Today's general service contractors are facing the worst economic pressures in their history. Reports of staff cuts, branch closings and rampant rumors of insolvency reveal the seriousness of the situation. "A number of contractors are in severe financial straits, not paying their bills, late on union dues," says Ken McAvoy, Executive Vice President of Gelco Convention Services in Orlando.
Contractors who have typically enjoyed profit margins averaging from eight to 10 percent, are now struggling to break even. "There isn't one contractor I know of that hasn't been the subject of some rumor concerning their inability to pay their bills," says Steve Schulz, President of Strategic Alliance Services, a project management firm in Peachtree City, GA. For the first time, some contractors are questioning not only their company's viability, but the future of their entire profession as well. "Contractors are on the edge, and we're going to see some companies fail if there isn't change," predicts Craig Smith, Vice President of Andrews-Bartlett Exposition Services, and current President of the Exposition Service Contractors Association.
Seasoned contractors point to a series of interrelated industry conditions that are shrinking both their revenue bases and profit margins at an alarming rate. As with the rest of the business world, a major factor is the recession. "Our industry is facing what the corporate world has faced for the past two years," says Jack McEntee, Chief Executive Officer of the I & D Group, an independent installation and dismantling firm.
Although show numbers, didn't decline seriously in 1991, most industry observers expect sharp drops in 1992 -- and into at least the first half of 1993. Events scheduled for later this year are already reporting the absence of major exhibitors and booth space reductions among mid-size participants. While this downturn impacts all segments of the trade show industry, contractors say they are hit with its economic repercussions from all sides.
Identifying the causes
Fewer exhibitors means lower overall exhibitor service revenues for show contractors. Additionally, drayage revenues, the single largest source of income for contractors, are falling off as exhibitors attempt to trim show participation costs. "Exhibitors are building lighter booths and sending less freight," says Schulz.
General contractors are also losing more and more business to the independent I & D houses. Five years ago, 20 to 40 percent of a show's installation and dismantling revenues went to the independents. Today, the I & D firms pick up 30 to 60 percent of those revenues.
While exhibitor revenues decline, show managers are forced to make cuts which further injure the service contractor's bottom line. The demand for "zero show management costs," a virtual condition for awarding some show contracts, is becoming an economic albatross. "A registration counter that cost us $50 to give away 15 years ago, now costs us hundreds in material and labor," explains Smith. "The philosophy has always been to try to break even with show management and make it up with exhibitor revenues. But we can't break even with show management anymore, and you can only raise exhibitor rates so much before the customer says it's not worth it."
Some show managers cut further into those precious exhibitor revenues by demanding a percentage as a reward for bringing the business to the contractor. To make up the deficit, contractors will raise rates -- usually on drayage fees -- which in turn leads exhibitors to cut back. And the cycle continues. "We're supposed to have a symbiotic relationship, not a parasitic one," says Smith. "The parasite will eventually kill the host, and these kinds of management demands are killing us."
Facilities faced with their own economic woes are also contributing to the contractors' financial straits.
Facility managers nationwide are looking for new revenue sources to meet municipal demands that they become self-supporting. "Political bodies are dipping into the budgets of these facilities," explains Don Jewell, President of Facility Consultants Inc., and Chairman of the International Convention Center Conference, an annual event produced in cooperation with the International Association of Auditorium Managers. "Anaheim had to give up something like 20 percent of its operating budget this year. Yet the city says, 'We still expect you to break even.'"
In response, facilities are taking many services in-house, or are negotiating exclusive contracts to shore up budget gaps. The IAAM recently published a position statement supporting the right of facilities to ease their economic burden through such changes. "Los Angeles took in electrical service and was able to add something like a million bucks in increased revenue," says Jewell.
Necessary as it may be for facility survival, such changes can spell economic disaster for service contractors. When cleaning, electrical and other exhibitor service income is taken away, contractors say they can't make a show pay. "It erodes the profit centers that have been the basis of a service contractor's business," says Larry Arnaudet, Vice President of Sales for Freeman Decorating Co. "Certain facilities are even trying to go with an exclusive labor situation -- where the contractor must use their labor, which is marked up and billed back," says McAvoy. Thus taking away the final revenue bastion of the service contractor.
As prevalent as the problem is, facility experts don't see exclusive services popping up at every convention center. This is primarily because opposition to exclusives is growing among show managers. A recent industry survey found that nearly half of polled show managers would avoid a facility with an exclusive general contractor. "The bottom line is that only very successful buildings -- those that can stand tough because of high market demand, like Chicago or Atlanta -- can tell the client 'it's our way or no way,"' says Jewell. "Secondary markets will not be able to do that because there's an oversupply of buildings. If having an exclusive becomes a negative marketing factor in booking shows, it would not be in their best interests to establish such rules." Yet service contractors maintain that many large shows have special space needs that can be met by only one or two facilities. In those instances, the facility is in the driver's seat -- a situation that may leave contractors out in the cold.
Facility changes may have an even greater industry-wide impact as the possibility of facility-owned trade shows moves closer to reality. "I think facilities will start to produce their own shows as well as take services in-house," says Schulz. In fact, a minor controversy arose last year when McCormick Place announced that it would begin producing expositions in cooperation with Dusseldorf Trade Shows -- an independent show management subsidiary of the Dusseldorf Exhibition Center. (EXP0, January/February 1991.)
The final component of the service contractors' economic plight is plain old-fashioned competition. With revenues slipping at an alarming rate, shows are being bid at drastically reduced prices. One contractor illustrates the point: "In 1990, the show management bill for a large, technical show was $350,000. In 1991, I did the show for $150,000 -- with no change in show management services. The winning bid on that show for 1992 was $75,000."
With price wars like this, it's not surprising that profit margins have become a thing of the past. "There is a parity in terms of services, so price becomes the central issue for awarding bids," says Schulz. "Competing companies may use some creative pricing and make a profit on an individual show, but it isn't enough to cover the down times between shows."
Fighting back
As service contractors do battle on the economic front, new ammunition is added to the arsenal. Cost-cutting programs have been undertaken by nearly every major contractor. "In this industry, to increase profits you must cut labor costs," says McAvoy. Gelco has done this primarily through consolidation of freight handling and computerized equipment that lowers man hours. At Andrews-Bartlett, "SWAT" teams have been organized which are loaned to temporarily overworked offices, thereby eliminating the need to hire permanent employees. "This way we share the workload and maximize our utilization of resources," says Smith.
Other efficiency programs translate into cost savings by cutting overhead costs. Freeman has begun a carpet depot program, which warehouses all its carpet in two locations. Rather than allowing all 16 branches to maintain their own carpet inventory, the corporate office makes all purchases. According to Arnaudet, "We're not maintaining idle inventory. By cutting our purchases, we realized a cost savings of over a million dollars in the first year."
Contractors looking to streamline operations are also taking a closer look at less profitable locations. "We went through a serious cost-cutting program about a year ago and adjusted our permanent staff based on the volume of business we had coming for the next fiscal year," says Arnaudet. Such belt-tightening has resulted in Freeman closing its Miami office, and United Exposition shutting its Houston office.
Industry impact
Many show managers worry that service may be an additional casualty of these cost-cutting measures -- and contractors aren't necessarily disagreeing. Staff reductions cause longer onsite service lines, and orders may not be processed in time for show openings. Show management services could suffer a similar fate. "I've seen opening mornings where the aisle carpet wasn't down, the registration area wasn't set up correctly, and the show directory wasn't delivered yet -- all as a result of trying to keep labor costs down," says Brian O'Neill, General Manager for United Exposition Service Company's Atlanta office.
Of even greater consequence than service slippage is the long-term impact of a contractor's pricing decisions. As contractors learn that all of their cost-cutting and efficiency measures are not enough to kill the "red ink" monster, they are forced to fall back on their only sure income generating strategy. They'll balance their books on the backs of exhibitors through increased drayage rates. "We actually end up penalizing the exhibitors who ship the most freight. If you penalize your biggest exhibitors, it's going to come back to hurt you," admits McAvoy. At a time when the corporate exhibit world is examining every expenditure for cost efficiency, these price hikes may be the proverbial "straw" that breaks the exhibitors back. "As the cost of a trade show lead starts climbing closer to the cost of a field sales lead, there's no longer justification for show participation," warns Schulz. "Then we're all in trouble."
Solutions
While contractors say exhibitor prices will rise to stave off budget shortfalls, they recognize that such price hikes are not a long-term solution to shrinking revenue bases. Instead, contractors are looking for new revenue sources. Freeman recently invested millions of dollars to purchase its own custom furniture line, the first major contractor to do so. "It's helping to make up for lost profit centers that are being taken in-house by facilities," says Arnaudet.
Modular booth systems and audiovisual equipment are becoming common rental items available from contractors. Exhibitor service "packages" are also being developed. They include everything from drayage to drapes, priced according to exhibitor square footage. "Such package rates give contractors a more solid base of revenue," says Schulz. "It's better than trying to predict that 400,000 pounds of freight will be coming in, and only 300,000 actually comes."
Contractors are looking not only at new profit centers but at new markets. "Our main market is big conventions, but now we're targeting the hotel and private corporate shows as well," explains McAvoy. Service brokering, or project management companies are also emerging as an answer to providing the services of a general contractor without incurring high overhead and investment costs. Schulz's company is one of the first of this new breed of businesses. "Project management is for show managers who want to outsource operational responsibilities. We help select suppliers, review proposals and act as on-site liaisons."
Finally, contractors are cultivating their existing customer base with renewed zeal. Aggressive telemarketing teams are going after exhibitor business that has been slowly slipping away to the independent I & D firms. A major goal is to change the exhibitor perceptions of service contractors. "We're trying to regain the trust and loyalty of exhibitors by emphasizing the same kind of personalized service as the independents," says Arnaudet.
Industry support
These in-house measures are a starting point, but contractors are beginning to see that an industry-wide problem requires an industry-wide solution. Concern over the growing number of exclusive facility contracts prompted several industry leaders to call a "summit meeting" last November to assess the impact of these changes. Nineteen representatives from various industry associations and organizations attended. "The purpose was to gain awareness of the pervasiveness of the problem," says McEntee. "We now recognize where the changes are heading, and see how we must adjust our business practices to play in this new world."
ESCA is also advising contractors to solicit client help in the fight over in-house and exclusive facility contracts. Contractors believe show managers have the economic clout to prevent halls from going exclusive -- if they will exercise it. "Show management should be concerned about exclusive situations because service and price will suffer if they have to use one supplier," says O'Neill.
The strategy has worked successfully in the past, such as when the San Diego Convention Center reversed its decision to take cleaning services in-house after a deluge of show management objections. Several ESCA members also organized a campaign to alert the industry to a brewing labor problem at a Florida facility. "Some of these facilities are managed by private firms with contracts on several buildings. So if they do this in Fort Lauderdale and get away with it, you'd have to be stupid to think they won't do it at Moscone," exclaims O'Neill.
Predictions
For some contractors, however, these strategies and measures will not be enough. "The change is already upon us, and for some it's too late to adjust." says O'Neill. "It's inevitable that we will see some contractor business closings within the next one to two years." Many believe the service contractor industry will be significantly reduced through mergers and franchises. "I think we'll see more reorganizations and acquisitions than bankruptcies," says Schulz. "If they go bankrupt they lose their major asset -- signed contracts for future business."
As these economic pressures continue to rise, some contractors see another inevitable change -- the end of the free lunch. "At United, we're looking more closely at jobs, and we're not going to take those we can't make a profit on," says O'Neill. Smith agrees: "I see a change in the pricing structures for show management business. We may have to walk away from some business.
As long as contractor competition holds out, most contractors feel that the major price changes will affect exhibitors, not show management. "Now that they have seen what they can get, I think show organizers will continue to demand lower management bills. I don't think that's reversible," admits Schulz. He also points out, however, that the long-term effect of this pricing structure will dry up the very competition that gives show management its negotiating power. "Instead of three or more bids on a show, they'll have fewer -- and the rates will reflect that."
As the exposition industry grows from adolescence to adulthood, industry veterans believe that established business relationships will continue to change and evolve. The key to surviving these changes, say service contractors, is awareness, adaptability and action. "We need to be a party to the change," says Smith. "We can't just stand on the sidelines and see what happens
During the past decade, general service contractors have seen large percentages of their lucrative exhibitor business migrate to the independent contractors. Nearly every exhibitor service from installation and dismantling to booth cleaning has been affected. It's not uncommon to see over half a show's exhibitors select an independent for at least one service. This added competition has sparked better prices and value for exhibitors, but has also put added strain on the besieged budgets of both the general contractor and show management.
The extra costs associated with exhibitor designated contractors for installation and dismantling are the principle economic drain. For the show-appointed contractor, these costs typically include post-show clean-up and damage charges assessed to them, although several EDCs may have contributed significantly to those costs. "Our trash removal bill at a recent show was $17,000," says Larry Arnaudet, Vice President of Sales for Freeman Decorating Co. "It's hard to say how much was really our responsibility."
But for show management, those charges represent only a fraction of the costs associated with EDC participation in a show. Of greater impact are administration costs involved in tracking and processing EDC paperwork. There are phone calls, faxes and overnight delivery charges to make sure exhibitors get their EDC paperwork in on time. There are extra printing and mailing costs involved in distributing additional exhibitor manuals and informational mailings. "The last two FOSE shows were a bit of a nightmare, with EDCs sending things in after the deadline," says Robbi Lycett, Director of Expositions for National Trade Productions, Inc. "We had to hire some temporaries just to make sure everything got done."
At the show, extra supervisory staff is often required to monitor EDCs. "We found fire exits blocked, tape was removed from the floor, and storage rules were being ignored by some independents," says Lycett. "I had to put extra floor managers on duty." For shows like FOSE, with a high percentage of exhibitors using independent I & D firms, show management can find itself monitoring as many as thirty or forty individual EDCs.
These cost considerations, as well as growing concern over EDC liability issues, have forced some show managers to rethink independent contractor policies. The first EDC fee system was introduced about four years ago at the National Cable Television Association show. Now the idea is being tested by several show management firms. "After absorbing these costs for a couple of years, we decided to collect an administrative fee to cover at least the extra personnel we required," explains Lycett.
Major show management firms such as Cahners Exposition Group, Bruno Blenheim and National Trade Productions have each developed a different schedule of fees and rules based on their costs for managing the independents. For example, Cahners' original fee structure was based on booth size. Charges to be assessed were to range from a minimum of $100, to a maximum of $1,000 per exhibitor. At NTP, the same contractor could expect to pay a flat $100 per exhibitor, with a cap of $1,500 for any one contractor.
It's precisely this wide disparity in fees that has sparked heated opposition by both independent contractors and their loyal exhibitor clients. Independents feel the fees are nothing more than a profit venture motivated by greed more than need. "I know what administrative costs are," says Jack McEntee, Chief Executive Officer of the I & D Group. "I think they'll make a lot of money off of a few contractors under the guise of 'administering' these things."
Independent contractors are clear about their intentions to pass these EDC fees directly to their exhibitor clients. McEntee says letters are sent to all exhibitors explaining that a surcharge will be added to their bill due to the management-imposed EDC fees. The situation has many exhibitors feeling like an economic scapegoat. "We are subjected to higher costs and yet are left in the dark about where these fee systems, that appear to be exorbitant, are coming from," explains 3M Trade Show Supervisor Romayne Loudenback.
Exhibitors are voicing their objections both verbally, and potentially, with their checkbooks. For his part, Loudenback stops short of saying he would cancel participation in a show with EDC fees, but does warn of future consequences. "Down the road, a backlash could occur when exhibitors gather together and say this is enough."
Fear of this kind of industry-wide backlash is causing some show managers to back down from initial EDC fee systems. A meeting between Cahners and representatives of the Exhibit Designers & Producers Association resulted in a temporary cap on EDC fees at $250 per independent contractor. Cahners has also agreed to let the Exhibit Industry Congress review its EDC contract language and fee system. The EIC is comprised of representatives from all the major industry associations including the National Association of Exposition Managers, the International Exhibitors Association, the Healthcare Convention & Exhibitors Association, the International Association of Auditorium Managers, the Exposition Service Contractors Association and EDPA. Although its resolutions are nonbinding, many industry associations will encourage members to abide by EIC decisions since they are made for the benefit of the entire industry, rather than just one segment.
"We were willing to negotiate the $250 cap to get people to relax about the short term, and get to the business of resolving the long-term issue," says Cahners Mime President of Operations Tony Calanca.
Strong concern voiced by FOSE exhibitors and independent contractors also caused NTP to cancel its plans to implement an EDC fee system at the 1992 show. "Exhibitors were not understanding why we did this," says Lycett. "They were listening to the contractors, and we were starting to look like the enemy. " NTP was also concerned about service problems on-site. "Feedback I was getting indicated that contractors were not going to pay. They were planning stand-offs on the show floor, which would mean that some exhibitors wouldn't get their booths up."
Although the decision to retract the EDC fee meant absorbing costs again this year, NTP did warn independents and exhibitors that it could no longer afford to take the time and money to follow up on EDC paperwork and problems. A letter informed exhibitors that any costs incurred by NTP as a result of an independent's violation of the rules would be billed back to them. Lycett says they will monitor problems at this year's show and wait for the EIC recommendations before taking further actionon an EDC fee schedule.
This "wait and see" attitude seems to be shared by many show managers currently considering this issue. "If the resolution from the EIC is something we just can't live with, we can always go back to our original fee system," says Calanca. "But I don't think that will happen," he adds. Cahners has already invested over $90,000 in lawyer's fees and contracts for its EDC program, so turning back is not an option. Many industry observers are convinced that EDC fees are inevitable. "Once the EIC comes out with something on this, I think you'll see a lot of other organizers go this route," predicts Calanca.
In the meantime, independents and exhibitors seem satisfied to wait for the EIC ruling expected in May. They're hoping for a standardized fee schedule. "What our industry has to discover is what is equitable and who should pay," maintains McEntee. "That issue hasn't been dealt with."
