SUPER STAR STUDIOS

Ricky Anderson and Stephen Ash both enjoyed their full-time jobs, but in March 1990 they were discussing starting a sideline business somewhere in Atlantic Canada. They had become intrigued with a business concept Ricky had first seen when a cousin returned from Niagara Falls with a music video of himself and his wife performing Whitney Houston's "Greatest Love of All". The professional-looking video had been produced at Super Star Studios for $20.

Super Star Studios offered a simple service which enabled customers to create high-quality music videos showing themselves lipsynching hit tunes. Ricky and Stephen contacted the creators of the concept and determined that the rights were available for Atlantic Canada. They also collected some operating data and market information.

As he turned to Stephen, Ricky said, "We've collected all the information we need. Either we go for it or we don't. If we don't make a decision soon we're not going to be ready for this year's tourist season. So what do you think? Should we do it?"

Personal Backgrounds

Ricky Anderson and Stephen Ash were both black Nova Scotians, born and raised in Halifax.

Although Ricky and his wife had no children, they were anxious to start a family. At 29, Ricky was the youngest of seven children, four of whom were from his mother's first marriage. Ricky's mother, a strong force in his life, had always stressed the importance of education and hard work. As a result, Ricky worked full-time in order to finance his studies and in 1988, after almost 10 years of part-time study, earned his Bachelor of Arts in Sociology. In the process he had also taken a few courses in marketing, retailing and management.

Ricky worked as a Special Liaison Officer for the Nova Scotia Commission on Drug Dependency (a provincial government agency). In this capacity, he worked with students and minorities to make them aware of the dangers of substance abuse. He also volunteered as an executive member of Concerned Citizens Against Drugs, a minority evaluator for the Nova Scotia School Board Association, and as a


This case was prepared by Professor Robert G. Blunden and Tammi Mason (B. Comm. '90) of Dalhousie University for the Atlantic Entrepreneurial Institute as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management. Some of the case information was collected by Lisa Mullins (M.B.A. '89).

Copyright c 1990, the Atlantic Entrepreneurial Institute. Reproduction of this case is allowed without permission for educational purposes, but all such reproductions must acknowledge the copyright. This permission does not include publication.


boxing coach for adolescents. In 1981, in recognition of his contributions, he was awarded a Certificate of Merit from the Nova Scotia Human Rights Association. However, Ricky's interests were not limited to young people -- he had also been a star amateur and professional athlete.

As a boxer, Ricky had been honoured twice with the Nova Scotia Athlete of the Year Award, and had also been named Canadian Sportsman Celebrity of the Month. He earned his highest athletic achievement in 1985, when he won the Canadian Professional Welterweight Boxing Championship. His boxing career had exposed him to some aspects of the entertainment and promotion industries.

Stephen Ash was 34, divorced and childless. But, like Ricky, he enjoyed being around young people and wanted to have a family some day. He came from a large family. When he was six, his father had died, leaving his mother to raise and provide for her five children. Mrs. Ash worked at three jobs while Stephen, the youngest, was cared for by his older siblings.

During elementary school he sold newspapers, and after graduating from high school worked as a labourer, filing clerk and sales representative. Stephen also took part-time courses in accounting, sales, and marketing and in 1989 he co-founded B&A Associates Ltd, an insurance agency. His responsibilities there included all aspects of sales and brokerage management.

Ricky had approached Stephen about the Super Star venture because Stephen was a good friend, honest and an experienced manager. Both Ricky and Stephen believed that together, they were well suited to opening a Super Star Studio.

The Concept and Opportunity

Super Star Studios were entertainment centres where customers were videotaped as they lipsynched popular songs. The customer chose the music from a library of more than 250 popular hit tunes, and selected the laser-generated video background from a predetermined selection. Musical instruments and sound stage equipment were provided as props. The resulting video was similar in style and quality to the music videos seen on television.

Five years earlier, Super Star Studios had been conceived and started by Star Trax of North Carolina. In response to the Studios' increasing popularity, Star Trax had begun to sell equipment, technical expertise, and licenses to use the Super Star Studio name to interested investors. By 1990, 25 Studios were located throughout North America. Thirteen of these were independently owned and operated.

Location was critical to a Studios' success and amusement parks with high traffic volume seemed to be ideal settings. Most Studios operated seasonally, except when located in year-round tourist destinations. Three independent and seasonally operated Studios were located in amusement parks in Ontario. Most of their customers were between 12 and 30 years old, and willingly spent $19.95 for the entertainment experience and tape. This resulted in a profit margin of about 72%. One of these Studios sold about 7,500 units in a season. Table 1 provides a summary of unit variable costs for a typical studio.

|Table 1 |

| Unit Variable Costs |

Video Supplies*

$5.000

Star Trax Royalty

0.057

Employee Commission

0.500

Total Unit Variable Costs

$5,557

* Includes preprinted labels, box, and the videotape

Source: Star Trax

Ricky and Stephen were very enthusiastic about Super Star Studios and saw themselves holding the rights to the entire Atlantic Canadian market. They thought that in time Atlantic Canada might support several Super Star Studios.

Market Trends

Economic conditions, both nationally and locally, were mixed in early 1990. Many small business owners were worried that the federal Goods and Services Tax, which would become effective January 1991, would be complex and costly despite assurances to the contrary from the government.

The impact of the Free Trade Agreement between Canada and the United States, which had become effective in January 1989, was still uncertain. Free Trade was intended to allow each country easier access to the other's markets through the reduction of trade barriers, tariffs and taxes. Many believed that Free Trade would result in more jobs overall, while others worried about job losses and the loss of a unique Canadian identity.

Concern about the economic future of Atlantic Canadians continued as interest rates (Table 2) reached the highest levels since the early 1980s, and Atlantic region unemployment levels continued to exceed the national average (Table 3).

Despite some unfavourable conditions, several trends in the entertainment and recreation industries were encouraging. Canadian amusement services earned over $761 million in 1985, up from $690 million two years earlier. Revenues for home video distributors had grown from $6 million in 1982 to $74 million in 1985. And in 1988, over 50% of Canadian households owned a video cassette recorder, up from 6.4% in 1983.

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Table 2

Interest Rates (%)

Year  

Rate  

Year  

Rate

1980  

21.00  

1985  

9.50

1981  

15.75  

1986  

7.50

1982  

11.00  

1987  

8.75

1983  

11.00  

1988  

12.25

1984  

10.75  

1989  

13.50

Source: Statistics Canada

Table 3

Unemployment Rates (%)

1986 1987 1988 1989
Nova Scotia 13.4 12.5 10.2 9.9
New Brunswick 14.4 13.2 12.0 12.5
PEI 13.4 13.3 13.0 14.1
Canada 9.5 8.8 7.8 7.5
Source: Statistics Canada.

 

Like the growth in the entertainment and recreation industries, Atlantic Canadians' disposable income increased significantly during the '80s (Table 4). Leisure time also increased, as the average Canadian worked about 36 hours a week in 1989, down from 40 hours in 1969. With more time and money, Canadians increased their recreational expenditures from 4.1% of total expenditures in 1969 to 5% in 1986. Table 5 summarizes family recreational expenditures.

Competition

Ricky and Stephen believed that there were no direct competitors for a Super Star Studio in Atlantic Canada; however, at Star Makers in Cavendish, Prince Edward Island, customers created their own audio cassette tapes by singing to the music of a favourite song. Their voices were dubbed over those of the original artists. Star Makers charged $10.95 for an individual session and $3.00 for each additional person in the group. The three-year-old business operated in Cavendish during the tourist season only. At other times, such as Christmas, Star Makers would set up a recording studio in malls to generate off-season business.

Table 4

Per Capita Disposable Income ($)

1980

1982

1994

1986

Nova Scotia 6,512 8,441 9,757 11,062
New Brunswick 6.216 7,977 9,277 10,447
PEI 6,130 7,911 9,167 10,078
Canada 8,465 10,665 11,967 13,413
Source: Statistics Canada.

Table 5

Family Expenditures on Recreation

1982   1986
Nova Scotia 996 1,384
New Brunswick 971 1.504
PEI 642 1,227
Canada 1,261 1,771
Source: Statistics Canada.

 

Start Up Financing and Operating Costs

Ricky and Stephen believed that about $80,000 (Table 6) was required to start the business. They planned to invest $10,000 each, and thought they were also eligible to receive up to $7,500 per year for two years from a grant under the Black Entrepreneurs' Program. This program was funded by the Nova Scotia Department of Small Business Development; eligible applicants had to be black Nova Scotian residents who either owned a business or were starting a new business. The grant was to fund forty percent of the capital cost of land, buildings and equipment.

A typical Super Star Studio required about 600 square feet of space for the studio and front store. Ricky and Stephen felt that they could hire a studio manager at $350 for a 40 hour work week. Part-timers at $5 per hour would supplement the manager during evening hours, meal times and busy periods. Open hours would depend to some extent upon the location; most malls required that tenants be open during mall hours while freestanding locations offered more flexibility. Staffing levels were also expected to vary somewhat, depending on anticipated sales. Ricky and Stephen thought that one person would be adequate during quiet times but that at least two would be required during peak times. Sales commissions would be in excess of regular salaries.

Table 6

Start-up costs

 

Video Equipment   $44,921
Audio Equipment 5,381
Video Music Library 14,238   $64,540
Installation
Musical Instruments 1,500 3,000
Cash Register 70 2,200
Leasehold Improvements   10,000
Total Initial Investment    $79,740
Source: Company documents.

 

Potential Locations

Ricky and Stephen were considering a number of sites in Halifax and elsewhere in Atlantic Canada. The local sites included three mall locations. Other sites being considered included Upper Clement's Theme Park near Annapolis Royal, Nova Scotia; Crystal Palace in Moncton, New Brunswick; and a strip mall location in the tourist community of Cavendish, Prince Edward Island.

Park Lane Mall located in downtown Halifax, had opened in the fall of 1988 and by March 1990 was 76% leased. Upscale boutiques occupied the two upper floors while movie theatres and a food fair were situated on the lower level. About 60,000 people, most under 24 years old, visited Park Lane weekly. Of these, 22,000 came only for the movies. Park Lane management believed that a Super Star Studio would fit in well with the mall's image.

Two locations within Park Lane were recommended (Exhibit 1): sites T308 on the top floor, and T115 near the theatres on the lower level. While T308 was large enough, the top floor was primarily unleased and had no direct street level access. Site T115, despite its proximity to the theatres, was small and hidden in a corner. It was already finished (two other businesses had previously leased the premises and vacated) so leasehold improvements would be minimal. The only access to this floor was provided by escalators from the ground level or elevators from the parking garage. The mall management, anxious to lease T115, was willing to waive the usual five year lease requirement for a one year commitment. Table 7 summarizes leasing costs at Park Lane and other locations.

Halifax Shopping Centre, also had retail space available (see Exhibit 2), as renovations were transforming Nova Scotia's first major mall into an expanded and upbeat shopping destination. A variety of stores were situated on two floors, with a department store and bank located at one end of the mall, and a major supermarket and food fair at the other. Once fully leased, over 150 stores would occupy the mall. Mall management believed that Super Star Studios would fit in well with the mall's new focus on younger shoppers. Forecasts projected at least 75,000 customers per week, up from 68,000 in 1986. Several special events were planned for the fall and Christmas seasons, beginning with the September 26 Grand Opening.

Historic Properties, like Halifax Shopping Centre, had been a shopping and tourist destination for many years. Its downtown waterfront location was popular with tourists. Most of the shops, located on the ground level, targeted these visitors. Offices occupied the upper floors. Suitable space would be difficult to obtain since the vacancy rate was less than 1%. Although traffic counts were not available, one vendor indicated that traffic flows were quite seasonal -- high in the summer but much lower in the off-season. Parking in the area was limited.

Table 7

Mail Leasing costs

Park Lane    Halifax Shopping Centre
$43 per square foot $50 per square foot
7% on sales over $25 1,000 7% of sales
Utilities $2 per square foot one time charge
for Grand Opening
Annual contribution to marketing
fund
$1,500 one time charge for plan
approval
Historic Properties $1,000 + 5% per year customer
service contract
$25 per square foot
Source: Company documents.

Ricky and Stephen wondered if revenues at an Historic Properties location would be sufficiently high in the summer to offset the slower periods in the off-season. They were also concerned about the mall's management; they had seen no marketing efforts directed toward the local market. It had been rumoured that Historic Properties was being sold and they believed that changes in consumer focus would be a priority for new owners. While the existing management was interested in Super Star Studios, Ricky and Stephen were uncertain about the mall's future and how a new management might respond to the concept.

Upper Clement's Theme Park, located about one and a half hours by car from Halifax, had begun operations in the summer of 1989 and operated from 10 am until 6 p.m. daily from mid-June until early September. It was also open weekends for a month prior to and following the peak season. In its first year, 180,000 people visited the park, and 1990 forecasts projected 190,000. While the government-run amusement park had not yet leased space to independent vendors, management indicated that, despite finding the concept unusual, it was compatible with other park attractions. To consider the idea further, management would require a detailed proposal.

Crystal Palace, located three hours by car from Halifax, in Moncton, New Brunswick, was a another new amusement park. It had begun year-round operations in February 1990. Promoted as a complete family entertainment complex, it housed a 120-room hotel, 4 cinemas, a community centre, restaurants, and over 60,000 square feet of indoor amusement area. Space was available at an estimated $45 per square foot. Crystal Palace was adjacent to Champlain Shopping Centre, the largest one-level shopping centre in Atlantic Canada. For 1990, 1,500,000 visitors were forecasted, and in March, they were on target.

Cavendish, another popular destination for tourists, was located on Prince Edward Island, five hours by car and ferry from Halifax. In 1989, 70% of the tourists to the Island visited Cavendish to see one, or both, of two major attractions - The Prince Edward Island National Park and the setting for Lucy Maud Montgomery's fictional book Anne of Green Gables. The National Park, to which Cavendish commanded one of several entrances, was the third most visited National Park in Canada even though the primary tourist season was limited to the period from mid June to early September. While there were many tourist attractions and activities in Cavendish during this period, most businesses closed during the off season. Suitable space in Cavendish was expected to cost about $4,500 for the season. Tables 8 and 9 summarize tourism information for Prince Edward Island, Nova Scotia and New Brunswick.

Approximately 20% of visitor expenditures in Nova Scotia were made in the Halifax area. About 40% of visitors to New Brunswick visit.

Table 8

Tourism For Prince Edward Island
Visitors (000s)

1985 1986 1987 1988 1989
635 656 704 715 744

Age (% Of Visitors)

Age 1996 1987 1988 1989
under 15 n/a 17.5 13.0 0.1
15-19 0.6 3.6 4.8 1.0
20-24 4.3 6.0 9.6 5.8
25-29 6.8 7.8 10.8 10.8
30-34 7.4 8.6 9.8 14.6
35-39 9.3 9.0 8.2 13.8
40-44 11.7 9.9 9.2 15.3
45-54 14.9 11.8 10.4 13.2
55-64 22.3 13.1 9.9 12.6
over 65 22.6 12.3 14.3 12.8

Expenditures ($000,000s)

1985 1986 1987 1988 1989
65.5 74.1 82.3 90.0 98.3

Source: Prince Edward Island, Department of Tourism and Parks.

Table 9

Tourism For Nova Scotia And New Brunswick
Visitors (000s)

1986 1987 1988 1989
Nova Scotia n/a 1,197 1,222 1,177
New Brunswick 701 n/a 1,014 n/a

Expenditures ($000,000s)

1986 1987 1988 1989
Nova Scotia n/a 700 760 795
New Brunswick 84 n/a 132 n/a
Source: Statistics Canada.

Table 10

Population (1986)

Age NS NB PEI Canada
under 15 187,360 161,550 29,370 5,391,965
15-24 153,460 124.355 22,190 4,178,205
25-34 149,690 122,075 20,295 4,527,155
35-44 120,980 98,280 16,735 3,640,895
45-54 82,840 64,765 11,600 2,545,325
55-64 75,025 59,665 10,370 2,328,325
over 65 103,835 78,740 16,085 2,697,580
Total 873,110 709,430 126,645 25,309,450
Source: Statistics Canada.

With growing excitement, Ricky and Stephen turned their attention to identifying a location for the studio. Ricky said to Stephen, "Steve, I know this is going to work. I can just feel it. It's going to be fun too! Where do you think we should open our first Super Star Studio?"

Exhibit 1

PARK LANE SHOPPING CENTRE

exh179.jpg (19394 bytes)

Lower Mall Level

exh180.jpg (17951 bytes)

Upper Mall Level

Exhibit 2

HALIFAX SHOPPING CENTRE*

exh181.jpg (15371 bytes) exh182.jpg (15417 bytes)
Lower Mall Level Upper Mall Level

* - numbers indicate square footage in available retail space.

Source: Halifax Shopping Centre.