Three Takeaways from the Forbes Team Valuation of the Royals

As profiled and summarized on Royals Review, Forbes released their annual MLB Valuation rankings and reports for 2020. The information is interesting for those who are financially or economically inclined, as the reports not only say a lot about the Royals current financial status, but about many other clubs and their value in Major League Baseball today.

While Royals Review did a thorough job summarizing the information, I did a deeper dive into the data, and came away with a few takeaways concerning the “state of the Royals” financially. The Royals are not exactly in an easy spot, as they play in one of Major League Baseball’s smallest markets, ranking 29th out of 30 MLB teams in terms of current value, ahead of only the Miami Marlins (who are the only team valued under a billion at a $980 million). However, the club is still worth $1.025 billion (.025 more than what they were sold for), and there is potential for the Royals to grow in value should they play their chips right and compete sooner rather than later.

Anyways, let’s take a look at three things Royals fans can learn from Forbes’ most recent report on MLB team values.

The World Series runs of 2014 and 2015 had an effect on revenue and value

Prior to the 2014 season, the Royals were not only one of the worst franchises in baseball, but also perhaps one of the least valuable as well. And it made sense: the Royals were a losing club, with only two winning seasons from 1995-2013 (2003 and 2013), and as of 2014, according to Forbes, were only valued at $490 million, generating a revenue of only $178 million that season as well.

However, after an AL Pennant and a near World Series title, the Royals parlayed that postseason success to financial gain the following seasons. The club increased their team value $210 million the following year ($700 million), and in just three years hit the $1 billion mark in terms of value. And revenue proved to be the same story, as it increased from $178 million to $231 the following season, and averaged $251.8 million over the next five seasons from 2016- present.

Thus, this can be said for certain: the two AL Pennants and World Series runs had a long term financial effect on this club, and it’s highly unlikely they would be as valuable today if it were not for those two postseasons of success. Therefore, if the Royals can be competitive again and make the postseason within the next 3-5 years, that could further boost revenue, which has been pretty stagnant since 2015 and 2016, which happened to be the height of recent Royals fandom in Kansas City.

The Royals though have not necessarily parlayed that into much profit

While the Royals revenue and value numbers are strong for a small-market franchise, their Operating Profits numbers are a bit more concerning. When examining the Royals’ Operating Profits (or Operating Income according to Forbes, it’s essentially the same thing), over the past ten years (2011-Present), the Royals were actually making decent profit prior to 2014, as they made $10.3 million, $28.7 million, and $16.3 million from 2011-2013, respectively. 2012 was the year Kauffman Stadium hosted the All-Star Game, so it is likely that the increase in 2012 came from All-Star festivities, especially since the club was a sub-.500 team that season.

With the increased profits from the All-Star game, the Royals increased their payroll, going from $64 to 81 million from 2012 to 2013, respectively. This trend continued as the Royals became more competitive, as they increased payroll again to $92 million in 2014 and went over the $100 million mark in 2015. The Royals payroll stayed over $100 million until 2019, when it fell down to $96 million, and it continues to decline, as it sits at around $80 million this season (it was $78 million until the club signed Trevor Rosenthal to the active roster).

The increase in payroll made sense: the Royals were competing for playoff spots and a World Series title from 2013-2017, and in order to do that, Dayton Moore needed to upgrade the roster, which requires a steeper financial commitment. But, while the Royals had their most competitive stretch as an organization since the early 90’s during that 5-year span, it didn’t always result in profit. The Royals actually lost money three times from 2014-2019: 2014 (-$6.5 million), 2017 (-$900,000), and 2018 (-$17 million).

Thus, it makes sense that with the Royals currently in a rebuild, they have slashed payroll to make sure that they are making a decent income, especially with ownership changing hands. Even though the season is in question, one thing working in the Royals favor is their new TV deal, which was finalized shortly before Spring Training. Here is what Forbes said about the Royals’ new TV deal, which should help boost their profits in the coming years:

“The Royals signed a new deal with Fox Sports Kansas City that will pay the baseball team an average of $50 million annually for the next 10 to 15 seasons beginning in 2020. The Royals took in less than half of that during their previous television agreement”

No. 29 Kansas City Royals;

However, while the Royals television deal is nice and an upgrade from the previous Fox Sports Kansas City deal, it still pales in comparison to other TV deals around the league, even in small markets. The Cincinnati Reds are another small-market team, located in the Cincinnati metro area Southern Ohio and Northern Kentucky, not exactly a “urban” area by any means. That being said, the Reds have a flexible deal where they have an equity stake in the Fox Sports Ohio network. Thus, when ratings go up, profits go up not just for the network, but the team itself. And according to Forbes, ratings were up a year ago, which explains where the Reds got the money to have a free agent spending spree this past Winter.

The Royals market will be a challenge for the club to make major gains when it comes to value

The Royals actually ranked 22nd in MLB when it came to Operating Profit, which is promising, especially if the club can over-perform in 2020 (that’s if games happen). However, there are a lot of challenges standing in new owner John Sherman’s way if he desires to make this club a more valuable organization in the next 3-5 years.

While building the talent in the farm system and a competitive team at the Major League level are two challenges that Sherman and Moore can address and fix, there are other issues that will be tough for Sherman to control. The biggest one is the market size of Kansas City, which plainly speaking, is just not that big, and doesn’t generate the kind of revenue and profits that a bigger city like New York, Boston or Los Angeles can. While Kansas City is growing, it is still to be determined if that growth can have a significant impact on the Royals generating more revenue and profit in 2020 and beyond.

Case in point: even the Chiefs, who won a Super Bowl, and were competing for one for about a half-decade prior to this year, only ranked 24th in the NFL Team Valuation on Forbes in 2019. While that will go up, it’s hard to imagine the Chiefs cracking the Top 20 in Forbes’ 2020 list.

That must be sobering to Sherman, for even legitimate success in Kansas City at Kauffman Stadium may not move the needle that much in the financial hierarchy of Major League Baseball. After all, the Chiefs can’t do it in the NFL, and they’re the head-honchos in Kansas City when it comes to sports allegiance.

Nonetheless, the Royals are certainly in striking distance of many clubs in the lower third of baseball. From the Milwaukee Brewers at #24 to the Tampa Bay Rays at #28, it is possible that the Royals could sneak within that range and maybe even knock off Milwaukee, whose market size is comparable to Kansas City. In order to do that, the Royals need to keep payroll responsible, generate more revenue at the K (maybe lower ticket prices or give more deals to get more butts in seats, which they were starting to do this preseason), and produce a competitive team at the Major League level that will inspire hope for the future. If those things happen, not only will Operating Income increase, but the team value could rise as well, especially if those 24-28 range team regress competitively.

Of course, that is heavily based on the latter point, and right now, it doesn’t look too good that Royals fans will come out and fill Kauffman Stadium to watch a team that may only have an upside of 70 or so wins.

But then again, that’s if we have a season. And if we don’t…well…it will be interesting to see what Sherman and the Royals will do in 2021 to recoup those losses from a lost year of missed profit and revenue.

And thus, it will be hard to see much difference in the 2021 Forbes valuation of the Royals from 2020.

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