A Study Into The Viability of Division II Football In Canada Phase II – Feasibility Of The National Professional League and Regional Semi-Professional Development-Focused League Options
July
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In A League Of Our Own A Study Into The Viability of Division II Football In Canada Phase II – Feasibility Of The National Professional League and Regional Semi-Professional Development-Focused League Options
First Published July 2012
Š 2012 by Rethink Management Group, LLC. All rights reserved. No part of this document may be reproduced or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of Rethink Management Group, LLC.
ACKNOWLEDGMENTS: Rethink would like to thank Dr. Duane Rockerbie and Mr. Richard Whittall for their valuable contributions to this project.
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Table of Contents 1 I. Introduction 7
II. Analysis – National Professional League
29
III. Analysis – Regional Semi-Professional Development League
45 IV. Afterword
APPENDICES 51
Data used for Canada FIFA Ranking Forecast
FIGURES 10
Figure 1 - Annual Real GDP Growth Rate (%) Canada
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Figure 2 - Unemployment Rate (%) Canada
13
Figure 3 - Toronto Stock Exchange (TSE) Index
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Figure 4 - Index of Leading Canadian Indicators
TABLES 16
Table 1 - CSA Registrations By Province / Territory
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Table 2 - Unofficial Average Attendances for MLS, NASL and USL PRO
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Table 3 - Population Growth for Metropolitan Census Areas
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Table 4 - Age Profile of Metropolitan Areas
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Table 5 - V enues That Meet CSA Professional Football Standards Requirements
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Table 6 - E stimated Annual Operating Budget For Typical Professional Football Club
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Introduction
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Introduction In October 2011, the Canadian Soccer Association (CSA) commissioned Rethink Management Group, LLC (Rethink), to study and report back on the viability of a new men’s professional football league in Canada. The new league is intended to operate at the division II level of the North American football pyramid and provide an opportunity for promising Canadian footballers to play meaningful matches in a professional environment. It was agreed upon by the parties that the study would be broken into two separate phases. The broad objectives of phase I of the study were:
n To examine previous efforts to establish a Canadian professional league to identify reasons for their failure;
n To study other North American and global sports leagues to identify administrative and legal best practices;
n To consult with a wide range of people both inside and outside of the football industry through interviews, meetings and social media exchanges;
n To identify and describe a minimum of two preferred league models (e.g. national versus regional; single entity versus franchise; closed fixed-membership versus promotion/relegation) that could provide an appropriate structure for a new professional league in Canada;
n To conduct a detailed SWOT assessment analysis of the best models that emerged to determine what one(s) is/are the most appropriate for Canada’s sporting landscape;
n To submit an assessment report to the CSA of each model(s) strengths, weaknesses, opportunities and threats. In December 2011, Rethink presented to the CSA a draft of our findings and recommendations from phase I of the project. When first encountered, the nature of a problem is often imperfectly understood and only fully revealed as progress is made to solve it. During the phase I consultation period, as we sought input into the design of a new league, we received a number of submissions and substantial feedback suggesting that what Canada needed — perhaps more than even its own professional league — was a competition, operating at the division III level of the Canadian football pyramid, that could help bridge the development gap between academy and first-team professional football. Given
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the large number of people who responded with this suggestion, it was felt that a rigid adherence to the original project objective of only considering a professional league would only hinder the game’s long-term development in Canada. Therefore, in addition to recommending for further study SWOT Option 1, a new National Professional League, in phase I we also advocated for SWOT Option 3, a Regional Semi-Professional Development-Focused League. A review of the elements from each of the two recommended options from phase I of the study are listed below:
Option 1 – National Professional League The National Professional League option is based largely on the format of previous attempts to create a national professional football league in Canada with some modern innovations that could increase its likelihood of success. The features of the National Professional League are quite similar to those of the current Canadian Football League (CFL) and a possible league model could feature:
n Clubs owned by private investors that must meet the minimum budget and capital requirements imposed by the CSA for a professional league ($1.5 million annual budget, $500,000 player payroll, $200,000 letter of credit, etc.).
n Eight to ten clubs, growing eventually to 12, that are geographically dispersed and located in Canada’s largest metropolitan centers.
n A sufficiently flexible import player quota that allows owners to acquire foreign talent to enhance attendance and media coverage.
n Minimum facility size of 4,000 - 5,000, possibly expandable, as stipulated by CSA requirements.
n Western and Eastern Conferences that play a majority of games within conference.
n A playoff format with a final championship game between the Western and Eastern Conference champions.
n The anticipation of sufficient attendance, media revenues and sponsorship monies to cover expenses without the sharing of local revenues.1
1 National revenues including TV, apparel, logos, merchandising, etc. can be shared equally. Local revenues include parking, concessions, local advertising and revenues from supporter’s trusts (if they are used). Some revenues cannot be shared so as to give local investors incentives.
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INTRODUCTION
Option 3 – Regional Semi-Professional Development-Focused League The Regional Semi-Professional Development Focused-League option places an emphasis on footballers aged 23 and under and draws upon many of the elements of the three junior hockey leagues that make up the Canadian Hockey League (CHL), but also includes features that are specific to the Canadian football market. It is expected such an entity would operate at the division III level of the Canadian football pyramid. A possible league model could feature:
n Three or four regional leagues that are principally located in Canada’s largest provincial football markets (B.C., Ontario, Quebec and possibly Alberta).
n Clubs owned by private investors, community owned in the form of a supporters trust, integrated within an existing amateur club structure, or a blend of all three models that meet the minimum budget and capital requirements imposed by the CSA for a semi-professional league ($225,000 annual budget, $75,000 player payroll, $50,000 letter of credit, etc.).
n Each regional league would be comprised of six to eight teams, one of which would include a development team from the professional club located in the region.
n While principally focused on players aged 23 and younger, there could be opportunity for each team to field an agreed upon number of overage-players who are nearing the end of their careers and who have an interest staying in the game as player-coaches.
n Teams would travel to away matches by motor-coach. n An end of season tournament among the top clubs in each regional league to determine a national champion (similar to junior hockey’s Memorial Cup).
n Possible inter-league and/or tournament-play against NASL and USL Pro clubs.
n
Possible coordination with Canadian Interuniversity Sport (CIS) football programs in the form of playing season, access to facilities, talent supply and scholarships.
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In April 2012, after a four-month period of review, we received acknowledgement from the CSA that the Association was in full agreement with the recommendations contained in the phase I report and approval to move forward with the second phase of the project. In phase II of the study we build on the findings from phase I and seek to determine the viability of the two advised options.
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Analysis: National Professional Football League
II
Analysis: National Professional Football League Since the collapse of the original CSL (1987-1992), Canada’s last national professional football league in 1992, there have been two studies we are aware of that have investigated the establishment of a new professional football league in Canada. In February 2000, the accounting firm KPMG completed a study into the feasibility of a new professional league that was commissioned by the CSA. In the report, KPMG concluded that the business conditions necessary for financial success and long-term viability did not exist at the time. Nine months later, in November 2000, a working group comprised of business leaders and stakeholders in Canadian football published a report proposing the formation of a new professional division II league, to be named the Canadian United Soccer League (CUSL). Unfortunately, sufficient private investment could not be procured to launch the new league by the proposed 2001-2002 start date and the idea died. As part of our research, we reviewed both studies and met with key people involved in authoring the two reports.
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The Current Economic Climate in Canada The CUSL proposal in 2000, despite having some sound ideas, did not materialize into a viable national league in large part due to the difficulty organizers had securing adequate interest and funding from investors (to acquire franchise clubs) and sponsors. Potential investors are drawn to purchase professional sports franchises by the promise of future profitability and the potential for significant appreciations in franchise values. In addition to the prevailing economic and demographic conditions present in the cities where investors intend to locate their teams, investor expectations are also shaped by more general economic conditions. Economists use key macroeconomic indicators as barometers of the current state of economic health and employ leading statistics to provide forecasts of future economic conditions. The choice of indicators is somewhat arbitrary, but generally, growth in real gross domestic product2 (GDP) and the unemployment rate are broad measures of the state of consumer demand and the labour market, respectively. Additionally, a portion of Canadians’ wealth is held in equities in the stock market, hence the Toronto Stock Exchange (TSE) index provides a useful measure of the current economic health as well as an indicator of the market’s expectation of future business profitability. Statistics Canada also produces a monthly index of leading indicators, which is comprised of a weighted average of movements in ten key macroeconomic aggregates that are thought to reflect future economic conditions over the next one to two years. As we look to investigate the financial viability of a new national Canadian professional league, it is useful to compare the current state of the Canadian economy using the four economic indicators identified above (GDP, unemployment rate, TSE Index and Composite Index) to conditions that existed back in 2000 when the CUSL proposal was first presented.
2 Gross domestic product is an estimate of the total value of all final goods and services produced in Canada over a period of time, typically one year or one quarter. Goods and services are valued using prices that are held constant to a base year in order to eliminate the effects of inflation on total value. Since sales of goods and services are incomes for others (directly in the form of revenue or indirectly in the form of wages and salaries), GDP is also a measure of Canadian income.
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ANALYSIS: NATIONAL PROFESSIONAL LEAGUE
GROSS DOMESTIC PRODUCT Figure 1 below highlights Canada’s annual real GDP growth since 1992. Between 1999-2001 the country experienced declining real GDP growth before slipping over into negative growth by mid-2002. This was followed by six consecutive years of positive real GDP growth that coincided with a strong period of economic expansion in both Canada and the U.S. Using perfect hindsight, 2003 would have been a relatively good year to establish a new division II football league in Canada from the standpoint of aggregate consumer demand and income. The rapid downturn in economic growth experienced in 2008, largely created by a major recession in the U.S., has since been followed by modest positive growth with the most recent figure at 1.8% annual growth in June of 2012. The recent volatility in GDP growth has created an environment of economic uncertainty in Canada mixed with cautious optimism. FIGURE 1. Annual Real
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GDP Growth Rate
6
(%) Canada
5 4 3 2 1 0 -1 -2 -3 -4
Source: CANSIM series v41707125 Canada; 2002 constant prices (Dollars); Unadjusted; Gross domestic product (GDP) at market prices
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UNEMPLOYMENT RATE Canada’s unemployment rate,3 as shown in Figure 2 below, dropped steadily from 1994 to 2000, with a brief increase in 2001-2002 followed by another steady decline to 5.9% in mid-2007. Again the picture in 2003 to launch a new professional league was much brighter than today in 2011. Unemployment spiked to 8.7% in mid-2009, but had fallen to 7.2% by June of 2012. The recent fall in the unemployment rate is encouraging although part of the downward trend might be the result of discouraged individuals falling out of the Canadian labour force. FIGURE 2. 13 12
Unemployment Rate (%) Canada
11 10 9 8 7 6 5 4
3 The unemployment rate is the number of unemployed individuals as a percentage of the labour force. To be counted as unemployed, an individual must be willing and able to work, hence students, the
Source: CANSIM series v2062815 Canada; Unemployment Rate (Rate); Both Sexes; 15 Years And Over; Seasonally Adjusted
elderly, the disabled and others are not counted as being unemployed.
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ANALYSIS: NATIONAL PROFESSIONAL LEAGUE
TORONTO STOCK EXCHANGE Within their investment portfolios, potential investors and sponsors of a Canadian professional league will likely hold equities in domestic and global stock markets. Any material change in the values of these equities can affect their ability to borrow (using equities as collateral) and invest the borrowed funds in franchise fees, facilities, player salaries and the other expenses necessary to operate a professional football team at the division II level. The TSE index in Figure 3 below provides a broad measure of the health of Canada’s equity market. The year 2003 completed an 18-month period of decline in the TSE index with the index losing approximately 40% of its value. Again, with the benefit of perfect hindsight, this would have adversely affected the ability of CUSL organizers to attract the necessary financing to launch the CUSL, although GDP growth and the unemployment rate were favorable. Since mid-2009, at the worst point of the recession, the TSE index has risen by nearly 50% to recapture most of the losses it incurred due to the economic crisis. Economists often rely on stock market indices as one of several measures of the market’s expectation of the future state of the economy and political situation. Without resorting to complicated technical analysis, one can conclude that the market in Canada is still healthy and cautiously optimistic about the future. Although government and consumer debt levels around the world are rising, corporate debt in the companies that survived the wave of the recent financial crisis is quite low.4 This fact, coupled with historically low borrowing rates in Canada (Canada’s June 2012 prime rate was 3.0%) increases the ability of corporate entities to invest in a professional division II football league. COMPOSITE INDEX OF TEN INDICATORS Canada’s leading indicator index, as highlighted in Figure 4 below, showed little 4 Canada’s corporate debt-service payments are currently about 30% of total operating earnings, compared with a 100% figure in
or no movement up to November 2011, but increased by 4.8% in the first quarter of 2012. This suggests expectations are for modest real GDP growth and a cease to the decline in unemployment over the next 12-24 months. Although Canada’s
the 1991-92 recession.
economy has fared relatively well in comparison to other G-20 countries over the
Source: CIBC World Markets:
past three years, Canada is still very susceptible to economic shocks introduced
Corporate Canada’s Debt Levels Will Lessen Effect of Rate Hikes, April 29, 2010. 5 TD Economics, Quarterly Economic Forecast, September 13, 2011
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by exogenous forces. The European debt crisis and subsequent instability in the Euro zone, coupled with record levels of consumer and government debt in the U.S. have led to concerns that the world’s current upward trend in accumulating debt is unsustainable. Canada’s business sector is well positioned to weather any economic storm but consumer spending is a concern.5
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FIGURE 3. 7 6
Toronto Stock Exchange Index
5 4 3 2 1 0 -1 -2 -3 -4
Source: CANSIM series v122620 Canada; Standard and Poor’s/Toronto Stock Exchange Composite Index, Close (Index, 1975=1000)
FIGURE 4. 13 12 11
Index of Leading Canadian Indicators
10 9 8 7 6 5 4
Source: CANSIM series v7688 Canada; Composite Index Of Ten Indicators (Index, 1992=100); Smoothed
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ANALYSIS: NATIONAL PROFESSIONAL LEAGUE
WHAT IT ALL MEANS An analysis of Canada’s current economic climate indicates that the conditions to attract investment capital to a new professional division II league are generally favorable; however, consumer demand might not be sufficiently strong enough to allow the league to realize its profit expectations. Professional sports leagues that have been in existence since the 1960’s tend to show that profits are insensitive to business cycles. The NFL and MLB have used various forms of revenue sharing over their long histories so that those teams that draw well help those that underperform at the gate. Salary caps are used in the NFL, NBA and NHL to control the growth of salaries and cap payrolls to a certain percentage of anticipated league revenue. Smoothing revenues and controlling costs has worked well for all four of North America’s major sports leagues. However, it has not always been this way. All four of the region’s major leagues have experienced some difficult periods during their early years and teams have come and gone frequently. If one uses North American leagues as an example, it generally takes 20 or more years for a professional sports league to move to stable profitability if it survives at all (which most do not). MLS is now nearing its 20th anniversary and is just now beginning to look like a financially stable and viable league. One can expect that a new Canadian professional football league will experience sensitivity to the business cycle for some time, and as such it would be important to structure any new league’s governing practices to encourage financial stability.
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League Size and Club Locations The National Professional League model is constrained in scale and form by the CSA’s standards for a professional league, the most important of which are the capacity of the playing venue, the minimum player salary budget and the minimum overall team budget.6 These requirements have a large bearing on the potential location of individual teams, the types of players that can be recruited and the amount of money that can be spent on marketing, administration, travel and other operating costs. TAKING THE GAME TO THOSE WHO PLAY IT Initially, the number of clubs in the national professional league is determined by identifying the largest football markets in Canada subject to the availability of suitable playing venues. One measure of market size in the national professional league context is the number of footballers registered with the CSA, as these are individuals clearly interested in football, support the game, and are potential consumers of a professional league product. Table 1 below summarizes these figures. The participation rate is an estimate of the minimum market size based on the assumption that each 8-18 year old football registrant with the CSA has two parents, are potential consumers themselves, and that each 19+ age registrant is a potential consumer.7 The participation rate is the percentage of the provincial population that has some connection to the football community. It does not include officials, sponsors and so on. This is not reflective of estimated attendance since each participant might not attend a league game. Attendance estimates are provided later in this section based on a consumer demand model. The figures in Table 1 below merely suggest the largest potential markets where spillover effects to consumers who are not active football participants are most likely. The data clearly indicate that clubs should be located in Ontario, Quebec and B.C. Any other provinces could prove to be more risky. Participation is relatively high in the Maritime Provinces, indicating possible locations for future expansion. Surprisingly, Alberta (5.34%) is well below the country’s average participation rate (6.65%), although the large size of the population in the province might still provide a sufficient level of support. Nevertheless, Alberta is a question mark, while Canada’s two other Prairie Provinces, Saskatchewan and Manitoba, are also not considered good candidates to locate teams.
6 Canada’s professional league requirements are set by the CSA’s Professional Soccer Committee, which is composed of representatives of Canada’s three MLS clubs, one NASL club, and the CSL. 7 This method provides a higher weight to the 8-18 age group than the 19+ age group.
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ANALYSIS: NATIONAL PROFESSIONAL LEAGUE
TABLE 1.
2010 CSA Registrations
Province / Territory
Age 8-18
Age 19+
Population
Rate (%)
By Province / Territory
Participation
Prince Edward Island Yukon Nova Scotia Ontario
4,933
615
143,395
10.75
916
446
34,559
9.24
23,102
4,471
944,810
7.81
292,740
66,448
13,227,791
7.14
Newfoundland
11,636
1,217
511,281
7.07
British Columbia
98,486
21,759
4,529,674
7.00
Quebec
165,466
22,467
7,905,679
6.56
New Brunswick
13,892
1,381
752,838
5.72
Alberta
59,506
20,330
3,720,928
5.34
Northwest Territories
526
661
43,830
5.11
Saskatchewan
15,291
5,015
1,044,028
4.87
Manitoba
11,542
4,770
1,234,535
3.19
Source: CSA 2010 Annual Report, p. 24.
Economic research has shown that the total number of people who are sports product consumers (individuals with disposable incomes who purchase some sort of product(s) related to the sports industry) is generally a strong determinant of attendance, usually by a multiple that varies considerably across metropolitan areas. It is essential to estimate attendance figures using a quantitative approach (the 2000 CUSL feasibility study assumed average attendance of 2,500 without explaining how they arrived at this figure). An attendance demand model assumes that attendance is related to metropolitan area population, incomes, ticket prices, the presence of other professional sports teams (MLS, NASL, USL Pro, NFL, NHL, NBA, MLB), winning success and the number of youth football registrations in the area, as examples of variables that could affect attendance. Due to the lack of reliable historical attendance data in North American football leagues (and ticket prices), a simpler approach will be used here; however, much can be learned from the 2011 unofficial attendance figures of MLS, the NASL and USL PRO presented in Table 2 below. Not surprisingly, MLS leads the NASL and USL PRO in average attendance. The league’s recruitment of high-profile players (Beckham, Henry, Marquez, etc.), superior marketing, television rights and large metropolitan locations give it a significant business edge over its division II and III competitors. This is particularly evident in cities that share MLS and NASL or USL PRO clubs.
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TABLE 2. MLS
NASL
Chicago
13,919
Montreal
Chivas USA
14,425
Fort Lauderdale
Colorado
14,410
Columbus
2011 Unofficial
USL PRO Orlando
5,330
3,976
Rochester
4,927
Carolina
3,015
Wilmington
3,969
10,882
Tampa Bay
2,977
Charleston
3,459
Washington
15,347
Atlanta
2,844
Richmond
1,986
Dallas
12,993
Puerto Rico
1,984
Antigua
1,576
Houston
17,032
Edmonton
1,843
Harrisburg
1,404
Kansas City
17,811
Minnesota
1,670
Pittsburgh
1,130
Los Angeles
22,722
Charlotte
1,043
New England
12,092
New York
830
Philadelphia
18,262
Dayton
684
Portland
18,627
Los Angeles
410
Real Salt Lake
16,873
Red Bull NY
18,216
San Jose
12,251
Seattle
37,188
Toronto
19,977
Vancouver
20,580
Average
17,422.61
11,460
Average
3,721
Avg. (no Montreal)
2,616
Average
2,229
Source: http://www.cansoc.org/showthread.php?42707
Los Angeles has two MLS clubs, the L.A. Galaxy and Chivas USA, which appear to have completely captured the Los Angeles professional football market, leaving an average attendance of only 410 people per game for the USL PRO club, Los Angeles Blues. The Dayton USL PRO club is in close proximity to the Columbus MLS club and draws only 684 per game. The MLS New York club has left only 830 per game for the New York USL PRO club. Clearly having an existing MLS team in the same metropolitan area does not bode well for the financial sustainability of a division II or division III team. Successful NASL and USL PRO clubs are generally geographically dispersed from one another, with no clubs in either league located within 300 kilometers of each other. Rather, they tend to operate in fast-growing, but more modest urban areas that are as yet un-serviced by other professional sports leagues whose playing seasons overlap.
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Average Attendances for MLS, the NASL and USL PRO
ANALYSIS: NATIONAL PROFESSIONAL LEAGUE
This Page Intentionally Left Blank To receive a copy of the full phase II report please contact the CSA at their offices in Ottawa, Canada.
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