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Will USL teams recover from Covid-19?

Will USL teams recover from Covid-19?

There is nothing so inspiring as seeing a patient released from the hospital after going into the ICU with Covid-19 and beating the odds to come off of a ventilator and receive their discharge papers.

 

On the other extreme, there is almost nothing as heartbreaking as seeing a tweet from someone relaying that a friend or relative has died from Covid-19. As of 10am on May 1, that tweet, Facebook post, email, or phone call has gone out in regards to 63,109 people in the US; and 233,657 people worldwide, according to the New York Times.

It is important to begin with that context so that no one misunderstands that the life and death of human beings cannot be compared to the life and death of a business like a soccer club. You can always rebuild a business. You can’t bring back a life.

But with USL shut down for March, April, and the month of May at the very least, we’ve got to talk about the economic trauma being inflicted on USL teams, and whether the league can withstand this economic shock as a whole.

Just as Covid-19 has raised life and death issues for millions of Americans, it might ultimately prove fatal to some soccer clubs as well.

2020 is going to be a financial hit for all soccer clubs, worldwide

I doubt I need to explain this to the readers, but every soccer team on the planet, from your local clubs and their U4’s that barely trundle four steps without falling over, to the big teams like Manchester City and FC Barcelona, is taking a massive financial hit right now. Budgets were made with expected revenue from games that never happened. Youth registrations didn’t take place. Tournaments went unplayed. Most employees’ wages, from the players to the executives on down to the tea lady, are still being paid; when Liverpool decided to furlough their stadium employees, the fan backlash was so furious that the club relented just a day later. MLS teams and the league office have announced pay cuts and layoffs.

Even when soccer resumes, the needs of social distancing will result in a lot of changes. In a best-case scenario, soccer teams will be required to reduce attendance capacities in order to provide safe-space between supporters. Otherwise, teams will be playing their matches behind closed doors – the Bundesliga is already formulating a closed-door plan in hopes of a mid-May resumption of play.

For the big European clubs, that’s a bummer. However, top-flight clubs earn a huge chunk of their money from television revenues. MLS teams also get some monies from TV, but earn most of their dollars from gate receipts. For USL and almost every other second and third-tier team in the world, attendance, in-stadium advertising, and merchandise make up nearly 100% of income. Closed-door matches broadcast on TV are going to be a massive financial hit, even if the teams find a way to broadcast the games on a pay-per-view service or sell a little commercial advertising.

To be purely pessimistic, it might not be economically viable at all for USL to play closed-door. Meaning: the USL won’t be able to play until social distancing rules can be significantly eased up or completely lifted.

Some people don’t expect that to happen until Fall; or perhaps when a vaccine is ready, which would perhaps be sometime in 2021, at the earliest.

The Two Types of USL Teams Best Poised to Survive – The Elites and The ‘Twos’

Financially, some USL owners are simply better situated than others. And some USL clubs have different goals than others. I split the various teams in the USL Championship and League One* into four different categories. Two categories of teams, ‘The Elites’ and ‘The Twos’, are the types of clubs that are likely to ride out the full and partial quarantine period and return. Two categories of teams, ‘The New Guys’ and ‘The Indys’, face bigger challenges.

The Elites

The first ‘type’ is the USL elite – teams with billionaire owners, large fanbases, and/or MLS aspirations or plans. That includes Sacramento, Louisville, Saint Louis, Phoenix, Las Vegas, and Indianapolis. All of these clubs are positioned to take the financial hit and recover. Their owners can absorb losing all their operating income for a season and still be fine. Their aspirations to jump to MLS already included spending scads of cash in the short term – investing in stadium upgrades, player upgrades, a larger front office, sales and marketing infrastructure – in order to position themselves to be awarded an MLS franchise in the next round of league expansion. They also were all able and willing to pony up the MLS expansion fee, currently set at $200 million. What’s an operating loss of $10 million when you were gonna drop 20 times that just to gain access to the coveted top-tier of American professional football?

Sacramento and Saint Louis have already been selected for the next round of MLS expansion in 2022, while Louisville, Phoenix, Indianapolis, San Antonio, and Tampa Bay have been in the mix over the last few rounds as potential MLS expansion teams. Saint Louis’ situation is a little different in that the STL MLS franchise will likely use a different name and branding as a full-on reboot. That team is either ‘leaping to MLS’ or closing up shop at the end of 2020 – depending on how you look at it. The quarantine probably won’t change any of those facts.

The ‘Twos’

The second type of USL team that probably isn’t worrying are the so-called MLS 2 teams: the reserve and lower-level affiliates of larger MLS teams who operate clubs to allow their youth players, NCAA draftees, and MLS reserve team get some game action while they continue to develop. This list includes Championship teams Salt Lake, Portland, Tacoma, Los Angeles, Kansas City, Atlanta, Loudoun, Philadelphia, and New York. It also includes teams in USL League One teams in Fort Lauderdale, New England, North Texas, Orlando, and Toronto.

While it is possible that the economic hit their MLS clubs are taking might result in some cost-cutting that may include slashing their USL team, it is unlikely. ‘Two’ teams already operate with scant fan attendance or profit: they don’t exist to make money, they exist to get the youngsters a little run. Of the 36 USL Championship teams that took to the field in 2019, the five teams with the worst attendance were all ‘Two’ teams: Bethlehem Steel(now Philadelphia Union II), Swope Park Rangers (now SKC II), New York II, LA II, and Loudoun. Bethlehem and Swope averaged paltry crowds of around 500 fans. They weren’t making money before. Covid-19 doesn’t change that much.

The Two Types of USL Teams to Worry About – The New Guys and The Indys

If I didn’t already mention a USL team in the section above, they obviously fall into the ‘uh-oh’ category. That’s comprised of two sub-groupings of teams for whom a long term stoppage of play or requirement of playing only closed-door matches might be ultimately fatal. In the event that the income loss from the quarantine is significant, or the country experiences an extended economic slowdown trying to recover from the mass unemployment and shock of the Covid-19 quarantine (the “R” word; or even the “D” word), soccer teams will see huge financial losses. And only those with great fortitude and deep resources will survive.

I want to note that I don’t have any inside information here – I’m just spitballing based on my experience talking to folks on the business side of soccer. It’s entirely possible that most or even all the clubs on this list will come through this rough patch just fine. That said, these are the teams that have some of the signs of being vulnerable in a financial downturn.

I also recognize that this whole topic is a huge bummer for everyone. It’s a bummer for me, too. But it’s on my mind, so it needs to be explored.

The New Guys

The third grouping of teams in USL, and a group that we should be slightly concerned about, is new clubs. That list includes New Mexico, Birmingham, Memphis, Hartford, Austin, San Diego, Chattanooga, Madison, and Omaha. Those teams all began play in USL in 2018, 2019, or 2020.

A new soccer team is hoping to generate buzz and sustain growth based on that tremendous energy that happens only in the first few years of the club. The already-two-month layoff from games has killed any momentum these teams could establish or sustain from last year in terms of marketing and attendance.

Businesses like these almost certainly build into their planning the expectation that, for the first months and years of existence, their expenditures will exceed their income. Any startup business can expect a situation like this – if you start a restaurant, you’re going to blow wads of cash on equipment, renovations, advertising, and staff before you even open the doors. To some extent, that’s good news for these teams, since they were already planning to not turn an early profit. The challenge, of course, is that the date at which they’ll start earning back income to offset their spending has been pushed out further, while the costs are still mounting.

A lot of these teams should be OK. New Mexico, San Diego, and Madison have had splashy and exciting debuts. Hartford opened their new stadium last year, and have averaged near-capacity crowds. Memphis had the Secretary of Defense playing at goalkeeper for their inaugural year. The exciting starts for each of these clubs demonstrate that there are a lot of reasons to feel less-anxious about them.

Still, an indeterminate date for the renewed spinning of turnstiles is not good for the league’s youngest clubs.

The Indys

The fourth and final category of teams is a collection of clubs that raise the greatest degree of concern. That’s the group of older, established independent USL teams, a group that includes Reno, Orange County, Colorado Springs, Oklahoma City, Tulsa, Miami, Tucson**, Charlotte, North Carolina, Charleston, Pittsburgh, and Richmond.

Simply put, these teams don’t have an MLS club funding their activities. They don’t have the big money or massive supporter base that the league’s top teams have. And they don’t have the hot marketing buzz that the new teams have. All were below the USL’s average attendance figure of 4,476 per game in 2019, and Charlotte (1,750 per game), Tulsa (2,031 pg), and Charleston (2,424 pg) were well below that mark.

I’m not diving into the specific details of each ownership group, because it’s a little more information than I feel compelled to exhume, and also because it may not entirely be relevant – a hundred-millionaire owner and a billionaire owner may feel the exact same way about losing millions on a second or third division soccer team. But let’s take a snapshot of three teams and their owner groups in order to consider some of the elements that might put a team on uneven footing. I’ll consider Charlotte, Richmond, and (of course) Pittsburgh.

Charlotte are run by team President Jim McPhillamy and owned principally by Dan DiMicco, the retired CEO of Nucor Steel. Spending on player personnel and stadium amenities has never been impressive by USL standards, and as a result the team has never finished higher than fifth in the USL East table in its five-year existence. However, the city of Charlotte recently began a $35 million dollar project to renovate Memorial Stadium, and the plan is for the Independence to begin playing there in 2021. That is, unless an MLS Charlotte team gets the nod for expansion, led by Carolina Panthers owner David Tepper. At which point everything regarding the Independence is up in the air.

According to Biz Journal, Charlotte’s USL team have been losing $1.5 million a year. It was hard to ascertain the 2019 net worth of Dan DiMiccio; his annual salary was reported at $5.5 million back in 2009. Suffice it to say he’s not a billionairehe’s probably a less-than-a-hundred-millionaire. None of that is particularly confidence-inspiring. If your team doesn’t have a strong fan base or a balanced budget, it’d be nice to have a deep-pocketed owner. Charlotte has none of the three.

After years of being unable to keep up with the spending and the success of their competitors, the Richmond Kickers, one of the oldest and most storied teams in USL, made the responsible fiscal decision to drop from USL Championship down to League One for the 2019 season. There, they had lower expectations in terms of spending, and a shorter season. In 2019, their average attendance of 3,468 a game was second-best in the league. They play in City Stadium, a beat-up-but-charmingly-rustic concrete bowl near Downtown Richmond that was built in 1929. The city owns the stadium, but the Kickers are responsible for upkeep and improvements.

Their ownership group is interesting – it is comprised of a bunch of former Davidson College players, including lead investor Rob Ukrop and club president Matt Spear. The group of owners also includes their youth club. From what little I could derive, this ownership group doesn’t have a lot of money – the sum total of their assets is probably the Richmond Kickers. My assumption is that the Kickers do their best to operate in the black because they can’t afford to operate any other way. A prolonged Covid-19 cessation of play or an inability to have fans in the stadium could be a devastating blow for the historic Kickers.

Burying the Lede – How are the Hounds financially positioned to weather the crisis?

Finally, there’s the Riverhounds. After some shaky years in the 2000s and 2010s, the Hounds were bought by Tuffy Shallenberger in 2013. Shallenberger’s tenure has been marked by stability, expansion, and a focus on strengthening the youth soccer academy – all of which is an extension and demonstration of Tuffy’s deep personal love for soccer. Shallenberger has both resources and a desire to spend them to build a winning club, and his investment into the club – from the move to Highmark Stadium and improvements made to the facility, to the plans for a glittering and robust training facility in Coraopolis – has demonstrated his willingness to build a winner in Pittsburgh.

In terms of attendance (and parenthetically, revenue) the Hounds are a mid-pack USL team, recording an average attendance of 3,729 in 2019, good enough for 22nd out of 36 teams.

The Riverhounds are, like Richmond, not ‘new’ or ‘hot’. The team was founded back in 1998. They’ve never won the league. And over their two decades of soccer in this city, no one has seriously made a case that MLS is at all interested in coming to Allegheny County. The Hounds did, however, go through a robust rebrand in 2017, dropping a cartoonish dog as their logo in exchange for a badge that global soccer fans would more readily identify as suitable for a football club.

Shallenberger is financially well-off, but since his company isn’t publically traded, his financial details are opaque. Like Charlotte owner Dan DiMiccio, he would fall into the category of ‘not a billionaire’. Shallenberger’s companies are principally involved in construction, trucking, equipment rental, oil and gas extraction, and coal removal and production. An Atlantic magazine advertisement article from 2015 disclosed that Tuffy’s company had around 300 employees and 400 pieces of heavy equipment. So it would be fair to estimate that Shallenberger’s companies turns revenues somewhere between $5 and $25 million a year.

In terms of assets, Shallenberger owns Highmark Stadium and the parking lots that surround it. The stadium is valued at $4.5 million, and the land was purchased for $8 million just this past year. Shallenberger and his businesses own 47 properties in Fayette County and Connellsville, PA, including several office complexes. Altogether, those properties are valued at $7.1 million. Putting together the properties, the businesses, and the equipment, Shallenberger likely has assets worth somewhere between $30 and 100 million. Note that none of this takes into account any potential liabilities or debts that Shallenberger may have – I’m only aware of what records show he owns, and not whether those assets were acquired from loans or commercial mortgages.

All in all, that’s good news for Hounds fans – their owner is solvent and capitalized, and he owns the stadium that the team plays in, unlike the Independence or the Kickers.

The economy right now isn’t great for oil producers, as oil prices have cratered and the construction of new wells and pipelines is halted; the same likely goes for natural gas production. Coal and coke prices are also likely to take a hit, as the steel industry will be experiencing a slowdown due to the economy’s woes. As of May 1st, US Steel has shuttered its Mon Valley plant and laid off 2,700 workers. None of those facts are good for Shallenberger’s companies.

Shallenberger is likely positioned to weather a prolonged economic slowdown. His businesses can probably absorb losses for a while. During this bear-market economy, some businesses might find themselves in a position to come out of the downturn stronger, as their competitors fold up shop or they find opportunities to buy distressed companies or properties at bargain prices. Tuffy might take a hit during the slowdown, but it is also conceivable he could emerge even stronger.

The opposite is also a possibility: in the face of mounting losses, the Riverhounds could become a financial albatross that Tuffy cannot afford. The team might see cuts, or go on hiatus, or be shuttered completely. All of that seems unlikely based on the information before me, but it’s hard to know for sure.

Pittsburgh Soccer Now reached out to the Riverhounds with specific questions regarding the team’s financial position in the event that USL plays games closed-door, or cancels the 2020 season entirely. The Hounds politely declined to answer.

The great difficulty of the Covid-19 economic crash is that we are still in a phase of unknowns. No one knows if there will be USL soccer in 2020. No one knows if games will include fans. No one knows if the virus will peter out in June or roar back in August. No one knows when robust testing will be in place or when a vaccine will be ready. No one knows whether the mass layoffs and economic paralysis are short term or whether we are about to endure economic calamity for a long while yet.

And although we can look at signs for each second division team, and at the USL as a whole, no one knows for sure what all this means for the immediate future of soccer in America.

 

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* I left out USL League Two because their season is so short, their players are unpaid, and their clubs so regularly in flux that trying to make an educated guess about any one team or the league as a whole is a fool’s errand. Suffice it to say, things look lousy this year for all of the USL’s entry-level clubs.

** Tucson is an affiliate of Phoenix Rising FC. But being an affiliate to a USL Championship team is hardly the same as being an affiliate of NYRB or Toronto FC. So I dropped them into this more financially uncertain pool.

Mark Asher Goodman is a writer for Pittsburgh Soccer Now, covering the Riverhounds, the Pitt Men's and Women's teams, and youth soccer. He also co-hosts a podcast on the Colorado Rapids called 'Holding the High Line with Rabbi and Red.' He has written in the past for the Washington Post, Denver Post, The Athletic, and American Soccer Analysis. When he's not reading, writing, watching, or coaching soccer, he is an actual rabbi. No, really. You can find him on twitter at @soccer_rabbi

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