Author: Myles McGrane

FM Issue: May/June 2017

Profit is a fungible term for convention centers. Sometimes it is expressed properly, as you may see it in a public corporation’s annual report. Sometimes it is expressed where revenues include unearned income (such as a government contribution, normally a hotel tax). To avoid confusion this article uses EBITDA (acknowledging that convention centers pay no T – tax). EBITDA is described as a way to evaluate a company’s performance without having to factor in financing and accounting decisions or tax environments. Non-cash expenses of depreciation and amortization are left out. Also, unearned revenue like hotel tax subsidies and interest earned on surplus subsidies and/ or expensed for debt service are left out. EBITDA as an earnings measure is particularly useful for organizations like convention centers that have large amounts of fixed assets which are normally subject to heavy depreciation charges. What you are left with is a performance statistic showing whether earned revenues can cover and exceed operating expenses and if not, what amount and percentage (in total revenues) of subsidy is necessary.

How Do Most U.S. Convention Centers View Success?
The primary measure of success is to attribute convention and tradeshow annual attendance to a healthy hospitality industry where hotel occupancy is high, and out of town dollars spent at hotels, restaurants, entertainment, shopping venues, rental car outlets, etc., all flow on a regular basis. These facts are reported as “economic impact” – a result of event attendee and event organizer spending. Attendee spending refers to additional expenditure within a city from event‐related visitors such as exhibitors and attendees. For events, attendee spending forms the major component of economic impact. Collectively, attendee and organizer spending in the host city are directly attributable to event production and is termed direct economic impact.

To make the economic impacts easier to track, cities have determined through independent research the average spend per event visitor. You will see economic impact explained in various press releases as an annual event attendance figure multiplied by the average attendee spending. As an example, San Diego Convention Center’s marketing literature shows an annual event attendance of 824,376 with average spending of $1,179. The impact calculation is close to $1 billion.

Should Economic Impact Be the Only Measure of Success?
Achieving favorable and growing economic impact is the primary convention center goal. Those of us in the business appreciate and can parse the sometime overwhelming impact that’s reported. Many of us know that the impact estimates are heightened and often overplayed. We all know that:

• There are show managers (typically tradeshows and consumer shows) who exaggerate attendance.
• There are show managers (typically tradeshows and consumer shows) that present inaccuracies regarding the percent of total attendance from out of town.
• Event attendee spending does not apply to the city or metropolitan region as final demand, and there are doubts that the proper calculations actually occur. The basic problem is with retail purchases of goods that are produced outside of the region. Only the retail margin, and maybe some portion of wholesale and transportation margins, should apply as final demand for the region.

For the most part, taxpayers understand direct economic impact. Indirect and induced economic impact is not so easy to follow. If the impacts are substantial, the evidence unfolds before them as market forces drive private investment in new hotels, upscale restaurants, and entertainment and shopping districts, all in proximity to the convention center. Adding indirect and induced economic impact without a truly convincing explanation can sometimes be a tough sell. So, in answering our own question, “Should Economic Impact Be the Only Measure of Success?” yes, something more is needed. For a convention center, having a goal of improving cash flow, watching as your efforts bear fruit, and eventually achieving positive cash flow measured as EBITDA is as satisfying to convention center leadership, staff, board members, and political supporters as a large economic impact is. Favorable cash flow statements have these attributes:

• A solid ring of truth about them; they demonstrate management competence.
• They resonate well with most segments of the population who may be naturally skeptical of unusually large economic impact statistics.
• They add a legitimacy, believability, and clarity to economic impact reporting. Ultimately clarity matters. Clarity leads to public support and unity of effort

If successive years of positive cash flow are achieved, covering all cash related expenses and accumulating a capital reserve, that fact will provide a reputation lift to the convention center and city and will be regularly reported and indeed celebrated with pride.

Conclusions and Recommendations
First let me commit a bit of heresy and say that I disagree with the oft repeated phrase “convention centers are not designed to make a profit.” I consider it one of the more ill-advised management declarations in the convention center business. My view as a former GM is that talk like that will discourage creativity and any entrepreneurial spirit your staff may have.

The research and findings for this piece are encouraging. There are good examples of cash flow improvement and coverage of operating expenses with earned revenue. One of the better examples is the work of a private convention center management company, AEG Facilities. They’ve taken the step of thinking and acting strategically in announcing that covering expenses with earned revenue as a primary goal for their clients. They made it policy, and they met that goal at the Los Angeles Convention Center for successive years. They have been able to increase occupancy from 55 percent, when they assumed management in Dec. 2013, to 72 percent currently, a notable turnaround. It has been recently reported that for FY 2016 that Los Angeles Convention Center achieved an $8.1M operational surplus. Additionally, similar progress has been made at the Hawaii Convention Center which AEG Facilities also manages. The Los Angeles Convention Center has retained the profits and funded the center’s own capital reserve. It is often surprising how rapidly the fund accumulates cash. At some point, a convention center can reach a level of self-sufficiency where technical improvements can keep pace with the market and deferred maintenance doesn’t grow out of control. AEG Facilities accomplished this with cost cutting (principally payroll), renegotiating terms, commissions and price schedules for contract services, and aggressively filling open dates with film and photo shoots and consumer shows.

AEG Facilities’ effort will probably represent a change in the way private management companies compete. Normally, private management proposals are strong on cost cutting measures which they can all do consistently well. Rarely is there a stated and clear objective of covering operating expenses with earned revenues in privatization proposals.

We reviewed many service order forms and found some meaningful price differences among convention centers in the same region serving the same market sectors. Recommend that a pricing audit be conducted and see how you compare to current market prices. Perhaps, you have more pricing power than expected.

In several of the audited financial statements, there appeared a line item entitled “rent credit.” We learned that this was a way of accounting for rent discounts and rent free events. Rent credits are classified in financial statements as unearned revenue and are, from what we have learned, non-cash revenues, i.e., convention centers do not actually receive a partial or full reimbursement. Some of the credits were substantial. For example, the Los Angeles Convention Center posted 2016 rent credits of $6M. Rent credits occur mostly with association meetings and exhibits. These terms are negotiated by CVBs. This happens whenever there is a “citywide” event measured by the number of anticipated hotel rooms needed. The usual offer to clients is zero rent. Zero rent became common in the early 2000’s. The dot com bubble had burst, more exhibit space was coming online, and cities were concerned about losing market share. Then 9/11 hit, and the recession followed in 2008. Now, zero rent is a common negotiating tactic, especially for professional associations. I believe convention centers are making it too easy for CVBs to offer zero rent on proposals for these reasons:

• It is wrong that one organization crafts transactions that are not particularly beneficial to the organization that is ultimately accountable.
• Generally competing on price alone diminishes the perception of your city’s brand and creates an impression that event locations are like commodities; one is as good as the other. Indeed, cities and convention centers are not. Reasonable price competition can work, but once you start leading with price, especially zero rent, the expectation is that you will do it all the time.

Challenge CVBs to offer better justification for zero rent. Force them to obtain more corporate intelligence about the client’s real intentions; is coming to your city a real market advantage to the client zero rent or not, for associations – is your city part of a predictable rotation increasing the probability of a booking – are there less costly value added parts of a proposal that all together are as attractive as zero rent. Additionally, engage in conversations with the general decorating contractors, hoteliers, board, or advisory association members, and key exhibitors from your city. This takes hard work and finesse, but clear information about location decisions are sometimes revealed.

Myles McGrane is a principal with MTM Consult, where he provides consulting services for convention centers including development, sales and marketing, operations and management.