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Chapter 9: Cost Volume Profit (CVP) Analysis and Strategy: The Rialto Square Theatre Background and History The Rialto Square Theatre (the Rialto) is a 2,000-seat theatre located in Joliet, Illinois. Initially owned by the six Rubens brothers, it was completed in 1926 and built to host vaudeville acts and silent movies. Entertainment tastes changed from live vaudeville acts to silent movies and then to “talkies” and the Rialto accommodated the change in customer choices. As the population shifted away from downtown retailers to large-scale shopping malls with multi-screen theatres, the Rialto struggled financially and fell into serious disrepair. One alternative considered for the building was demolition. Thankfully, a civic-minded individual, Miss Dorothy Mavrich, initiated the “Save the Rialto Campaign”. Assisted by local businesspeople, she was able to seek funding from city, state and federal individuals and have the theatre and its building become registered in the U.S. National Register of Historic Places. Through the vision of these selfless volunteers, the stage of the Rialto once again hosts venue-appropriate live entertainment, offers vintage film screenings, and rents the rotunda and esplanade for weddings and receptions. The European architecture of the theatre is reminiscent of the Hall of Mirrors in the Palace of Versailles.1 Extensive bas-relief sculptures adorn the walls, ceiling and even on the outdoor grand niche, rising over 100 feet above the marquee. The artist, Eugene Romeo, has worked on various notable buildings in and around Chicago: The Board of Trade, the Chicago Daily News Building, Soldier Field, the Merchandise Mart, Blackstone Theatre, Wrigley Building and the Joliet Township High School Auditorium.2 The Will County Metropolitan Exposition and Auditorium Authority (WCMEAA) owns and operates the entire facility. The WCMEAA is considering partnering with Blue Sky Entertainment Inc. (BSE). BSE is the largest diversified promoter, producer and concert operator for live entertainment events in the United States. The WCMEAA is considering offering an average of 40 concerts with 12 year-round staff planning and managing each season. BRINGING CONCERTS TO REALITY A concert becomes reality in many steps. First, a group or performer with an interest in performing at the Rialto will discuss with BSE the possibility of performing at the theatre and look at the open dates. When agreement is reached, BSE and the booking agent for the performer sign a contract. Each performing act has its own list of demands, which are negotiated. 1 The Rialto Square Theatre, https://rialtosquare.com/about/history/ 2 The Rialto Square Theatre, https://rialtosquare.com/about/history/ The job of the staff during an event is to make sure every patron has a pleasant experience and that the mission of the company is clearly seen by everyone that “a concert….. it’s better live.” After a show, It’s a Wrap, Inc. of Joliet handles the cleanup. CONTRACT NEGOTIATIONS The executive director and team are currently negotiating a contract for Daughtry: The Dearly Beloved Tour with Black Stone Cherry and Travis Bracht. The band’s recognition comes from the band’s namesake, Chris Daughtry, who finished in fourth place on American Idol in 2006. KEY BUSINESS ISSUES Marketing has an important role in the success of each performance event, but marketing expenditures are carefully watched. For every show, the marketing budget is limited to $5,000. For many shows, it is difficult to stay within the budget since the Rialto hopes to draw patrons from the southwest suburbs/collar counties as well as Chicago and northwest Indiana. Most of the marketing budget is spent on advertising with radio, TV, internet and print media in the designated regions. Prior to developing advertising plans, the marketing staff analyzes ticket sales geographically. It is important to know the demographics of the regions and compare them with the profile for each performer. The more the Rialto can know about the fans, the more they know about where to spend the $5,000. Other areas where costs have increased dramatically include the cost of the performing artist. The average cost per performance is approximately $80,000. Daughtry is negotiating for a fixed fee of $150,000. Some artists are paid on a fixed-fee basis and others are paid on a per capita basis. Generally, the most popular artists seek a per-capita contract because they are confident of a high level of attendance. In contrast, the artist paid on fixed basis is guaranteed whether 100 or 2,000 people attend (the capacity of the Rialto is approximately 2,000 seats). The fixed fee shows often have a low projected attendance. These artists do not have the “draw” of the other artists. In these types of shows, the role of marketing is extremely important, since the Rialto must work hard to attract attendance for the show. As noted above, lower ticket sales also mean less revenue generated from parking, concessions and merchandise, so effective marketing is critical. One method the Rialto uses in addition to advertising is to distribute “comp” tickets to media outlets such as radio stations to build interest that will hopefully be realized in the future with paying ticket sales, and because comp customers will still spend on parking, concessions and merchandise. The cost of the performing artists grows annually, so it is very important for the Rialto to reduce non-artist costs. There are several operating costs at the theatre, including expenses for parking, security, concessions and merchandise. Also, there are a number of other methods used to make the concerts more profitable. For example, the parking service passes out flyers for upcoming events. Also, the theatre trades “comp” tickets for online spots in the radio industry and gives local business tickets in exchange for advertising on their premises. FUNDING AND FLASH REPORT The sources of funding for the theatre are ticket revenues, concession (food) revenues, merchandising revenues, parking revenues, sponsorship revenues and other. Exhibit A is a flash report for the Daughtry proposal. A flash report is a projection of what a concert or event will cost and what revenues will be received. The guaranteed talent cost ($150,000) is the amount Daughtry is guaranteed for the show. Attendance is the number of paying ticket holders, while the “drop count” is total attendance both for paid tickets and comp tickets. For every 19 paying attendees, there is 1 comp ticket awarded. So, in a bundle of 20 tickets, 19 are paying and 1 comp ticket is awarded for the performance only. The Flash Report projects total revenues, including parking, concessions and merchandise. The parking, concession and merchandise operations are outsourced to other service providers, so the direct costs for parking, merchandise and concessions are determined based on contracts with the service providers which include both a percent (20%) of applicable (parking, merchandise or concession) revenues and a fixed fee. Operating expenses include an allocation of the total of fixed production and operations costs for the fiscal year, the advertising expenses for the Daughtry event, and other variable expenses. REQUIRED 1) What is the Rialto’s competitive strategy? 2) For the Daughtry event, how many tickets must the Rialto sell to break even? (Hint: you need to separate the variable and fixed costs of concessions, parking and merchandise.) 3) Daughtry has tendered a second contract for consideration which requests the following conditions: a. DAUGHTRY will receive a fixed contract rate of $70,000 plus 25% of total TICKET revenues b. The Rialto Square Theatre will provide additional musicians to enhance the performance for several of the musical numbers. These musicians are hired from the Chicago Federation of Musicians, the union for professional musicians. The cost for the string and brass instruments needed is $7,300. c. What is the break-even analysis for this version of the contract negotiations? 4) What is the number of ticket sales where the fixed cost and per capita/fixed contracts are equal,i.e., the point of indifference? (Hint: The initial solution is the drop count. Then, allocate the drop count. It is a good idea to do a proof.) 5) Which Daughtry contract should the Rialto consider, the fixed fee or per capita, and why? Q6 - Q8 responses should be in the section: ** This is a retitled step 5. ** Provide a reflection of the usefulness of Cost-Volume-Profit Analysis for future events 6) From the Rialto’s point of view, for which type of performer (fixed fee or per capita) is breakeven analysis particularly important, and why? 7) From the performer’s point of view, for which type of performer (fixed fee or per capita) is breakeven analysis particularly important, and why? 8) Will performers, such as the Eagles or Tim McGraw, ever perform at the Rialto? For purposes of solving this problem, segregate the tickets only between paying and comp, not by the type of ticket, i.e. A seat, B seats, etc. If you feel adventurous, you can solve this by ticket type, but it is not required. Exhibit A - Flash Report for Daughtry: The Dearly Beloved Tour ARTIST NAME Daughtry ACTIVITY/EVENT NUMBER 3185385383 EVENT MONTH 3 EVENT DATE 3/8/2022 DROP COUNT 2000 Average Projected Sales (Number of Seats) # of Seats Ticket Price Revenue net of comps Main Floor Orchestra AAA 40 $428.50 17,140.00$ Main Floor Orchestra BBB 55 378.50 20,817.50 Rows A-F 165 325.00