In this paper, we will be evaluating the scope of current investment initiatives in Americas most populous and diverse demographic - the inner city. As part of our research, we will broadly define the scope of existing opportunities and then, as a case study, more closely evaluate the business development strategies of Magic Johnson, a notable celebrity and entrepreneur who has focused his commercial efforts on the inner-city. As part of this case study, we will formulate and evaluate the investment potential of a Megaplex theatre located in the East Bay. The opportunity will be presented under a backdrop of Magic Johnson serving as the principal investor seeking to extend the reach of his franchise of Magic Johnson theatres. This topic has relevance due to the implications for investment in the inner city, the creation of an investment model to be used across urban areas, and the benefits of successful businesses for the creation of role models and opportunity for continued capital inflow.

We will use the following as a working definition for the "inner-city": economically distressed urban areas suffering from unemployment and poverty.' We obtained this definition from Inc. magazine and The Initiative for a Competitive Inner City ("ICIC"), an organization leading the research on the competitive potential of inner cities. Before delving into our case study on Magic Johnson Enterprises, we will first evaluate the strategic and economic potential of this emerging market. To gain an appreciation for for-profit commercial ventures in the inner-city, one must first understand the demographic data driving the viability of many of these business opportunities. Thus, we will first review the demographic shifts in both the U.S. and then specifically in the inner-city. We will then consider the strategic and economic benefits of investing in inner-city business ventures. Finally, we will assess existing businesses that have thrived in the inner-city before reviewing Magic Johnson Enterprises as a case-study.

Many of the business opportunities in the inner city emanate from the changing demographics and consumption patterns of America's minority population. Demographics point to three themes that support our thesis that the inner-city is a viable emerging market: I) the increasing purchasing power of minority consumers; 2) a growing cadre of minority entrepreneurs, and 3) dropping crime rates in many U.S. urban areas.

The increasing purchasing power of the minority consumer results from the rise in the minority population as well as an increase in the median income in minority households. 1990 U.S. Census figures show that as a percentage of the total U.S. population, Asian, black, and Hispanic populations have been steadily increasing. In 1970, these minority groups represented just 12.5% of the U.S. population. By 1980 their numbers had increased to 21.0%, and by 1990 to almost 24.0% of the U.S. population. According to the Urban Institute, a nonprofit public policy group in Washington, DC, collectively, these groups are expected to grow to 28.3% of the U.S. population by the year 2000, and to almost 38.0% by 2030. Workforce 2000, a project conducted by the U.S. Department of Labor and the Hudson Institute, predicted that by the end of this decade, the majority of the population of California will consist of minoritiesiii.

Median household incomes for minority groups have also been on the rise. Since 1979, AsianAmerican median family income has been higher than that of white Americans. In 1992, 32.0% of Asian-American households were considered affluent, earning at least $50,000 annually, compared with 29.0% of white households, according to American Demographics, a research firm in New York. Growth in affluence among blacks has also been on an upward trend. In 1980, about 8.0% of black households were considered affluent. By 1990, the figure was almost 12.0%, with more than a third of those households earning $75,000 or more. In the Hispanic community, upward mobility has also been strong, with 8.2% rising into affluence by 1980iv.

The rank and number of minority entrepreneurs have also been increasing due to rising education levels and increased access to capital. Education levels and professional training have been increasing for minority small business owners as well. According to the U.S. Bureau of the Census' Characteristics of Business Owners database, education differentials between minority and non-minority small business owners are narrowing. In 1987, 34.7% of non-minority small business owners and 30.5% of African-American small business owners were college graduates. Millions of college educated and managerially experienced minorities began entering the labor force in the late 1960s. As a result of this growing pool. recent statistics show that minorityowned businesses have grown at more than twice the rate of all firms in the U.S. economy, both in numbers of new firms and in annual receipts. Today, minority owned businesses have total revenues of $265BN, with sales growing at close to 11.0% a year v. 1992 Census figures indicate that 49.0% of all minority-owned firms are located in California, Texas, and Florida. Revenues for minority-owned businesses in these three states exceeded $6IBN, $19BN, and $2IBN, respectively (see Exhibits I ) & 3). In California, from 1982 to 1987, the latest time periods for which comparable data is available, the increase in the number of businesses owned by Blacks, Hispanics, and Asians increased 22.8%, 88.2%, and 91.2%, respectively. Corresponding national figures for these groups were 37.6%, 80.5%, and 87.2%, ~ Nationwide, the majority of minority-owned businesses operate in service and retail industries, in that order (see Exhibits 4 & 5). In parallel with the growth in the number of minority-owned firms, the total annual receipts for such firms has also increased for all groups during the 1987 to 1992 period (see Exhibit 6).

Some minority owned businesses have grown increasingly successful over the last few decades. For example, while the nation's largest black businesses generated less than $5OOMM in sales in 1971, by 1993, the sales of the 100 largest black industrial service companies exceeded more than $6RN. Early on, black-owned businesses served mostly black consumers. More recently, such businesses have expanded into national and international markets, doing business with the nation's largest customers--corporate America and the federal government vii. Sales for the 500 largest Hispanic-owned companies in the U.S. exceeded $IOBN in l993 viii" (see Exhibit 7).

Historically, minority entrepreneurs have built a range of businesses ranging from franchises to specialty services and retail. Touted as excellent businesses for minority entrepreneurs, the $758BN franchise industry has offered some opportunity for minority entrepreneurs. Franchises usually involve less risk than building a business from the ground up, have immediate market recognition, and provide comprehensive operational training. During the recession of the 1980's, corporate downsizing and restructuring contributed to the franchise industry's growth. Many franchise companies tapped the wave of displaced corporate executives as potential franchise owners. While fast-food franchising has declined in recent years, business and personal service franchises, which range from specialty retail stores to credit collection services, have grown steadily, especially in the areas of healthcare, niche restaurants specialty retail, and specialized business services.

As small minority-owned businesses have moved from startup status to established players in expanding markets, many minority enterprises have begun to consider consolidations, joint ventures, and massive expansions of their existing businesses. Although some minority entrepreneurs have noted that they still face financial and management impediments to growth, recent trends have opened new opportunities. Financing for minority enterprises has increased from foundations, large corporations, minority focused investment funds. and even mainstream investment funds. Crowing numbers of minorities coming from investment banking and corporate management backgrounds have capital and are looking to buy into such businesses. Additionally, this contingent of skilled minority professionals provides a pool of candidates for leadership in expanding and growing minority companies. Some believe that in view of the growth of the minority markets, there exists a growing need for funding. Research suggests that among young firms nationwide that were operating in 1987, average start up capital for non-minorities was $31,939, while corresponding figures for blacks and Latinos were $14,226 and $15.1 19 x.

Beyond the shifts in the demographics of the minority entrepreneur, market researchers have also predicted a significant shift in the demographic patterns of the American consumer. This shift in consumption patterns is projected to continue through 2000 and beyond. The increase in dual-income families contributes to the decline of traditional roles. Households will have more money but less time, leading to more commercialization of the "three Cs" of homemaking: cooking, cleaning, and childcare. This trend is predicted to lead to greater demand for convenience in products and services, an increase in impulse buying, and more reliance on price and brand as cues for product selection, due to less time to glean product recommendations from friends and neighbors. The recent trend of a shift from daytime shopping to evening and weekend shopping (e.g. 24-hour shopping) is expected to continue. A shrinking of the middle class since the early 1960's will increase demand for both premium and low-end products and services. The increasing ethnic mix, regional and linguistic differences emerging in America will lead to more customized marketing to reach specific regional and demographic segments xi. The aging of the U.S. population will increase demand for home-care companies, nursing homes, and ultimately death-care companies xii, such as funeral homes.

Specifically, research has uncovered meaningful consumer trends in America's most diverse demographic-urban areas. According to ICIC, a Boston based research group founded by Harvard Business School's Michael Porter, "for growth-oriented retailers seeking new opportunities in a competitive global marketplace, the message should be clear: America's inner cities are the next retailing frontier for revenues and profits" xiii. An 18-month research project conducted by the ICIC and supported by Boston Consulting Group and Price Waterhouse found that U.S. inner cities (specifically, Chicago, Boston, New York, Atlanta, Miami, Oakland) have more collective retail spending power than Mexico (between $85BN and $IOOBN a year). ICIC compiled a ranking of inner-city growth companies and produced some notable results. The average annual compound growth rate of these companies is 44%, and collectively these companies created 4,695 new jobs between 1993 and 1997.xiv Due to higher population density, inner city areas may offer more retail buying power than domestic affluent suburbs. Average grocery sales per square foot can be up to 40% higher in low income neighborhoods than regional averages. The study also found that the inner-city consumers, while a very diverse group, tend to be more fashion conscious and spend a larger fraction of their incomes on apparel than the general population. Inner-city consumers have also been found to be more brand-loyal than the general population and willing to pay for quality goods. Among the firms adopting an urban growth strategy are Sears, Roebuck, and Co. and Walgreens Co., the latter of which will add as many as 100 inner city stores nationally in the next two years.

Research such as this ICIC study continues to highlight the robust nature of inner-city businesses. In addition, dropping crime rates in some of America's leading urban areas have contributed to the viability of conducting business in these areas. For example, in Upper Manhattan's Harlem, since 1993, murders have dropped 83%, shootings 84%, and overall crime 60%.xv Since 1994, more than $1.2 billion has been invested in new and rehabilitated housing in Harlem. All this has helped spur a retail revolution on 125th Street, where developers are building Harlem's first mall, Duane Reade has opened pharmacies, and Blockbuster Video and the Body Shop are doing business as well. One of America's most notable "ghettos" is reaping the benefits of the confluence of lower crime rates, a growing cadre of minority entrepreneurs, and the growing purchasing power of the minority consumer.

Having reviewed the demographic shifts supporting the viability of commercial business in the inner city, let us consider the specific strategic benefits gained from conducting business in this market. ICIC research has clearly identified and chronicled these competitive advantages xvi. Such research reveals three principal advantages: 1) strategic location, 2) underutilized labor supply, and 3) an underserved local market. Businesses in the ICIC 100 are typically located at the core of major urban areas, highways, and communication nodes. Such positioning typically creates powerful logistical advantages, particularly for service and supplier-based businesses.

The workforce tends to be underutilized in these areas as well. According to the ICIC study, inner-city CEOs cite as a competitive disadvantage the negative perceptions about their neighborhoods far more often than they cite an inadequate labor pool. The research reports that due to location retention tends to be high. As we continue to operate in a tight overall national labor market. workforce retention will continue to be an important factor for commercial success. Finally, as developments in Harlem are proving, inner-city markets are under-served. An early Harlem study found that 60% of Harlem's money was spent outside the ~ Purchasing power in inner-city areas can support more retail and service businesses.

Let us now examine the type of companies that best take advantage of the emerging markets of the inner city. We will use the ICIC 100 ranking as a proxy for high performance in this market xviii. To qualify for the 1999 list, a company had to pass a series of screens, including: I) be an independent for-profit corporation, partnership, or proprietorship; 2) have 5 1 % or more of physical operations in inner-city areas; 3) have 10 or more employees in 1997; and 4) have a five-year operating sales history that included at least six months of sales revenue in 1993, an increase in 1997 sales over 1996 sales, and sales of at least $1 million in 1997. Within the ICIC 100, the average five-year compounded annual growth rate is 44%, the average 1997 sales is $13.8 million, and aggregate revenues are $1,387 billion. The types of businesses that dominate the ICIC 100 rankings are largely logistics and service intensive firms. For example, the fastest growing firm on the list, Pac-Van, experienced 273% compounded annual growth in revenues from 1993 to 1997. This firm leases and sells modular offices and storage units. 24% of the companies on the ICIC 100 were involved in business products or services, 20% in construction products or services, and 1 2% in high-tech products or services. Although service businesses are dominant on this list, consumer goods and lodging/ food businesses comprised 22% of these high-flying companies. As an aggregate sector, retail trade composed 11% of the ICIC 100 rankings. Retail business can be a viable growth opportunity in this market, and entrepreneurs such as Magic Johnson and looking to take hill advantage of this opportunity.

Magic Johnson Enterprises Modelxix

Earvin "Magic" Johnson garnered fame and acclaim for his exploits as an NBA superstar. Magic created a form of basketball known as "Showtime" and went on to capture 5 NBA world titles along with 3 Most Valuable Player awards. Infection with the HIV virus brought a premature end to his basketball career, but allowed him the freedom to explore opportunities as a businessman. The genesis of Magic Johnson as a businessman can be traced to 1990 when Johnson and Earl Graves, publisher of Black Enterprise, partnered to acquire a Pepsi-cola distributorship. That deal presented Johnson with his first opportunity to deal with corporate executives as a business manager. The experience brought situations where Magic dealt with small "Mom and Pop" grocery stores as well as large customers such as Marriott Hotels. The Pepsi experience highlighted the desire of big business to engage in meaningful business ventures with minority entrepreneurs and provided insight to the creation of an investment model to do just that.

Magic Johnson Enterprises was founded to serve as a vehicle to enter the business world and to take advantage of the Magic's competitive advantages: Entertainment and Customer Service. This umbrella organization oversees the operation of 5 separate divisions:

JDC operates under a business strategy that seeks to bring entertainment, restaurants, and retail options to under served areas. Johnson states, 'Approximately 32%-35% of the movie audience is minority, but we have [no theaters] in our neighborhoods. We have to drive 30-40 minutes to get to a theater." The company also recognized that, along with an outing to a movie, families might want to enjoy a meal or a cup of coffee. To take advantage of the market opportunities presented by this dynamic, strategic partnerships would need to be entered into. Johnson contacted Lawrence Ruisi, CEO of Loews Cineplex Entertainment, a division of Sony entertainment. Ruisi knew of the revenue generating potential of inner-city theaters, but needed a strategic partner that understood the community and operating style necessary to be successful. Loews sought to combine its theatre operating expertise with a minority entrepreneur's ability to generate community acceptance, involvement and support. The final hurdle proved to be financial- the terms of the agreement and the amount invested by each party.

JDC and Loews decided to be equal partners sharing operating responsibilities and splitting profits. Ruisi believes that this model of shared risk is essential to create joint ventures focused on the inner city, '~.. he (Johnson) was coming to the table with capital and taking the same risk as we were. ' In addition to shared risk and profit, JDC is responsible for scouting for potential sites and dealing with local government officials to generate support for the venture and deal with any zoning issues. Thus far, the partnership has built theatres in Houston, Los Angeles, and Atlanta with construction underway in Cleveland and Harlem. The three existing locations have averaged almost $7M per theatre in revenue while creating 850 construction jobs to build and 100 permanent positions to manage and operate the business.

Other strategic partnerships utilized by JDC include Starbucks and T.G.T. Friday's. These eateries are central to the JDC strategy as they meet a market need. Moviegoers complained of the plight of having to travel upwards of 40 minutes to have dinner after enjoying a movie at a Magic Johnson Theatre. The inner-city restaurant dollar was leaving the community and JDC recognized the opportunity to put its inner city investment model to work. With almost 2 million patrons going through their theatres annually, JDC had the opportunity to cross-market restaurants through the theatre locations. Executives at Starbucks and T.G.I. Friday's leapt at the opportunity to gain access to the untapped urban market and entered into partnerships that mirrored the accord reached with Loews. In addition to these successes, JDC has its eye on real estate transactions aimed at expanding the retail options available to inner city communities. Target tenants include Old Navy, Home Depot, and Bed, Bath and Beyond.

The Magic Johnson investment model offers a clear set of winners. First, the consumers who reside in the communities where the new entertainment and retail establishments are built gain easier access to services and products demanded. Customers who had to travel 40 minutes for purchase of entertainment and goods can now do so closer to home. The labor force benefits from hundreds of temporary jobs created by the construction effort in addition to the permanent management and operational jobs that result from the new businesses. Governments pick up incremental tax revenues that may have gone to other cities that residents traveled to for shopping and other commercial activity. Established businesses gain entry to untapped markets with a positional advantage provided by their strategic partner. The strategic partner, the minority entrepreneur, receives the operational experience of the corporate partner and can leverage the financial resources and brand equity of the partner to increase the probability of success and limit risk.

The downside of the Magic Johnson investment model centers squarely on its transferability and scalability. While no clear losers come to mind, great uncertainty exists surrounding the speed with which businesses can be started and the entrepreneurs who will share risk with corporate partners. Magic Johnson has the good fortune of being one of the most beloved sports stars of the 201 century with a cash reserve ready to be put to work. Also, Johnson's celebrity status gains him access to business executives where a lesser known entrepreneur might find a closed door. Sharing risk equally with corporate partners requires a significant amount of capital that is not readily found in the financial accounts of minority business professionals. To make investment in the inner city work, where sufficient capital is not present, companies will be forced to accept a larger share of the upside (profits) in exchange for taking on more risk (initial investment). The CEOs that have partnered with Magic Johnson have anchored on the appeal of having Johnson taking equal fiduciary responsibility.

Another negative to this investment model exists in its strategic aim: focus on retail, food, and entertainment businesses. Alternative uses of capital might include sectors of the economy that bring higher paying jobs that increase the intellectual capital of the community. JDC brings jobs that tend to be lower paying on average and offer lateral movement but not an abundance of management opportunities. In addition, corporate partners bring bureaucracy in addition to their financial muscle. There is no guarantee that partners will have pure alignment with the goals of the entrepreneur. However, these factors do not create enough concern to erase the underlying fundamental of the Johnson Investment Model.

A Movie Theatre in the East Bayxx

Entertainment has long been a lynchpin in the minority community. Movie box office gross totaled $6.4BN in 1998. The movie theater business is not currently considered a growth business. Theatre operators conduct business in a mature industry where ticket price increases have trailed inflation and attendance has been mainly flat over the past decade. Theatre operators must keep pace with the growing array of entertainment offerings by updating their venues to offer a more state of the art experience. Megaplexes (14 to 30 screens) which offer a range of amenities including stadium-style seating, state of the art digital sound systems and more comfortable seats are replacing old multiplex theaters (13 or less screens). Brand-name concessions are also making their way into theaters. The untapped urban market presents an opportunity to ride the wave of change in the industry and create value in previously under served communities. JDC could be used to construct a Magic Johnson Theatre megaplex in the East Bay.

Megaplexes offer benefits to the theater operator in terms of overall economics. Profit margins are greater on ticket sales and concessions in megaplexes than in older multiplex theaters. A research report by Salomon Smith Barney reports that AMC, one of the leaders in the theater business and a pioneer of the megaplex concept, earns an average of 10% more on ticket sales in its megaplex theaters and $0.20 to $0.30 in terms of per capita concession revenue. xxi The availability of more screens will provide additional benefits including increased flexibility to allow theater operators to better deal with the increasing number of films being released by Hollywood. The operator can respond to varying levels of demand for films by shifting popular films to larger or additional theaters leaving the smaller theaters to house the less popular films. This optimization should lead to higher overall attendance levels that translates to more revenue. Amortizing overhead expense over a greater number of screens yields even further scale economies.

Building a megaplex is not without risk and drawbacks. Megaplexes have high fixed costs to support the buildout of a facility with a greater number of screens. More screens increases the business' sensitivity to box office declines or decreases in the number of films released. Distribution is also a concern, as the theatre will have to have first rate, first run films to attract movie goers from established theatres. Patrons will have to be convinces that the new establishment is a suitable substitute (movie selection, amenities, safety, cleanliness, etc.). In order to understand the financial implications of the movie theater industry, it is important to understand that theater profit is heavily dependent upon movie selection. It is critical to have good relations with the studios. On average, ticket sales account for slightly less than half of theaters' income, with concession sales making up the majority. Special promotions, such as summer movie camps for children and corporate programs, also help boost income.

Successful location and operation of a megaplex theatre is dependent on 5 environmental factors. These include:

The Oakland metropolitan area represents a large market with more than 2 million residents. Total population growth during the 1990's has been more than 9% as opposed to 7% nationally. Median income for the area was $42,400 per household in 1996 that was almost $7,000 higher than the national median. The University of California-Berkeley drives much of the cultural and intellectual growth for the area. This is of{set by the high crime rate that Oakland suffers from. Oakland has more than 850 violent crimes per 100,000 inhabitants. The national average is 684. However, the statistics represent a fall in crime rates. Burglary and motor vehicle thefts have dropped 22% since 1995. The East Bay is becoming a safer place to transact business.

The retail sector is lagging commercial development in the East Bay. Approximately 650,000 square feet of new retail space was developed in 1997. This is half the size of the Stoneridge mall in Pleasonton. Developers fearing vacancy have chosen to stay away from retail development. An entrepreneur with a link to the community would be able to secure relative attractive financing and tenants.

The East Bay continues to share in the economic prosperity led by technology firms in Silicon Valley. The employment base relies heavily on the government and private sector employers such as Clorox, Kaiser Permanente, Pacific Gas & Electric, and Wells Fargo Bank. The economy trails national averages for proportion of persons employed in both the manufacturing and retail sectors. Pleasonton and Fremont have become attractive for high tech firms and Devry Institute is considering a campus in Fremont. The employment base, though trailing national averages in certain sectors is growing with net job creation. Another sign of vitality in the Oakland-East Bay area is the $600 million dollar expansion of the airport.

Successful construction of a megaplex requires a balance between current amenities, cost and flexibility. Design is a key component for success based on a number of factors. First, theater operators rely on facility attributes such as stadium seating, a large number of screens and high quality wall materials to enhance sound quality for a competitive advantage in the market. Next, megaplex theatres need entertainment-related retail to create incremental revenue. Finally, operators must constantly reevaluate strategies and product design due to the prevailing dynamic nature of the movie industry. The following features have been identified as central to the long- term competitiveness of a megaplex: large number of screens, stadium seating, efficient concession design, adequate and well-designed parking.

The following represents an attempt to quantify the cost to build the megaplex and bring it to operating readiness.

i A window on the new economy, May 1999, Inc. Magazine.

v Minority Businesses Need Capital to Thrive. January 18, 1999. Los Angeles Times.

vi 1994 Small Business Profile: California. November 1994. U.S. SBA.

vii 25 Years of Black Capitalism Initiatives. November 1994. Black Enterprise.

viii Plugging in to Minority Markets. September 1994. Journal of Accountancy.

ix Driving for Diversity. September 1992. Black Enterprise.

xi A Marketer Profiles 'The Consumer of Tomorrow.' January 22, 1990. Drug Store News.

xii Going for the Geezers. December25, 1995. Time Magazine.

xiii Inner Cities' Retail Punch. June 12, 1998. The Boston Globe.

xiv A window on the new economy, May 1999, Inc. Magazine.

xv Harlem Finally Rides the Economy’s "A" Train, May 5. 1999. The Washington Post.

xvi A window on the new economy , May 1999, Inc. Magazine.

xvii Ibid.

xviii The Inner City 100, pg. 81 (pg. 69) May 1999, Inc. Magazine.

xix Tile Magic Touch, May 1999, Black Enterprise.

xxii Oakland-East Bay Vol. 19, National Real Estate Index, Third Quarter 1998.