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When Morons Have Power

This week's edition of BusinessWeek warned that casinos are losing money. Well, duh. It's not hard to figure that when you have no disposable income, you will be even less inclined than usual to do things that are wasteful and expensive. Or at least that's how normal people think. For some reason, some people with a lot of power make incredibly stupid decisions. Today's example is Drayton McLane, owner of the Houston Astros Major League Baseball club.

The Houston Chronicle released a study which showed that MLB has been trying to protect fan interest and attendance during the recession, and one of the steps taken by almost every club is to allow fans to bring in their own food and drink. While certain conditions apply (no glass bottles for example), every Major League club but one allows folks to bring in their own food and drink. That exception is the Houston Astros club.

The Astros actually set up sentries at the gate to catch anyone trying to sneak in food. Ahhh, but it gets better. An NBC reporter noted "inane stadium policies seem to be Houston's stock in trade. From personal experience, you should know that if you should purchase a beer on one level of Minute Maid Park you are not permitted to bring said beer with you to your seat on a different level. Attempts to figure out why that's the case via conversation with the guard stopping you from the stairwell will result in splitting headaches."

Nice to know that the 'Stros are building a national rep in that category, huh?

The Astros first tried to claim that they are bull-headed about food price because they have low ticket prices, but that turns out to be a lie as well: 19 of the other 29 teams offer lower average ticket prices than the Astros.

The team also tried to suggest that we are paying for a quality team. Problem there is that the Astros are in last place in the NL Central, and playing like they mean to stay there.

McLane then tried to claim that banning outside food at Astros games "has been kind of a tradition in Houston", said Astros owner Drayton McLane, who purchased the team in 1992. Spoken like a descendant of Louis XVI, not a guy who knows baseball or gives a fart about anyone but himself. Even Steinbrenner would know better than to toss out that kind of arrogance to the public.

So all that establishes that the Astros club doesn't care a fig about its fans, and is just a business based on greed. That proves poor morals, not bad business, right?

To answer that, let's consider the business model of MLB club. There are four sources of revenue for a ball club; ticket sales, shares of broadcast revenue, marketing and souvenir sales, and concession sales. McLane is not about to open his books to the public - that kind of honesty has never been how Baseball clubs work - but we can figure out some general numbers from public data. USA Today says that the Astros have a payroll of $103 million, which happens to be the highest in the NL Central. The average ticket price for an Astros game is $28.73, and average attendance for Astros home games so far this season is 29,932, lowest in more than a decade.

That's down 13.9% from last year's average at this time, which was also no record-setter. But the revenue from attendance, using the year-to-date pace, would produce $69.6 million for the Astros, more than $33 million short of the payroll even if it cost nothing to operate the stadium, equip the team or pay anyone else. The drop in attendance from last year means at least $11 million lost in lower ticket revenue, unless the Astros do something to attract more fans.

The same effect happens in broadcast games, in fact it's amplified. The networks only run games that they believe have significant fan interest. While the Astros would receive a minimal amount of attention, their poor performance and low fan attendance would reduce their network profile, meaning fewer televised games and lower revenue from broadcast. Specific numbers are closely protected, but it's just common sense to conclude that empty seats mean lower broadcast share revenue.

Then there's souvenir and marketing sales, like jerseys and bobbleheads and so on. How hard is it to understand that if folks don't buy tickets and go to the games, they won't buy anything from the gift shops? And even though many stores sell Astros merchandise, last-place teams are not known for strong team product sales. Combine the lousy performance this year, the recession, and management's jerkwad attitude towards the fans, and it's very reasonable to guess that product sales are sharply down, by even more than attendance.

- continued -

Then there's that concession revenue. Just how stupid McLane is being, becomes evident when you think about the fact that absolutely no one will buy food at Minute Maid Park unless they actually go to a game there, meaning that Drayton's ridiculous attitude is punishing the people he should be bending over backward to make happy - the fans who are still coming to games. As attendance goes down, concession revenues will also necessarily decline, and given the nature of concession inventory, profit margins will also fail. I used to run movie theaters, and I know that when attendance falls below certain levels, your losses from unsold food increase, no matter how well you try to plan ahead. That is, a 14 percent drop in attendance will necessarily mean about a 16 percent drop in concession profits, unless you lose even more.

Forbes says that the Astros' operating income is only 8.76% of their total revenue, meaning that unless the Astros had a 5.1% profit margin or better in 2008, they are going to lose money this year. This is because so much of the Astros' costs are fixed, like payroll and leases; they are not going to be able to reduce costs to any great degree, because their variable costs are below 10 percent of their total costs. The short version of MLB clubs' model is that they are profitable only when their home games have high attendance; low attendance produces business losses. Accordingly, the only sane strategy for a team owner is to attract the maximum number of fans, and this is why 29 of 30 clubs have relaxed their rules on outside food and drink - it's much better to lose a bit of concessions revenue but protect the fan base, than to lose money in all four categories through sheer stupidity.

It's curious that Drayton McLane could fail to understand this rule of business. McLane is very wealthy, and became so through running his father's grocery business, spending 14 years as a general manager of operations. The key seems to be that from 1964 on, McLane moved out of operations and into distribution planning. That is, McLane has not had real contact with regular people for decades and has increasingly come to believe not only that he is competent at whatever he chooses to do, but also that only he understands the situation and the best plan of action. Not so long ago, Sports Illustrated wrote that McLane is obsessed with control, unwilling to allow anyone else to make adjustments, even when those people know far more than he does about what needs to be done.

It appears that this is another such situation.

In the 2005 season, the Astros started off horribly but rallied and frankly got a lot of luck on their way to the World Series, where reality set in and they were swept by the Chicago White Sox. The Astros have not even made it to the playoffs since then, something McLane seems to miss every time he raises prices or does something else to show his contempt for Houston and the people who live there. The bottom line is that McLane does not understand the bottom line, strange as that may sound. He has the power to do what's needed, but would rather ram the iceberg at full speed in order to prove he has control.

Sadly, there are many people like McLane around right now, in all sorts of positions of power.


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Comments (14)

During a recession a guy ju... (Below threshold)
Paul Hooson:

During a recession a guy just has to figure new ways to bring in more money to do the type of things he likes. For example, if a guy likes girlfriends, etc., then he needs to expand his business opportunities, etc. to bring in more cash. That's the cold reality. But I know for a fact a lot of things that guys like are down in sales with the recession right now.

The thing I can never understand about baseball is the daytime games while most people are working during the day to nearly empty stadiums. Basketball by comparison has it right, night games, high attendance.

Once again, you get it half... (Below threshold)

Once again, you get it half right.

First, potential factors you haven't considered. McLane may not be making the decisions himself. The people making the decision likely looked at other options and decided their best interests were served by keeping the policy (and contrary to fan perception, the people running pro teams tend not to be idiots). The concessions contract may preclude allowing fans to bring in their own food and drink. Broadcast revenues may be set in advance and in the short term don't correlate with win-loss records. Like other owners, McLane may make money from the stadium that isn't reflected in the team's operating profits (a perennial allegation by the player's union).

All that aside, incremental gain in attendance from allowing fans to bring in their own food could be more than offset by lower concession revenues from fans in attendance. If the team loses $35 in concession sales (a result of letting fans bring in their own food) for every additional $10 ticket they sell, isn't the team better off leaving the policy in place?

Keeping the policy is not as black and white stupid as you imply... but don't let the lack of information keep you from slamming McLane.

Hooson,Outside of ... (Below threshold)

Hooson,

Outside of the Cubs, most MLB teams play their games at night--Sundays excepted. It's becoming more and more rare to even see Saturday afternoon games--a majority of teams now play Sat. evening or early evening games.

The thing I can never understand about baseball is the daytime games while most people are working during the day to nearly empty stadiums.

This is easily explained. Those are "getaway" or "travel" day games for most teams where a series starts on a Monday and ends on a Wed. or Thurs. The teams have to play those games during the day so they can accomplish one of three things: 1.) get to the series that starts the next day; 2.) travel scross the country or changing time zones and 3.) just a good old day off during the 162-game schedule every so often.

What's bad for baseball's revenue stream in general is that the playoff and World Series games are often on too late for folks (particularly kids) on the east coast to bother watching games, thus creating a another revenue sucker via weak TV ratings. For example (and if memory serves), the WS between the Giants and Angels in '02 had very weak east coast ratings. But, as I've been reading, there's talk about moving all post-season games up to earlier times

DJ,

You didn't mention it, but given the 'Stros high payroll this year, do you know if they're also subject to MLB's luxury tax as well? I don't know what the cutoff is for the tax to kick in but I imagine they're close to it. Related, do the 'Stros receive any of the revenue from the tax? (I kind of doubt it as they're probably not considered a "small market" club.)

And to make matters worse for McLane, rumors are that Lance Berkman's prolonged season slump is due to some real problems in his right shoulder. Not good.

Ahh, leave it to Steve Stur... (Below threshold)
DJ Drummond:

Ahh, leave it to Steve Sturn to put the "ass" in assumption.

1. McLane is the sole owner of the Houston Astros and has authority to unilaterally amend the team's contract with Aramark, which also serves the Texas Rangers (who allow outside food). If Drayton wanted to allow outside food and drink, he has the authority to do so. In fact, the only person or group who can make that decision, is McLane.

2. Concessions revenues are already dropping due to lower attendance. As I mentioned, I have specific experience in that area, and the problem Aramark has is unused capacity - Aramark is designed to serve 40-45,000 fans at MMP, but is serving less than 30,000 on average, which is less than 70% of capacity. Spoilage is increased relative to raw product used, so the key metric for concessions is to increase foot traffic, which can only be done by increasing attendance. Per-capita consumption at outside-allowed venues has not dropped this season, demonstrating that increased attendance will increase gross and net revenues.

This is one of those rare occasions where it is in fact a black and white decision, which is one reason why 29 of 30 clubs made that decision. What, you think Steinbrenner is more charitable than McLane? You think the Cubs care less about profits than McLane? They just did the homework better.

You obviously did not even try.

I shall appoint a Consessio... (Below threshold)
Barack Obama:

I shall appoint a Consessions Czar!

"and has authority to un... (Below threshold)

"and has authority to unilaterally amend the team's contract with Aramark"

And you know this how? The contract in the public domain? You privy to confidential data? So what that McLane is the sole owner? That status doesn't entitle one to break/modify contracts on their own. You do know that is the point of a contract, to BIND the parties, and absent a provision that expressly addresses the point, neither party to a contract can unilaterally change the terms of the agreement?

Your (flawed) logic would provide that McLane could also refuse to pay his players per the terms of their contract if he doesn't like the way they're playing or shortchange the county their share of ticket sales... after all, he is the SOLE owner of the team, right?

And you make a typically silly point by claiming that if 29 out of 30 clubs do something, the 30th club is stupid for not doing so. By this standard, each team in MLB is stupid by signing their players for more money than the other 29 teams deemed appropriate, right?

And.... cue the response, yeah, I'm stupid, an a**hole, don't respond to the specifics, just go off on a rant. My goodness, you are easy

Steve: 'don't respond to... (Below threshold)
DJ Drummond:

Steve: 'don't respond to the specifics"

Yes, that does describe your tactics. I explained my position in detail Steve, something you never did. You made assumptions, got caught, then did your now-habitual piss and moan.

To your latest soiled diaper, then:

McLane set up the Aramark contract, including variance terms. Yes, he can set parameters, just as the Rangers did. The Rangers' decision is prima facia evidence that the variance clause exists and is operable. As the sole owner of the Astros, only McLane could exercise it. If you still do not understand Steve, you're too far gone to ever grasp that point.

And no, the variance clause in the concessions contract is not the same thing as any of the labor contracts, which in any case are sanctioned by the MLPA. If you do not understand that, you don't know MLB well enough to post here. If you do, then you got caught in a false assertion, and you should stop while you are well behind.

And as I explained, 29 of the 30 clubs understand the business model of MLB, which is that attendance drives all profit engines. Whether the gate, television, merchandise or concessions, more people is more profit and less people is losing money. I explained - three times now - how the Astros' low operating income ratio makes them sensitive to fan traffic, which is the rationale for their ticket price structure. You may note that I never criticized the Astros' ticket prices, except that they are lying to claim the tickets are low in price. The math does not lie, but either Steve Sturn does or he never bothered to study Cost-Benefit Analysis.

When it comes to profession... (Below threshold)
Mac Lorry:

When it comes to professional sports, if I were the chief grand supreme Ayatollah I would... well lets just say I would need body guards and lots of them.

and you know that the terms... (Below threshold)

and you know that the terms of the Rangers contract and the Astros contract are the same? yeah, companies always recycle other companies' contracts to save money on legal fees. And so what that McLane set up the variance terms, he is still bound by whatever those terms are... which, as I repeat, you don't know.

The only assumptions I make are (1) you're going to go off on something you have less than full knowledge (in this case, knowledge of the terms of the ASTROS contract), (2) you jump to the conclusion that those who do something other than what you would do are idiots, (3) you react like a child, jumping to vulgarity to those who don't worship your every word, and (4) you fall asleep at night by counting the ways you consider Bush the best president ever.

Again, to the specifics of my comment: you don't know the terms of the ASTROS agreement and your arguments are based on the presumption that McLane's actions are counter-productive and that he is either unaware or doesn't care that they are. Other than that, this is another well-written, researched and argued DJ post.

And now the sadly predictab... (Below threshold)
DJ Drummond:

And now the sadly predictable attempt by Steve to avoid the unpleasant details and the substance of the discussion.

You really should see a professional with help on your BDS, by the way. This post had nothing to do with him, yet you still obsess on the man.

and now the sadly predictab... (Below threshold)

and now the sadly predictable attempt by DJ to make me the issue rather than answer the substance of my charge that 9 times out of 10 he goes off half-cocked on a subject he knows a little, but not enough, about.

And its not BDS to make references to your adoration of him. Note that I wasn't criticizing Bush, I was making fun of you.

And now we start the clock on how long it takes DJ to call me another name... which, of course, will be long before he admits he doesn't know the terms of the ASTROS contract and that he was making unsubstantiated allegations.

And by the way, DJ, what ex... (Below threshold)

And by the way, DJ, what exactly is the 'power' that the alleged moron has? He forcing you - or anyone else - to attend an Astros game? He forcing you to buy food or drink? He's offering you a transaction, which you and every other person has the ability to accept or reject.

If you bothered to check the dictionary, you'd see that 'moron' is not defined as someone who does something with which you disagree... but why let facts get in the way of your rant?

Meh, I have boycotted MLB s... (Below threshold)
TexEd:

Meh, I have boycotted MLB since they went on strike in 1994. I have never taken any of my kids to a MLB game, but we have enjoyed college baseball. MLB is just like the NBA and NFL, a bunch of narcissistic primadonnas not worth the price of admission or an 8 dollar watered down beer.

We have much bigger problems than not being able to take food into an Astros game.

DJ,You wrote "[McL... (Below threshold)
T:

DJ,

You wrote "[McLane] has increasingly come to believe not only that he is competent at whatever he chooses to do, but also that only he understands the situation and the best plan of action."

Sounds like Obama.




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