Opportunity Recognition Project - Super Yacht Party Business

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Timothy R Solichin BAEP 451 Prof. Henry Opportunity Recognition
1|Timothy R Solichin

Opportunity – Superyacht Party Business
What is the opportunity?
Hosting a superyacht party in this economy is a great opportunity to make profit. This is a super niche nightclub business targeting the richest 1% who is looking for better alternative to the typical nightlife entertainment in Hollywood. They are still partying hard, while the cost of hosting the events goes down. The opportunity lies in organizing the party and getting revenue from ticket sales, table reservations, and profit sharing from alcohol sales. The costs include wages, boat rent, music and lighting equipment rent. Event organizing carries minimal risk for a potential of up to 30% profit margin.

Are you pursuing this in 452?
YES, when I am taking BAEP 452, I will do the feasibility analysis on yacht party business. However, I would probably do the feasibility over the holiday in December. And executed the plan in late January, where I got a customer who is willing to pay $5,000 if I host the event in January for her birthday. Some of hardcore partygoers are willing to spend an average of $250 for this event. Preparation would take about 2 months because I have a team of professionals who are experienced in this industry.

What is driving this an opportunity?
The recession of 2008 is the major event that creates opportunity for this event. There are many yacht owners who faced trouble paying their yacht mortgage. This drives down cost of ownership and charter of superyacht. Rental price of furniture, lighting, and music equipment are also going down. IBISWorld estimates that night club industry will grow at 2.6% annually for the next five years. (IBISWorld) By registering the yacht in British Virgin Islands, boat owners can avoid 3 things: Jones Act, state sales tax, and alcohol sale permits.1 The superyacht party will be priced between $65 and $100 to make it affordable.
1

Jones Act refers to a bill where boat crews of U.S. registered vessels are able to sue owners for injuries in or out of U.S. territorial waters.

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Status of Nightlife Industry – Customers & Friends
After celebrating the last day in Mr. Orfalea’s class, I was invited to Bryan Harris to his fraternity party. There I realized why it clubbing so popular and lucrative. A few days after, I learned more from Christina – who regularly goes to club – that there is a significant niche in nightlife industry, the college social elites with great spending power who got bored from typical clubhouse in Hollywood ave. I was referred to Louis who are have 2 years of experience working as event organizer in Kuta Entertainment, a production house that hosts the annual Indoparty or Uparty. He recently graduates from USC and wants to work in nightlife industry.

Lessons from Bryan Harris:  A fraternity or sorority member typically spends about $2,000/semester for alcoholic products for weekly parties.  Retail prices of alcohol in clubs are up to 10 times the retail price in supermarkets.  The key to success for parties lies in a few popular girls.  A major problem in college parties are: theft, cleanliness, security and fights.

Lessons from Christina: (not in picture)  Upscale USC partygoers spend an average of $200-300/night and $2,000 for table reservations 3 times a week.  People paid premium for Champange bottle service because they seek attention.  Upscale partygoers are looking for alternative to typical house party. Yacht party is interesting.  Rich people hate drunkards who don’t know how to party.

Lessons from Louis Laurence:  100% of entry ticket sales are profit for production house.  Nightclub organizer needs to meet a minimum alcohol sales  It is not easy to stop underage drinker from bars.  Bouncers are very corrupt.  Finding the venue and dealing with club owner is a major pain. They didn’t honor verbal agreement and only look for the highest bidder.
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Status of Nightlife Industry – Professional Experiences
To understand the potential of superyacht nightlife industry, I further contacted professionals in the relevant industry: nightclub production owner (Roderick – Kuta Entertainment), nightclub sales & marketing (Kevin&Lorenzo - Cinespace), charter yacht company (Daniel Ginzburg – FantaSea One). I learned from their experiences that event organizing has the highest return on investment as compared to renting property. Event organizing is labor intensive, while renting properties is capital intensive. Mr. Ginzburg advised that it is betters to start as event organizer and use the cashflow to pay for yacht mortgage if successful.

Lessons from Roderick:  It is important to get a foothold in a particular niche. People do not like to go into a club full of strangers.  Production house is like a real estate business. Majority of the revenue comes from table reservations.  The costs for event organizers are: commissions, advertising, DJ & bouncer wage, and rent for lighting & music equipment.

Lessons from Kevin & Lorenzo:  As the licensed clubhouse, a minimum of $10,000 of alcohol sales revenue is needed to stay profitable. License is expensive.  Nightclubs are hospitality industry with wage expenses of about 25% of the total cost.  Any accidents happening in the property is the liability of the property owner.  Insurance is another significant cost for clubhouse owners.

Lessons from Daniel Ginzburg:  32 years in yacht charter industry, there are virtually no yacht dedicated for house party.  Transporting furniture, lighting, and music equipment is major problem for parties in Yacht.  Ownership of yacht carries a lot of hidden costs: maintenance, certifications, and insurances.  Most of the income from yacht rental comes from the food and event organizing service.
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Status of Nightlife Industry – Trade Industries & Journals
To validate expert opinion, I researched secondary data from four sources: OptimizeAtlanta, AYCA (American Yacht Charter Assosciation), IBISWorld, and NCIAA (The National Club Industry Assosciation of America). Optimize Atlanta is a marketing company that has important purchase statistics in Nightclub industry (Appendix A).

Lessons from AYCA:  By registering the vessel into offshore countries like British Virgin Islands (BVI), business can avoid paying: tax on purchase of boat, sales taxes, annual DMV fees and U.S. alcohol sale restriction.  Income outside BVI is not taxed.  When floating 24 nautical miles away from U.S. shores, economic resources of the sea are taxable by U.S. state, but not economic activity above the water.

Lessons from IBISWorld:  In the past five years nightclub industry suffers decline as spending power decreases.  In the next five years it is predicted have 2.6% annual growth  The industry has roughly 60% gross profit margin, but only 3.6% net profit margin.  44% of the cost is from purchases, 20.2% is from wage, and another 22.5% is spent on other costs like taxes.  Competition level is high.

Lessons from NCIAA:  The industry size is 22 billion dollars with 793 million in profit.  The industry is highly fragmented with largest 50 companies holding less than 5%.  98% of the establishments are small business with less than 9 employees.  There is low barrier to entry, high regulation, and medium level of capital intensity.  This industry is getting increasingly unprofitable because of regulations.
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Status of Nightlife Industry - Conclusion
Nightlife industry today is a $22 billion industry that grows steadily at 2.6%. The industry is highly fragmented with the largest 50 companies owning less than 5% of total. The benefits provided by the establishment to the customer is that the place to channel out their stress by drinking and dancing, as well as to show off social status by purchasing premium bottle service and table reservation services. The distribution channels for the tickets are typically through a ticket broker, free ticket for ladies, and sometimes online sales. In the past five years, nightlife industry faces steep decline due to the economic recession. Smaller establishments like neighborhood bars are hit the worst because their customer bases are mostly the middle to low income. However, the top nightclubs that are frequented by the rich 1% are not affected as much. Jobs in this sector are declining sharply. In the next five years, the industry is still predicted to grow at 2.6% despite strong increase in alcohol distribution channel substitutes (supermarkets and restaurants) it is predicted that jobs are still declining by 1% annually. The niche that I am exploring is the highest end of the luxury market industry where the demand is recession proof. What differentiates my business is that it has different taxation system and has better ambience of the ocean rather than the typical house party. The financing concept in my business is also different, by using profit sharing instead of renting. We can eliminate at least half of the rent fees. In conclusion, the growing need for the ultra-rich for alternative nightlife entertainment like in Europe, where there are plenty of yacht party charters. I can make the impact by filling in the gaps by bringing successful business concepts from Europe to the U.S.

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Value Chain Analysis (Vodka)
Alcohol Sales through Nightclubs (Gross Margin / Profit Margin)

Grain

Alcohol

Wine&Spirit

Nightclubs

Farming
50% / -16.3%

Distillery
40.2% / 13%

Wholesaler
16.6% / 3.5%

(Retailing)
59.1% / 3.6%

Alcohol Sales through Alcohol retailers (Gross Margin / Profit Margin)

Grain
Farming 50% / -16.3%

Alcohol
Distillery 40.2% / 13%

Wine&Spirit
Retailer 24.1% / 8.6%

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Value Chain Analysis (Vodka)
Grain production for vodka is unprofitable
Fluctuating grain prices and increased costs for farming is bad news for agriculture industry. People who planted crops are facing difficult times and needs government subsidy to stay in business. There are not many opportunities in this field.

Alcohol distillation is a promising industry
Alcohol distillery naturally has the highest profit margin because it is the process in the supply chain that adds the most value to the product. There is a great potential in making profit in this industry. However, the barriers to entry is great because most of the overhead is not invested in tangible assets, but rather spent in brand building which is risky for upstart entrepreneurs.

Wine & Spirit wholesaler has very low profit margin
Wine and spirit wholesaler has the lowest profit margin; this means that they are adding little value to the product. This sector is also not suitable for new entrepreneurs because wine and spirit wholesaler depends on volume to generate profit.

Alcohol retailer is a good business
There are 2 major ways in which alcohol is distributed: the first one is through a licensed drinking establishment, and the second one through liquor retailers. The average price for 750 ml Grey Goose Vodka through retail is $24, while the average price for the same item in nightclubs are $240. There is a clear opportunity in the sale of alcoholic beverage through nightclubs. However, as we can see, there is a major difference between the gross margin and the actual profit after taxes and interest. Since distribution of alcoholic beverage is highly regulated, it adds a lot of cost.

But… nightclub business has greater potential.
The sheer amount of gross profit in nightclub industry is being eaten away by difficulties in managing the overhead, namely the musical equipment, lighting, furniture, and property value. Night club owners who can better control their overhead and own the building instead of renting will likely to be more profitable.
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Patterns of Change
“Marinas industry in the United States suffered an annual decline of -1.5% between 2006 to 2011. It is predicted that the growth in the next 5 years would be stagnant at about 0.8% annually” – IBISWorld
This is a great day to rent or buy a charter a private yacht. As there are many people in this industry who are facing bankruptcy, as well as end consumers who are trying to sell off their luxury yachts for cash, the price of yacht rental and purchase has decreased. It is true that the total sales in the yachting industry increases from $195 million to $259 million, this is because of some billionaire purchasing ultra-luxurious yacht which skews the total number. That purchases aside, the volume of purchase actually dropped by 204 boats to 1,922 boats. (Burnham) From this change in boat sales, it also signals that people are not buying boats because it is much cheaper and hassle free for them to rent the boat. Recessionary economy and high competition amongst boat charter companies drive down the price of boat rents, which comprise the majority of the cost structure of the superyacht party business. This cuts down the rent expenditure by almost 20% (based on last year’s price and this year’s price), increasing the profit margin of this business.

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Working Concept Grid
Customer Partygoers in small groups Distribution Direct Ticket Sales Benefit Alternative nightlife entertainment, cheaper than retail drinks. Cheaper, more convenient. Convenient, last minute purchases More flexible use of boat, people can customize the event according to their will. Reduces hassles for planning events Immediate pricing and negotiation Determine the best pricing option for both parties.

Online Ticket Sales Ticket Brokers People who wanted to charter a yacht for party Yacht Charter service

Event Planning service Event organizers Direct Sales of Yacht Charter Online event brokerage

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Three Concepts

Private Yacht Charter
Pain: It is difficult to find a company that provides yacht charter at the right price. Who has it: people who wanted to charter a yacht. Benefit Package: Time saving. Service: Yacht comparison and charter service. Distribution: Direct and online sales. Revenue Model: Renting out boats that are owned by the company and advertising fee for other boat charters who want their boat to be displayed online. Also use external event organizer for events.

Public Event Organizer
Pain: People who want to be considered as having high social status while celebrating an event or want to have fun with their friends at an exclusive event on yachts. Who has it: partygoers Benefit Package: Getting public recognition of high social status through exclusive ticket sales and expensive table reservations. Service: Event organizing Distribution: direct sales, affiliate ticket sales, online ticket sales Revenue Model: Rent the boat and sell the ticket, tables and alcohol.

Yacht Sales Broker
Pain: It is difficult for yacht buyer to compare yacht prices and maintain yachts. Who has it: People who want to buy new or used yachts. Benefit Package: Finding the right yacht to own and maintenance service for their need faster and cheaper. Service: Helping boat owners to decide which boat is the best suite them, and maintenance. Distribution: Online catalogue sales Revenue Model: Advertising fees, brokerage fees, insurance commission, maintenance fees.
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Best Concept
Public Event Organizer
Choosing the best concept requires validation of the feasibility of the idea. The other concepts are great ideas for yacht industry. However, they require significant capital in software development. On the other hand, This concept on event organizer can be run with little capital and data on prices can be found easily by contacting various businesses. These are the actual income projections assuming all the ticket are sold, and all the equipment are rented at the highest price. There is an additional $5,000 for emergency funds just in case there is a sudden increase in any of the prices. The assumption of people’s wages to work for about 8 hours at @50 each is an exaggerated wage projection, where the actual cost of labor is less, or more labor can be included for this event. Paying $4,000 for a DJ can also invite very popular DJ which helps to maximize ticket sales. VIP ticket holders and people who reserve tables gets free tapas and vodka. Projected Income Statement – FantaSea One (Worst Scenario) Revenue Ticket Sales (175x$65) VIP Ticket Sales (50x$150) Table Reservation Sales (10x$2000) Liquor revenue sharing Total Costs Yacht Charter Price ($14350 + fees) Decorations ($3000) Lighting Rental ($3000) Furniture Rental ($4000) Bouncers & Cleaners & Bartenders (20*200) DJ ($5000) Food Other expenses ($5000) Insurance Total Net Profit Net Profit Margin

$11,375 7,500 25,000 4,500 $48,375 $17,283 3,000 3,000 4,000 4,000 4,000 2,000 5,000 2,000 $44,283 $4,092 8.4%

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Appendix A – Facts About Nightlife Industry

Source: “Facts About Today’s Nightlife Industry” Optimize Atlanta. July 19, 2010 13 | T i m o t h y R S o l i c h i n

Bibliography
American Yacht Charter Assosciation “Avoiding tax using offshore vessel registration” http://www.ayca.net Burnham, John “Yacht Sales Report – October 2011: Volume Down, Values Up” http://www.denisonyachtsales.com/2011/11/yacht-sales-report-october-2011-volume-down-values-up/ IBISWorld, “Nightlife Industry – competitive outlook” http://msbapps05.marshall.usc.edu:2391/industryus/ataglance.aspx?indid=1685 IBISWorld, “Wine & Spirit Industry – competitive outlook” http://msbapps05.marshall.usc.edu:2391/industryus/ataglance.aspx?indid=1685 IBISWorld, “Grain Farming Industry – competitive outlook” http://msbapps05.marshall.usc.edu:2391/industryus/ataglance.aspx?indid=1685 IBISWorld, “Spirit distillery Industry – competitive outlook” http://msbapps05.marshall.usc.edu:2391/industryus/ataglance.aspx?indid=1685 NCIAA, “Our Industry: Snapshot” http://www.nciaa.com/content.aspx?page_id=22&club_id=160641&module_id=29898 Optimize Atlanta, “Facts About Today’s Nightlife Industry” http://www.optimizeatlanta.com/nightlife-industryinfographic-from-optimize-atlanta/

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