Are Real Madrid Lagging behind their Competitors in the Transfer Market?

As we enter the knock-out stages of the Champions League, comparing Real Madrid’s level of investment in its roster to other European outfits makes for an interesting case study. Los Blancos, until recently, were known as the swashbuckling powerhouse of the transfer market. However, the emergence of wealthy owners with deep pockets following the takeovers of clubs such as Chelsea, Manchester City and Paris Saint Germain has tilted the playing field. In a recent analysis completed by the CIES Football Observatory (using their methodology / assumptions to derive estimates), Real Madrid fall outside the top 20 net transfers since the summer of 2016.

CIES website

While transfer spending and success on the field is not a linear equation, it is a fairly strong indicator of the financial ambition demonstrated by clubs as well as the quality of the roster. There are certain reasons — such as smart acquisitions or productive scouting / youth systems — that could explain why the value of some teams assessed by transfer spending may not reflect the market value of the players. However, Real Madrid not placing in the top 20 — where nearly all their major rivals feature such as Barcelona, Bayern Munich, Juventus and the English conglomerate to name a few — is fairly jarring.

CIES website

Going further down CIES’s list, Real Madrid appears in 30th place. This is even below clubs like Atletico Madrid that do not have comparable financial resources or Liverpool where their owners have been reported to pursue fiscally conservative policies. This is not an immediate problem as one could argue that the most dominant team in world football today doesn’t rank near the top of the list given Bayern Munich sits at 17th.

Similarly, a number of clubs near the top of the list do not currently match up against the elite. While this is a fair point, there are conditions and dynamics that allow teams to compete without spending as much as others. These include having a strong domestic influence in attracting local talent (e.g. Bayern Munich in Germany) or capitalizing on free agents / players nearing the end of their contracts (e.g. Juventus). Ultimately, there will always be anomalies and transfer spending will never perfectly correlate to trophies and performance on the field but there is an undeniable strong link between the two.

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Another argument is that perhaps looking at the last five years is not fair as Real Madrid made significant investments in the Galactico 2.0 phase and subsequent years building the squad which set Europe alight from 2014 to 2018 and kept up with the best even before then. One way to try and account for that is by looking at the total player amortization expense.

[Player amortization is when] the costs directly attributable to the purchase of the registration rights are capitalised, including (but not limited to) the transfer fees paid...(IAS 38 para 27). In accordance with paragraphs 97–99 of IAS 38, player’s registration rights would typically be amortised on a straight-line basis over the rights period, corresponding to the term of the contract that the club has signed with the player. The original amortisation period might be revisited in case of an early renewal of the player’s contract. - PWC website

When looking at player amortization, Real Madrid is in a slightly better position but still ranks behind other major clubs in Europe. Although they surpass Bayern Munich and Atletico Madrid (with the caveat that the data is from two seasons ago), they still stand far behind their biggest domestic rival and reference point. While it’s clear that the financial implications of the pandemic as well as Real Madrid’s economic and operating model means they may struggle to compete on a euro by euro basis with the Manchester City and Paris Saint Germain’s of the world — the club also hasn’t tapped into debt financing as much as Barcelona to support player acquisitions.

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Based on the latest set of accounts, Barcelona still outstrip Real Madrid. While these numbers may include amortization for non-football operations as well as women’s teams, their effect if included would not significantly distort the picture. Overall, Real Madrid are somewhat lagging behind Barcelona. However, it is important to note that the difference isn’t as stark compared to the net transfer spend over the last five seasons.

Nonetheless, it certainly points to a possible decline in club investments from their heyday in the transfer market. Given the aforementioned pandemic and organizational operating model in addition to the stadium renovation project, the gap compared to the biggest spenders may persist for the near future. Although if the rumours are to be believed, Real Madrid are plotting a big splash in the upcoming transfer windows that may close that gap.