Running head: Economic Impact Analysis 1

Economic Impact Analysis - Part 3

Group 3 - Sean McIntyre, Garrah Parkes and Kenny Triplett

SPB 570

Dr. S. Carney

Sunday, April 12, 2015

Economic Impact Analysis - Part 3Revenue In order for this franchise to be successful, it is important to capitalize on the communitys desire to have a team to call their own. While it is important to make sure the franchise has a great product on the floor, the management must be certain to create value for the fans while still being fiscally responsible. It is challenging bringing a new franchise to a city, growing fan base, building community support, establishing business and political relationships, all while trying to turn a profit. Group threes outlook over the course of five (5) years is to build a brand, increase fan support, and become entrenched in the community. While at the same time cultivate business partnerships through sponsorship and marketing deals in hopes to partner with the city to build the franchises first arena. Group three has outlined projections over the next five (5) years in three categories, conservative, moderate and aggressive. The conservative pricing is far below what fans may pay to attend an NBA game. Additionally, research shows conservative pricing is comparable to most other semi-professional teams (Holden Moss CPA, 2012). To be a successful, small, start-up franchise in a new city, management must attract fans and put a product on the floor that is competitive, entertaining and value priced comparable to other entertainment options in the area. The divide with the NBA league and the average family of four wanting to watch fun basketball is where the semi-professional leagues have a chance to fill in the gap. The average fan of any professional association will always comment about the outrageous salaries of the athletes, or the profits team owners are raking in year after year. Therefore, it is important that management understands the pricing must reflect but balance the needs of the fan to pay a fair price for entertainment and the desire to be fiscally responsible. The conservative pricing is as follows: Tickets: $5- $10, drinks: $1, food: $2-$3, parking: $5, merchandise such as T-shirts (kids/adults): $5/$8. For the conservative pricing, the underlying logic is that in a new city with a new team, management is going to have to generate fan support. With so many entertainment options, a family has (i.e. movies, eating dinner at a restaurant, or taking the family to the zoo) management wanted to keep the price low enough. Therefore, the price is not the limiting factor in whether or not they attend a game or purchase season tickets. Research shows that on average most of the semi-professional teams just starting out will play their games at a local high school, or college or a recreation facility. This helps to generate revenue as ticket admission prices are relatively low in order to get fans to the game (Remington, 2015). When building a franchise in a city that does not currently have a professional basketball team, management is capitalizing on the economic principle of scarcity. This is because there is currently no available resource to fulfill the current demand for professional basketball (Brown, Rascher, Nagel, & McEvoy, 2010, pg 108). The demographics of a citys population would also dictate pricing so the location of the actual games would play a factor in the ticket pricing, concessions, parking, and merchandising. When estimating the revenue that will be generated it is best to look at the population of likely attendees to see how it compares with other markets that have similar sport facilities with similar tenants(Brown et al., 2010, pg 284). With the conservative pricing and an aggressive marketing and promotion campaign, it is possible to generate fan support and keep the seats filled providing the game experience is great, and the fans leave entertained. Conservative pricing would be utilized after analysis of the income of the local population, lifestyle information, and retail spending of the residents. A more aggressive pricing model can be used if the research supports this strategy.The moderate pricing is as follows: - Tickets: $15-$20, drinks: $2, food: $5-$6, parking: $10, and merchandise such as t-shirts (kids/adults): $8/$12. It is important to realize that there are many factors involved in creating a pricing strategy. The objectives of the franchise include maximizing attendance or at least meeting minimum attendance levels and maximizing or increasing revenues. Longer term goals would be increasing the market value of the team, and creating a strategic plan towards investing in a permanent home for the team with an arena. In order to accomplish this management must improve the fan experience and the quality of services provided prior, during and after games. Moderate pricing is dictated by the demographics of the surrounding community, and residents and management would not use this unless the data justified the pricing model. Generally speaking, some key aspects of successful pricing strategies are segmenting customers and managing their expectations. For sporting events, segmentation can be found in the price difference for seats. The better the view, the more you can expect to pay (Hunt & O'Neill, 2013, para 3). In building a great fan experience, management must create segmentation in the seat pricing by improving either the services offered for various seating options or creating courtside seating in order to differentiate and justify different higher ticket prices. This can be a challenge depending on the location and layout of the facilities where the games will be played. But this type of segmentation can make the difference in the bottom line and also assists in providing the fan alternative game experiences that may improve fan loyalty. Across the athletics industry, there are evolutionary changes occurring as it relates to fans and amenities. As a new franchise, it would be wise to adopt some of these ideas, even on a smaller scale or the fans will simply watch games on television from the comfort of their homes, or choose alternative forms of entertainment (Henry, 2015, para 11). The aggressive pricing is as follows: - Tickets: $25-$40, drinks: $5, food: $9-$10, parking: $20, and merchandise such as t-shirts (kids/adults): $15/$20. In the aggressive pricing, all analysis would have proven that this strategy would make sense. The market would be able to afford these price points because of higher discretionary income, relatively higher retail spending by residents relative to the cost of living. Tampa and Tucson have a lower cost of living averages than Chapel Hill. Residents of Chapel Hill may be able to afford a higher price point because they have a higher income that allows them to have a higher cost of living while living in an affluent area (Areavibes Inc., 2015). Other factors that could influence the use of an aggressive pricing model will be a demand for the product by the local community due to the level of talent and competitive nature of the league. The success of any franchise has as much to do with the talent that the management/ownership and coaching staff can put on the floor (Association for Psychological Science, 2014). If the team can recruit some well-known athletes to the team, this may influence fans to support the team and pay premium pricing providing that the amenities can justify the costs. This pricing will not necessarily work for a high school gymnasium, or local college facilities. However, it could work for a venue that has very comfortable seating, various seating options, amenities such as premium food and drink, including service at your seat during games. The estimate for conservative pricing model is three hundred (300) fans attending each home game. Management estimated ninety percent (90%) of fans would purchase an affordable ticket at five dollars ($5), and ten percent (10%) of fans would buy an upgraded ticket of ten dollars ($10) in the conservative pricing model. To estimate concessions including food and drinks, it was estimated that fifty percent (50%) of fans would purchase drinks at one dollar ($1), and thirty percent (30%) of fans would buy a food item valued at two dollars ($2), and thirty percent (30%) would purchase a food item valued at three dollars ($3). Parking management concluded would be priced at five dollars ($5), and sixty percent (60%) of attendees would utilize parking. (facilities assume 1 car = 4 fans: 25%) Lastly, management estimated that twenty percent (20%) of fans would purchase merchandise such as t-shirts in the conservative pricing model. The franchise would offer both kids and adult sizes, and it was estimated that average merchandise sales would be approximately eighteen dollars ($18). If t-shirts cost $5/$8, then 20% buy 3 items? (meaning 60%)The estimate for moderate pricing model is eight hundred (800) fans would attend each home game and the same percentages (20%) for all categories of income would be the same. Management estimated ticket prices at fifteen dollars ($15), and an upgraded ticket of twenty dollars ($20). Concessions including food and drinks are priced at two dollars ($2) for drinks, and food items valued at five dollars ($5) and six dollars ($6). Parking will be priced at ten dollars ($10). Finally, merchandise for sale such as t-shirts would expect an individual average sale of approximately twenty-eight dollars ($28). For aggressive pricing model, it is estimated that eight hundred (2000) fans would attend each home game. The percentage of fans purchasing the different ticket pricing options would increase to eighty percent (80%) for the regular ticket and twenty percent (20%) for an upgraded ticket. All other percentages in the income categories remained the same. Ticket prices would be at twenty-five dollars ($25), and an upgraded ticket of forty dollars ($40). Concessions including food and drinks are priced at five dollars ($5) for drinks, and food items valued at nine dollars ($9) and ten dollars ($10). Parking will be priced at twenty dollars ($20). Additionally, merchandise would be for sale including as t-shirts and expect an individual average sale of approximately fifty dollars ($50). Expenses were calculated based on data gained in research which showed a typical game the Explosion pay $400 for a game site, $20 an hour for police, $103 a month for insurance and $400 a game for referees (Pilon, 2013, para 31). Considering that the team will also need to utilize the facility for practices, the estimate takes into consideration 1-2 practices a week so instead of a per game rental fee, management considered a weekly fee extrapolated over a 14-16 week season. Security was calculated at two (2) police officers per game for the conservative pricing model, four (4) officers per game in the moderate pricing model, and eight (8) officers per game in the aggressive type. The increase in personnel is due to the increase in the size of the facility and potential fans attending. Travel expenses were calculated taking into consideration van rental, gas, and per diem for the individual athletes and any coaching staff traveling with the team. In the conservative pricing model, it is estimated that carrying a roster of ten (10) players, and for both moderate and aggressive it is estimated that a roster size of twelve (12) players would be carried. Also worth noting overnight stays were not necessary as all games were within a five hour commute of the home location. The insurance was calculated based on a four (4) month season and one hundred and fifteen ($115) dollars a month. Officials were estimated at four hundred ($400) per game as mentioned earlier so the team would be responsible for officials for all fourteen (14) home games. Players salaries were calculated at one hundred and twenty dollars ($120) per game for a roster of 10 players in the conservative pricing model over twenty-eight (28) games. Players salaries were calculated at one hundred and forty dollars ($140) per game for a roster of 12 players in the moderate pricing model over twenty-eight (28) games. Players salaries were calculated at two hundred dollars ($200) per game for a roster of 12 players in the aggressive pricing model over twenty-eight (28) games. Operation estimates took into consideration the size and scope of the staff to run the organization based on the size of the facility, expectation of attendance, fan experience, marketing and promotions, ticket sales, concessions etc. The larger the facility and the more services that are offered to make the fan experience a positive one would require additional human resources. Additionally, with the aggressive pricing model it is assumed that the franchise is moving towards obtaining a new building so the staff needed to run an efficient back office will require additional monetary resources and investment. The inventory category of the teams expenses includes t-shirts, concession items such as food, and drink, and office supplies. With the increase in size and scope of the operation, the more aggressive the pricing model these numbers were adjusted higher. All pricing models assumed an average of fourteen home games per season and each year after the first year prices would increase. All pricing models are subject to an increase each year. Inflation historically runs at approximately 2-3% per year. Therefore, the plan is on increasing pricing by at least 2% for the conservative pricing model and 3% for the moderate pricing model each year going forward (EconomyWatch.com, 2014). For the aggressive pricing model management plans on increasing by 5% each year that would surpass inflationary pressure and also provide 1-2% increase in revenue. Justification of Investing Public MoneyEvery year decisions are made on how to spend the publics money and there has to be some justification for the publics money as it comes from the publics pockets. Therefore, when looking at using the publics money to support a new sports facility, the facility must benefit the majority of individuals money being used (Brown, Rascher, Nagel, & McEvoy, 2010).Also known as the benefits principle, for example, a ticket tax or rental tax for the new facility would be an appropriate tax to implement for a new sports facility. However, it may not cover the entire cost of the publics part of the facility. Therefore, additional sources may have to be utilized. For example, general obligation bonds. The citys economy will benefit from the new source of revenue coming from the facility itself, from the new tax, new jobs, and from the economic impact ie. surrounding hotels and restaurants. Ultimately, why should the public support a new facility? First, a new facility will build community and a sense of pride in supporting another home team. When looking at an ABA team the ticket prices will not be as expensive as an NCAA or NBA game, therefore, residents from all economic backgrounds would be able to attend an entertaining evening out for all (Pilon, 2013). Therefore, making it a real community team. Secondly, it is currently an exciting time to be a part of the ABA, with the goal of having a streamline league, that is professional and comparable to the NBA playing in the NBA. The ABA is also exciting because the players are still chasing the dream of making it big. Lastly, having a new facility will positively use the publics money in a way that benefits the public while improving the economy. So many times tax dollars are used not properly and do not benefit everyone. Although, there will be some negative comments helping to build a facility will be the best option (Crompton, 1996). Additionally, not only will a new facility will be a great resource for the ABA but for other teams and groups who will be able to use the facility and benefit physically and socially from it. Economic Impact An economic impact is the net economic change in a host community resulting from spending attributed to an event or facility. An economic impact analysis is a type of cost-benefit analysis that is based on the theory that a dollar flowing into a local economy from outside is a benefit to the local city (Brown, Rascher, Nagel, & McEvoy, 2010). The most important principle in evaluating economic impact is to measure new economic benefits that accrue to the region that would not occur, or have occurred, without the project or event (Brown et al., 2010). Economic impact analyzes are most heavily conducted for sports teams, events, and facilities. Having an ABA franchise will impact economically the three cities Chapel Hill, Tampa Bay, and Tucson. All three cities will have positive direct economic impacts from fans of the team in their home cities, and fans from cities close by as well. The spending provided will mostly come from residents, and the franchise will grow with attendance in five years. The fans will not only be family and friends and residents, but tourists from other cities around the country as well. With a new stadium planned for the three cities in five years, the spending and costs of attendance will rise. All three cities will be impacted significantly by a new ABA franchise. ABA games will be a place for families and friends to enjoy quality basketball while purchasing excellent food and drinks and merchandise. If a new facility is built after five years, all of the cities will benefit with large crowds because they all love the game of basketball and will go anywhere to watch it. Geographic location is a major factor when considering building a sports stadium, and management chose three cities that do not have professional basketball teams and love the sport. Also, in five years the facility will host not only ABA basketball games, but also other forms of entertainment such as shows and concerts. With a new local franchise and new facility in five years, all three cities will benefit the hotels and restaurants. More fans will want to enjoy before and after games at the local restaurant as well as stay the night over at a nearby hotel. Similarly, this occurred at the Staples Center in Los Angeles being built in 1999. The local economy rose, and the restaurant and hotel business benefited greatly with increased revenue each year (WSOCTV, 2015). New facilities in Chapel Hill, Tampa Bay, and Tucson will also create new jobs after five years. New homes will also be constructed in the cities because it will be a more attractable destination for people. Finally, a new stadium with increased expenses beyond five years will benefit the franchise significantly. The teams will be able to afford to pay their players and coaches more and be able to travel and stay at more luxurious hotels. In regards to the conservative pricing for expenses of an ABA franchise, the total income will be $59,220 in year one. With a three percent increase of tickets, drinks, food, parking, and merchandise by year five, the income generated by the conservative pricing will be $64,102. This amount of income will allow the three ABA franchises positively to impact the community by hosting charity events and auctions for fans. With increased prices for the moderate pricing model for expenses, the income will be $354,680 in year one. By year, five with a three percent increase each year, out total income will come out to $399,195. The moderate pricing will undoubtedly allow management to afford more things such as travel and hotel expenses in comparison to the conservative pricing model. The aggressive pricing model will be a five percent increase for tickets, drinks, food, parking, and merchandise for five years. In year one, the total income will be $1,629,600 and in year five the total will be $1,980,789. By aggressively pricing certain expenses, the franchise will have more than enough revenue to lease a nice basketball facility and create jobs for residents in the three communities. The total direct spending for the conservative pricing model in year five is $81,507.14. For the moderate pricing, the total direct spending is $166,468.38. The total direct spending for the aggressive pricing model is $689,465.53 (Brown, Rascher, Nagel, & McEvoy, 2010). Throughout, these examples the multipliers used were from exhibit 12.6 from Financial Management in the Sports Industry.(what numbers did you use?) When the franchises location is determined, then a specific multiplier can be purchased from the U.S. Bureau of Economic Analysis to maximize the accuracy of the economic impact (Brown, Rascher, Nagel, & McEvoy, 2010). The total economic impact of conservative pricing in year five is $145,405.16. The total economic impact of the moderate pricing model is $290,468. The total economic impact of the aggressive pricing model in year five is $1,222,155. The indirect economic impact of the conservative pricing model in year five is $63,898.02. The indirect economic impact of moderate pricing is $123.999.62. Lastly, the indirect economic impact of aggressive pricing in five years is $532,689.47.Benefits beyond Economic impactAs previously discussed, a ABA franchise would have a great impact on any of the three chosen locations. As the prospected ABA organization grows, the chosen city will experience an increase in spending, increase in visitors, increase lodging revenue, increase revenue and an increase in jobs. Based on research, organization leaders believe the ABA team would create additional spending inside the city (location).This portion of the proposal focuses on the additional benefits beyond economic impact. Along with the benefits that the ABA team will bring to the chosen city (location), it will also bring additional benefits such as tax benefits. Tax benefits are composed of sale and use, alcoholic beverage, hotel occupancy, and indirect taxation. Tax benefits is a component of indirect spending. Organization leaders have calculated an estimate of tax benefits that the chosen city would receive. Its important to know that tax vary for each location. Organization leaders have used a standard tax rate for retail, state, average tax rate, and merchandise (sale and use). For a closer analysis, this information can be obtained from the excel document in the appendix. Organization leaders have calculated the conservative five-year fiscal impact to be $3333.85, moderate five-year fiscal impact $13,633.79, aggressive five-year fiscal impact $68,976. 06. Therefore, the estimated tax generated by the ABA franchise can offer additional benefits beyond the economic impact. Additionally, each fiscal impact varies depending on the market response. Therefore, there is an unlimited amount of revenue the chosen city could receive. The more the market grows and responds to the proposed ABA franchise, the more revenue the chosen city will receive. If the additional jobs, indirect spending, and visitors is not enough to prove that the proposed ABA franchise will have a positive impact on the chosen city, the tax generated from our franchise is one that will provide additional benefits. Therefore, group three asks to join the previously discussed ABA franchise by helping both the franchise and city grow together as a unified community. The above-proposed tax generated by the ABA franchise is only comprised of game events. A sport facility can provide economic impact both during the constructions phase and during the operational phase, when it hosts hundreds of events (Brown, Rascher, Nagel, & McEvoy, 2010, p. 316). This is one of the major reasons why organization leaders want to obtain a facility. Organization leaders believe doing this will allow the organization to lease out the facility for different entertainment events. So not only will the chosen city receive a percentage of the tax generated by the facility, but the chosen city would receive tax generated from entertainment events housed at the facility. Therefore, there is an unlimited ability for the chosen city to gain additional tax revenue.

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