The cost of relegation

Looking at the most recent accounts from the 2021/22, on the face of it Leicester City have the most to fear from relegation, because they had by far the largest operating loss of £83m, the highest wage bill of £182m, the highest wages to turnover ratio of 85%, the highest debt of £346m and the highest interest payable of £19m.  If we look at net profitability over the last five years, it is clear that Leicester have posted the highest losses of the relegated clubs.

However, the picture was not exactly rosy at the other two relegated clubs with Southampton and Leeds United posting large operating losses of £37m and £34m respectively.

Obviously, the most significant revenue decrease following relegation is broadcasting, even though the blow is softened by parachute payments. Basically, a club will earn at least £100m TV money in the Premier League, which will be halved to around £50m in the first season in the Championship.

The fall in broadcasting will be steeper for Leicester, as their £151m revenue in 2021/22 was boosted by competing in UEFA competitions (Europa League group stage, then Europa Conference semi-final). Leeds and Southampton’s earnings were much lower at £116m and £115m respectively.

Leicester also earned the most from the distribution of the Premier League’s central TV deal in 2021/22 with £129m, compared to Leeds £115m and Southampton £111m. All three clubs received an equal share of £88m, but Leicester had a very high £27m merit payment after finishing 8th, while Leeds benefited from a £19m facility fee after being broadcast live on 22 occasions.

In year 1, Leicester will see their domestic TV money fall by £81m (63%) from £129m to £48m. The reductions are smaller at the other relegated clubs, but still substantial: Leeds will be down £67m (58%) and Southampton down £63m (57%).

Of course, the relegated clubs still enjoy a considerable advantage over other clubs in the Championship, who only receive £8.4m, comprising the £3.6m EFL central distribution plus a £4.8m Premier League solidarity payment.

Leeds look most vulnerable to a fall in match day revenue, as they booked £25m in 2021/22, partly due to attracting crowds of over 36,000 in the top flight, their highest for over 20 years. This was significantly more than the £13m they achieved in the Championship pre-pandemic. They also increased ticket prices by 10% in 2022/23, but the proposed additional 10% increase next season has been withdrawn following relegation.

Leicester’s £21m in 2021/22 was a club record, partially due to playing 7 home games in Europe, so this will inevitably fall in the Championship, probably down to the £13-15m level. They raised ticket prices by 5% in 2022/23, but have frozen them following relegation.

Southampton have gone one step further by reducing ticket prices by an average 10% following relegation, having frozen them last season. If we also consider lower crowds in the Championship, their revenue could drop by £3-5m.

There can also be a large drop-off in commercial revenue, as sponsorship agreements invariably contain a clause reducing annual payment in the event of relegation, due to the much reduced exposure in the Championship. There will also probably be decreases in hospitality and merchandising.  In the last five years the average commercial income of a relegated club fell £6m (45%) from £14m to £8m.

It is estimated that  Leicester’s revenue would drop the most compared to 2021/22 with £119m (55%) from £215m to £96m.  There would also be sizeable decreases for Leeds, down £79m (42%) from £189m to £110m, and Southampton, down £72m (48%) from £151m to £79m

It seems probable that Leicester will have to sell James Maddison and Harvey Barnes, though the fees will not be as much as they would have commanded in the top flight. Their ability to “wheel and deal” is also compromised by the fact that no fewer than seven of their players are out of contract this summer.

One of the reasons given for Southampton’s relegation is that they invested too much in young players with much potential, though this should now hold them in good stead in terms of player sales, as there will be much interest in the likes of Romeo Lavia and Kamaldeen Sulemana. It would also be no surprise if club stalwart James Ward-Prowse moved on.

Leicester have famously gone down with the highest wage bill (and squad cost) of any club relegated from the Premier League with £182m, which was actually only behind the Big Six, though this would   It has been reported that players have relegation clauses reducing salaries by 35% to 50%, though the most highly paid will almost certainly leave in any case with so many of them being out-of-contract and others keen to move on.

Southampton’s wages have been held at more-or-less the same level of £113m for the last five years, which probably helps to explain their decline on the pitch. Their relegation clauses are lower at 40%, but then again the base is also smaller.

Whichever way you look at it, relegation is never a good thing financially (or indeed from a sporting perspective). However, it’s also not the end of the world, as reductions in the wage bill and other expenses, allied with profits from player sales, can largely compensate if done well.

Relegated clubs enjoy a big advantage over all other clubs in the Championship, thanks to the money they get from parachute payments. This is obviously not a guarantee of success, but it sure helps.