1. Oklahoma State University
School of Hotel and Restaurant Administration
Retrieving Money from the Table –
Gentlemen’s Clubs Operational Maximization as Adopted from Markowitz ‘s Portfolio Economic Theory
David J. Paster
ABSTRACT
INTRODUCTION
METHODOLOGY
LITERATURE REVIEW
• Modern portfolio theory (MPT), as introduced by
Markowitz (Markowitz, 1952; Michaud, 1989) is an
economic based theory of finance which attempts to
maximize portfolio expected return for a given
amount of portfolio risk, or equivalently minimize
risk for a given level of expected return, by carefully
choosing the proportions of various assets.
• For the purposes of this examination, the general
constructs of the theory are adopted; however, assets
are replaced by the inclusion of active revenue
streams in the form of guest offering / amenitiess at
gentlemen’s clubs.
• An emulated business operations structure derived
from the another libertarian hospitality field, the
casino industry, reflects product diversification
colloquially known as the “Mirage Effect” (Ehlers,
1997) of establishing a “superstore” / “big box”
casino resort experience comprised of ancillary and
auxiliary revenue streams.
• As with the majority of finance focused hospitality
research, secondary data sources were primarily
utilized for purposes of analysis. Since this endeavor
is more conceptual than traditionally experimentally
oriented, information collection was somewhat
organic and not necessarily linear / sequential
• SEC filed 10-Ks were chosen to represent publicly
traded casinos and gentlemen’s clubs while trade
publications (e.g., Exotic Dancer), trade organizations
collateral and conference attendance (e.g.,
Gentlemen’s Clubs Owners Association) coupled with
limited primary correspondence / interviews were also
utilized to ascertain the varying independent operators
scenarios. The methodology attempted to re-enforce a
delineation between corporate and independent units.
• Recognizing and leveraging opportunities “to
increase profits by optimizing the total product
portfolio” (Hoang, 2007), is a means to assist
gentlemen’s club operations to position themselves
“on the frontier”. “On the frontier” indicates that a
unit is delivering maximum output given the
available resources or, conversely, is maximizing its
resources such that outcomes are proportional.
(Reynolds, 2003).
• The current research demonstrates that the
Gentlemen’s Club business model is significantly
different in its composition from more general
hospitality outlets (e.g. restaurants, hotels, cruises),
but established hospitality business practices (and
formulations/metrics) may be adjusted to address the
peculiarities.
• The adult nightclub entertainment business is highly
competitive with respect to price, location and quality
of the facility, entertainment, service, and food and
beverages. Due to the highly fragmented nature of the
adult nightclub industry, exact industry details are
(often) sparse (Ricks, 2011).
DISCUSSION
RESULTS
• The preliminary observable situation is that the highly
fractionalized gentlemen’s club business is generally
“not using resources poorly or operating at the wrong
output level, but rather failing to use the best input
mix to produce revenue” (Reynolds, 2003).
• The ~85% of gentlemen’s clubs that are
“independents”, “non-affiliated”, “mom and pop
shops” and subsequently do not have the managerial
support nor economies of scale and scope that the
~15% of corporate (publicly traded)/chains have, are
proverbially, “leaving money on the table”.
• Integration of Markowitz-style portfolio
diversification in terms of amenity offerings to guests
would seem to have a positive affect on both corporate
and independent’s operations.
• Unlike the highly organized corporate entities that
control the minority (in terms of number of facilities but
near equal with EBIDTA and other KPIs within a classic
Pareto paradigm), independent (e.g., non-corporate
owned, operated or affiliated) gentlemen’s clubs do not
share the comparative advantage of centralized corporate
bench strength with their engagement of more efficient
and effective respective business practices nor on
property (at least) partial adoption of Markowitz-style
business portfolio diversification.
• Still, in concentrated markets, independents must
attempt be as competitive for patron’s discretionary
spend or “share of wallet”.