11/06/2015

The Economic Impact of Hosting an Event

Earlier this week I had the opportunity of uniting with some of SUU's ground school business students to attend the SEMA Show in Las Vegas. It was a lot of fun! Thank you SUU for the opportunity! SEMA is the world's premier automotive specialty products trade show, hosted at the Las Vegas Convention Center since 1977. This event draws in more than 130,000 attendees and over 60,000 buyers, from over 100 countries. If you like anything about the automotive aftermarket industry, this is a convention you want to be at. Not only does it offer over 500,000 square feet of automotive eye candy, it also provides a significant economic opportunity for Las Vegas and the surrounding areas.

While I was there, trying to keep the drool from falling out of my mouth, I wondered, what economic impact do events like SEMA have on the community? It turns out SEMA is anticipated to generate over $827 million in non-gaming revenue to the Las Vegas area by the end of its lease agreement, which ends in 2017. The local governments of Southern Nevada are very appreciative to have organizations like SEMA, hold their events in the area because the revenue helps provide jobs and build new roads, parks, and schools.

Large trade shows are not committed indefinitely to one location. What could cause SEMA to exit Las Vegas and move to a different geographical site? What would be the economic impact to Las Vegas if SEMA did leave? Would a slightly smaller competitor to SEMA, like AAPEX (who also holds their trade show in Las Vegas around the same time) have an increased demand or a decreased demand as a result? Would this create potential for new entrants as discussed in Chapter Seven of our text, Managerial Economics & Business Strategy, Baye, 8e.

6 comments:

Dr. Tufte said...

Hank Hill: 100/100

Would it be rude if I didn't comment on this one at all? Probably so.

The issue for me is that estimates of economic impact, like the one for SEMA, are notoriously ... awful. These are often put together by people with a vested interest in producing large impacts. And technically, the problem tends to be double counting: how do we avoid counting spending that would have taken place without SEMA? These sorts of reports are very widespread. There are methods that academics can use to do the accounting better, but academics aren't that interested in doing repetitive estimates, and business economists often don't have the skills or interest to do them better. A similar area that has been explored extensively is whether stadiums are a good investment: almost no research indicates they are, and yet politicians and sports team owners keep pushing them using the same old techniques.

As to free entry and exit for conventions, there's a problem there that occurs in a lot of fields. Think about it: two (or more) entities incur costs competing for a single prize (like SEMA). When they get the prize, they compare the marginal benefits only to their marginal costs; the marginal costs of the other locations are ignored. This happens quite widely: pharmaceutical companies developing similar drugs but only one can be patented, the "race to the bottom" as localities offer infrastructure improvements to attract manufacturers, or even people investing in their own looks to attract mates. Again, assessing an individual aspect requires assessing all aspects, and mostly ... interested parties just don't do the hard estimates they probably should.

Captain Jack said...

I have quite a bit of interest in this subject as I used to work for a casino in Las Vegas and saw the impact of large conventions on our business. Some of the best revenue weeks we saw all year were during conventions such as SEMA. Although I have seen firsthand that these events benefit the city holding the event I agree with Dr. Tufte that the estimated results are overstated. These results are probably provided by a group with financial incentive that comes from boosting the value of the events.
I have often questioned the value of the Olympic Games for a host city. Events Like SEMA are held in cities that have existing venues that are used multiple times, while the Olympics require a huge expense that might primarily be for an event lasting only a couple weeks. We should recognize that these events may not be financially sound but have other benefits such as bringing a sense of community or culture to a city.

Dave Tufte said...

Captain Jack: 50/50

Ooooh ... maybe this is why ManEc is required in every MBA program. I have no doubt that those shows were the "best revenue weeks". But that isn't what businesses are supposed to worry about. Were they best profit weeks too? I'd be pretty sure that they were "worst variable costs weeks" as well.

It's interesting that you brought up the Olympics. Estimates show that those are some of the worst public investments that are even possible.

I get that these public events can have benefits that are non-monetary (costs too). The whole point of using economic profits rather than accounting profits is that economists at least acknowledge that those non-monetary benefits and costs are out there.

So here's what I worry about. We get pretty good measures of monetary benefits and costs from accountants. Then managers (and supporters of events) say that there are all these net non-monetary benefits that should be counted, and economists support them on that. Fair enough. Can we then get people to commit to guesstimates of how big these are? Or alternatively, can we back out of what the present value of the event is some ballpark estimates of what the cash flows have to be? I've done this for some projects, and what I've found is that they have to assume ridiculously large non=monetary benefits, or exceptionally low discount rates, to justify the numbers. I hate to admit it, but I'm convinced that most of these projects are boondoggles put together by politicians who need to take a class like this one.

Jake Eliason said...
This comment has been removed by the author.
Jake Eliason said...

The estimates for big events like SEMA or the Olympics must be incredibly hard to quantify. Huge events like that attract millions of people in person and in the media. People attending the events spend money from the gas station to the casino and everywhere in between.

One event I enjoy attending is an off-road motorcycle race in Idaho City, Idaho. Idaho City has a population under 500 people, so having an event like this makes a big impact. The race brings between 150 and 300 riders, with a support staff for each rider. The population of Idaho City more than doubles in two days. Business get a huge benefit out of the event.

Another off-road race in Henderson, Nevada is very particular about the places you spend your money while attending. The race officials even check to see which attendants use the hotels for lodging. The website says “PLEASE STAY IN THE HENDERSON HOTELS – PLEASE!!! This is very important to our sponsors and… this may affect our sponsorship and we may not get the race again” (BEST IN THE DESERT). It seems that the economic benefit to small towns is easier to put a number on than these giant conventions in major cities. For this industry, economic benefits of the event in smaller areas may be part of what keeps it alive.

Dave Tufte said...

Jake Eliason: 47/50 ("businesses get a huge benefit" or "business gets a huge benefit" but not "business get a huge benefit").

I think this actually supports my position. I think if these sort of events were a clear positive, then this sort of begging wouldn't take place. I think it does because the events are more marginal than we're led to believe.

Having said that, I do like your small town examples. Most of the reason that "events" are not economic positives is that the facilities that need to be built stand vacant too much. But, in a small town, I suspect it's a lot more likely to have overbuilt facilities to handle peak traffic. Then, doing anything that can cover your variable costs and leave something left over to help cover fixed costs may be beneficial.

But then you need to ask yourself how the overbuilding happened in the first place? Cedar City is a good example of this. It's great that we have the Utah Shakespearean Festival here, but it's not so great that we have the hotel capacity to support it that is only used for 4 months out of the year.

FWIW: The threat to conference organizers is a real one. I used to attend the Southern Economics Association meetings quite a bit. In 1991 they were in Nashville, and the conference and facilities were great. But the SEA had guaranteed a certain number of rooms, and Nashville wasn't the draw that some expected it to be, and the SEA had to eat the cost of the vacancies. They still haven't been back to Nashville.

FYI: The Olympics were brought up earlier in this thread. Did you see the photos of the flooding in Sochi this past summer? It turns out that the most expensive Olympics in history didn't budget enough for flood control after covering up a lot of bare earth with concrete and asphalt.