The reason so many companies want to be associated with United is because the club are a prestige brand. But there is little prestige in losing to Cardiff City at home or playing teams like Zorya Luhansk on a Thursday night in the Europa League.

Especially when put in contrast to what is going on across town at Manchester City. There you have titles, a successful manager in Pep Guardiola, a multitude of world-class players, Champions League participation, nights out at the Tunnel Club for corporate partners and – crucially – trophies.

One day there will be a generation of football fans the majority of whom will remember United winning nothing of note, only City. And that’s when being associated with United – for top brands – will no longer be worth the price. Who wants to be partnered up with an also-ran?

And then what? Woodward – or whoever else in in charge – has got to find a way to replace that money somehow.

United will see their broadcast revenues shrink next season when the loss of Champions League football kicks in. Their matchday revenues are growing sluggishly. For those reasons they slipped from the top of the Deloitte Money League this year, dropping two places to third, and recording the lowest growth of any club in the top five. 

The landscape has changed utterly from United’s trophy-winning days but they still enjoy the legacy of those Sir Alex Ferguson-derived titles.

The club’s current commercial incomes will please investors and should also go towards replenishing the first team with top quality signings. But United are in a vicious cycle. They have been spending more and more on wages and fees in pursuit of success; they may as well be throwing money in a hole.

And there is a definite trend between how well a club do on the field and how they perform off it. Their share price in New York has risen and fallen broadly in line with how they’ve fared in competitive action. That is a word of caution United would be wise to heed.

Other clubs have grown more resourceful, both in terms of how they recruit players and how they run their businesses. United have been overtaken on the field not only by City but by Liverpool, Tottenham, Chelsea and Arsenal too. And that’s only in England.

Look further afield and you will find clubs like Real Madrid, Barcelona, PSG, Juventus and Bayern Munich all with better football operations. United’s revenues remain strong for now but there is only one way off the summit, particularly if the team are not winning.

And the dip has become a prolonged period of failure – in the big competitions at least. Unless United take care of the fundamentals – signing the right players, playing proper football and winning tournaments again – then they risk taking the path of other behemoths that were too big to fail.

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