ARTICLES OF INTEREST

5 questions for the facilities industry

Sports Business Journal, 01.25.10

Will corporate hospitality in sports return to pre-recession spending levels?

Premium food providers took a big hit in 2009 as companies tightened their belts and reduced or eliminated suite catering expenses. Some suite patrons are saving money by purchasing regular concessions fare outside the premium level. To stop the bleeding, teams, facilities and concessionaires worked together to keep people spending in the skyboxes, providing deep discounts on alcohol, distributing player-signed jerseys for buying standing-room tickets, and eliminating service charges. In some cases, the cost to buy a bucket of beers in the suites now proves to be a much better bargain than buying a bottle of suds on the main concourse. Expect those deals to expand across all leagues.

Where is the financing?

As the economy slowly rebounds, the credit markets are starting to loosen up. The New Jersey Nets’ ability to sell $511 million in bonds to help pay for building Barclays Center in Brooklyn is an encouraging sign for teams developing new facilities and renovating older ones. However, the door remains shut on public funding options as municipalities and states face budget shortfalls. That has forced some innovative — and offbeat — funding proposals. In Minneapolis, for example, one legislator has suggested adding slot machines to the state’s two horse racing tracks to generate revenue toward a reconstructed Metrodome for the Vikings (shown below) or a new stadium at a separate site. In Pasadena, Rose Bowl officials are selling pieces of the turf from the BCS title game to raise money toward a $160 million renovation for the 88-year-old facility. Purdue is using part of its share of Big Ten Network television revenue to pay for a $100 million renovation of Mackey Arena. Other schools, such as Kansas and Cal, are adopting the pro model of PSLs to fund premium-seat installations.

Where is the premium-seat market headed?

There is a growing list of teams turning their attention to selling more suites for single games and repositioning premium spaces into hipper, club like spaces that appeal to younger crowds. Teams also continue to knock down skybox walls to develop more flexible spaces for group rentals. The St. Louis Blues, based on the success of last season’s new party suite, built a second one (shown at right) this year at Scottrade Center. The renovation resulted in a net loss of 61 regular seats, but the Blues plan to recoup their high six-figure investment in two years by offering a bigger space for corporate meetings.

Is the market dead for lucrative naming-rights deals?

We’re still waiting for Cowboys Stadium and New Meadowlands Stadium to slap a corporate label on their front doors. New Meadowlands’ deal with Allianz fell through in Jersey, but the joint venture representing the two New York teams and their naming-rights consultant, Jeff Knapple, remain confident that they’ll get a deal done this year. In Arlington, bad timing came into play as the Cowboys opened their $1.2 billion facility a few months after Capitol Hill slammed the corporate world for spending millions on sports marketing. Both buildings have secondary deals that rival some top-tier naming-rights agreements. For example, the aggregate value of Cowboys Stadium’s six founding partners is more than $45 million annually. In Louisville (shown below), officials continue to hold out for a $40 million deal over 20 years to name a new 22,000-seat college basketball arena after turning down two offers for less money.

Where is the work?

All the hoopla over Citi Field, Yankee Stadium and Cowboys Stadium opening in 2009 overshadowed the sobering fact that architects had to scramble to find new work after those billion-dollar buildings and several smaller projects at the college and minor league levels were completed. As the recession forced projects to be downsized, or put on hold indefinitely, it left a void for the bigger jobs that designers could sink their teeth into for an extended period of time. Populous, Ellerbe Becket, HKS, HNTB and 360 Architecture all were forced to lay off architects and support staff. Moving forward, work remains scarce at the big league level so architects have turned their focus to working with teams to renovate arenas and stadiums, and develop master plans for college campuses. Beyond that, a few opportunities remain stateside to develop new MLS stadiums and overseas for World Cup and Olympic venues.

SQUEEZE PLAY

Minor league baseball tries to keep its unique feel while costs and profit pressures threaten its business.

By ERIC FISHER

Published August 16, 2010

The Connecticut Tigers, a short-season Class A minor league baseball team playing in a Norwich, Conn., office park, rank a meager 12th in the 14-team New York-Penn League in attendance, with an average draw of about 1,400 fans per game. The club is not yet certain whether it will be profitable this year. And team officials freely acknowledge that they are playing in a market with historical challenges: The previous tenant, the Class AA Connecticut Defenders, left last year for Richmond, Va.

But after a move early this year from Oneonta, N.Y., where minor league baseball had been played since 1966, Tigers officials say they have absolutely no regrets about their own relocation. There was little economic choice in their eyes, and slim, if any, chance for long-term success in the small upstate New York town.

The Tigers drew just 692 fans per game in 2009 at outdated Damaschke Field, an average that was the lowest in Oneonta since 1976 and marked the continuation of an extended attendance decline. Available 230 miles to the southeast was Dodd Stadium, a 15-year-old ballpark with much more modern amenities.

“You never want to be the folks who relocate, but this was an opportunity we simply couldn’t pass up,” said Andrew Weber, Tigers general manager. The club’s move happened despite their pledge two years ago to stay through at least 2010 in Oneonta, a market where dozens of future stars including Don Mattingly, Jorge Posada, and Curtis Granderson made their pro debuts.

“The landscape in minor league baseball has changed,” Weber said. “It’s really much more of a business now. We’re fighting for the disposable income like never before. People don’t have as much of it, and what they do have, they’re being much more conscientious with it. Before, people might go to a game and a movie in the same week. Now, it’s one or the other.”

The Tigers are a microcosm of a rapidly shifting dynamic within minor league baseball. Serving as the player development arm of Major League Baseball, the affiliated minor leagues have historically been a grassroots version of the game, with many team operators not obsessively concerned about profits and losses. The Tigers under previous owner Sam Nader, who sold the club to New York attorney E. Miles Prentice in late 2008, operated the franchise as more of a local community asset and did not sell beer, a principled decision on his part that cut significantly into revenue.

Franchise values for minor league clubs vary widely, from $25 million for some Class AAA clubs down to low seven figures for A-level ball. About half of the 176 affiliated minor league clubs historically lose money annually on a net accounting basis and perhaps one-third do so on an operating basis, according to Minor League Baseball.

Adding to the challenges for all teams most recently is the impact of the global recession of late 2008 and 2009, which cut industry wide operating income by an estimated 20 percent last year, a sizable amount given the tight economics of the game.

The financial environment is somewhat better this year, with MiLB attendance up 1.4 percent through July and sponsorship sales in many markets, particularly Class AAA and AA markets, on the rebound. Still, the business of minor league baseball is undergoing a historic maturation into something much more akin to the major league model, all while the teams and leagues try to retain their unique character.

“The downturn from 2008 into 2009 was fairly precipitous and it’s still definitely harder to make money than it once was,” said Pat O’Conner, Minor League Baseball president. “But as concerned as I may be about the economic environment, I’m not concerned about our model. We are still providing quality, affordable family entertainment.”

Heightened pressure

Marv Goldklang, chairman of the Goldklang Group that owns four minor league teams and has been in the business since the 1980s, sees the major changes in the business, too. Among those changes is a far more serious tenor behind the scenes.

 

FEWER DEALS DONE
MiLB club sales since 2000
YEAR	NO. OF TEAMS SOLD
2009	2
2008	11
2007	13
2006	18
2005	11
2004	15
2003	5
2002	15
2001	11
2000	16
Source: Minor League Baseball

“It’s night and day now from what it was,” Goldklang said. “We spend a lot more time these days at league meetings talking about marketing issues as opposed to the umpire with the tight strike zone that we’re all frustrated with. But there’s been a payoff there, too. Some of the best marketing talent in the business is found at the minor league level.” (See story, below)

Indeed, the minor leagues have made their mark and experienced both attendance and revenue growth over the past two decades thanks largely to promotions and giveaways that never would happen in the majors. Goldklang’s own partner, Mike Veeck, was the brains behind Tonya Harding Mini-Bat Night, Enron Night, the ill-fated Vasectomy Night, and scores of other newsmaking and attendance-boosting promotions.

Other marketing efforts, however, are more straightforward and aim to play into societal trends, in turn serving as something of a lab experiment for potential use at the major league level. The Goldklang Group’s latest marketing push is Be Your Own Fan, an effort that incorporates social media and online video to promote minor league baseball as a highly variable entertainment option, where a fan may come to a game for the baseball, a summer night out of the house, a group outing with friends and family, or for some other, individual reason.

The relentless marketing and sales push is borne out of necessity, whether for minor league baseball’s MLB-affiliated clubs or for those teams and leagues that operate as independents. Even with attendance remaining at historically high levels, the minor leagues are facing increasing pressure from scores of other entertainment options, both in and out of the home.

Generally speaking, the working agreements between MLB parent clubs and their minor league affiliates call for the MLB club to pay the salaries of players and coaches, some equipment costs, and per diems. The individual minor league teams then are responsible for stadium operations, business and marketing functions, team travel and other similar expenses. Individual minor leagues pay for their umpires.

Independent minor league teams and leagues are just that, independent, and do not have the financial support of MLB.

The Class AAA Indianapolis Indians, one of a handful of minor league teams whose stock is publicly owned and traded and thusly files financial reports, has been profitable for the last 37 years, with a 38th all but certain to happen. Profits for the team fell sharply last year, to $459,603 compared with $1.23 million in 2008. Even with an expected rebound this year in every key business metric, the club has some type of giveaway, promotion or theme night for every home game the rest of the season, with many games featuring multiple elements.

“We have such sincere competition in Indianapolis,” said Indians general manager Cal Burleson. “Particularly in August, there is a definite increase in the competition here for the entertainment dollar between the state fair, the [NFL] Colts starting back up, the [WNBA] Indiana Fever, high school and college football, kids going back to school. We have to do things at a higher level than we might otherwise.”

Reid Ryan, president and chief executive of multiteam operator Ryan-Sanders Baseball, said he notices a couple trends in particular in things being down from several years ago.

“Everybody is really struggling with those Monday to Wednesday dates,” he said. “People are still coming out, but more on the weekend [or] once a week as opposed to twice a week or so, like before.

“And for our [Class AA] Corpus Christi [Texas] team in particular,” Ryan said, “there has been a real big push on real substantial promotional items — a shirt or backpack or something like that — where that would enable people to perhaps avoid a trip to Wal-Mart.”

Ticket trouble?

A fundamental part of minor league baseball, of course, is the relative inexpensiveness of its tickets. Like their major league brethren, minor league teams over the past two years have been particularly aggressive in promoting value-based offers. Dollar nights, two-for-one deals and scores of similar ticket offers are commonplace throughout the industry.

But there also, in recent years, has been a steady price creep at the high end, and that has some executives concerned. Box and lower-level seats that not long ago went for $8 to $12 in many markets are now frequently being sold in the $14 to $18 range.

“There’s a possibility that we could price ourselves out of our natural market and blur the distinction between us and more expensive recreational options,” Goldklang said.  “If it’s costing $100 or more for a family of four to come to the park and have something to eat, it calls into question who we are. There hasn’t been a lot of dialogue on this, and that’s part of my concern, too.”

Part of the ticket price escalation has been designed to counter fixed and operational costs that have increased substantially throughout the industry. Items like insurance, travel and utilities — elements largely out of direct team control — have spiked in cost, eating directly into team profits.

The Class AAA Buffalo Bisons, whose opening in 1988 of what is now called Coca-Coca Field in downtown Buffalo helped spur the stadium building boom in both the majors and minors over the ensuing 20 years, has seen double-digit percentage increases in its utility and insurance costs and has drastically cut down on the number of flights it takes for road games. Team officials didn’t increase ticket prices for this season, with the peak price in Buffalo remaining at $11, but they do acknowledge the rising cost burdens.

“The price of baseball has gone up a lot,” said Jon Dandes, president of Rich Baseball Operations, which also owns the Class A Jamestown (N.Y.) Jammers and Class AA Northwest Arkansas Naturals. “With insurance, for example, the premiums and deductibles have both gone way up. You’re literally paying more now for less coverage. Other things we’ve had to deal with — workman’s compensation, training expenses, extra netting at the ballpark to reduce our [insurance] liability and so forth — it all adds up.”

Facility bust

If there’s another indicator to be had on the altered environment, it’s the level of facility construction activity. After a furious wave of development lasting more than 15 years, the market has slowed considerably. Outside of Florida and Arizona, where MLB clubs annually work on their spring training sites, there are only two projects among the affiliated minors currently on the board for opening in 2011 or 2012.

“I can’t remember the last time I’ve seen that,” O’Conner said.

That dynamic predictably owes to the minimal appetite cash-strapped municipalities have these days for financially supporting sports facility projects, same as what’s happening in the major leagues. Even when proposed ballparks would be privately funded, strict environmental requirements, tight credit markets and other hurdles have stifled activity. The result is that team operators have fewer new-ballpark opportunities available to them than in past years to help counter their increasing expense-side pressures.

The shrinking number of team sales and relocations in recent years reflects this reality. In fact, franchise activity has slowed greatly since the collapse of the financial markets in 2008 (see chart, at left).

The moves that have been made, such as those of the Tigers and Defenders, and Mandalay Baseball Properties’ pending purchase of the Class AAA Oklahoma City RedHawks and pending sale of the Class A Hagerstown (Md.) Suns, have been directly motivated by finances and a desire to get into better markets and more modern facilities — but no deal is easily done.

San Diego Padres owner Jeff Moorad, similarly, is leading a group looking to buy the club’s Class AAA affiliate in Portland and move it to California, perhaps to a new stadium to be built north of San Diego in Escondido. The Portland Beavers’ stadium is being converted into a soccer-specific venue, and efforts there for a new baseball stadium have failed. Numerous approvals and conditions must still be met before the Padres’ deal is completed and construction work begins.

“We’re all in the revenue business, and while we’re doing what we can to manage costs like everybody else, the main thing is to be able to grow revenue,” said Steve DeLay, Mandalay Baseball Properties executive vice president and chief marketing officer.

The group, which manages the publicly owned Class AAA Scranton-Wilkes Barre (Pa.) Yankees and PNC Field, has been in lengthy, often-tense negotiations with local and state officials about the future of that franchise and its aging ballpark. Mandalay has a purchase option for the club for a below-market rate of $13 million, but attendance has fallen off sharply since 2007, the first year of a new affiliation with the New York Yankees that has since been renewed through 2014. No conclusions have yet been reached, and several outcomes remain possible, but DeLay said the group is not looking at other markets for the club.

Digital future

A key source of growing revenue is not occurring at the ballpark but instead online, via a new digital media strategy. The creation of the Baseball Internet Rights Co. (BIRCO) in late 2008 has grouped many of Minor League Baseball’s individual teams, leagues and the official MiLB site into a cooperative agreement with MLB Advanced Media. The new structure, seeking in part to replicate MLBAM’s own success at the major league level, has yielded a series of relaunched websites and new mobile offerings this season.

On an anecdotal level, online video consumption and traffic for Washington Nationals pitcher Stephen Strasburg’s high-profile tour through the minors this spring mirrored the sharp attendance increases seen at the ballparks. More Strasburg-type stories are anticipated, as MLB teams continue to embrace the annual player draft and in-house player development as more efficient means of roster construction.

“What we’ve done is put in a structure that now makes it far easier to follow people like Strasburg and do so wherever you are and in real time. That’s a very exciting development for our industry and something as individual franchises we’re far less equipped and able to do alone,” said Frank Burke, BIRCO chairman and owner of the Class AA Chattanooga (Tenn.) Lookouts.

O’Conner, however, cautioned that the BIRCO story is far from fully told.

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