The Ostrich Syndrom

In 1960, the city of Chicago built McCormick Place. This facility was the first convention building built specifically to hold very large national conventions. McCormick Place put Chicago, as a convention center, on the map, where it stayed as one of the top convention destinations for the last fifty years. Now clouds gather on the horizon. Several large conventions have cancelled their Chicago venue and switched to other cities, like Las Vegas or Orlando. They site Chicago’s high cost and complex labor work rules. (See “Video #9: Overcapacity and How it Develops” on StrategyStreet.com.)

The economy has jarred the convention business in 2009. Nationally, the business was down 3%. Chicago is off by a great deal more. Its revenues have fallen 18%, while attendance at its conventions has fallen 23%. Chicago is hemorrhaging market share.

In other hostile industries, we have often found that a company gets ample warning of its deteriorating costs and price position. We see that again with McCormick Place (see “Video #3: Predicting the Direction of Margins” on StrategyStreet.com). For several years now exhibitors have been complaining about high costs and tough union work rules in Chicago. Chicago ignored them.

Now the rout is on. One big show cancelled its Chicago convention and moved to Orlando. This show annually brought 75,000 people to Chicago for its convention. This convention argues that it will save $20 million in its move to Orlando. How soon do you suppose they will reconsider Chicago?

Labor leaders in Chicago don’t see the problem as resting with them. They argue that they have lowered their hourly rates and offered greater work rule flexibility three times in the last fifteen years. But customers see it differently. (See “Video #26: Example of the Customer Buying Hierarchy at Work” on StrategyStreet.com.) You can’t argue with customers who are able to compare apples to apples. Costs are simply too high. The primary reason seems to be work rules. Those will either change or Chicago and McCormick Place will continue to lose market share.

The convention industry is one where high costs and high prices translate relatively quickly into a loss of market share. Other industries take more time. It took the domestic automobile industry nearly twenty years to lose half of its market share to less expensive foreign competitors, including foreign competitors with domestic manufacturing facilities. Neither management nor labor can force customers to subsidize costs that are higher than those of competitors. Many domestic industries have learned this lesson. How has it escaped the labor leaders at McCormick Place?