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 US 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. All cities however, report indirect and induced spending and add this estimate to direct economic impact. Indirect impact or effects are the changes in sales, income or jobs in sectors within the region that supply goods and services to the hospitality sector. For example, increased sales in transportation to and from airports or linen service companies serving hotels and restaurants resulting from increased business volume is an indirect effect of convention and tradeshow attendee spending. Induced impact or effects are the increased sales within the region from household spending of income earned due to conventions and tradeshows and their supporting sectors. Convention center workers, hotel and restaurant employees spend the income they earn because of conventions and tradeshows on housing, utilities, groceries, clothing and other discretionary spending. Multipliers are applied to capture the size of the indirect and induced effects, expressed as a ratio of total effects to direct effects. Total effects are direct effects plus the secondary (indirect plus induced) effects. A sales multiplier of 2.0, for example, means that for every dollar received directly from a convention or tradeshow attendee, another dollar in sales is created within the region through indirect or induced effects.
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 $1billion.
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 sometimes 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.
Findings –Are Convention Centers Able to Cover Operating Expenses with Earned Revenues?
Some are, and more than you’d think. Some are closer than you’d think. All should at least try.
The research conducted is illustrative. For convention center sample we were able to find and review audited financial reports for the most recent business year (either 2014 or 2015). The sample size was smaller than desired however; many of the financial reports that exist are bundled with other public facilities like theaters, arenas and stadiums. Phone calls to convention centers were not effective; most did not have the information readily available and often ended with suggestions that we file a FOIA request. To conduct a full blown study with a larger sample size and a review of multiple years would be daunting; beyond the process delays of FOIA requests there would probably be many questions as each center has different accounting methods for classifying revenues and expenses. For example, some centers count deferred revenues (rent received for an event which hasn’t yet occurred) as operating revenues while others count it as unearned income. A detailed study would also do a more complete job of explaining why some convention centers do better than others financially as the study reviews and compares occupancy rates, service offerings and their pricing models, and overall expenses.
In general the findings were surprising. Our expectation is that we would only find one or two convention centers in the sample where earned revenues covered or exceeded operating expenses less depreciation. We found six (37.5% of total). We also found convention centers where in our judgment achieving the goal of covering expenses (“operating profitably”) seemed reachable. Given the limits of sample size, the tables below summarize findings. The tables also attempt to benchmark (using averages and medians) the occurrence of “being profitable” in calculating the following; earned revenues, operating expenses (less depreciation) and net – all per gross square foot of exhibit space; dependence on government support (normally from tourist taxes) expressed as an amount and per cent and; documenting which service offerings the convention centers provide.
Sample Convention Center Operating Cash Flows – 2014 or 2015
NOTES: * WSCC carries all or part of the city’s convention marketing expense of $10.4M. This expense is normally carried by the CVB elsewhere. Without this expense WSCC’s cash flow improves substantially. WSCC’s F&B is self op.
** DC Convention Center’s revenue and expenses were derived from DC Auditor’s report 2015.
*** The Javits Center could well be considered an outlier in this comparison. Center has a high client demand, books all its own business, rarely gives rent concessions and has a full range of high value services including labor provider to General and Exhibit Appt’d contractors
Sample of Convention Center Major Service Offerings
- If the Javits Center is taken out of the analysis as an outlier, then four of the five convention centers that covered expenses with earned revenue had both earned revenue per square foot of exhibit space above average and expense per square foot of exhibit space below average.
- If the Javits Center is taken out of the analysis as an outlier, then four of the five convention centers offered the high value services of F&B, Utilities (elec. and plumbing), Telcomm/Internet, and Parking
- Of all the convention centers that covered expenses with earned revenue, four of the six had a known occupancy rate above 65%. There is a strong inference that convention centers with a favorable occupancy rate (over 60%) which offer a full range of high value services (especially utilities) have a much greater probability of covering operating expenses.
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% when they assumed management in Dec. 2013 to 72% currently, a notable turn around. 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 on line 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 from your city and key exhibitors from your city. This takes hard work and finesse but clear information about location decisions are sometimes revealed.
For convention centers interested in improving cash flow, consider the audit services that MTMConsult, LLC can provide. The audits can be scaled to fit your situation and are reasonably priced. Our team of experienced practitioners with real field experience will drill down to the important details and provide actionable results.
Email us at email@example.com or call – 203-273-6999