Real Madrid won’t spend big this summer, here’s why.

With each passing week, transfer rumors' surrounding Real Madrid and Barcelona grow stronger. Both clubs have seemed primed for a big renewal for quite some time now and, if you take the word of the Spanish papers, this summer will be the one that both clubs flex their financial might. For some fans that last sentence might have caused you to cringe a little and I am right there with you because, as nice as it is to imagine Erling Haaland or Kiylan Mbappe emerging from the steps of the Bernabeu dressed in all white, the reality is that neither of Spain’s traditional giants are in a place to make those sort of moves happen this season.

Though the papers are certainly the main culprit when it comes to fueling transfer rumors', they aren’t alone in the belief that Real Madrid are going to spend this summer. Too many fans not only believe Los Blancos have the money to spare, but are strongly of the opinion that Perez and his board are obligated to financially support Zinedine Zidane this summer. This belief is born out of fundamental misunderstandings about where Real Madrid get their money from.

Ownership structures

Photo by David S. Bustamante/Soccrates/Getty Images

Unlike a majority of its European rivals, Spain’s big two are entirely owned by their fans. The club’s board and general assembly are entirely made up of club members (called socios) that are elected to four year terms to run the club on the behalf of its other members. According to Real Madrid’s 2019/20 financial records, socios season fees account for 7.2% of the club’s income while matchday revenue accounts for about a 1/5 (20%). These are sizable figures, however, it is difficult to believe that losing part of that income could stop Real Madrid from spending this summer, this is where the limits of the ownership model come into play.

Powerhouses such as Paris Saint Germain, Manchester City and Chelsea all have rich owners that can inject cash into their respective clubs to cover losses. Roman Abramovich reportedly invested 247 millions pounds in Chelsea this summer. Apparently, the London club’s parent company, Fordstam, owe the Russian oligarch 1.7 billion in loans should he ever choose to sell the club. Manchester United can sell shares in the club on the US stock market to cover their losses. All this is not taking into account that the top English clubs have access to the most lucrative broadcasting revenue deal in the world. Being completely fan owned, Real Madrid can only spend the money they make each season and there are no corporate or private groups that give Real Madrid a consistent financial cushion that many top European clubs currently enjoy

Although Florentino Perez is a rich man, Real Madrid’s ownership structure prevents him from personally investing any of his own money into the club, though there are caveats to this. To run for club presidency, Spanish sports law dictates that a perspective board must guarantee 15% of the club’s budget and assume 100% of its losses. Last season, Real Madrid invested 331 million (excluding the costs for renovating the stadium) with 30% of that amounting to about 100 million.

Provided Real Madrid make more than that 100 million over Perez’s four years as president, he won’t be asked to put a pledge forward again if he runs for reelection. Nonetheless, the sort of personal risk that Real Madrid’s board make when they run for a position of power is huge and, unlike private owners who have control over how much they invest, Real Madrid’s board are legally required to cover losses, be it through a bank loan or out of their own pockets. If they can’t cover those losses, then a new board would have to be elected and, in normal circumstances, no one really ticks all the boxes to succeed Perez’s regime. Too much loss means the Spanish government can take club ownership away from the fans and turn the team into an SAD (the notoriously dodgy ownership structure currently used by all but a handful of Spanish clubs).

Bayern Munich are the only top European club with a comparable ownership structure to that of Real Madrid. 75% of Bayern Munich is owned by a entity called Bayern Munich eV which represents over 250,00 Bayern club members. The remaining stock in Bayern is owned by long term partners, Audi, Adidas and Allianz. Bayern is often quoted as Europe’s healthiest club due to its high matchday revenue, varied revenue sources and ability to turn profits season after season.

This has allowed Bayern to spend during a summer where few clubs with a similar model are able to. Though comparable, Real Madrid and Bayern Munich differ in a couple of crucial ways. The first being that Audi, Adidas and Allianz give Bayern a financial cushion that Real Madrid don’t have by being completely fan owned. Bayern’s dominance of the Bundesliga and consistency in the Champions League makes them one of the only universally recognized German team and has allowed Bayern to monopolize the German sponsorship market, a massive financial boost given Germany’s place as Europe’s biggest economy.

An uncertain future

Now we have covered how Real Madrid differ to other clubs and why being fiancially healthy is so important for them, lets look at the challenges COVID has set down for the club’s board.

Real Madrid are expecting to make 300 million euro less than they had planned to this season, dragging the club’s income down from 715 million euros to 607 million. The team is expecting to make a 91 million euro loss for the 2020/21 season having just broken even last year. This expense is also being balanced with the stadium renovation, which the cub is financing via a 575 million euro bank loan which will be repaid in installments across the next 26 years, starting in 2023.

To manage these expenses, Real Madrid are cutting player wages, have taken out more bank loans and are seeking new sponsorships. They have sold a chunk of their sponsorships rights to the US company, Providence, for 200 million euros in a deal that will last until 2027. This will be paid out across four years and gives Providence full control of Real Madrid sponsorship direction outside of the name of the stadium, training ground and shirt sponsorships. Real are also reportedly looking at a deal with Saudi Arabia’s Qiddiya project which would be worth 15 million a year.

It should be noted with the latter deal that Real Madrid signed the United Nations Global Compact last June (the first football club to do so), which means the club will align its business dealings to the universally accepted standards of human rights and labor standards. Given Saudi Arabia’s track record on these issues, Real Madrid might avoid a sponsorship deal with them. In general, securing these sponsorships are hard. Providence have been a partner with Real since 2017 when the club agreed to a 500 million euro deal in exchange for the club’s internet rights. Reportedly, Providence were cautious about renewing their deal with Real, however, the Bernabeu redevelopment encouraged them to stay on.

Although club officials claim they aren’t giving up control of elements of the club, its clear these deals come with huge ethical and administrative sacrifices for Perez and his board. It’s unlikely that such sacrifices would be made simply to fund a summer spending spree and demonstrates the financial strain that COVID-19 has placed Real Madrid under.

In the post COVID-19 world, the future looks much brighter. The club rightfully took advantage of the lack of fans to start redevelopment of the Bernabeu and expect the new stadium to be complete by June 2022. It’s expected that the new Bernabeu will push club income to over a billion a year, which should allow Real to compete in a more sustainable manner than its rivals in the transfer market. When these benefits will be felt is another question entirely. UEFA have set a deadline of April for host cities to have plans for the return of fans to stadiums. Madrid is not a host city, however, Bilbao is and the return of fans to the domestic game will be a critical practice for an international competition.

Saying this, Madrid remains a hotspot for the COVID-19 pandemic and its lax restrictions so far mean that this is unlikely to change anytime soon. As other regions might feel the benefits of the vaccine and lockdowns, Madrid could very well be on a long road to recovery. As a result, there is a scenario where fans might return to stadiums elsewhere in Spain and Europe before they do so in Madrid. Even when things have returned to “normal”, the fallout of the virus could have a lasting financial impact on football with some studies suggesting travel and football stadiums might not return to pre-COVID levels for another couple of years.

All this is to say that the future for Real Madrid is highly uncertain and the club is in survival mode as a result. One can daydream all they want about big spending this summer, however, those dreams becoming a reality are still a little while away.