Friday, May 14, 2010

Sky City Convention Centre Expansion a Money loser



The proposal for Sky City Entertainment Group Ltd [SKC.NZ] to build an extension to its Auckland conference centre while on first look appears positive, if you look closer its validity as a revenue earner, for the centre itself and then providing extra foot traffic to the casino doesn't stack up as a good return for shareholders.

I have been googling around and this has confirmed by suspicions that the majority of convention centres just do not make money and are in fact capital losers.

"The center was promised to bring out-of-towners who stayed in hotels and spent money," said Heywood Sanders of the University of Texas at San Antonio, who studies the performance of convention centers and is a longtime critic of such publicly financed projects. "They routinely overpromise, and they never do what they're supposed to do. The question is how badly they perform. Putting in a hotel is no guarantee that it will improve the center's performance." Washington Post: Heywood Sanders of the University of Texas at San Antonio - Researcher of Convention Centre performance.

Convention centres are generally built and run by local Governments because of the poor economic returns (it seems it is OK for them to lose money because it is only the taxpayer forking out moola) and the premise seems to be that the centre itself will not make money but that it will bring high spending convention delegates into town that would not ordinarily be there and that their largess would then be spent in businesses in the local area.

For Sky City this would hopefully mean more hotel rooms used and more money spent in its bars, restaurants and with fingers crossed its casino but this is not necessarily a given if you look at the example above and your own convention centre in your own local town or city. Sky City has a casino patronage of more than 80% locals so the convention centre crowd is unlikely to increase bums on slot machine seats.

The impact on Sky City shareholders will be felt first at the capital expenditure stage of any proposal going ahead and secondly future running costs of the larger centre. (this also appears to be where the proceeds of the sale of SKC cinema assets are going - $60-70 million worth) The extension of the Federal Street centre is a complex one with the street needing possible under-grounding and the expansion itself being suspended in open air over the street.

The success for Sky City shareholders (and when a say success I mean a decent return on investment) seems to lie in getting enough extra traffic through Sky City complex in order to get the increased revenue to justify the initial expense but as studies have found this does not usually eventuate, so the Sky City Convention Centre expansion would be an exception to the rule if it were a ripper of a money earner.

Management are clearly trying to squeeze more revenue and profit from their biggest money earner and that is admirable but expanding their convention business is not going to do that.

Best to let the willing city fathers (but unwilling and poor ratepayers may I add) spend ratepayer moola on a convention centre just around the corner and target the stragglers from there.

Read Sanders Paper - PDF


Disclosure: I own SKC shares in the Share Investor Portfolio


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