Case Study #29: Chicago Cubs Acquisition by Ricketts Family Will Drive Local and State Level Economic Progress

It is unfortunate that Chicago does not get to host the 2016 Summer Olympic Games. One of the sources of disappointment stems from not capturing incremental economic impact and job creation from being able to host the Games. According to the “Chicago 2016 Economic Impact Analysis”, the Pre-Games (2011-2015), Games year (2016) and Post-Games year (2017-2011) would generate $22.5 billion in incremental economic impact and 315,000 jobs in incremental job creation in Illinois. Chicago would represent 61% of the incremental economic impact and 55% of the incremental job creation. It is tough not having the opportunity to achieve those metrics, but I give props to the Chicago 2016 planning committee for their hard work and relentless dedication.

Indira Gandhi, ex-prime minister of India who was assassinated 25 years ago on October 31st, 1984, said: “Have a bias toward action - let's see something happen now. You can break that big plan into small steps and take the first step right away.” While the big plan to drive incremental economic impact and job creation for Illinois via Chicago 2016 will not happen, I strongly believe that the Ricketts family acquisition of the Chicago Cubs are one of the steps to drive economic progress at local and state levels.

The price the Ricketts are paying for the Cubs is much lower than the $8.4 billion Illinois would have paid for the 2016 Summer Olympic Games. Therefore, the incremental economic impact and job creation will be significantly lower for the Ricketts acquisition than the 2016 Summer Olympic Games. The Ricketts are paying the bankrupt Tribune Company $845 million for a 95 percent stake in the team and Wrigley Field and 25 percent of the Comcast SportsNet Chicago cable channel that carries Cubs games (Sandomir, Richard. “New Owner to Improve Wrigley, and Maybe the Cubs”. New York Times, October 31, 2009). So, how is this hefty deal being financed?

Tom Ricketts father, Joe Ricketts, is the founder of TD Ameritrade. The family sells shares of the company to help finance the Cubs acquisition but still owns 90 million shares; one of Ricketts’s two brothers, Pete, and his father still sit on the board (Sandomir). The Ricketts maintain their decision-making power and manage risk by owning 90 million shares of TD Ameritrade while having controlling stake in the Cubs. Selling more shares to raise cash may relinquish control in a profitable company and unnecessarily inflate the acquisition cost for a new entity.

After raising $845 million through sales of TD Ameritrade shares, it may sound surprising to hear Tom Ricketts say: "We don't have quarterly results to worry about, or a year-end return. Our shareholders are our fans." The Ricketts are private owners of an entity and are not obligated to publicly report financial results on a quarterly or yearly basis. But, I really admire the transparency and accountability of the last line of his statement: “Our shareholders are our fans”. That commitment represents a bottoms-up approach to delivering the creation of overall value, not maximization for profit returns.

If the Ricketts are deploying a “fan-centric” approach to deliver overall value creation, one area of focus should be forecasting attendance. Here is the total attendance at Cubs games and year-over-year change (2001 to 2009):

2001: 2,779,454
2002: 2,692,071
2003: 2,962,630
2004: 3,170,184
2005: 3,099,992
2006: 3,123,215
2007: 3,252,462
2008: 3,300,200
2009: 3,168,859

(MLB Attendance Report - Chicago Cubs)

Since 2001, overall attendance increases by 14%, but in the nine seasons, there isn’t consistent year-over-year growth in attendance. This may be attributed to an overall increase in ticket prices. According to Team Marketing Report’s Fan Cost Index, which publishes data about average ticket prices for professional sports franchises, the average ticket to a Chicago Cubs game rose to $42.49 in 2008 from $28.45 in 2004, a 49 percent increase in four years, or three times the inflation rate of 16 percent during that period. The rise in prices for the Chicago White Sox and Chicago Bears also outpaces inflation (Templon, John. “High-price Chicago sports tickets will withstand downturn”, Medill Reports Chicago, October 18, 2008). The Fan Cost Index (FCI), a metric published by Team Marketing Research, measures the prices of two (2) adult average-price tickets, two (2) child average-price tickets, two (2) small draft beers, four (4) small soft drinks, four (4) regular-size hot dogs, parking for one (1) car, two (2) game programs and two (2) least expensive, adult-size adustable caps. Between 2008 and 2009, the FCI for Cubs games increases from $251.96 to $305.00, but attendance drops by 4%.To generate positive growth rates in attendance in 2010 and beyond, the Ricketts must develop a strategy to contain FCI while generating profit to wholly invest in ballpark and team expenditures.

Plans to open the Triangle Building at Clark and Waveland and re-modeling the ballpark’s bathrooms, concourses and concession stands are very “fan-centric” decisions. The Ricketts can benchmark retail business models when implementing these plans. Every touchpoint at a retail space gives customers an opportunity to interact with a brand and spend money. The Ricketts should consider doing extensive, insightful market research on Cubs fans to understand what improvements should be made at the ballpark. This is an excellent way of getting the community involved with a long-term project. The costs of re-modeling the ballpark and containing FCI will be offset by repeat purchases from a larger attendance pool. An increase in attendance rates also appeals to brands which are planning to spend dollars on events sponsorships and advertising to build awareness levels and drive sales. These activities will require headcount at various levels. More attendance at the games will also help local businesses in the neighborhood, not to mention the need of public services such as police officers and waste management. Overall, increasing attendance levels at games by reducing FCI and improving the ballpark based on “fan-centric” insights will provide incremental economic and job creation impacts.

It’s highly unlikely that the Cubs will generate even a tenth of incremental economic and job creation impacts as the 2016 Chicago Summer Olympic games. Nor does a transfer in business ownership mean that the Cubs are any closer to winning a World Series next year or five years from now. But, a family that sells several shares in a successful, publicly traded company to invest in a loved baseball team and its historical ballpark, definitely sees the “big plan” beyond their own self-interests as private owners.