Will Suppliers Compete With Producers?

By Michael Hughes -- Tradeshow Week, 4/19/2004

Between 1980 and 1999, the North American exhibition industry grew by an average of 6.2 percent in net square footage per year. Net new tradeshow launches, subtracting cancellations, likely added 1 or 2 percentage points to this annual growth rate. So the industry expanded by 7 to 8 percent per year, growing faster than the U.S. gross domestic product and inflation for 20 years.

Many exhibition executives, especially on the services and facilities side, do not expect the industry to rebound to these growth rates in the next few years. In a December 2003 column, I suggested that the exhibition industry had entered a mature phase following this period of significant growth. Since then, industry leader optimism has increased and, based on our surveys, exhibitors finally expect to increase their event marketing budgets in 2004. The increases will be modest. Still, it's likely that the exhibition industry will grow as fast as or even a little faster than the U.S. economy this year, which would be a first since 1998.

Even with the rebounding fundamentals, the optimistic growth rate and industry maturity debate, I predict "vertical integration" will be discussed more often over the next five to 10 years. Vertical integration occurs when companies within the same industry, but in different sectors of the production process, start to merge. As an example, a service contractor purchases a show management company or a show producer invests in or purchases a venue.

The North American exhibition industry hasn't had much experience with vertical integration yet, as show producers don't own exhibit houses, contractors, venues or hotels. Conversely, most convention centers don't run their own shows and most don't provide exclusive general contracting. Moreover, contractors and exhibit houses don't usually own events, though they have enhanced their overall event management services since the late 1990s.

But if the industry has entered a mature phase, with slow growth likely over the next few years, we will continue to see an unprecedented divide in the industry. Show producers are doing pretty well but many service providers, including venues, are not. In fact, almost every executive in the exhibition and events business that is not a show producer believes the industry structure is flawed, the model broken.

If these trends continue, what is to stop service providers and venues from launching events and expanding their service offerings? From becoming vertically integrated? This may sound like heresy now, but just imagine what five more years of flat to sluggish growth would do to industry dynamics.

What's more, it's likely that service providers and venues would drive most of the integration, since show producer margins are more attractive. Of course, most municipal venues are loss leaders, essentially local governmental departments, but industry leaders know that nearly any convention center could turn a profit within two years by running its own shows, diversifying the services it has available and offering lucrative exclusives.

Think venues wouldn't dare get into the event management business, especially with business-to-business events? Just imagine what a well-funded Las Vegas casino company or a national hotel powerhouse could do if it decided to get into the arena. The vertically integrated model is already common in other parts of the world, particularly in the European and Asian exhibition industries, so there are dozens of successful models to emulate.

If venues and service providers eventually expand their services and even buy or start show management operations, existing show producers surely will voice their concern. But so what? IAEM or SISO would whip off a strongly worded press release, a few heated phone calls would be made – but that's about it.

The big associations won't care if venues or contractors run their own shows – as long as the show doesn't compete with theirs. For-profits would strike deals with venues or suppliers to compensate themselves for the new competition, or just take their business elsewhere. One could argue even now that a show producer's general service contractor (or other service provider) is already a competitor by doing business with the producer's competition. A competitor's friend is a competitor too.

Don't worry. All this vertical integration is not likely to start this year or next, and maybe not even in 2006. The industry still needs that long to rebound and stabilize. The service sector needs that time to build up its confidence.

There's also a mind-set issue: most sectors in the industry are rather rigid in terms of what they believe their core competencies are. Consultants and analysts will argue that everybody should stick to their knitting. And that's certainly a valid argument.

But if what appears to be a long slow-growth phase allows show producers and exhibitors (and attendees) to continue to squeeze suppliers, more companies will either exit the industry, start a wave of consolidation – or vertically integrate.

B-to-B media companies such as Advanstar, Hanley-Wood and VNU, to name just a few, have been vertically integrating for years, mainly by buying exhibition and conference businesses to supplement their publishing components. Advertising agencies, media buyers and marketing firms constantly buy and sell each other in an effort to provide "seamless service" to corporate marketers. Witness the recent high-profile Comcast offer for Disney.

What's to stop the exhibition industry from being next? Only multiple years of 7-percent annual growth. Or a massive show management consolidation wave of its own that, by 2010, leaves only three to five major for-profits standing instead of the 15 to 20 there are today.