Oklahoma State University

School of Hotel and Restaurant Administration

Retrieving Money from the Table – Gentlemen’s Clubs Operational Maximization as Adopted from Markowitz ‘s Portfolio Economic Theory

David J. PasterABSTRACT

INTRODUCTION

METHODOLOGY

LITERATURE REVIEW

• Modern portfolio theory (MPT), as introduced by Markowitz (Markowitz, 1952; Michaud, 1989) is an economic based theory of finance which attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets.

• For the purposes of this examination, the general constructs of the theory are adopted; however, assets are replaced by the inclusion of active revenue streams in the form of guest offering / amenitiess at gentlemen’s clubs.

• An emulated business operations structure derived from the another libertarian hospitality field, the casino industry, reflects product diversification colloquially known as the “Mirage Effect” (Ehlers, 1997) of establishing a “superstore” / “big box” casino resort experience comprised of ancillary and auxiliary revenue streams.

• As with the majority of finance focused hospitality research, secondary data sources were primarily utilized for purposes of analysis. Since this endeavor is more conceptual than traditionally experimentally oriented, information collection was somewhat organic and not necessarily linear / sequential

• SEC filed 10-Ks were chosen to represent publicly traded casinos and gentlemen’s clubs while trade publications (e.g., Exotic Dancer), trade organizations collateral and conference attendance (e.g., Gentlemen’s Clubs Owners Association) coupled with limited primary correspondence / interviews were also utilized to ascertain the varying independent operators scenarios. The methodology attempted to re-enforce a delineation between corporate and independent units.

• Recognizing and leveraging opportunities “to increase profits by optimizing the total product portfolio” (Hoang, 2007), is a means to assist gentlemen’s club operations to position themselves “on the frontier”. “On the frontier” indicates that a unit is delivering maximum output given the available resources or, conversely, is maximizing its resources such that outcomes are proportional. (Reynolds, 2003).

• The current research demonstrates that the Gentlemen’s Club business model is significantly different in its composition from more general hospitality outlets (e.g. restaurants, hotels, cruises), but established hospitality business practices (and formulations/metrics) may be adjusted to address the peculiarities.

• The adult nightclub entertainment business is highly competitive with respect to price, location and quality of the facility, entertainment, service, and food and beverages. Due to the highly fragmented nature of the adult nightclub industry, exact industry details are (often) sparse (Ricks, 2011).

DISCUSSION

RESULTS

• The preliminary observable situation is that the highly fractionalized gentlemen’s club business is generally “not using resources poorly or operating at the wrong output level, but rather failing to use the best input mix to produce revenue” (Reynolds, 2003).

• The ~85% of gentlemen’s clubs that are “independents”, “non-affiliated”, “mom and pop shops” and subsequently do not have the managerial support nor economies of scale and scope that the ~15% of corporate (publicly traded)/chains have, are proverbially, “leaving money on the table”.

• Integration of Markowitz-style portfolio diversification in terms of amenity offerings to guests would seem to have a positive affect on both corporate and independent’s operations.

• Unlike the highly organized corporate entities thatcontrol the minority (in terms of number of facilities but near equal with EBIDTA and other KPIs within a classic Pareto paradigm), independent (e.g., non-corporate owned, operated or affiliated) gentlemen’s clubs do not share the comparative advantage of centralized corporate bench strength with their engagement of more efficient and effective respective business practices nor on property (at least) partial adoption of Markowitz-style business portfolio diversification. • Still, in concentrated markets, independents must

attempt be as competitive for patron’s discretionary spend or “share of wallet”.