to contents FeatureNo.60
October 2010		  
 

 

Calculating the Primary Economic Impact of a Sports Club`s Regular Season Competition: A First Model
Holger Preuss, Thomas Könecke & Norbert Schütte
Abstract
In discussions about the use of public money for popular sports clubs, it is often argued that the money is well-invested due to an economic win-win situation for the clubs and their home regions. Aside from various soft factors, such as a higher awareness and improved image for the region, the main justification for spending on sport clubs is the primary economic impact they supposedly generate and re-spend through participating in a popular sports league. The primary economic impact consists of the additional money brought into a region that would not exist without the clubs competing at such high level. The two main sources of the additional monetary streams are the money spent by spectators of the clubs` matches and the clubs` business activities.
Currently, no methodologically sound models exist to calculate the additional impact of a sports club on its home region. Consequently, the aim of this paper is to modify the tools that have proven to work well in the Keynesian analysis of singular major sporting events for the analysis of a sports club`s primary economic impact on its home region. This aim was achieved by developing a 3-step model for the calculation of the mentioned impacts, and consists of the following steps:
  1. Identification and quantification of the relevant spectator spending.
  2. Identification of the club`s relevant financial streams by “regionalising” its cash-flows.
  3. Summing up the results of steps 1 and 2, taking care to avoid double counting.
The model will capture the primary economic impact of a team sports club`s regular season competition on its home region. It must be pointed out that no indirect, induced, or intangible effects are taken into account. Consequently, results calculated using the model can only be considered a bottom-line of a club`s total economic impact on its home region.
 
Introduction
Public and political discussions in Germany – and in almost all other European countries and North America– constantly address the question of whether public money spent on sport, especially clubs in popular team sports, can be politically justified. These discussions arise regardless of the actual source of the money provided for sport. Public subsidies of sport may take the form of increased taxes, lotteries, or some other method. What matters is that these funds could also be spent for some other public purpose depending on political decisions.
In these discussions, it is often argued that supporting sports clubs with stadium infrastructure, security for match days, or other subsidies, results in an economic win-win situation for the club and its home region. The reason given is that the participation of these clubs in regular season competitions of popular sports supposedly generates economic benefits for the region where they are located. Besides the so-called “soft benefits” (see Hamm 1999; Pagel & Peters 2010) – such as increased popularity for the home region – it is frequently claimed that the great spectator interest generated by popular sports clubs and their business activities create immediate “hard” monetary flows into the home regions of these clubs.
Thus, it is implied that a positive “primary economic impact” is generated for the home regions of the clubs. However, some argue that the monetary streams generated are not larger, and may even be smaller, due to the money that leaves the region, through salaries for players living abroad, crowding-out effects, licence fees to federations, or home fans` expenditure at their team`s away matches. Consequently, the existence of the sport club could result in a neutral or even negative “primary economic impact” for the region.
Due to the many and often contradictory estimates of the economic impact professional sports clubs have on their home regions, it is necessary to develop a sound model for the quantification of such impacts. Keynesian economic analysis of the impact of sporting mega-events (Olympic Games, Soccer World Cups etc.) has become a field of major interest and the tools used in corresponding studies can be considered reliable. However, literature shows that a constant concern regarding studies not based on sound methodology exists (Getz 1994; Crompton 1995; Késenne 1999; Baade & Matheson 2004; Preuss 2009).
Therefore, the aim of this paper is to describe a model derived from the modification of the tools that have proven to work well in the analysis of singular major sporting events (Preuss 2004; Preuss 2005; Solberg & Preuss 2007; Preuß, Kurscheidt & Schütte 2009; Preuß et al. 2010). This model captures the primary economic impact of a team sports club`s regular season competition on its home region. As shown in figure 1, only the actual monetary streams are targeted in this model. Indirect, induced and intangible effects are also important factors in the evaluation of the economic relevance of a sports club for a region, but these are not taken into account in the model presented here.

  

 Figure 1: Economic Impact generated by a Sports Club on its Home Region
 
Corresponding to the research done on sporting mega-events based on Keynesian methodology (Preuß 1999; Brill et al. 2003; Preuß & Weiß 2003; Preuss 2004; Preuss 2005; Solberg & Preuss 2007; Kurscheidt 2008; Ruetter, Popp & Busin 2008; Preuß, Kurscheidt & Schütte 2009; Preuß et al. 2010), the first step to develop a model is to reliably calculate the “autonomous monetary stream” into the club`s home region that is directly linked to the club`s participation in a sports league. This “autonomous monetary stream” (or primary economic impact) would not be generated for the region if the specific club did not exist or compete at such a high level. However, to be precise, opportunity costs have to be considered (see Preuss 2009).
The general interest in the competition is obviously very important because the higher the league, the more spectators, sponsors and media will be interested in the club. This is highly relevant because they are all main contributors to the money streams generated by the club.
As shown in figure 1, the primary economic impact is the result of financial flow 1, the money streaming into the club`s home region, and financial flow 2, the money leaving this region due to the club. If the value of stream 1 is greater than that of stream 2, the primary economic impact is positive. If the value of stream 2 is greater than that of stream 1, the impact is then negative, and money is flowing out of the region due to the club.
So far, analyses of the economic impact of sports clubs participating in a league have not been based on sound theoretical assumptions and focus mainly on marketing figures. Therefore, they do not satisfy the requirement to thoroughly capture the consumption patterns of the spectators (see Rappaport & Wilkerson 2001; suggestions for Germany`s soccer league “Bundesliga” have been made by Hamm 1999; Willms & Fischer 2001; Pagel & Peters 2010; Völpel & Steinhardt n.d.). A correct consideration of spectator expenditure has been proven to be one of the key elements to accurately calculate the economic impact of a sporting event on a specific region (Preuss 2004). Consequently, it is important to apply this knowledge to impact studies of clubs in sports leagues. In addition to spectator spending, for a sports club playing in a league, the cash flow of the clubs caused by its business activities is another major factor to be considered. Until now, no thorough examination of the primary economic impact of these cash flows regarding their actual regional effect can be found in the literature.
 
Development of the Model
As a first step, the tools that have proven to work well in capturing spectator spending in the economic analysis of single major sporting events (see Preuß 1999; Preuß & Weiß 2003; Preuss 2004; Preuss 2005; Preuß, Kurscheidt & Schütte 2009; Preuß et al. 2010) were analyzed and modified to be put to use in calculating the primary economic impact a sports club has on its home region due to its participation ina regular season competition. In a second step, a model for the analysis of the club`s cash flows was developed that enables a researcher to instruct a knowledgeable accountant to “regionalise” a club`s monetary streams. Furthermore, it was shown how the “regionalised” monetary streams can be used to calculate the exogenous shock for a club`s home region due to its business activities. The total sum of the results of steps 1 and 2 indicates the sought-after primary economic impact on a club`s home region (step 3), as shown in figure 2.

 

Figure 2: Sources of the Primary Economic Impact by a Sports Club and Steps of its Quantification
In the model, a conservative approach is suggested to ensure that the results will underestimate, rather than overestimate, the actual primary economic impact caused by a club.
 

Step 1: Quantifying the primary economic impact caused by spectator spending

First of all, a proper region, time frame and welfare function must be defined. While the time frame is linked to a span of one seasonal year, defining the region of the sports team is more complicated. This can be a single city, a metropolitan area, a state, or even a country. The welfare function also has to be set. Since the aim of this paper is to calculate the economic impact for a region, we do not focus on whether the club is profitable or not, but the monetary flows in and out of the relevant region due to the club.
The following considerations concerning spectators of a sports club`s regular season competition focus on whether spectators generate an autonomous monetary flow. This is the case if the money spent would not have been spent in the home region of the club if the club did not exist. In other words, the intention of spectators to visit or stay in the region must be due to the club`s match. The calculation of this “spectator spending” is not at all trivial because not all expenditures of spectators result in a positive economic impact. Some monetary streams do not create an impact and others even create a negative one. Figure 3 differentiates the intentions to visit the home region of the club and its away matches.
 
 
Figure 3: Spectator Groups, their Movements and Contributions to the Primary Economic Impact by a Sports Club (Source: modified from Preuss 2005)
Figure 3 shows the differing visitor groups of a club. The model distinguishes between “locals”, who are living in the club`s home region (arrow originating in the region), and “foreigners”, who live in another region (arrow pointing towards the club`s home region).

Groups A and B: Home Stayers and Match Visitors generate positive monetary streams for the region

“Home Stayers” (A) are inhabitants of the club`s home region who are attending a home game. They would not have stayed in the region without the match taking place, but would have gone to another region. The money they have not spent abroad but in their home region can be seen as import substitution (Cobb & Weinberg 1993; Cobb & Olberding 2007). Consequently, the monetary stream they generate has to be considered a positive contribution to the primary economic impact.
The group “Match Visitors” (B) consists of all the spectators of the match who live outside the region and are exclusively coming to watch the competition. Thus, all consumption by “Match Visitors” also creates a positive economic impact.

Groups C, D, and E: Inhabitants, Casuals and Time Switchers are considered to have a neutral economic effect

“Inhabitants” (C) are residents of the club`s home region watching a match of the club in its home venue who would not have gone to another region if they had not attended the match. For this reason, their expenditures would have remained in the region anyways and are not to be considered as contributing to the economic impact caused by the club. Due to the conservative approach, no assumption is made concerning possible additional spending caused by “Inhabitants`” visiting a home game, even though it is possible that they spent more than they would have done alternatively. This may also be the case for the “Casuals” (D) and “Time Switchers” (E). This implies that the opportunity costs of not having the club in the region would be the same for an alternative entertainment.
The “Casuals” (group D) are spectators who are in the region for some other reason and make use of their stay to attend the teams` home match. Since their original intention to visit the region was not watching the team`s match, their consumption cannot be considered as part of the primary economic impact. The same is true for “Time Switchers” (D), who planned to visit the club`s home region but switched their time schedule in order to attend one of the club`s matches. Thus, the money they spend would have been spent in the region anyways and therefore cannot be taken into account.

Group F: Spectators at Away Matches take money away from the region to spend it abroad

Spectators living in the club`s home region who leave it exclusively to accompany the club to away matches outside the region (group F) will spend money while doing so. Consequently, this money spent at away matches has a negative effect on the primary economic impact of the club on its home region because it is not spent there.
Some of the people visiting away matches would probably also leave the region irrespective of the match. They are the opposite of “Casuals” and “Time Switchers” and therefore their spending abroad can also not be counted as a negative impact (see Preuss 2005 for more detail on these groups). In a very conservative approach, one could still deduct their expenditures abroad by assuming that they would not spend money alternatively when leaving their home region.
The calculation of the primary economic impact from spectator spending is not trivial because, on the one hand, not all expenditure by visitors from other regions have a positive effect (groups D, “Casuals”, and E, “Time Switchers”). On the other hand, it has been shown that the expenditure by some of the residents of the home region also have to be considered. However, the majority of the home crowd will be in group C, the “Inhabitants”, and their consumption will not at all be taken into account.
Finally, the “Spectators at Away Matches” (F) have to be considered as those that create a loss for the region, because they usually live in the club`s home region but leave it due to the club playing somewhere else. Their spending has to be deducted in the analysis.
Summing up into one formula, the primary economic impact by spectator spending is shown in below, where ?YS describes the additional primary economic impact by spectators` spending and A, B and F denote the spending by the corresponding spectator groups:
?YS = A + B – F
This is step 1 in the model.
To obtain the figures for the calculations needed for step 1, visitor-statistics published by the club and/or the sports federation can be consulted. Furthermore, questionnaire-based inquiries at a specific number of home and – preferably also – away matches of the club have to be conducted. These inquiries and the questionnaires employed must be thoroughly planned to be able to accurately identify the different spectator groups and their consumption patterns. This should be done with great care. Mistakes made when identifying the different groups leads to errors in the calculation of the primary impact.
 

Step 2: Quantifying the primary economic impact caused by the club`s business activities

Sports clubs with teams competing at the national level can often be considered revenue generators with a significant turn over. Thus, every elite professional sports club has a large cash flow. The result of these business activities is a monetary flow into and out of the home region of the club. In order to quantify the primary economic impact caused by the club`s business activities, all monetary streams have to be “regionalised”. That is to say, that each payment made or received has to be analysed regarding the  residence of the respective payee or payer. The questions that have to be answered are illustrated in figure 4:
  1. Which payments went to a payee in the club`s home region and which did not?
  2. Which revenues originated from a payer residing in the club`s home region and which did not?
 Figure 4: Aggregated Monetary Streams to and from a Club in Relation to its Home Region and other Regions as Considered in the Model
It is important to remember that the welfare function is not based on the club`s financial success but on its economic impact on the home region. Therefore, from the home region`s perspective, only money earned from the club or spent by the club is taken into account. If, for example, a club earns 5,000 Euros but does not spend it, only the stream of 5,000 Euros for the region where the payment originated is taken into account. As long as the money is not spent by the club, no “gain” for either the home region or any other region has been achieved. Furthermore, a mere financial transaction which does not involve an exchange of services or goods does not matter in the model. For example, if a club is saving money or takes a loan, these transactions are not taken into account because this money does not create any impact on the region as long as it is not spent. But, if a credit is used to pay an invoice, the resulting monetary stream has to be considered because the invoice originated from an exchange of goods and/or services.
Out of the four aggregated monetary streams illustrated in figure 4, only two have to be taken into account in the model. The monetary streams B and D illustrate the economic exchange of the club with regions other than its home region. These streams do not need to be considered because the club`s impact on other regions is not part of the welfare function at hand. Therefore, only the monetary streams exchanged directly with the home region matter for the primary economic impact. These are the streams A and C depicted in figure 4.
It is important to understand the perspective in this model: The “region” considered is the economy of the club`s home region and therefore it matters what money is generated in this region. The intervention is the sports club that receives money from sources in the home region (stream C) but also spends money in the home region (stream A). Other revenues and expenditures of the club do not have to be considered.

Monetary stream A: Aggregation of the money the club spends in its home region

The money a club spends in its home region over a defined period of time is additional spending for the region, but only if the money originated from another region. Otherwise, this spending has to be considered as “neutral” because it is only a re-distribution of funds within the club`s home region.
The following two examples will illustrate this point:

Monetary stream C: Aggregation of the club`s revenues from the home region

Club revenues from the home region have to be considered money flowing out of the region if the club spends them in another region. If it is spent in the home region, these revenues have to be seen as re-distributions.
The following two examples will illustrate this point:
Regarding the economic impact created by the club, it is given that the re-distributions that are part of monetary stream A are equal to the re-distributions being part of the monetary stream C. Consequently, these re-distributions neutralise each other and the primary economic impact generated by a sports club`s business activities for its home region can be calculated by simply subtracting the aggregated monetary stream C from stream A. If ?YC denotes this primary economic impact by the club and A and C represent the values of the corresponding monetary streams, the formula for step 2 is:
?YC = A – C
The data needed for this calculation have to be provided by the club`s accounting department due to the necessity that insights about the origin and destination of the money are needed. It will probably be impossible to get these data from any published club statistics because a correct “regionalisation” will only be possible if financial transactions, receipts, payrolls and other confidential data can be analysed.
 

Step 3: Calculating the total primary economic impact of a Club`s Regular Season Competition

To calculate the total primary economic impact caused by a sports club`s participation in regular league competition for its home region, the results of the above steps 1 and 2 are simply added. If ?YT denotes the sought-after total primary economic impact, the formula for step 3 is:
?YT = ?YS + ?YC
However, the model is limited in that it assumes that no other economic activities other than spectator spending and club activities occur. Any infrastructural activity, international tournaments (non-regular) or one time subsidies are not included.
 
Conclusion and Further Thoughts
It can be concluded that the tools used for the economic analysis of mega sport events can be adapted for the calculation of the primary economic impact of a sports club`s regular league competition on its home region. During the evaluation of data generated with this model, it is important to keep in mind that neither any indirect, induced or intangible effects are considered nor are any one time investments. Overall, this paper provides 5 central conclusions:
  1. The model presented here underestimates the overall economic effect of a club on its home region due to a conservative approach and by not considering indirect, induced or intangible economic effects.
  2. Any model that does not distinguish the intention of visitors attending a match and their origin will calculate the primary impact incorrectly. Without sound quantification of the primary economic impact, any further calculation of the induced effects will be wrong.
  3. The consideration of opportunity costs is limited to the alternative spectator spending but not to alternative investments and subsidies from money provided by public sources. Therefore, the economic impact just provides a benchmark on what the club contributes in direct regular monetary value to its home region.
  4. The model presented here only calculates the primary impact and not the overall economic impact. This means it only calculates what people living in the club`s home region earn directly due to the existence of the club. It is not considered to what extent the expenditure of the money thus earned leads to induced effects. This makes a comparison with alternative projects difficult, because it is possible that a great share of the primary impact, for example players` income, will be saved or spent for investments in other regions and therefore will not create additional economic activity.
  5. For each club, the primary economic impact in its home region will be very different. Not only the size of the region makes a difference, but also the fan culture and fan community of a sports club does as well. Some clubs traditionally have many spectators from far away constantly attending home matches and therefore creating a more significant impact. But when these fans go to away matches, they do not create a leakage, because they are not from the home region. Furthermore, teams in “attractive” cities may more often have spectators that stay over-night in the clubs` home region and therefore will spend much more than in non-attractive cities.
Finally, some suggestions are made to avoid possible mistakes when calculating the monetary streams generated by spectator spending (step 1) and by the club`s business activities (step 2). Double counting, for example, has to be avoided in regard to all expenditures from spectators because these are also revenues for the club. Therefore, club revenues from tickets, merchandise, food and drinks have either to be counted in step 1 or in step 2. Counting the money as spectator consumption has the advantage that it can easily be attributed to the different spectator groups described in step 1. Thus, its effects concerning the primary economic impact can be analysed accurately. However, when collecting data by field research, the total revenues from tickets, merchandise, food, and drinks will not be quantified as precisely as they could be by the club`s accounting department. Alternatively, the money can be considered as a part of the club`s aggregated monetary streams. Then the overall figures are right but have to be broken down by the accounting department of the club to be regionalised as described in step 1. Consequently, it is recommended to use data from the club and questionnaires. The field research provides the various shares of spectator expenditures by the different spectator groups, which will then be used to distribute the actual revenue figures provided by the club.
It was stated that the size of the impact of sports clubs on their home region is very different from team to team and sport to sport and region to region. To evaluate the correct primary impact for a region, a well thought out methodology has to be applied. The analyst has to fully understand the model and correctly instruct all parties involved in data collection and analysis to properly account the financial streams.
 
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Contact
Prof. Dr. Holger Preuss
Thomas Könecke, Dr. Norbert Schütte
Institute of Sport Science
Faculty of Social Science, Media, and Sport
Johannes Gutenberg-University Mainz
Mainz, Germany
Email: preuss@uni-mainz.de
 

 



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