Look at the chart below. What it shows is net square metres sold at UK exhibitions between 1985 and 2010. And net square metres are a good proxy for revenues.
The 2010 figure has been estimated based on shows we already know are not going to run (Motor Show, Royal Show, Grosvenor Antiques etc) and the forward planning of events in the first half of 2010. The contractors Melville and Early Action have very reliable systems to predict volumes 12 months out and, given rebook rates at larger events, our industry has already booked half of everything it will sell in 2010.
It now seems very likely that the UK exhibition industry won’t be much larger in 2010 in sold square metres than it was in 1992, and that was the worst year in the last quarter century.
Startling though this may be, as a medium we’re not exceptional. Television advertising in the UK is now cheaper than in 1987, the newspaper industry, in real terms, is less than half the size it was in 1990 and total revenues for print media have fallen 32 per cent in the past 15 months. With the exception of online, the situation is comparable for almost every mainstream medium.
You may say we’re not so dependent on the UK now; we have exhibitions worldwide. Actually, no. In 1992 Blenheim, then the world’s biggest organiser, derived only 15 per cent of its turnover from the UK. Reed was similar. UBM, DMGT and others may have expanded into various countries, but our London-based industry is no different in its worldwide breadth than it was in 1992.
The ups and downs
The graph is nonetheless startling. The 1992 figure of 2.4 million square metres sold was the trough of the 1990-1993 recession. The industry then experienced the golden age with a rise of some 50 per cent in metres sold during the post-Cold War boom of the 1990s, dramatically peaking in 2000.
The brief post-NASDAQ recession of 2000-2002 hit exhibitions hard with a 20 per cent fall between 2000 and 2003, and visitors fell by even more. But what was striking was that the losses were concentrated in industrial/manufacturing events, resulting in the near disappearance of large IT shows, such as Comdex and Networks, which have not been revived.
The collapse of the 2008-2010 recession is noticeably much broader based and has been driven by the disappearance of larger events like the Motor Show, Royal Show, Grosvenor Antiques as well as a severe decline in many market leaders such as Spring Fair, Autumn Fair, Furniture, Ideal Home and the Caravan Shows.
Trends can fool investors
There is a tendency to see these issues from the organisers’ point of view because most companies in the industry are organisers. But that’s the wrong focus. It’s the venues and major suppliers that should be at the core of the debate.
One can see the last 25 years of our industry reflected in this simple chart. It was the massive growth in exhibition square metres from 1992 onwards that lead to two critical decisions. One was the expansion of the NEC to accommodate larger events (particularly EMAP) and to try to attract European shows. If you were shown a graph that started at 1992, it seemed that the industry was a one-way bet.
The 1990s were also essential to the decision to build Excel. Major investments of that nature can only occur when the stars look propitious. Major players like Reed and UBM were prepared to invest heavily in a big new London venue because they felt the grip Earls Court and Olympia/National Exhibition Centre had on the market was forcing prices too high and the businesses of major organisers were being damaged. They put their money where their gut feelings were, investing directly in Excel. UBM and Reed were later forced to write off £30 million (US$49 million) of their investment, giving perhaps some insight as to the quality of the initial proposition. This was all violently debated in the industry at the time and I confess that I argued publicly against expanding the venue base because the consequence would likely be an increase in unnecessary competition.
Needless to say, those decisions were made towards what we can now clearly see was the peak of the market in 1997-2000. So, as an industry, we now have three major venues fighting for no more square metres than were being sold 20 years before, when there were just two. Yes, there are other income streams, but the likes of 02 Music doesn’t help, and we all know how well conferences and Goldman Sachs Christmas parties are doing.
Capital investment tragedy
There is a peculiar cycle in capital investment in many businesses; basically, it’s usually made at the wrong time. Economic activity drives prices upwards and it’s only well into a boom that banks have plenty of money to lend. So, when we see a boom like 1992-2000 (see the net space chart – trade shows are, by their nature, quite a good proxy for what is happening in most other industries), it is towards the end of the boom that investment decisions are made. Oil prices rise to $147 a barrel, so billions are invested in tar sands; paper prices double so millions are invested in new pulp plants. The story is always the same; just as these investments come on stream, the boom is over, prices fall and overcapacity then makes things worse.
It seems to me that this is what occurred with exhibition capacity in the UK. It was the long, upward trajectory of revenues in the 1990s that persuaded investors to expand the NEC and build Excel. I can imagine all those glossy PowerPoint presentations from the likes of PWC and KPMG. ‘Look, the graph just goes straight up. Let’s extrapolate it for another 10 years. What can possibly go wrong?’
If we had been able to tell those investors what was going to happen to exhibitions between 2000 and 2010, do you think they would have built what they built? Of course not.
What happens next?
There are a lot of imponderables here. ECO is privately owned, and thus arguably less flexible. Excel is privately-owned, but like Manchester City, by an owner who doesn’t need to worry too much about (relatively) meaningless losses. The NEC/ICC have a different role to perform as frontmen and boosters for the West Midlands. In this sense, they could be loss-leaders and still operate much as before.
But managements, rather than owners, must remain under extreme pressure as evidenced by the recent redundancies at the NEC.
My own prediction is that capacity must fall. ECO and the NEC will be looking at mothballing, or otherwise re-designating, some of their facilities. It’s clear that the NEC is now simply too big for any realistically available business. It may take time, but, ultimately, in every economic sector, excess capacity always disappears.
Excel is in a different position because of its owners’ deep pockets. They can afford to keep promoting themselves and be loss-leading, particularly if they believe other venues will cut capacity. I don’t believe, for instance, Excel would have increased electrical prices as NEC has done recently. Excel can play a long game.
Will product protection loosen?
On the surface, one clear development would seem to be a loosening of product protection, with venues letting in more new events irrespective of the attitudes of current tenants. Excel, because of its funding situation, has been able to offer unprecedented deals to get business. The other venues have had to reduce rates to existing customers to keep their business. Part of the reason for these deals has, I would guess, been to tacitly keep new competitors out.
I think the big players will pressure the venues not to risk the business they have. In the past 12 months, venues have been generous in reducing the tenancy costs of their bigger customers. It seems to me that there will be a straight trade-off here: ‘We’ll pay the agreed rates as long as you don’t let any competition into the venue’.
Is this good for our business? Probably not. Is it good for one or two large companies? Probably yes. Herein lies the great dilemma facing the venues. Let’s say Venue X has a trade show of 100,000sqm, and that show declines to 50,000sqm over three years. What does the venue do?
It is losing enormous revenues from 50,000 less square metres, plus electrics, catering, car parking etc. But it still has a 50,000sqm show. It can’t create another 50,000sqm show in that sector even if it wanted to, and where is it going to find 25 new events of 2,000 metres each? Whatever decisions it takes, it is suffering big revenue reductions. This is a circle that cannot be squared. The very nature of the industry, its relationships and straightjacket grandfather rights lead me to conclude that the industry will not grow itself out of this situation for a long time.
Who loses?
This doesn’t mean that bright young things with good ideas can’t slip between the cracks and create good small to medium events. But it’s still the blockbusters that drive the revenues. By my calculations, in 2007 the largest 20 exhibitions in the UK (all of them with turnover north of £5 million) represented 40 per cent of the turnover of all recognised exhibitions.
And that is why this crisis, if crisis it is, is about venues and suppliers. We have three large venues and three or four large suppliers. They cannot hide from a 25 per cent reduction in the industry, any more than DMGT or Trinity Mirror can hide from the collapse in newspaper readership.
There simply have to be some consequences and the most likely is excess capacity disappearing. The big venues will close space, and economics says that one supplier will probably disappear.
If there are opportunities, they are likely to be for small, agile organisers. They can live with reduced profit margins, they’re not sitting on massive capital projects or staff pyramids. They should be able to see opportunities, very often in areas where the bigger players have been forced to cut back on their events. Three of the biggest five organisers are public companies and two are private equity funded. The pressure to maintain profits will be intense. And the smaller guys, if clever enough, can get to their audiences far more cheaply than 15 years ago.
And the future?
The exhibition industry in the UK is caught in a historical trap. Small to medium-sized organisers can develop smallish events, but this cannot compensate for the loss
of the Motor Shows or the decline in size of the blockbusters.
So we have a conundrum: great opportunities for some but apparent decay and stagnation for the industry as a whole. The analogy is what happened to dinosaurs and mammals when the meteor struck 65 million years ago.
There are three alternatives. One, that the industry bounces back and by 2020 is where it was in 2000, which implies an annual growth in real revenues of five per cent per annum for 10 years. The second is that the industry continues to decline, albeit at a much slower pace. Since 1999 overall visitor numbers have declined at an average rate of 3.5 per cent a year, we might simply see this trend continuing.
The third is bouncing along the bottom for perhaps five years as is the likely state of the housing market.
The consensus is for the third of these; it is the safest bet. But nothing rules out the other two and always remember: “Nobody knows anything much”.
Interesting times…
Copyright by Philip Soar 2009. None of this material can be used without the author’s permission.
