The Case for Justifying La Fabrica as Real Madrid’s Cash Cow

The title of this column includes the term “cash cow”. What exactly is a cash cow? Like me, maybe you envision a cow that when milked, spurts out gold coins instead of dairy. The vision is not far off from the metaphor - a cash cow relates back to a dairy cow, an asset that requires little to no maintenance but provides positive cash flows. In the grand scheme of things, it’s a low risk, high reward financial strategy.

Fortunately for Real Madrid, they have uncovered their very own cash cow. Maybe you have heard of it? It’s dubbed “La Fabrica”, where Real Madrid develops youth players in their academy at the illustrious Real Madrid City. The best and brightest talents across the globe are plucked, trained, and then more than likely, sold for a profit. La Fabrica translates to “The Factory”, an appropriate name for what feels like a constant conveyor belt of talent passing through.

In this current summer transfer window alone, Real Madrid have made up to ~€95 million from home grown academy player sales. No club has ever achieved such a feat. Despite a depressed market due to COVID-19, Real Madrid have shattered their previous record which was achieved in the previous season (a transfer profit of €85 million). The golden goose, the cash cow, whatever you want to call it – Real Madrid have identified another avenue from which they can beef up the bottom line.

Last season, Real Madrid released the figures for the annual investment in their youth facilities which was around ~€20 million. The sale of Reguilon (€30M) and Achraf Hakimi (€40M) alone could have paid for close to four years worth of facility upgrades. Investing in your infrastructure and specifically your academy reaps an unfathomable ROI. It’s a infinite cycle: investment into the youth infrastructure, management, facilities etc. then leads to attracting greater talent and greater development, which then leads to larger profits once those player are sold. And once those players are sold, the process repeats.

For the current summer, the club expected to bring in €94 million from player sales. This number was agreed upon and presented to the public in the fall of 2019:

Real Madrid Annual Report

That budgeted figure of €94 million was achieved without tampering with the current first team squad. How many clubs in the world could be successful in attempting such a feat? Very few, if any at all; ask most club President’s across Europe and their response would be that it is simply unattainable.

Zoom out even deeper — over the last 19 years, Real Madrid has invested a total of €233 million in Real Madrid City:

Real Madrid Annual Report

What has been the return on that investment? An income from transfers, as homegrown player’s do not have an amortized transfer fee, of just under €400 million. Taking the difference between the investment and the transfer income (€400M – €233M = €165M), Real Madrid nets out with about a 71% return on their investment. There are not too many financial vehicles in the world that reap a better return.

Take note of the explosion of growth from academy player sales in the last five years:

Data Courtesy of Transfermrkt

Part of this explosion is down to inflation, a market that ballooned post-Neymar’s transfer to PSG, but it also refers back to the infinite cycle mentioned above. Let’s compare some of the players that have been sold in the last five years compared to some of the players sold at the start of the century:

2015-2020 (High Profile Academy Departures): Reguilon (Tottenham), Achraf (Inter Milan), Marcos Llorente (Atletico Madrid), Alvaro Morata (Juventus, Chelsea), Jese Rodriguez (PSG), Raul De Tomas (Benfica)

2000-2005 (High Profile Academy Departures): Valdo (Osasuna), Juanfran (Osasuna), Fernando Morientes (Liverpool), Jurado (Atletico Madrid), Raul Bravo (Olympiacos), Arbeloa (Deportivo La Coruna)

The value of the player and the stature of the club signing those players has improved dramatically.

Most Madridista’s harbor immense sanctification and pride when an academy graduate forms as part of the first team and stakes a true claim for minutes. Raul, Guti, Iker Casillas — they were all idolized by the fan base partly because of their Real Madrid DNA formed in the youth structure. It would have been nice to see a new generation of former cateranos and Castilla graduates transition into the squad this year. The contingent of Achraf, Oscar Rodriguez, Reguilón, Valverde, and Ødegaard all played together at some point within Madrid’s academy. But at a club of Real Madrid’s stature, there are not enough minutes to go around for deserving players. The cream will always rise to the top, which is why Ødegaard and Valverde are two players who have managed to work their way into the first team picture. In fact, of the 40 academy players sold for a profit in the last 20 years, arguably none — even in their peak — would break into Real Madrid’s current starting XI.

Put simply, in order to sign the holy grail (Mbappe) and retain the services of a Kroos, a Varane, or a Casemiro — a club has to keep up financially with those player’s ever-increasing value. That means high wages and lucrative bonuses when it comes time for a renewal. To keep and attract the best, a club’s finances have to be in order. If Real Madrid’s academy stars are not quite ready to make an impact at the club, then selling them for a profit is justified — just look at the numbers.