Norwich City's Remarkable Transformation

When Canadian international forward Simeon Jackson struck the last-gasp winner for Norwich City against Derby County last weekend, it was incredibly the 12th goal that the Canaries had scored in the 90th minute or later this season. This is a sign of a team that never knows when it is beaten and this resilience is just one of the reasons for Norwich’s impressive surge to a highly commendable second place in the Championship. Paul Lambert’s team stand on the threshold of the Premier League, which would mean a second successive promotion and represents a remarkable turnaround in the club’s fortunes.

At the beginning of last season, Norwich played their first match in the third tier of English football for 50 years and were on the wrong end of a 7-1 hammering by the mighty Colchester United. This humiliation in front of their devoted Carrow Road fans resulted in the sacking of the manager Bryan Gunn, the popular former goalkeeper, but it’s an ill wind that blows no good, as Norwich then secured the services of the manager responsible for that spectacular defeat, a certain Paul Lambert.

A Champions League winner with Borussia Dortmund, Lambert was unlikely to be fazed by the task facing him, but even he might be a touch surprised by the magnitude of the transformation. Despite the awful start, Lambert led Norwich to the League One title and promotion back to the Championship, with prolific striker Grant Holt and attacking midfielder Wes Hoolahan thriving under his guidance. This duo have continued their fine form in the higher division, scoring 30 goals between them and being named in the PFA Championship team of the season.

"Grant Holt - the only way is up"

Norwich’s progress is all the more noteworthy when you consider that it has been achieved without bringing in a raft of big names. Indeed, the most well known of last summer’s signings were probably Andrew Surman, who only played a handful of games for Wolves in the Premier League, and Elliott Ward from Coventry City, who was loaned to Doncaster and Preston last season. Nevertheless, they have shone for Norwich, while other unheralded arrivals have also made notable contributions, including the battling Welsh midfielder Andrew Crofts, snapped up from Brighton, and John Ruddy, a goalkeeper plucked from Everton’s reserves.

The excitement at Norwich’s possible return to the top tier is a major improvement on the Norfolk club’s recent history. The last time they were in the Premier League was 2004/05, when they survived just a solitary season, before relegation back to the Championship where they languished for four miserable years prior to their demotion to League One. This period was marked by a series of poor managerial appointments with three managers (Peter Grant, Glenn Roeder and Gunn) lasting less than three years between them. This managerial merry-go-round was nothing new for Norwich, as they had employed no fewer than nine managers after the current owners took over in 1996.

This was all a far cry from the early 90s, when Norwich City were very much a force to be reckoned with. In fact, they were founder members of the Premier League, actually leading the table for much of the inaugural 1992/93 season before being over-taken by Manchester United and Aston Villa in the final furlong. During this golden age, they also memorably defeated Bayern Munich in the UEFA Cup with a spectacular goal from Jeremy Goss in the Olympic Stadium forever emblazoned in the consciousness of Norwich supporters everywhere.

"Jeremy Goss - that goal, that shirt"

However, these successes masked the growing financial problems at Norwich, which were only kept at bay by former chairman Robert Chase selling the club’s best players like Chris Sutton and Ruel Fox, a policy that adversely impacted performance on the pitch and provoked Martin O’Neill to resign after just six months as manager. Following fans’ protests against the player sales, Chase stepped down in 1996, leaving the club with large debts of £7 million. Many years later in the 2008 accounts, the club described the situation back then as “virtual disintegration.”

Former chairman, Geoffrey Watling, stepped in again, buying out Chase, before selling the majority shareholding to current owners, well-known TV chef Delia Smith and her husband Michael Wynn Jones. There followed several years of stagnation in the old First Division (then the second tier), before promotion back up to the Premier League in 2003/04.

Although the single season at the highest level provided the club with some financial stability, it did little to ease Norwich’s long-term difficulties, as the board “chose to make considerable investment, both in team strengthening and in infrastructure.” Former chief executive Neil Doncaster cautioned, “It is a sobering thought that, despite the many millions of pounds of television money we received during our short stay in the Premiership, the club's overall cash position only improved by £0.7 million that season.”

"Delia - Let's be having you!"

In 2006 the accounts drily noted that the key task facing the executive management team was “to ensure that the club does not run out of cash”, which is not a phrase likely to inspire confidence. Last year, the message was more or less the same, though a little less abrupt, as one of the principal business risks was described as the club having “insufficient cash flow to meet its obligations for the 2010/11 season.”

Despite denials at the time, it is now evident that there was a strong risk of the club going out of business in January 2010 with chief executive David McNally warning, “Clearly the financial challenges that we’re having to face up to are real.” Indeed, at the 2011 Annual General Meeting, the chairman Alan Bowkett admitted, “We couldn’t afford to pay our interest and we couldn’t afford to pay the amortisation owing on the loans on time.” Norwich City could easily have fallen into administration if they had not managed to persuade the banks to temporarily suspend repayments of interest and capital.

The level of indebtedness remains the club’s biggest financial problem, even though it was reduced by £2 million in 2010 to £20.9 million. Although this may seem trivial compared to the astronomical debt owed by many leading clubs such as Manchester United, it is far from insignificant relative to Norwich’s revenue of £17 million, which is much diminished after many years outside the Premier League.

Most of the debt was incurred for stadium improvements, in particular the construction of the Jarrold Stand (at a cost of £6.5 million) and the Norwich Union Community Stand (£3.2 million), though it also covered the cost of new offices and land purchases around the stadium.

The £22.9 million net debt comprises loan notes £11.2 million, bank loans £3.5 million, other loans £6.3 million, preference shares £1.6 million and an overdraft £0.2 million less £1.8 million cash. The outstanding loan notes represent the unpaid element of a 15-year £15 million loan from AXA Investment Managers Ltd, which was released in two instalments of £7.5 million at fixed rates of 7.67% and 7.24%. In addition, there are two bank loans: £1.0 million with the Bank of Scotland repayable over 10 years at 2% above base rate; and £2.5 million repayable in 2012 at 4.25% above LIBOR.

The loan notes and bank loans are secured on land and future income streams, but the other loans of £6.3 million (from directors past and present) are unsecured and interest-free. This is just as well, because the annual interest on the loan notes and bank loans of £1.6 million is difficult for the club to cover from normal operations with the interest rates now looking quite high by today’s standards.

"Wes Hoolahan - when Irish eyes are smiling"

This helps to explain why the club was in breach of certain covenants at year-end with its principal lenders, AXA and the Bank of Scotland, which explains why the debt is show within creditors amounts falling due within one year, as is the £1.4 million owed to deputy chairman Michael Foulger, as this is repayable on the earlier of promotion to the Premier League or August 2012.

The worries over Norwich’s funding issues led to auditors Grant Thornton inserting the dreaded “Emphasis of Matter” statement in the delayed 2009 accounts, warning of “the existence of an uncertainty which may cast doubt about the company’s ability to continue as a going concern.” Although such comments do not necessarily sound a death knell to a club, they are obviously not good news, hence the importance of the agreement with the club’s lenders to defer payments. In fact, the rescheduling of debts was sufficient to remove this statement from the latest 2010 accounts.

This does not alter the fact that Norwich’s business model relies on regular injections of cash from its owners. Since Delia Smith and Michael Wynn Jones took over the club in 1996 they have put in around £12 million via share purchases and interest-free loans, which they have promised they will not ask to be repaid while the club still owes money to the banks. No wonder that former chairman Roger Munby said that “the club remains hugely indebted to their incredible generosity”, which enabled the Canaries to support a reasonable wage budget and prevent the sales of too many players.

However, they’re not the only benefactors, as fellow director Michael Foulger has also provided loans of £1.4 million and two months ago bought £2 million of new shares, increasing his stake in the club to 15% and reducing that of the Delia Smith and Michael Wynn Jones combination from 61% to 53%. This money has been ring-fenced to be used solely for the playing budget. Foulger also gifted the club £360,000 in the summer of 2009, when he matched pound-for-pound all the money not claimed by season ticket holders, who were entitled to a 20% rebate following relegation to League One.

Finally, Andrew and Sharon Turner loaned the club £2 million when they became directors in 2007, though their pledge to provide another £2 million of support unfortunately did not come to pass, as they left the board the following year for reasons unknown. The hole in the budget was closed by yet another contribution from “Smith and Jones.”

Over the last few years, the club has been living a hand to mouth existence, attempting to generate cash and balance its books with a variety of creative initiatives, such as refinancing, share offers and sales of property and land. A £1.5m share issue in 2004 helped bridge the gap left by the collapse of ITV Digital with £1 million coming from the fans and the other £500,000 from Delia and her husband.

"Andrew Crofts - the running man"

The £6 million received from selling land near Carrow Road for a housing development that year paid for the “calculated gamble” of signing three strikers (Darren Huckerby, Mathias Svensson and Leon McKenzie). Similarly, the £720,000 raised from the unclaimed season ticket rebates in 2009 allowed the purchase of Grant Holt, whose 24 goals were vital in gaining promotion from League One.

Most recently, the £2.1 million of funds received from the sale of some more land adjoining the stadium to a housing association in November 2010 were used to reduce the club’s borrowing. This was an important part of the financial restructuring agreed with the two main lenders that extended their repayment schedule: AXA’s hefty loan to May 2022; the Bank of Scotland’s £1.5 million overdraft facility to August 2011 and bank loans to October 2013. According to chairman Alan Bowkett, this move left “the long-term future of the club much more secure”, but he was less circumspect at the club’s AGM, admitting that without the rescheduling, “We would not be standing here today.”

There is little doubt that the new management team of Bowkett and chief executive David McNally, who arrived with a fine track record from his time at Fulham and Celtic, have wasted no time in addressing the club’s financial issues since their appointments in July 2009, following the resignations of Munby and Doncaster as a result of the disastrous drop to League One.

"Simeon Jackson - another hat-trick"

They have had to balance Norwich’s proud tradition of a club run for the community with the commercial needs of a modern football club, so that annual losses and debt levels can both be reduced, while keeping the squad competitive.

As an example, this means fine-tuning the ethos of “affordable family football” by raising ticket prices and reviewing the number of tickets sold on concessions (over 50%), as gate receipts have to be a key element of the club’s revenue, especially at this level. Such moves are never going to be universally popular, but fortunately for the new board most supporters understand that revenue growth is necessary to avoid less palatable alternatives, such as selling star players or the club ultimately ceasing to exist.

The new executives put together a seven-year plan to return to the top flight and become an established Premier League club, which originally included two years to get out of League One and three years consolidation in the Championship. McNally further explained, “We would then be promoted to the Premier League, allowing for immediate relegation and an immediate return. From that point we would continue to play our football in the Premier League.” This must have looked fairly optimistic to fans, but barely after the ink has dried on the new vision, they might have to rip it up and write another one, as the team is way ahead of schedule.

"John Ruddy - calm and collected"

This begs the question of whether it might actually be too soon for Norwich to be promoted to the Premier League, but as McNally pointed out, “There are 90 million reasons to make certain we are ready.” He is referring to the financial bonanza available, though it’s important to appreciate that the money does not arrive in one fell swoop. Even if a club finishes bottom of the Premier League, it earns around £40 million from the TV deal, but it is also in line for £48 million in parachute payments over the next four years (£16 million in each of the first two years, and £8 million in each of years three and four). On top of that, gate receipts and commercial income would certainly be higher, hence at least £90 million more revenue. To place that into context, that is more than five times Norwich’s current turnover of £17 million.

Such an enormous disparity explains why clubs are so desperate for promotion to the Premier League, even though the Championship is a successful league in its own right, boasting the fourth highest attendance in Europe with a total of more than 9.9 million fans ahead of Italy's Serie A (9.1 million) and France's Ligue 1 (7.6 million), though admittedly fewer matches are played in those divisions. The sad reality is that money talks and precious little of the Premier League’s wealth finds its way down the football pyramid. These days, Football League clubs cannot even rely on raising serious money from player sales, as the Premier League tends to buy from overseas or their own division.

Consequently, it is very tough for Championship clubs to break-even from operations, especially if they are carrying a wage bill that will enable them to challenge for promotion, which means that most Football League clubs almost inevitably make large losses. Therefore, they must rely on other forms of financial support. As Delia said, “Anyone outside the Premiership is going to struggle without billionaires and millionaires.”

Norwich City’s financials are no exception to this rule, showing losses in each of the last three years, ever since the parachute payments from their last stint in the Premier League came to an end. Although the 2010 loss of £5.8 million might not seem a huge amount, it is equivalent to 34% of revenue. The same percentage would produce a loss of almost £100 million at Manchester United – even more than the real thing.

In fairness, the club did very well to restrict the loss to just £0.8 million more than the one recorded the previous year in a higher league, especially as they had to cover £2.6 million of exceptional charges, including £0.6 million relating to Paul Lambert’s move from Colchester United (fines, compensation, legal fees), £0.5 million for a strategic review and £0.2 million to directors and senior executives for loss of office plus £1.3 million classified as staff costs (£0.9 million promotion bonus and £0.5 million players’ compromise agreements).

Profit on player sales was also quite low at £0.8 million, including £0.3 million appearance related fees for former players, but this has never been a big money spinner for Norwich with the highest profit in the last six years being the £6.2 million made in 2005/06, mainly from the sale of Dean Ashton to West Ham. Since then, very few players have brought in large sums, even though the club have sold internationals like Robert Green and Robert Earnshaw.

The price of relegation can be clearly seen in the decline in revenue over the years with turnover falling from £37 million in 2005 (Premier League) to £17 million in 2010 (League One). Most of this decrease is due to TV, as the central distribution dropped £12 million in 2006 following relegation to the Championship, though it was held up by £7m of parachute payments in 2006 and 2007, before falling off a cliff in 2008. This was obviously a bitter pill to swallow for the club, particularly as it accounted for approximately 30% of total revenue. Commercial revenue also took a hit as a direct result of relegation, but gate receipts have held up remarkably well, which is a tribute to the fans’ steadfast support.

Even though Norwich’s revenue has fallen so much, they still have the ninth highest revenue in the Championship, based on the 2009/10 accounts. Clearly, the three clubs that were in the Premier League last season (Portsmouth, Hull City and Burnley) have the highest revenue, while the next three teams in the “league table” (Middlesbrough, Reading and Derby County) had the benefit of parachute payments. Even so, as former chief executive Neil Doncaster said, “We are in a far better position than a lot of other clubs, because our season tickets sell out and activities off the pitch.”

This is even more relevant this season, as only four clubs are boosted by parachute payments: the three relegated last season and Middlesbrough. Given that both Portsmouth and Hull City have encountered steep financial difficulties, we now have a more level playing field than in the past, at least from a financial perspective, which helps explain why the division is so competitive.

That said, Burnley’s revenue of £45 million last year was significantly higher than Norwich’s £17 million, entirely due to the difference in broadcasting income (£34 million compared to £2 million). In fact, revenue from gate receipts and commercial activities was actually higher at Norwich, even though they were two divisions lower. Following relegation to the Championship, Burnley’s projected revenue will still be more than Norwich, purely due to the £16 million parachute payments, though the gap is much closer, because of the increase in Norwich’s TV revenue to £5.5 million.

This estimate is mainly derived from three payments given to all clubs in the Championship: the £2.47 million Football League distribution; £2.2 million solidarity payment from the Premier League (up from £1 million last season); and £0.5 million share of the parachute payments given to Newcastle and WBA, as they went straight back up to the top tier. In addition, I have included £0.3 million for cup runs and facility fees (each time a team is shown live is worth £100,000 to the home team, £10,000 to the away team).

Unfortunately, the new Football League three-year TV deal signed this month, which kicks off in the 2012/13 season, is £69 million lower than the current contract at £195 million, a reduction of 26%. As there was no interest from BBC, ITV or even ESPN, the only game in town was Sky, who could accordingly lower their bid. Given that most of the money is allocated to the Championship, this is where the impact will be most keenly felt – another reason, if one were required, to push as hard as possible for promotion.

Although Norwich listed a reduction in attendances as one of their principal business risks, there would appear to be little danger of this happening, given that crowds have remained at more or less the same levels whatever league the Canaries find themselves in. Little wonder that the club formally thanked the “passionate, loyal, local support who continue to demonstrate their undying loyalty to their football club.”

In fact, their average attendance of 25,346 is the third highest in the Championship, only behind Leeds United and Derby County, and is actually higher than seven clubs in the Premier League (Birmingham City, Fulham, WBA, Blackburn Rivers, Bolton Wanderers, Wigan and Blackpool). There is no sign of this slowing down with season ticket sales for the 2011/12 campaign already standing at a record high of 21,063, considerably more than the 19,250 the last time that Norwich were in the Premier League, even though prices have been raised by an average £1.50 a game and the starting age for adult concessions has been increased from 60 to 65.

Of the clubs averaging more than 20,000 in the Championship, Norwich have by far the highest capacity utilisation at 94%, which has raised the possibility of a stadium expansion. Although 1,000 seats were added last summer, the board has discussed a plan to increase Carrow Road’s capacity from 27,000 to 35,000, though this would only be considered if the club had two consecutive seasons in the Premier League. Although it could make the club self-sufficient, the expansion would cost £20 million, which would take nine years to repay, and the club would lose £1.4 million gate receipts from lost capacity during the building phase, so this would be a momentuous decision.

"Yellow and Green Army"

Alternatively, there would be the possibility of a sale and leaseback deal on the stadium, which would raise enough money to pay off the debts and leave a useful transfer budget. Carrow Road is valued at £32.9 million in the books, though the directors believe that the market value is higher. However, every club that has followed this route now regrets the decision. Mike Reynolds of the Norwich City Supporters’ Trust summed up the fans’ views, “It would be very much selling off the family silver - once it's gone, it is gone and you can't go back and use it as an asset.” Indeed, following the restructuring, Delia promised that the ground would “absolutely not” be sold.

Commercial income of £8.5 million is quite high for a Championship club, but is bolstered by £3.8m catering revenue. That may not be too surprising, given the owner’s day job, but it’s strange to think that last season this was more than twice as much as TV revenue, though the margins will not be quite so impressive.

The current shirt sponsor is insurance giant Aviva, the parent company of Norwich Union, who extended their three-year deal in the summer of 2009 to the end of the 2011/12 season. The value of the deal has not been divulged beyond the fact that is a “substantial seven-figure sum.” The kit supplier is Xara, though McNally has told supporters that there will be a new contract from next season.

Other commercial revenue comes from a variety of sources, including a joint venture for the hotel at Carrow Road, a security business and hosting events at the stadium, such as a George Michael concert.

On the cost side, the wage bill is the key factor in a budget that the chairman described as one that “will allow us to compete for a top six position.” As always, this is a balancing act between spending enough to compete at the top of the Championship, while not damaging the club’s long-term security if it fails to win promotion. It is clear that Norwich have made strenuous efforts to control their wages, as these have been steadily reducing since the last Premier League season from £16.9 million to £12.2 million, though the important wages to turnover ratio has increased (worsened) from 45% to 72% in the same period, as revenue has fallen at a faster rate.

This is not too bad, given the pervasive impact of the stratospheric wage inflation in the Premier League, “where the wages of excellence are considerable.” The accounts tell us that Norwich structured their contracts to reduce in the event of relegation, though interestingly only if the team did not win back promotion in the following two seasons. If the club does get promoted, this can also affect the wage bill through performance-related bonus payments: £1.7 million in 2005 and £0.9 million in 2010.

Norwich’s wage to turnover ratio is actually the sixth best in the Championship, while their wage bill of £12.2 million is one of the lowest, placing them 16th in the wages league. Although there is seemingly not much between each team with 15 of the 24 teams having a wage bill between £10 and £20 million, that can still provide a healthy competitive advantage, for example Reading enjoy twice the budget of Watford. Of course, these figures are all at least 12 months out of date, so the position may well be different this season.

Nor have Norwich City been big spenders in the transfer market. Over the last decade, their net spend has been flat with the only year where they had relatively large net purchases (of just £7 million) being the one that they spent in the Premier League. The fallow period in the Championship featured a series of net sales, totaling £16 million, and it’s only really in the last two years that Norwich have lived up to their own description in the accounts of being a “buying club.”

To be fair, the sales came during a period when the club’s debts prevented them from splashing the cash. As the finance director said at the time, “player trading is a fact of life in football and will be used to support both the business and development of the team.” Norwich have always claimed that they were working towards a situation where they did not have to sell players for financial reasons. After the debt restructuring, they have proved true to their word and have been the second highest spenders in the Championship this season, only surpassed by QPR. OK, the figures are not that high, but everything’s relative.

Like almost every other club in the Championship, Norwich have also made good use of the loan system, bringing in promising Premier League youngsters like Henri Lansbury (Arsenal), Dani Pacheco (Liverpool) and Sam Vokes (Wolves) for meaningful roles.

Some fans have questioned Norwich’s “prudence before ambition” policy. Although there is no doubting Delia’s passion for the club (“Let’s be having you!”), nor the millions she has put in, some would still prefer wealthier investors. However, McNally for one is supportive of the majority shareholder, “Delia Smith has made an enormous contribution to Norwich City Football Club and her part in ensuring our survival should never be underestimated.”

This is very much a case of caveat venditor (let the seller beware), as not all owners would be such selfless benefactors as Delia and her husband, who have not taken any salaries, dividends or interest from the club during their fifteen years at the helm. That said, they have repeatedly asserted that they would accept a suitable offer if they felt that it was in the best interests of Norwich City.

The other salient point is that it is not that easy to find an ideal investor with the right credentials. The club has been “committed to attracting new investors” since 2008 and even appointed professional advisors Deloitte at great cost to assist in the process in 2009. They identified more than 50 potential investors globally, speaking to possible candidates in America, Europe, Far East, Middle East, Russia an Britain, but none of them have come up with an acceptable offer, even though Norwich is a club in a large catchment area with substantial potential.

"Henri Lansbury - hair today, gone tomorrow"

There has been a view that the club is against foreign ownership, but Michael Wynn Jones has clarified the couple’s views, “You have to make doubly certain about the validity and intentions of any foreign investor. They too would be welcome if we were convinced that they subscribed to the values this football club has always maintained.”

Regardless, the closest the club has ostensibly come to an investment was a couple of years ago with local insurance tycoon, Peter Cullum, the executive chairman of Towergate Partnership, who offered to put in £20 million for new shares, which would then be used to buy new players. Apparently he did not want to buy out the existing shareholders, but was told that he would need to stump up £56 million for the club: £16 million for shares, £20 million to clear the debts plus the £20 million transfer fund. At this point, he walked away, observing that “the economic environment is simply not conducive to investing in an ailing football club.”

In any case, the question has to be asked whether the club is now still under pressure to find additional investors following the successful financial restructuring, as McNally recently stated that the seven-year plan does not include any external investment. Additional cash would certainly come in useful, whether it be to reduce debt, fund stadium expansion or indeed strengthen the squad, but it would appear that it is no longer a necessity.

"Russell Martin - eyes on the ball"

As a sign of confidence, Norwich have already forecast an improvement in next year’s financials: revenue to increase by at least £5 million (to £22 million); the biggest operating profit since 2007, the last year that the club received parachute payments from the Premier League; and net debt to reduce by at least a further £1 million. The club remains focused on paying down debts from the sale of non-core, non-football assets, while McNally said that they could be debt-free if they achieve the objectives laid down in the famous seven-year plan.

Of course, the price to be paid for success includes the possibility of larger clubs tempting away your prize assets, specifically the manager and star players. Norwich have already refused one club (Burnley) permission to talk to Paul Lambert, but if a larger club came knocking at the door, it would not be a massive surprise if such an ambitious coach were to exit stage left.

"Andrew Surman - all smiles"

Similarly, covetous eyes must have been cast on success stories like Holt, Hoolahan and young striker Chris Martin, to name but three. Fortunately, all of them have recently signed new deals with the former two extending their contracts to 2014. Of course, the club might still be tempted to cash in if the price is right, but they are no longer in a position where they have to sell.

The club has certainly come a long way since the players had to pay for their own flights to Blackpool for an away game. The new executive team has pulled them back from the financial brink, while the new football manager is poised to lead his team to a second successive promotion, this time to the Premier League. It’s still too early to say that they will reach their destination, but it’s fair to say that these Canaries have already taken flight.