Assignment
Beer Licensing at Eastern Michigan University Football
Midwest College is facing a challenge common to regional colleges and universities in the past twenty years - declining attendance at home football games. Where twenty years ago, average attendance at a home football game was 15,000 fans, last year's average attendance was only 11,000, an over 25% decline in attendance where enrollment at the College had only declined by 10%. This is a problem for multiple reasons. For one, attending home football games are a key part of the college campus experience, so maintaining a robust football program is seen as an important recruitment device. Also, the revenues from football games are often used to fund less well known athletic programs that might not be otherwise financially viable. Again, access to a wide variety of athletic programs is important for recruiting new students. Rosanna Luchan, the athletic director at Midwest College, (MC) decided to investigate ways to enhance revenues and/or increase attendance at home football games.
The Big Idea
In early spring 2021, Rosanna was enjoying a pint at a professional baseball game. Noticing how many other cups she saw in the stands, she wondered if it would be possible to offer beer sales at their college home football games. Beer sales would provide a new revenue stream, beyond ticket sales and the typical concessions. She had also noticed that some locals and alumni would spend the whole game tailgating in the fields surrounding the stadium. In-stadium beer sales could potentially encourage more fans to attend the game, increasing revenues from both ticket sales and beer. Rosanna started looking into what it would take, and what it would cost, to sell beer at this fall's college football games.
Establishing the Parameters
Rosanna quickly found that beer sales at their college stadium environment would have some differences from beer sales at the professional baseball game where she first got the idea. In order to stay in compliance with local laws and ordinances, and to meet the requirements of MC's insurance company, patrons would not be allowed to take beer into the stands. Instead, MC would have to establish a gated area in which beer sales and consumption would be allowed - like a 'beer garden'. This means that MC would have invest potentially tens of thousands of dollars to purchase tables, tents, hedges and other equipment if the decided to sell beer on an ongoing basis. In addition, MC would have to hire additional security officers to staff the beer garden for each of the six home football games.
Obviously, Rosanna was concerned about making such a huge expenditure when she was not even sure how profitable this revenue stream would be - profitability would be dependent on what proportion of patrons would buy beer during the game, and that was entirely unknown. Instead, Rosanna decided to try it out with a 'pilot program'. Before making the decision on whether to purchase in the long-term equipment (i.e., the tables, tents, hedges, and other equipment for the beer garden), Rosanna would rent that equipment for the first game of the season to determine the consumption, profitability, and identify any other unidentified problems that might arise.
Rosanna contacted the College's Facilities Management team, and identified a contractor that could provide the necessary equipment for a gated beer garden for a single game rental fee of $9,000. That initially seemed like a high price, but again, this rental fee would just be for the pilot program. If beer sales were continued long-term, the College would instead have to budget to purchase this equipment. It would take time to buy and install that additional equipment, so any long-term plans would not begin until next season at the earliest.
A second call to the campus security office quickly set the cost for additional security at the beer garden at $2,000 per game.
Finally, Rosanna gets to the fun part - planning the beer. At a recent football fundraiser, Rosanna met a benefactor and alumni who is also the owner of a popular local microbrewery, Tipsy Bull Brewing, since the mascot for Midwest College is a bull. Tipsy Bull was so excited about the idea, they agreed to provide beer for the pilot program at their normal cost - $1.55 per pint can. Conveniently, there are no regional beer festivals that day, so they would bring their typical system on campus for the pilot program and staff the event with four Tipsy Bull employees at no additional cost! As it turns out, many of the brewpub workers are alumni or current students, and they also would like to see this endeavor succeed... On a long-term basis for next year, though, Tipsy Bull did mention their fees would increase slightly to $1.85 per pint can, and could not guarantee that their employees would be available to staff all six annual home games.
Roseanna planned to hold the pilot program on the first home game of the 2021 season, to give plenty of time to analyze any results and make decisions on long-term implementation for the following season.
Results from the Pilot Program
Unfortunately, there was a heavy rain at the beginning of the game which led to an underwhelming game attendance of 6,448. They sold 806 beers at the established rate of $9 each. Tipsy Bull had carefully managed beer sales in the fourth quarter to minimize waste and to manage drunk driving concerns. Specifically, they stopped beer sales with five minutes left in the fourth quarter, which provided some confidence in the safety of the patrons, and that the pilot program adequately assessed the consumer demand for beer.
The pilot program could be deemed a success if it provided administrators the necessary information to determine whether an investment in the necessary equipment to sell beer at home games on an ongoing basis would be a profitable endeavor, regardless of the net profit or loss of the pilot program itself.
Rosanna wants another set of eyes on the financials for this highly visible decision. It could cost her more than just dollars and cents if she moves forward with this long-term investment in a stadium beer garden and beer sales ultimately turns out to be unprofitable.
Task
Create a memo addressed to MC's Athletic Director, Rosanna Luchan, with your written analysis of the success (or failure) of the pilot program and whether Midwest College should move forward with a long-term program of beer sales at home football games, including answers to the following questions and any assumptions you may have made in your analyses. Include your financial analyses, either at the end of the memo or in an attached document, where you show the calculations needed to support your analysis.
A. Identify the costs associated with this pilot program, and how they should be categorized (e.g., fixed, variable). Assume that the cost object (X) is a pint can of beer.
B. What was the net profit (or loss) of the pilot program?
C. What attendance would have been required for the pilot program to break even?
D. If MC did move forward with a long-term program of beer sales at home football games, how much could they budget for beer garden equipment and still earn a profit over a six-game season? Assume attendance would match last year's average game attendance and that the pilot program correctly identified the demand for beer. Note: to answer this question, you will have to determine how the profit equation you wrote in requirement #2 will change for a long-term model.