Why teams/franchises fail - untangling the web

I was asked this in light of the Otago rugby saga, and initially my thoughts resembled a tangled mess. After time for some thought, I've managed to separate what I believe are the major factors in why we have seen several teams/franchise strike difficulties in Australasia in recent times - and there are many parallels with the North American experience.

There is no question whatsoever that the role of bad debts has played a major hand in Otago rugby's imminent demise. The fact that the Otago Rugby Football Union (ORFU) owned its own aging ground, Carisbrook, and were therefore responsible for costly maintenance and upgrades would have hurt the union. The fact that despite its iconic status, the threat of losing major games if the ground was not overhauled was the major spur to build the Forsyth Barr Stadium. As soon as the FB Stadium was given the go-ahead, it was curtains for Carisbrook, and the ORFU therefore lost a lot of leverage in their financial situation. With a ground that was no longer the first-choice venue for rugby in the future (and had lost cricket to the University Oval), its value was diminished. Adding to their woes, they were understood to have been locked into long-term deals like a 30-year agreement to use lighting that they no longer use at Carisbrook. Despite offloading Carisbrook to the Dunedin City Council, and ridding themselves of many of the operational costs associated with the old facility, they were anticipated to be an anchor tenant in the new stadium and paying rent for the privilege - rents they were not paying at Carisbrook. According to the Otago Daily Times, the ORFU chairman Wayne Graham was reported as saying:

... owning Carisbrook had become a millstone around the union's neck, while matters such as how much it would cost to play at Forsyth Barr Stadium were never considered.

When the Union hasn't planned ahead to meet these costs, there must be serious questions asked of the present and past boards. While the wisdom of many of these decisions is debatable, the fact remains that the debt situation got to such a state that the New Zealand Rugby Union (NZRU) refused a bailout, despite sinking $200,000 into the Union for the first two months of 2012 in an attempt to alleviate the problems the ORFU were facing.

[NZRU chairman Steve] Tew told Radio NZ no other rugby unions were in as bad a shape as the Otago body, but he hoped it would be a "bit of a wake-up call'' to administrators that the NZRU won't be able to bail everyone out forever.

There are several pressing issues that will continue to shape the future of rugby in this country.

There is also no question that rising player costs has played a part in the ORFU's predicament. One needs to look no further than Southland, Otago's partner in the Highlanders Super Rugby franchise, who were given a substantial funding injection of $1.5 million by a group including the NZRU in 2011 with player costs believed to be a major contributing factor. The rise of the players association has been a factor in rising player costs, and has hurt some provincial unions. One could argue that the growing role of the players association/player unions is an evolutionary step in professional sports to combat the monopsony power of team owners, but it is worth recognising that player unions are primarily interested in, but not restricted to, facilitating higher wages for its members. The rising influence of player unions has been a major issue in professional sports leagues across the world, resulting in lockouts in three of the US major sports leagues in recent times, and will be an important issue in New Zealand rugby should we see other provincial unions continue to struggle financially.

One must also consider the nature of the revenues earned by provincial rugby unions in this part of the world. Provincial unions don't have the comparative luxury that the Super Rugby franchises enjoy with the lucrative broadcasting deals negotiated by SANZAR and broadcasters. Provincial unions rely on money filtering down from the professional franchises. At the advent of professional rugby in New Zealand in the mid-1990s, the provincial game has been caught in between the fully professional Super franchise and the amateur club rugby scene. The result has been that provincial rugby, at least for the ITM Cup provincial unions, is effectively semi-professional, which means that while the costs are sizeable, the revenues earned are not. At least the ORFU owned Carisbrook, which it was able to rent out to users. According to the Otago Daily Times (ODT), the ORFU's revenues from gate takings and ground rentals fell by up to a third in the past five years.

Fan support and the demographics of the Dunedin city and the Otago region must also be recognised as a factor in this situation. Crowd figures at Carisbrook were in steady decline, and this can be attributed to a combination of local area demographics, increased entertainment options (particularly the increasingly televised national game) and the poor on-field performances of the local team. Otago finished last in the ITM Cup in 2010, and although the team improved in 2011, attendances had flatlined and only the diehard fans were making the trip to the House of Pain to see the region's best go around.

There appears to be a growing gap between the haves and have-nots in New Zealand provincial rugby. This from the ODT:

In the past six years, the union has accumulated losses of some $10.5 million and in the past decade it has made just three surpluses, according to documents lodged with the Companies Office.
That compares to a decade of profitability for the Auckland Rugby Football Union, and just two deficits for the Canterbury Rugby Football Union in 2007 and 2009. The Wellington body reported three deficits in 2008, 2009, and 2010, but enjoyed a $1.2 million profit in the 2005 season.

As I mentioned in an earlier post in this blog, it is somewhat ironic that the team was expected to tenant the new Forsyth Barr Stadium - a facility that received rave reviews during the recent Rugby World Cup. The honeymoon effect associated with a new facility is likely to have at least given local attendances a boost while the novelty of the new stadium remained. A return to the days of a competitive (read: winning) local team would also go some way towards restoring local interest and getting the turnstiles moving again.

A related issue is the likely effect of the ORFU announcement on the anticipated private funding towards the Forsyth Barr Stadium. The ODT has raised this issue, and it is sobering. No Otago team would likely hit revenues from season ticket holders expecting to see not only Super Rugby but also ITM Cup rugby, and will lower anticipated hire revenues received from the ORFU. Local corporates might well review their longer term involvement in a facility that now has one less major attraction on its books.

The ORFU drama - is it time to go cap in hand to Government?

I guess it was only a matter of time before someone made the suggestion that the Government could bail the Otago Rugby Football Union (ORFU) out. Fortunately the PM has poured cold water on this suggestion.

This from the PM:

"It's a bit of a worry, it's a very old union, historically very successful. I understand, amongst other things, they had a lot of debts racked up against Carisbrook that they couldn't sell for the price they anticipated they would."

If there's one thing I've learned over time, it is that history counts for very little when it comes to paying the bills. Sport is no different, semi-professional or not, than any other business. If the bills can't be paid one way or another, then maybe it is time to shut up shop. I have two concerns with a proposed Government approach. My main concern would be what message would be sent to other unions who have been and continue to struggle by on modest means if the Government decided that the ORFU was worthy of a bailout. It might seem heartless, but the reality is that sports must also pay their way and live within their means, just like the rest of us. The other concern is the movement of good money following bad - how much would be 'enough'?

Of course, if there was a wealthy benefactor (or more) in the deep South who felt that the continued presence of Otago rugby was worthy of private investment, I am sure the ORFU would gladly consider all offers!

ORFU to be liquidated - is rugby in trouble?

This today from the NZ Herald: The Otago Rugby Football Union is to be liquidated, with the union facing a massive loss after years of poor financial results. The New Zealand Rugby Union (NZRU) has decided enough is enough, and will not bail the union out.

This puts rugby in a somewhat uncertain state in the deep South. Not too long ago the Southland union needed NZRU assistance with meeting financial shortfalls, and now Otago is to cease trading. Let's not mention the Christchurch temporary stadium arrangement - it's been an unfortunate sequence of events for southern rugby.

This has implications for the recently built Forsyth Barr Stadium in Dunedin. Sure, the Highlanders Super Rugby franchise will continue to play there (the ORFU is a separate entity to the Highlanders), but they were counting on an Otago NPC/ITM Cup team playing to fill in some dates and draw in some crowds to make the economic impact figures stack up. Admittedly nobody saw this coming, but it does make things even tougher on the Stadium to break even. Longer term, if there is no Otago ITM Cup team, does this mean that the Highlanders franchise might be 'up for grabs' with only the Southland union playing? Taranaki were known to be keen on a Super franchise - does the growing uncertainty in Otago open the door?
Some have wondered whether sports are recession-proof - here's a little bit of evidence that our national game, alongside many Australasian sports leagues including the A-League, the NBL, and even the NRL if you go back to the late 1990's with expansion and then the Super League war and contraction - is just as susceptible as any business in a period of downturn. A rugby fan hopes that this is an isolated incident, but an economist wonders whether it is merely the tip of the iceberg. Teams generally don't make profits - if they do, they tend to be small. Ironically, this might have been the ORFU's best chance at recouping some of their losses, with a likely increase in attendances in the form of the new stadium's honeymoon effect, where people come along to see the new facility as much as the game. Unfortunately they don't appear likely to get that chance.

Rugby World Cup in Taranaki

The following report was released in December of 2011, and I've bumped into it by accident.

Economic Impact of RWC 2011 in Taranaki released

What is particularly interesting about this report is the point made by the CEO of Venture Taranaki that it was a credit to the region that the actual economic impact of the event (calculated as a total impact of $16.24m, with a value added of $6.74m) exceeded the original projections made in 2009 (a total impact of $12m with a value added of $5.24m).

A closer inspection of the figures reveals a rather interesting and somewhat puzzling finding, given the nature of the release itself. The 2009 projections were made by BERL and projected a direct impact of $7.69m. This direct figure is, according to the report, the increase in spending by visitors that is attributed to the RWC. The 'actual' 2011 figures are calculated by TSMR (a quick web search failed to reveal what this acronym stands for) and found a direct impact of $7.68m. Yes, the direct spending was actually $10,000 less than originally projected! The indirect effects are considerably larger in 2011 ($8.56m) than in 2009 ($4.31m). Had the structure of the Taranaki economy changed so much in two years that the indirect impacts doubled from what turned out to be the same direct impact? Or does the answer lie in different multipliers being used for the two analyses? I tend to lean towards the latter.

It would appear, based on what I can see, that Taranaki met economic impact projections, rather than exceeded them. Not a bad result, all the same.

Visitor Impact of the Rugby World Cup - MED weighs in

I’ve just come across this report that I somehow missed two days ago – the Ministry of Economic Development has estimated that the visitor expenditure from the Rugby World Cup was $390 million, a figure claimed by some news outlets as higher than expected. I’m not sure where that has come from – I’m pretty sure the RBNZ estimated around $700 million in new spending, so the MED findings, assuming they are correct, are around 56% of what was predicted.

To assume that the figures in the report are correct requires confidence in the method which was used. The big eye-raiser was the margin of error of +/- 20%. The resulting net visitor expenditure was estimated as being between $220 and $340 million greater with the RWC than without it.

Further figures of interest in the article was the estimated spend per adult RWC visitor of $3400, which was $1000 greater than the average visitor. A crude back-of-the-envelope calculation suggests that if the entire 133,000 visitors that entered the country for the RWC were net visitors to the country (and they were all adults), the total spending from this group would be $452 million.

We have to factor in the crowding out effect into this calculation. A quick glance at monthly visitor arrivals (I know it is not the perfect measure, but I refer to it just for indications sake) show that visitor arrivals to the country in September were 26% up from the same time in 2010, and likewise the October arrivals were 17% up. As an aside, November and December arrivals were up by 1.7% and 5.4% respectively from the year before. If we attribute the total increase in visitors from August to October 2011 over the same period in 2010 to the RWC, then this figure (84,615) might reasonably be considered an optimistic number of net RWC visitors. The revised spending figure becomes close to $288 million, which is in the middle of the MED figures – not too unreasonable.

Some have already pointed out that tourism would have been worse in the absence of the RWC. The largest annual increase during the August-October period between 2007 and 2010 was 26,770 in 2009 and the largest annual fall was 19,433 in 2008. A pessimistic estimate of net visitors could thus be calculated assuming that there would have been an increase of the magnitude of August-October 2009, and an optimistic estimate could be calculated assuming that there would have been a fall of the magnitude of 2008. The resulting spending figures range from an optimistic figure of $354m to a pessimistic figure of $197m. My optimistic figure is a shade over 50% of the initial projected impact – hardly ‘better than expected’ material.  As is the usual, I urge caution – the figures above are very, very crude calculations, based on some pretty restrictive assumptions. I know I've ignored the margin of error - its inclusion would basically show that the estimates could be pretty much anything!

I am yet to see the report itself – no doubt it will make for interesting reading.

Ticket scalping and Trevor Mallard

I couldn't resist - if this isn't the best example of the pot calling the kettle black, I don't know what is.

From the article:

As a member of the Labour Government, Mr Mallard initiated the Major Events Management Act 2007, which tightened the rules around on-selling tickets to major events and allowed scalpers to be fined up to $5000.

In an opinion piece for the Herald at the time the legislation was passed, Mr Mallard said: "As for the proposed ban on scalping tickets for prices more than their face value - I think most people desperate for a ticket to a Rugby World Cup game would be frustrated, along with the event organisers, to see tickets being on-sold at levels designed only to make huge profits for the seller."

 And selling tickets to the Homegrown Festival for in excess of face value is different how, Trevor?

However Mr Mallard rejected he scalped the Homegrown tickets, saying he had intended to go to the concert but now had another engagement.
 
He said he started the auction at face value, but allowed it to run its course and not place a "buy now" option on the sale, as he knew the tickets were worth more.

He says he's done nothing wrong as they were sold at auction.

Oh, okay. That makes it all above board. It is also worth pointing out that the Homegrown Festival isn't under the Major Events legislation, so you can actually scalp. And then there's this:

"I'm tempted to breach their privacy the way they breached mine but I suppose that would be a bit silly," he wrote.

"I'm going to get a new trade me user name and others will front for my purchases and sales. Pisses me off." 

Hang on - if you've done nothing wrong, why would you go to all that trouble? Hmm.

For the record, I think scalping has desirable properties, most notably the reallocation of resources in a more efficient fashion. I have absolutely no problem with what Mr Mallard has done with his tickets - he just shouldn't deny that it is scalping. That's exactly what it is.

UPDATE: I should call it on-selling. That doesn't sound anywhere near as negative as scalping. Even if they are the same thing.

FURTHER UPDATE: It seems Mr Mallard is now offering to refund the scalped price of the tickets. Principles are sometimes hard things to stand by - but Trevor is standing by his (even if he needed his arm twisted).

Substitution effects - there's more!

It seems the Rugby World Cup has had all sorts of impacts - some good, some not so good. Sky City enjoyed a one-off surge in income due to the RWC, although Rainbow's End took a hit. I also noticed this story (Rugby fans shun cultural events) almost by accident but it is very relevant here - this counters the earlier post to some extent on Wellington's economic boost. Of course rugby fans would shun them - they're there for the rugby, after all. The question should be - by how much did the increase in rugby fans offset the loss in cutural visitors? This is the same point that Eric Crampton in Offsetting Behaviour made with the Christchurch experience of the RWC.

(BTW - thanks to Eric for a fascinating insight into his analysis of dodgy cost analyses in his talk to the School of Economics and Finance here at Massey today.)

And there's more - spending is up!

Results from the December 2011 Retail Trade Survey are out from Statistics New Zealand - and they are all pointing in the right direction if we wanted the Rugby World Cup to have had the desired effect. And yes, Statistics New Zealand has attributed the positive figures, at least in part, to the presence of the RWC - notably those of supermarket and fuel sales. I wonder what happened to accommodation, and cafes/bars/restaurants? Takeaways? Movies? Oh yes - we spent less on movies during the RWC (the substitution effect).

I took the aggregate seasonally adjusted figures from the HOTP release and did a quick calculation - the graph below shows the quarterly and year on year percentage changes in retail sales.




A quick glance sees that although there has been a healthy 2% increase from quarter to quarter throughout 2011, the yearly percentage increase has grown since December 2010, and has been slowing since March 2011. Yes, it is still positive, but when you bear in mind that the yearly percentage increase in the December 2011 quarter is compared directly to the impact of the first Christchurch earthquakes, then it takes a little of the sheen off.

More RWC statistics - Wellington wins!

This just in from stuff.co.nz - Wellington has enjoyed a substantial economic windfall from the Rugby World Cup. 268,000 bums on seats for the eight RWC games in the capital, 92,000 international visitors and a 'conservative' economic impact of $94 million. The mayor describes the result as a three-way win, with economic impacts exceeding expectations, and visitors and locals happy with the experience. At the risk of sounding like a killjoy (and like a broken record) what matters not is what the gross impact is but the net impact. Sure, some businesses did exceptionally well, but others suffered - that's basically the same story as in Auckland (although they are yet to release details of their economic wins). This fresh report cannot tell us whether there has been a net impact. What we really need to know is how regular business was affected during the RWC period.

The mayor castigates those who lost out, claiming they suffered from "inflated expectations" in the face of lower consumer spending. Should we wonder why? Oh yes, perhaps that had something to do with the "economic benefits" being trumpeted all over the country as being a boom for everyone concerned? That is, of course, an exaggeration but many believed that everyone in the retail, hospitality and tourism sectors were going to do well from the event.

Personally, I'd wait a while for other statistics to reveal themselves before declaring the Rugby World Cup Wellington as an economic windfall. We mightn't see the true regional net impact until much later in the year.

Hamilton headache: Claudelands claims 'overly optimistic'

This just in from the New Zealand Herald... the $68m Claudelands Events Centre in Hamilton is facing a $1.5m deficit in its first year of operation (and projected deficits until 2014/5) and questions are rightly being asked after the initial projection was for a $1.1m surplus in its business case. It is a sorry state of affairs, but by no means an isolated event. Hamilton ratepayers don't have to look too far to see a similar story with the V8 supercar race a prominent example. Unfortunately the same story has been repeated all around the world - overstated measures of benefit, understated measures of cost and a projected bottom line that is much more palatable than what actually eventuates. I wonder if the $30,000 cost of the peer review currently being conducted into the issue was included in the forecast as well? The good news: it isn't going to hit ratepayers in the pocket, according to the mayor. Unfortunately, even if rates don't rise, the need to bail out a facility shortfall will certainly result in funds being re-routed from other city services - and this will hit ratepayers. Is bailing out the Events Centre the best use of these funds?
There was a particularly interesting comment in the article above attributed to Councillor Dave Macpherson:

...the council had been informed by trained professionals who were good "talkers and persuaders".
"I think it's sort of an events industry culture; seeing things through rose coloured glasses," he said.

Hmm. Did the V8 experience not ring any alarm bells? Heck, didn't the experience of the Canberra V8 supercars in the early 2000's at least raise some eyebrows? What about the volumes of research that have questioned the accuracy of claims of economic benefit, of which this paper (and also this one) make important contributions. Forget the rose coloured glasses - put some prescription lenses on, read things carefully and ask serious questions.

There is still a small glimmer of short-term hope on the horizon as the Sonny Bill Williams boxing show heads to the venue on Wednesday for his NZ title fight versus Clarence Tillman. Will Hamiltonians get in behind their boxing chief?
UPDATE: They're trying to drum up support with a bit of push and shove in the pre-fight weigh in.