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.

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.