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At Delaware North, Leisure is Serious Business

At Delaware North, Leisure is Serious Business

What do old-fashioned paddle-wheel steamboats and ultra-modern sports stadiumshave in common? A need to provide the best possible food and customer service.

When Delaware North Companies (DNC) announced last month that it would be purchasing the assets and business of the Delta Queen Steamboat Co., no one should have been surprised (for more on the deal, see sidebar).

At a Glance

Name: Delaware North Companies, Inc.
Website: www.dncinc.com
Headquarters: Buffalo, NY
Founded: 1915
Annual Revenues: $1.5 billion
Top Management: Jeremy Jacobs, Sr. (Chairman/CEO); Richard Stephens (President/COO); Jeremy Jacobs, Jr., Louis Jacobs (Executive Vice Presidents); John Fernbach (Group President, Contract Services); Dennis Szefel (Group President, Hospitality & Entertainment)
Divisions (2001 revenues): SportSystems ($500 million); SportService ($285 million); Parks & Attractions Services ($232 million); CA One ($229 million); FleetCenter ($100 million); International ($100 million); American Park ‘n Swap ($8 million)

While Buffalo-based DNC is known mostly for operating concessions at sports stadiums and national parks and managing retailing at airports, Delta Queen’s riverboats are a natural extension of its capabilities, and their purchase signals a new aggressiveness by the company to expand into segments that complement its core businesses.

“We are evolving into broader aspects of the service business,” declares Chairman/CEO Jeremy Jacobs, Sr. “We’re not leaving one in favor of another, but we’re adding to them.” Jacobs notes that the recently purchased riverboats are similar in their day-to-day operations to what DNC’s Parks Services division already operates, “except they’re on water.”

Parallel with the acquisition, DNC also announced an internal management overhaul that consolidates the company’s seven operating units into two broad categories based on core business similarities that cut across segment lines. It positions Jacobs’s two sons, Executive Vice Presidents Jeremy, Jr., and Louis, to take on direct responsibility for developing new strategic directions for the company.

“Lou and I have extracted ourselves from the daily operating side of the business to focus more on the strategic opportunities that are before us,” explains Jacobs, Jr. “There is now the ability in the organization to literally enter new businesses like the riverboats without disrupting the overall efficiency of the company. I think what can be expected as a result is a more aggressive approach to how we think strategically.”

With the two initiatives, DNC embarks on a new chapter in an already long company history, one that began with supreme modesty in 1915 when three brothers—Louis, Marvin and Charles Jacobs—began selling peanuts to theater customers in Buffalo.

THE MANY FACES OF DELAWARE NORTH (top to bottom): High-end catering in sports arenas by the Well Bread division of SportService; letting loose the hounds at one of SportSystems’s dog racing tracks; the recently acquired Delta Queen riverboat churns up the Mississippi; visitors “Lunch with an Astronaut” at DNC Parks Services’s Kennedy Space Center operation.

Working on leisure

For most of its history, DNC has ridden American society’s expanding appetite for leisure, recreation and amenities, from those original 1915 theater patrons to today’s customers at ballparks, national parks, racetracks and even airports (where shopping and foodservice are practically the only “recreation” available).

The soundness of DNC’s strategy has been validated in the last few decades by an explosion in leisure spending in thiscountry. Despite talk of “overworked Americans” and “declining leisure time,” per capita recreational spending in the U.S. (adjusted for inflation) ballooned from around $500 in 1970 to $1,650 in 1995 (the latest figures available).

DNC’s sales continue to soar along with the cultural tide, up 33% in just the past five years, with no significant acquisitions.

DNC initially grew through aggressive expansion into a wide variety of businesses, often through acquisition. However, acquisition-fueled growth was curtailed in the 1980s, when the company decided to consolidate into a few core businesses. In fact, until the recent steamboat deal, the last major segment DNC entered was public parks, almost a decade ago.

The recent restructuring signals a return to a more orderly version of its former aggressive growth strategy by providing a template for controlled expansion into related businesses—such as riverboats. It’s also designed to facilitate the nurturing of organic growth through internal synergies.

“We don’t think of the company in terms of seven operating divisions any more,” says President/COO Richard Stephens. “Rather, we have two clusters of related businesses that can provide more flexibility.”

The new Contract Services division, headed by former vice president/CFO John Fernbach, includes CA One (airport retailing), SportService (sports concessions/catering) and DNC International (operations in Australia and New Zealand), while the Hospitality & Entertainment division, headed by former Parks Services president Dennis Szefel, includes Parks & Attractions Services, SportSystems (dog and thoroughbred racetracks), the new riverboat business and American Park ‘n Swap (see sidebar).

The FleetCenter arena remains independent of the two groups (see sidebar). CEO Jacobs also personally owns the Boston Bruins of the National Hockey League, but his ownership is separate from DNC and not reflected on its books.

“The Contract Services units are contract-based, percentage-rental situations where operating with financial control is paramount,” explains Stephens. “They are lowmargin businesses that need considerable attention to cost controls. On the other hand, gaming and some of our parks—and hopefully the Delta Queen—are much higher margin businesses that require a much wider array of services. They have more leeway for imagination—and for mistakes.

“I think that the temperament and characteristics of the management of the contract service businesses may need to be a little different from what they are in the other businesses,” Stephens adds. “Its pretty hard when you have a one or two percent bottom line at an airport or arena to encourage your managers to take imaginative risks.”

Another advantage of the new structure is that it allows the company to explore strategic expansion by providing a flexible template into which complimentary new businesses can be fitted.

“When the Delta Queen opportunity first surfaced,” Louis Jacobs says, “the initial response was, ‘Okay, reservation system, hotel rooms, entertainment, foodservice—we do all that stuff, we just don’t do it on something that floats yet.’ So the leap from what we do to the new business was not vast.”

The gambit is yet another sign of DNC’s willingness to stretch its core competencies to find new growth areas. The possibilities are as boundless as Americans’ appetite for leisure.

“We were a contract services company,” suays Jacobs, Jr. “We evolved with the addition of hospitality and recreation. Who knows what the next generation will bring. With the riverboats, we may find we’re great maritime operators. What’s happening is that the skill sets and core competencies that evolve as we expand from one business to the next give us the comfort to go into other businesses and change the face of the company.”

Beyond Peanuts and Cracker Jacks

THE SUITE LIFE: Luxury boxes help drive more revenue per event in big-time sports.

Sports and entertainment concessions was DNC’s original business, and the SportService division remains a primary revenue driver for the company.

Currently, it operates in more than 50 sporting venues and entertainment complexes, including eight major league baseball ballparks, seven NHL and/or NBA arenas, three NFL stadiums, over a dozen minor league baseball and spring training venues and in a wide-ranging collection of leisure and entertainment sites ranging from the California Speedway and the Miami Metro Zoo to Boston’s Tweeter Center for the Performing Arts and Wheeling Downs Race Track.

Last year, SportService also landed its first college account, the Nutter Center at Wright State University in Dayton, OH, and last month it opened its second convention center account in Wildwood, NJ.

Such diversification is necessary in a segment where top-end contracts are few. The NFL, NBA, NHL and major league baseball collectively operate in only 103 venues (some are dual-sport facilities), so concessionnaires looking to grow market share must wrest contracts one at a time from entrenched competitors during infrequent rebid periods.

SportsService’s Well Bread division offers upscale catering and premium dining services to today’s more affluent sports fans.

For the past decade or so, the most promising avenues for adding major sports business came either from league expansion— since the late 1980’s, 22 new major professional franchises began operations—or from the spate of new arenas, ballparks and stadiums that debuted over the period.

This remains an important growth vehicle for SportService, which recently landed the contract to operate concessions, fine dining and premium seat catering at Chicago’s rebuilt Soldier Field. It has also won contracts with the NFL’s Philadelphia Eagles and baseball’s Cincinnati Reds and San Diego Padres for their new facilities.

However, such opportunities are becoming rarer. No new expansion is planned by any of the leagues (in fact, baseball is talking contraction) and potential sites for new facilities are dwindling.

Another concern in the major sports segment: the leagues’ haphazard relationships with their players unions—baseball faces the prospect of yet another strike later this season—and the psychological effect that has on fans and attendance. “It complicates our business,” admits Nick Biello, COO of the Contract Services division that includes SportService. “Unfortunately, the product on the field positively or negatively impacts our ability to do business.”

Despite all this, and even though it is diversifying by growing its presence in the minor-leagues and other entertainment segments, major league sports remains SportService’s bread and butter. A key component of its growth strategy is its fiveyear- old upscale catering division,Well Bread. Well Bread operates premium dining, suite catering and other high-end amenities in arenas and stadiums.

Biello sees an even greater role for the unit.

“As Well Bread evolves, I also see a role for it in other segments like zoos,” he says, “where for example, there are high-end catering opportunities for conventioneers looking for an out-of-the ordinary venue to hold events.”

He also emphasizes that the major sports segment still offers plenty of growth potential as it attracts an older, more affluent fan base expecting—and willing to pay for—higher-end products and services, creating opportunities for an expanded array of service extensions like catering, onsite retailing and even destination restaurant management.

Today, there is also much more ground-up attention given to concessions and amenities when venues are designed. “You look at these new facilities and you see far more concessions stands, and with much greater variety, than ever before,” says Biello. “People want choices; we’re giving it to them.”

Filling the Days

A renas work overtime to fill as many dates as possible on the calendar with hosted events. After all, every day that goes by without one is a day without revenue coming in.

By that measure, DNC’s FleetCenter property in Boston is one of the country’s most successful indoor sports and entertainment venues. It ranked No. 3 in total gate receipts in the country last year, filling more than 200 dates, thanks in large part to its status as one of the ever-fewer arenas still home to more than one major professional team. Both the NBA’s Boston Celtics and the NHL’s Boston Bruins have called the FleetCenter home since it replaced the venerable old Boston Garden in 1995. The two teams not only fill more than 80 dates on the arena’s event calendar annually, but they don’t require the tear-down/build-up time that can idle arenas for days between events, days during which no revenue is being generated. That’s also why multi-date events are so important.

“The arena business thrives on multiple-date events because after the first day, the rest of the shows are pure profit,” says Richard Krezwick, FleetCenter’s president.“We battle hard to land multiday events and lobby acts to extend their dates.”

Of course, it helps to be state-of-the-art, and from its private club, its two onsite restaurants and its 36 permanent concession stands to its 104 executive suites, four promenade suites and more than 2,500 club seats, the 19,600-seat FleetCenter delivers a full range of amenities to customers and maximizes revenue generation for its owners, tenants and hosted events.

It’s also a uniquely situated building easily accessed by public transport. In fact, it was built on air rights over the Boston Transit Authority’s new North Station terminal, located directly underneath.

Fewer Customers, More Business

WHILE YOU WAIT...: CA One offers highpowered brands and upscale food choices for airport customers.

As might be expected, DNC’s airport business, operated by its CA One division, was the most affected by the events of September 11. It was forced to endure a three- to five-day shutdown of its operations and had to furlough 800 of its 2,900 employees. Since then, security concerns have impacted everything from how trash is disposed of to how deliveries are received. Hiring new employees also now takes longer because of more extensive background checks required for anyone working at airports.

Profitability has also obviously been affected. Typically, an airport concessionnaire guarantees the airport authority a minimum rent, and pays a percentage of the revenues that exceed that minimum. Chuck Moran, the former president of the unit who was recently named vice president and CFO of DNC, says airports generally made no concessions on the rent minimums in the wake of 9/11 but did show flexibility in areas like expanded (or contracted) hours, altered menus and staffing.

“They have given us a lot of help in other ways because most of them were not in a position, because of their own financial situation, to waive minimums or give rent relief,” he says.

Another post-9/11 issue is the location of airport retail operations. Putting them past security checkpoints was always preferable; it is even more so now that long lines prompt passengers to get through as quickly as possible, leaving them with more time to wait in the terminals. Meanwhile, restrictions on unticketed visitors mean more people lingering before the security checkpoints, affording more sales opportunities in those areas than before.

“We’ve been affected less than the airlines only because people are spending more time at the airports, so it gives us a greater chance to sell to them,” says DNC Chairman/CEO Jeremy Jacobs, Sr. “Our food volume is better, and I think our retail sales are better also.”

CA One operates 300 restaurants and retail outlets in 30 airports across the U.S., including Los Angeles, Detroit, Newark, Buffalo and Houston. The extent of the operations varies widely because most airports fragment concession contracts to foster competition and offer customers choices.

Until 9/11, the segment had been growing, with new airports coming on line in markets like Buffalo, Austin (TX) and Detroit. Moran expects that to slow now, but he notes that spectacular expansion is not CA One’s priority.

“Our goal is controlled growth,” he says. “We don’t want to do deals just to do deals.”

They have to be “right,” he says, because airport concessions takes substantial capital investment—all typically borne by the concessionnaire—which is then recouped over an extended contract term, usually 10 years. Even before 9/11, Moran estimates that building in an airport environment involved a 20%-30% premium over what similar structures would cost elsewhere. Now, he says, “that’s up to 30%-40%.” The construction cost can be $350-$375 a square foot.

That means concessionnaires have to toe a fine line between recouping their investments and still keeping the operations fresh. CA One generally schedules a five-year “refreshment” of its individual units, which can mean anything from a “sprucing up” to a complete changeover of concepts. “You can’t do it much more frequently than that because the economics of the transaction will never work,” says Moran.

Brands are also much more important. While CA One operates some of its own, many are franchises of recognized national concepts, especially in foodservice, where its portfolio brims with high-impact names like McDonald’s, Pizzaria Uno, Chili’s and even Wolfgang Puck.

There is also much more effort these days to integrate an airport’s retail operations with the culture of the host city. For example, at Austin (TX)- Bergstrom International Airport, CA One operates a live entertainment stage that books local bands weekly, capitalizing on Austin’s reputation as the “Live Music Capital of the World.”

In Detroit International Airport, retail outlets include the Henry Ford Museum Store, Motown Records, and local confectioner legend Gayle’s Chocolates. In the Louis Armstrong New Orleans Airport, CA One has partnered with the New Orleans chapter of the American Culinary Federation to operate a restaurant called Legends that engages local celebrity chefs to run the kitchen for extended periods and work with student culinarians from a local community college to execute their own specially designed menus.

A Brief History of DNC

1915–Charles, Louis and Marvin Jacobs begin selling snacks to movie theater patrons in Buffalo

1926–SportService formed to operate concessions in minor league ballparks in Buffalo and Syracuse, NY

1939–SportSystems formed to operate company’s growing racetrack holdings

1941–Air Terminal Services (later CA One) formed to operate foodservice at Washington National Airport

1960–International expansion begins with the acquisition of a British racetrack caterer

1975–Company purchases Boston Garden and the Boston Bruins

1980–American Park ‘n Swap acquired in an unrelated racetrack purchase

1985–Jeremy Jacobs purchases the Bruins from the company

1992–DNC wins a contract with Yosemite National Park, its first national park client, leading to the formation of the Parks Services division

1995–The FleetCenter replaces Boston Garden

1997–Well Bread upscale catering arm of SportService launched

2002–DNC purchases the Delta Queen Steamboat Co. from a bankruptcy court, entering the riverboat segment.

Preserving Public Trusts

ROOM WITH A VIEW: Parks Services offers national park visitors a range of dining options, from basic concessions to the finest cuisine.

DNC’s Parks Services unit is its fastest growing business for a number of reasons. Perhaps the most significant is the 1998 federal law change that ended the practice of preferential renewal rights for existing contractors and opened national parks to competitive bidding. DNC had lobbied hard for the change, believing it could rapidly expand in the segment once it was given a fair opportunity.

It must have been on to something because the Parks Services unit, formed only in 1993 when DNC landed a contract with Yosemite National Park, is closing in on the $300 million mark in revenues. That puts it practically neck-and-neck internally with the much older SportService unit.

Since landing Yosemite, DNC has gone on to accumulate an impressive roster of highprofile park contracts, including the Kennedy Space Center, Sequoia National Park, Grand Canyon National Park, the U.S. Mints in Philadelphia and Denver and, most recently, Yellowstone National Park. It also operates in a number of state and city parks, including California’s Asilomar State Beach & Conference Grounds, Jones Beach State Park on Long Island and Niagara Reservation State Park in Niagara Falls, NY.

It’s not an easy segment to grow in. Contracts don’t come around for bid that often—only 13 are due this year—and most aren’t particularly attractive financially. The usual contract length is 10 to 15 years.

“While there are 323 national park contracts out there, most are small,” says Parks Services President Tom Fears. “We’re really only interested in 50 or 60.”

Federal regulations require the U.S. Park Service to evaluate contractors for suitability and not just on price. DNC’s “suitability” was helped considerably earlier this year when its GreenPath environmental management system won the prestigeous ISO 14001 certification, reportedly making it the first U.S. hospitality company to receive such registration.

Concessionnaires that win Park Service contracts have to operate within strict guidelines designed to keep the parks accessible to as much of the public as possible. Prices are controlled and advertising restricted. Park hotels can’t even book blocks of rooms for conferences during the summer.

To compensate, DNC looks for innovative ways to drive business. One particularly successful initiative has been its “Lunch With an Astronaut” program, a big hit at the Kennedy Space Center now also being tried at Deer Creek State Park in Ohio.

National park contracts cover a variety of park-related services, from foodservice and retail operations to hotels, camps, maintenance, facilities and even the tours and public education services formerly provided by federally employed park rangers. Generally, about 30% of DNC Parks Services’s revenues come from retailing, 30% from foodservice, 30% from lodging and the rest from attractions and miscellaneous services.

“While all the services are important, food really does drive the business,” says Dennis Szefel, the unit’s former president who now heads the Hospitality & Entertainment Group.

To emphasize that, Parks Services employs Roland Henin, one of only 57 Certified Master Chefs in the U.S., as its corporate chef. It also operates a four-star restaurant in the Ahwahnee Hotel in Yosemite and another fourstar facility just outside the park at its Tenaya Lodge resort and conference facility.

Culinary expertise is also leading the way in DNC’s push into conference services. It hired a locally famous chef to run the onsite restaurant at Deer Creek, where it hopes to showcase its corporate conference capabilities. It’s also looking to buy properties near parks. “We’re not interested in running roadside hotels, but we’ll continue to look right outside the parks for one-of-a-kind destination type properties that we can own and operate,” says Szefel.

DNC Hopes Big Wheel Keeps on Turnin’

CLASSIC AND CLASSY: Elegance is the theme in riverboat dining rooms.

Creedence Clearwater Revival’s 1969 hit “Proud Mary” celebrated the mythic allure of paddlewheel steamboats in American culture. DNC hopes there’s some of that magic left in the popular imagination because it committed almost $81 million to a winning bid for three such vessels in a recent auction supervised by a bankruptcy court. The properties include the legendary Delta Queen, the country’s last wooden hulled steamboat, built in 1926 and designated a national historic landmark in 1989.

The acquisition includes the boats’ brands and business, which serves overnight passengers on tours up the Mississippi, Ohio,Tennessee and Cumberland Rivers in an ambiance of Victorian elegance.Among them, the three boats have more than 500 staterooms and can accommodate more than 1,000 guests.The two newer vessels, the American Queen and Mississippi Queen, are each around 400 feet long with over 200 staterooms.

The venerable Delta Queen is 285 feet with 87 staterooms. DNC says it will keep the base of operations for the boats, along with their sales and reservation center, in New Orleans, and is confident it can run the boats profitably.

The business is similar to the overnight lodges and tourist amenities the company already operates in various national and state parks, notes President/COO Richard Stephens.

Betting on Gaming

The one division of DNC that does own most of the facilities in which it operates is also its largest, generating almost a third of the company’s annual revenues. SportSystems operates one thoroughbred and six greyhound racetracks that offer both live and full-card simulcast races. The dog tracks are open afternoons and evenings while the thoroughbreds only race in the afternoon (evenings are reserved for harness races).

About 85% of a typical track’s revenues come from wagering, with the balance from the sale of programs, seating charges, admissions fees and food & beverage. Foodservice is considered an amenity in the track business. Full-service dining is available only during times when larger crowds can be expected. The rest of the time, concessions fills the gap.

“The rule of thumb in this business is that you make money on concessions and lose money in the clubhouse and hope you break even,” says SportSystems President Ron Sultemeier. “You can’t be too pricey on the food because you don’t want to alienate regulars.”

Pleasing the regulars also limits other revenue opportunities besides foodservice. Most tracks, afraid to put off customers, no longer charge for parking—unless its valet—or even admission.

More than any other business in which DNC operates, SportSystems is at the mercy of government policies, operating under a patchwork of state and local laws that vary widely. Expansion is difficult since state regulations generally limit the number of tracks that can operate within a geographic area. Consequently, SportSystems has to look in other directions for growth.

One is off-track betting parlors. SportSystems operates 30 of these, mostly in restaurants or sports bars, one of which it recently purchased and plans to operate.“We’ll see how we do and decide if this is something we want to get further into,” says Sultemeier, “but our primary strategy is to maximize our existing operations.”

To that end, SportSystems has made a major commitment to offer more general entertainment and recreation options at its tracks. It’s also looking into on-location movie theaters and dinner theater.

The most dramatic initiative is taking place at Wheeling Downs racetrack in West Virginia, which is being renamed Wheeling Island in conjunction with a major expansion that will see the addition of a 150-room hotel, a fine dining restaurant and other food and family entertainment offerings to the complex next year.

The Secret Life of Parking Lots

LET’S MAKE A DEAL: Park ‘n Swap events can draw thousands of vendors and customers.

A merican Park ‘n Swap is by far DNC’s smallest business, generating under $10 million in annual sales, but perhaps it’s also its most interesting. The unit organizes and manages swap meets and temporary retail activities on empty parking lots and in unused buildings.

Headed by unit president Jeff Hess and internally listed as a division of DNC’s SportSystems unit, Park ‘n Swap has been around since the 1970s (DNC purchased the business when it acquired a Phoenix-area racetrack in 1980). It’s a niche business that makes its money charging space and utility rental fees to participating vendors and a small—often only a dollar—admission price to the public. It also operates its own concession stands alongside those of outside vendors but retains a monopoly on alcohol sales and beverage carts (though other stands can sell nonalcoholic beverages as part of their overall menu mix).

Some regular Park ‘n Swap venues are SportSystems racetrack parking lots. At one Phoenix racetrack, Park ‘n Swap holds events three nights a week and all day Sunday all year. Others are onetime or intermittent events leasing empty fairground or abandoned mall parking lots where hosts are glad to get revenue from space otherwise going unused.

The audience for the service is considerable. A typical event can draw more than 2,000 vendors and up to 50,000 customers.

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