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Chain LeaderEditorial Archives2005 — August — Cover Story

Housing Boom
Greg Trojan is tuning up growth at House of Blues with a strong balance sheet and a powerful brand.

Looking up: With funding no longer an issue, CEO Greg Trojan sees a bright future for the House of Blues club venues.

House of Blues has built on its music-hall roots by venturing into clubs, amphitheaters and hotels. It will open three to five venues in fiscal 2006.

Greg Trojan climbs to the top floor of a soon-to-open nightclub at the Showboat casino in Atlantic City, N.J. The plush room, with its soft lighting and leather furniture, will cater exclusively to high rollers ordering bottles of liquor instead of single drinks. Trojan, chief executive officer of HOB Entertainment, the operator of the three-story structure, scans the room approvingly. “I like the fact there’s not much outsider art here. It’s not overly folksy,” he says.

“Folksy,” however, is what got 10-unit HOB—otherwise known as House of Blues—to the table. Founded by Hard Rock Cafe co-creator Isaac Tigrett, the company initially dedicated itself to the blues—an art form Tigrett has described as “the taproot of American music.” He envisioned a chain of live-music venues and restaurants adorned with American folk art. Musicians would play in small halls where audiences and performers would feed off each other’s energy.

That vision remains the bones of the brand, though today shows include hard rock, country and hip-hop artists, who play in high-tech music halls. The company added a concert business, paying Seagram’s $190 million in 1999 for 20 amphitheaters and arenas. It accounts for 30 percent of HOB revenues, estimated to reach $600 million in the current fiscal year, which ends July 3. The company is also opening new units again, having recapitalized its balance sheet in March 2004 with a $30 million private placement and a $75 million line of credit. Trojan plans to open three to five units in the United States and possibly one or two abroad.

The first House of Blues opened in Cambridge, Mass., in 1992, reportedly grossing $4.5 million in its first year. Early backers included actor Dan Aykroyd and Disney. Today, the company is largely in the hands of private equity firms. The Cambridge unit has since closed.

House of Blues
HOB Entertainment, Los Angeles
2006 Revenues
$600 million* (fiscal year ends July 3)
Average Unit Volume
$20 million
Average Check
Expansion Plans

3 to 5 new club venues in fiscal ’06 (ends July 3)

*Chain Leader estimate

Tigrett opened five more units—in Los Angeles; New Orleans; Chicago; Myrtle Beach, S.C.; and Orlando, Fla.—before being ousted as CEO in September ’97. Backers of the private company blamed him for losing huge sums on unprofitable ventures. “I wanted to make [HOB] a total entertainment company—TV show, record label, hip-hop touring business—but everybody was so scared,” Tigrett recalls.

Trojan, a former Pepsi executive hired the year before as COO, replaced Tigrett.

Back in Atlantic City, the nightclub at the 18-year-old casino is merely an expensive addendum to the 10th House of Blues, which opened in early July at a cost of roughly $61 million, according to documents filed by Showboat owner Harrah’s Entertainment. Asked why a nightclub and a House of Blues, Trojan shrugs. “It’s a must-have in a boardwalk casino,” he says, adding HOB does not operate nightclubs in its nine other venues.

One-Armed Bandits
Other firsts for the company include House of Blues-branded slot machines, gaming tables and a poker room—all formerly part of Harrah’s. “We proved out at Mandalay [Bay] that we bring in attractive and hip customers, and that that would work well with gaming,” Trojan explains, referring to his venue in Las Vegas, which is not part of the casino proper.

Trojan can afford to make the bet since Harrah’s put up most of the development money. The 46-year-old executive won’t disclose HOB’s participation in the deal except to declare, “We’re real partners.”

“I’m proud that we are a nuts-and-bolts, block-and-tackle operating company.”
—CEO Greg Trojan

Trojan oozes confidence as he takes a seat in the new restaurant in the casino. Above is a hand-carved mermaid, part of the collection of primitive folk art surrounding him. Trojan is quick to warn that management “guards [its] private company status very closely” and therefore won’t share financial performance.

So what remains of the $30 million cash infusion and $75 million credit line that were a part of the recap is anyone’s guess. But it’s clear Trojan isn’t particularly worried. “We’re well-funded. We have capital to grow for the next four or five years,” he explains, adding that opening a new House of Blues can cost anywhere from $5 million to $15 million, depending on landlord contributions. “For brand and operating reasons, we know we can execute three to five units a year.” Philadelphia, Detroit, Dallas and Miami are on the drawing board for fiscal ’06, which ends July 3.

Craftwork: In homage to the roots of American music and art, dining rooms feature folk paintings and sculptures from many different artists.

Investment banker Eric Beckman of majority owner Los Angeles-based Ares Management says growth is no surprise. “Over the years we’ve watched the company and saw that the business model was proving out very successfully,” he recalls. “But we felt they weren’t taking full advantage of growth opportunities because of balance-sheet constraints.”

Management attempted to raise $150 million via an IPO in 1999. At the time, HOB was a leading provider of music over the Internet. Trojan recalls analysts trying to convince him to sell the clubs and go public as a dot-com. But the market collapsed within months, and the company remained underfunded and privately held. HOB no longer distributes Internet content.

Southern comfort: Founder Isaac Tigrett, a native Tennessean, created dishes with roots in the Deep South. Although many items have been updated, Filet with Crawfish Bordelaise (pictured) and Pulled Pork still appear.

“From a performance point of view,” Trojan chuckles, “let me just say that [when I joined the company], we were doing about $35 million in revenues and were cash-flow negative.” He claims that after his first month on the job, the company was cash-flow positive. “We’ve been growing in a way that there’s not been negative cash flow,” he says.

Despite last year’s softness on the concert side of HOB’s business, revenues reached $400 million in fiscal ’05 with EBITDA growing about 20 percent.

Credit a strong brand and experienced managers on both the club and concert sides of the business; the two sides account for about 60 percent of revenues, with catering and souvenir shops making up the rest. Pollstar, a magazine that covers the concert industry, ranks HOB Entertainment, which sold 6.2 million tickets in ’04, the third largest player in the concert business after Clear Channel (28 million tickets sold) and AEG Live (7.9 million). “The HOB people have done an exceptional job” in a difficult concert environment, says Gary Bongiovanni, the magazine’s editor.

When choosing sites, House of Blues must balance developer contributions against whether the site can support a concert venue, restaurant, private club and special-event functions.

But it is the club venues, which include concert halls that seat 2,000, that are the focus of Trojan’s attention, and not necessarily because they are more profitable. Instead they further differentiate the concept by providing live music and food under one roof. “We have an opportunity to create something that hasn’t been created,” he says.

That hasn’t escaped the notice of industry observers. “If you think about it, they’re alone in the segment, offering live music, restaurants and hotels,” says restaurant-investment specialist David Epstein of J.H. Chapman & Co.

So far, however, it’s just one hotel, an arrangement in Chicago with New York-based equity partner Loews Hotels. The success of that property has prompted management to seek investors to fund a build-out of another hotel, perhaps in Detroit or Miami. Offers Epstein: “Those kind of deals generate considerable fee income.”

House Brand
The brand’s power with developers has made Trojan’s job easier, to a point. “The thing I worry least about is finding sites. What I worry most about is picking the right ones,” he wryly notes. New units must return 30 percent or more on invested capital or the company won’t consider the deal. And there are many of them, including a looming opportunity in London backed by a capital-rich firm whose name Trojan won’t disclose. “It’s amazing to me that there isn’t anything there comparable [to the United States] from a quality live-music experience,” he says. HOB is also scouting sites in China.

House of Blues club and concert businesses account for 60 percent of revenue.

The availability of capital gives management the luxury of research. “We use a quantitative site model to help us with cities. But there is still an equal amount of art to the science [of site selection],” Trojan says, adding that he must balance generous developer contributions against whether the site will support a concert venue, restaurant, a private club called the Foundation Room and special-event functions.

Trojan cites Las Vegas, where the company decided against opening in a casino in the middle of the Strip. “You could argue we would have done more volume in the first two years by being in the middle of the Strip, and we probably would have.

But it wouldn’t have been the right thing. Twenty years from now, we wouldn’t have the business we have, which is growing every year,” he argues. Mandalay Bay, HOB’s highest grossing unit, is a favorite with locals because it’s easier to get to by car, he adds.

House of Blues has a history of going against prevailing wisdom. Tigrett successfully opened club venues on seedy Decatur Avenue in New Orleans and Sunset Boulevard in West Los Angeles. “Isaac made a brilliant decision,” Trojan says. “Decatur Avenue was very run down. He recognized that. We’ve definitely spurred a lot of growth in that area.”

Seeking Synergies
Trojan’s job is now somewhat complicated by the temptation to open clubs in the same markets as the company’s amphitheaters. So far HOB has taken advantage of these synergies in Los Angeles, Cleveland and San Diego. Dallas, where the company operates the 20,000-seat Smirnoff Music Center, is a possibility along with Seattle (Gorge Amphitheater) and Toronto (Molson Amphitheater).

It’s simple: “Fundamentally, we are running a concert venue surrounded by restaurant, retail, Foundation Room, and special-event business,” CEO Greg Trojan says.

The marketing benefits are obvious despite the fact that the outdoor-concert venues’ names are different. “We don’t view [the venues] as competing. You’re selling tickets to the same music-loving customer,” Trojan explains.

The tough part is making sure the company isn’t lured to a weak site by landlord contributions or tax abatements. Cleveland, one of the nation’s most impoverished large cities, seems an unlikely spot for the hip club. But HOB’s developers financed the deal with the city’s help.

There is also the “routing” issue, which requires Trojan to make strategic decisions based on how many House of Blues he can book bands into in, say, the Midwest. Club venues in Toronto, Detroit, Cleveland and Chicago make it easy for bands to play multiple dates, thus cutting booking costs and, presumably, boosting traffic.

Trojan is confident he’s making the right choices. “We spend a lot of time assessing the market—it’s media value, routing value, etc.,” he says. And who knows where a nightclub will be required.

Peek Inside: The Foundation Room

House of Blues officials won’t share numbers, but they say that taken together the company’s six Foundation Rooms are the second-most profitable division after catering.

Annual membership fees for the private restaurant, lounge and prayer rooms run from $2,250 to $5,500. A tax-deductible portion supports the nonprofit International House of Blues Foundation.

Foundation Room Director Mike Grozier says venues with 600 to 700 members are “very profitable.” Today, membership totals about 4,500. Roughly 75 percent renew their membership, he claims. His goal is to boost the number to 7,000 in the current fiscal year as the company opens three units. He also believes adding a Foundation Room to the 8-year-old Orlando, Fla., venue would substantially increase membership.

Grozier solicits members by targeting a venue’s suppliers, which might include owners of linen and distribution companies. “There’s a group of successful business owners under restaurants and hotels,” he explains.

In Atlantic City, N.J., he’s also calling on law offices, citing the area’s real-estate development. The company meanwhile passed out food and drinks to hundreds of local VIPs who traipsed through the lavish rooms during the House of Blues grand opening in July.

HOB Entertainment wants members to use Foundation Rooms as they would any club. “The challenge we have, is not allowing them to be show-driven,” Grozier says. “We’re at our best introducing one guest to another and they strike up a friendship.”

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