Implications and insights regarding Cubs payroll & revenue/gross profitability

At first I was just going to respond to yesterdays FanPost but realized that this is bigger discussion that pulls in my payroll FanPost as well.

Background: There are some simple principles in business;

1. Can you explain your business model and plan on the back of the envelope---meaning it has to be simple and apparent as to how it makes money and the risks are reasonable.
2. What are the benchmarks, how can you tell a business is fiscally healthy outside a simple P/L statement.

Baseball possesses a fairly simple business model honed over a century; expenses are players, player development, venue cost, management and marketing, insurance and operations. The levels of marketing have become complicated but essentially the cost areas have remained the same.  Each business model then has its own internal ratio's providing guiding thumbnails as how to judge how well a certain management team is taking care of business. It appears that MLB has a simple one as well, % of on field payroll against gross gate revenues (all tic sales plus FCI). I am calling it G-R/P.

Relative speaking to the Cubs:

As fan[atics] we judge teams by their  wins & losses, playoff wins and ultimately WS wins. Through this decade I think I can say that Boston is the best organization both financially and fan-wise. The Yankees are a good #2 the Cardinals appear to be a solid #3 and recently the Phillies appear to approaching the top 5 along with the Cubs, Mets and even FL. Let us face it in relative terms Cubs have been in 3 playoffs since 2003, 3/6 years, while the Cards during the same period have been in the playoffs 4/6 years.

In my earlier spread and the earlier one regarding the Cubs payroll projected over the next 5 years it basically tells you how or what Hendry & Co. has done spending and making money. Naturally as fan[atics] we want it all and really don't care what it costs---at least some, but as the <em>Rolling Stones</em> wrote: <em>"You can't always get what you want, but if you try some time, YOU GET WHAT YOU NEED</em>!"  Bottomline is those 3.3M paying customers are paying for this and will continue to do so.

It appears that a good thumbnail to judge the fiscal health of a team is a ratio that direct on field payroll costs that is less than 60% from direct revenues, G-R/P.  Interestingly the NL splits their gate receipts 90/10 while the AL does 85/15, and that split is probably based on a thumbnail of what the traveling costs are for each club, translating to about $6M per NL club and $9M per AL club.

So the Cubs in 2008 appear to be at 57% (in the same class as with clubs like: NYM, StL, LAD, Phila, SF, HOU, OAK and BOS who is at 60%). Do you notice something here? Most are big market NL clubs who also have been successful generally on the field during this decade . BOS and Oakland are the lone AL teams where it seems that NYY seems to have pushed the G-P/R beyond healthy levels, NYY are at 74% where they have the most revenues $282M. I can say BOS has stayed healthy by having the highest FCI ($48.40) and Oakland by keeping payroll discipline. All other AL teams appear to be wilting trying to keep up with the NYY's, LAA, SEA are actually showing negative direct revenue gross profit and DET, TEX, CHISox, & BALT are showing G-P/R margins worse than many small market teams. Hmmm this doesn't bode well if we are falling into a deep recession or depression for the junior circuit.

Comparably speaking Hendry has done a masterful job. How does this all translate to what the Cubs can do in 2009 and then commit to more payroll in 2010-2014? I don't have the gumption to figure out what the new ticket price increases will translate but it appears the Cubs are be quite surgical on increasing revenues. Last year they sold 99.1% of their potential gate (BOS sold 104%, NYY 91% and NYM 89% and StL 90%, Phila 97% and DET 98%)  Remember the Cubs were 2nd in FCI at $42.49 to BOS's $48.80 and above the NYY's $41.40 and NYM's $34.04. StL, Phila and LAD all remain under $30.00 FCI

<strong>Thus I see the Cubs seeking to increase direct revenues about 15% to about $240M thus 60% of that brings the payroll to $141.5M </strong>

So through all that there is the budget folks it might move to $145M but that would take a sign-off or unepected increase in direct revenues of $10M  so by all accounts, both published and reverse engineered, $141-$142M appears the payroll budget based on the expected G-P/R.

Now this would put the Cubs are the highest payroll team in the NL and in the top 2 to 4 of MLB depending on what LAD, BOS do? For people like AL, you are paying for this, for people like me watching cable or MLB TV, merely commenting.

It would be interesting to see what the G-R/P was in 2006, 2007 & 2008 to see a trend but my guess is that Hendry has kept the ratio below 60% and was able to incrementally increase payroll accordingly.

Now the new owners will have a few new twists. It appears Zell is seeking to sell Wrigley Field to the State (Soldier Field & Comiskey) to save tax money where then they will have to sign a lease and possibly increase the costs of the Cubs home field. But the Cubs will probably be able to sell a portion of their weekend local broadcasts competitively like the NYY's, BOSox's, NYM's and LAD's.

So here is how it finally drills down

Cubs appear to be at $125-$127M right now for 2009
Cubs appear to be at $135-137M right now for 2010

My guess is that 2009 Hendry wants to keep at least $5M in reserves on his $141M so he has about $136M to spend now. If Bradley at $10M a year is the target he can do it with no other addition without subtraction and thus why I think he unloads as much of his marginal arb eligible players: Cedeno & Wuertz and possibly is looking to flip Vizcaino or Gregg attempting to pick up an additional $5-6M bringing his 2009 liability to $120-122M before more acquisitions. This might have to wait till March or he might be working the back channels all winter.

So here is the question for you fan[atics], what can you do with an additional $13-15M? in light that unless you are able to raise ticket prices in 2010 an additional 10% and still sell out at 99% in a eroding economy to cover a payroll I expect to be at $149M?

Something tells me Hendry is not sold on Bradley and he is looking for a marginally cheaper solution for 2009 and far less liability for 2010 and beyond. This could mean acquiring a veteran who is a FA next year or a younger arb eligble player OR BOTH who fulfill the left-handed bat and lead off hitter role(s).

Some have maintained that Lou is looking for both a RF'er, clean up hitting powerhouse---problem is there are now pigs who have wings right now. 

via www.redbankgreen.com

or at least no Babe Ruth's. 

via b2.ac-images.myspacecdn.com

I am just not seeing it as the math is telling me something else other than Milton Bradley---sure he might be plan B or C but not plan A as in example the the math eventually told Hendry that he couldn't have Peavy.

For DGU and Toons I think Hendry is revisiting Hermida for the math regarding FL tells me that even at their anti-fan G-P/R they are steadfast at surviving and being competitive at fielding a AAA All Star team with a payroll below $20-$25M. They love league minimum salaries against $2.5-$3M what Hermida expect to gain at a hearing.

The other question of course is allowing or forcing Piniella to move Soriano out of the lead off spot. Baltimore is a sick, sick organization that once was a very health team like the Cards. Last year they drew less than 2M fans, only 5 other clubs did the same, FL, TB, TEX, & KC. Their G-P/R cushion was just $16M, moving $8.5M in salary increases that by 50%!

Moves like this would probably spend $10.25M minus a possible savings of at least $1-2M in Cubs own arb eligible expenditures in trades implicating that $9.25M brings the Cubs to $135-$136M which again fits the budget math.

Is this a winning WS roster?NO...but it is a winning roster for the division and allows Hendry to make an opportunity or two moves during the season like he did the last couple of years and find that big thumper. All that is needed is the Cubs sell out their expensive seats and people continually buy expensive beers.