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Here is an article we wrote for Parking Today’s January edition:
While driving home from a conference recently, we realized there is quite a bit that rap music can teach our industry about parking and revenue control. Who knew all we had to do this whole time was jam out to some tunes!
The industry is changing more rapidly than ever. New niche players spring up seemingly every month with the next big solution. Our industry’s own data revolution is in its infancy, and the concept of “revenue control” is more important than ever, and should be at the forefront of every owner’s and operator’s operations.
Before we dive into the topic, let’s take a step back and define the term revenue control, as it’s long been a key concern in the industry that has surfaced in almost every industry publication since Nixon took office.
In the most basic form, revenue control extends far beyond sophisticated PARCS equipment and software, and more broadly defines the process of collecting the entire parking fee from a person who has chosen to park a vehicle in a facility.
Here are some key takeaways we learned on our recent drive:
“See I’ve been drinkin’ champagne all night. Never worry ‘bout a damn thing and y’all might …” – Wiz Khalifa
Often we tend to get in our comfort zone and fail to recognize that the environment around us is changing. Whether a person parks daily or via recurring contract; whether that facility was paid for by swiping a credit or access card, paid by phone or by handing over cash, using a validation, walking up to a kiosk or merely catching the view of an LPR camera – all that is beyond the scope of this discussion.
Continuing to have a strong handle on these processes will lead to a better understanding of operating efficiencies and basic measures that should be taken to prevent revenue erosion. This is an ongoing process that needs to be reviewed as your operations change, new people come onboard, and “materiality thresholds” are triggered. Plain and simple: Don’t get complacent.
“I know the price, know the risk, know the wrongs, and the rights …” – Jay-Z
If you haven’t figured out how to beat the system, someone has. It’s absolutely the responsibility of the parking provider to ensure that potential points of failure are identified so that opportunities for others to make self-serving decisions are eradicated.
Many parking professionals we have talked with know at least one way to scam their own facility: a gap in facility monitoring times, a software shortcoming or even a hardware loophole. The problem is that if one person knows about the gap, many others know about the gap! Just the other day we carried a large metal object over a loop detector to test whether we could bypass a control …
“I guess you lose some and win some, long as the outcome is income …” – Drake
OK, great, so now it’s time to rush out and start shopping for the best solution, right? Not so fast!
This is where materiality comes into the equation. It’s important to weigh the cost of implementing a control versus the overall risk of the exposure. In many cases, you can implement mitigating controls by adjusting resources and using the tools you already have available.
We know that equally important to controlling the revenue is controlling those around that revenue. Limit opportunities for those around the treasure to steal, manipulate numbers or lie – whatever it may be. Points of failure should be identified and evaluated after each discovery.
“I want it all, man. I never learned how to share” – Drake
The progression of our industry is dependent on the willingness of competing software and hardware providers to work with one another in order to serve their shared clients. Operators should have the freedom to choose the software that best serves their respective facilities. An unintended side-effect of open frameworks is the inevitable exposure to new or additional vulnerabilities.
Failing to integrate properly will also make it more difficult for a parking provider to identify points of failure. Moreover, a failed integration will most certainly lead to lost revenue or upset parkers. How many times have you heard of a municipal parking solution failing because of integration, only to find that one software provider is pointing fingers at the other?
On the flipside, closed-architecture environments have rarely been advantageous to the customer in any industry. Arguments against integration range from attempts to rescue diminishing margins to security concerns or poorly designed systems. Regardless of the reason, when operators are forced to push a square peg through a round hole, they are often left with an overabundance of unused software. This is not in the best interests of any party.
“You know how much you love it when you get it in abundance … ” – Mac Miller
So you get that new solution, and it has all these great bells and whistles. What people find is that they may have introduced more problems. In fact, less than 10% of revenue software is actually used (per PT the Auditor).
Not sure whom to blame for this – the parking provider who has not trained garage employees or its management properly; the software provider for designing a system that is too complicated to be effective; or the hardware vendor for providing an inferior but proprietary software solution, yet forcing its use through a closed-architecture environment?
One of the most common risks of failure is most certainly the acceptance of cash as consideration and best practices for handling currency. From shrinkage to throughput issues to limitations on dynamic pricing options, cash has proven a hindrance to the parking industry. Fortunately, as more access control processes move into the “cloud” via electronic payments, the use of cash is diminishing year over year.
With this trend, we have seen the increased importance of data mining and security; after all, aren’t data the new currency? In fact, data are currency in one of its most liquid forms. Equipment and processes should be sought out that provide relevant and actionable data and that can communicate effectively with legacy and incoming systems.
Strategic decisions based on these data will result in operational efficiencies and push toward revenue maximization while improving the parking experience.
A better parking experience
The parking process can be simplified through the use of innovation and technology. A very clearly defined and frequently audited revenue control plan that ties into the parking provider’s ultimate goals and limits shrinkage opportunities is crucial to lay out before purchasing a PARCS solution.
And vendors should be selected that are willing to effectively integrate both back- and front-end software in the best interests of the client. By doing so, parking providers will be given the best opportunity and clearest runway to understand and analyze their facility data to improve operations.
So maybe Drake and Wiz Khalifa weren’t talking about parking, but the concepts are universal. Revenue control should always be top of mind, and maybe that’s why we heard it on the radio! What has the music industry taught you about parking?
Will your problems be solved with the implementation of new parking meters, central pay stations, pay-by-phone, all of the above, or none of the above?
Another day, another article that touts how a city is unveiling parking stations to replace parking meters. Flip to the next article and you likely will see that there is a campaign in a different city to remove failed parking stations.
Notice in the title, we didn’t say which option is best, we said which option is best for YOU. It’s not surprising that we keep seeing a trend with reversion back to the basics. All too often we are speaking to parking providers and find that they are currently bombarded with a plethora of options that are positioned as being the end all solution. With good intention and promise, the providers quickly provide for the capital outlay and adopt the solution. Life is good now right? Well…maybe not. Before you know it the solution that was going to be the best thing since sliced bread is not getting the reception that you thought it would.
The common theme we find is that decisions are being made without regard to the actual needs of the community and instead are based on the perceived needs of what they think folks need. Providers should thoroughly research their community’s specific parking needs and understand that there will never be ‘one size fits all’ solution appropriate for any and every situation.
The adopted solution should also cover the objectives of all key constituents (residents, businesses, visitors, government). Which leads to the question: what are the key long-term objectives? Herein lays the challenge. Each party has slightly different goals.
Regardless of what solution you decide to adopt there will be a set advantages and disadvantages that inevitably will lead to complaints. Knowing what these are and how to navigate against the headwinds will help. Based on our conversations with a broad base of providers (municipalities, universities, and owner/operators) we have compiled a list of things to consider before going down the path of any one option.
Central pay stations / kiosks
Advantages
Disadvantages
Note that if you do implement a pay station do not make it pay and display i.e. requiring the users to walk to a kiosk, pay for time, walk back to the car and place a receipt on the passenger side dashboard. Simply said, it sucks.
New electronic meter heads
Advantages
Disadvantages
Pay-by-Phone
Advantages
Disadvantages
With inflation on the continuous rise, the migration to some sort of electronic payment is inevitable…there is only so many quarters and dollars you will stuff into a meter or kiosk!
In the end, it all goes back to doing what is right for meeting long-term goals / objectives of all parties. The right solution could involve any combination of the aforementioned alternatives but will depend on your situation and pressure points. Everyone has good intention but sometimes we fail to do what we should all be doing first: listen
Privatization is not a new concept but seems to be getting more attention in the parking industry especially on the heels of the recent deal between OSU and LAZ Parking. By now, I’m sure you have all heard that Ohio State made the decision to let LAZ Parking manage their parking operations for 50 years in exchange for $483 million (a pretty hefty Enterprise Value/2012 EBITDA of 24x). That seems like a lot of money… until we think about the recent Instagram purchase of $1 billion!
We have seen articles and opinions flying around and we decided to give the analysis on this deal a shot as well. We also understand privatization remains controversial but instead of getting into something rhetorical, let’s dissect this specific deal as a basis to form a view. Did LAZ increase its return on invested capital? Did OSU leave money on the table? Let’s find out!
Given our expertise and background in finance we decided to roll up the sleeves and do some quick back of the envelope number crunching. CAUTION – if you don’t like dealing with numbers stop reading now.
We have to say that we’re impressed with Ohio State’s approach and transparency of the bidding process. They have a dedicated site with all the latest information and resources located at http://www.osu.edu/parkingproposal/.
It didn’t take long to find the Request for Qualification completed by Morgan Stanley. Flashbacks to the investment banking days quickly surfaced as this RFQ looks identical to a CIM (Confidential Information Memorandum) used in every sell side process. MS did an outstanding job at laying out OSU’s parking situation. Hours of work and likely all-nighters were put into completing this document and it’s nice to be on the other side for a change!
Although we don’t have details for all the fine print in the contract, the document provides us with enough numbers (with the baseline being 2011) to formulate projections and perform a valuation using a discounted cash flows methodology. Here are the assumptions we used for the model.
Below is a snapshot of the framework we used to project out the cash flows for 50 years using the aforementioned assumptions above.
Articles mention that LAZ will “walk away with $3 billion”. Here is the basis for that number. If you cumulatively sum the net cash flow for all 50 years it totals about $3 billion at the end of year 50 as shown below.
The reason why LAZ’s offer is in the millions and not billions is because you have to determine what that stream of cash flow is worth to you today. You do this by discounting the projected cash flow by LAZ’s cost of capital. Since we already knew LAZ’s bid, we backed into what the range of discount rates needed to equate the stream of cash flows to the $483 million bid.
Wave the magic wand and voila! Out comes one of the key takeaways. Using high-level assumptions we see the discount rate is about 6.5-7%. So what does this mean? At a high-level it represents the opportunity cost that LAZ must compare this investment versus others with similar risk profiles. Estimating the cost of capital is a topic on its own but tells us what LAZ expects to earn from the deal.
As you can see the implied deal value using the various discount rates ranges from approximately $400 – 500 million. The chart below compares the pure free cash flow from parking to what those cash flows are worth today.
OSU plans to take the $483 million cash injection and invest it in their endowment where they state that they expect a growth rate of 9%. This is a very lofty goal considering the average S&P 500 return is around 9% (Robert Schiller Online Data, which includes dividend reinvestment) without any management fees or taxes layered on top. Layering on 1% management fees, which would be relatively low, and a 10% tax (not all of the investments would turn over year to year) you would come to a total growth rate of roughly 7%.
OSU will also continue to receive all revenues from ticketing less LAZ’s cost to enforce. This is for another topic but what incentive does LAZ have to ticket when they don’t benefit from the additional overhead?
So is this a good deal? Taking our endowment breakdown above you will find that using 7% growth rate will give you an net present value on the cash flows of $406 million. If OSU does an average job of investing these funds, they should come out on the better end of the trade.
But, as always, the devil is in the details. It’s not totally clear how LAZ is limited or how creative they can be with price increases. For instance, can they change a variable rate structure to charge more up front while keeping the daily max within the 5.5% maximum raise? This would represent a significant increase in revenues from day one and would change the picture painted here dramatically.
There are other questions involved that we won’t have answers to, or won’t have the time to find, but given the information available, the deal doesn’t look as bad from OSU’s side as so many people are stating.
Also, let’s not forget one of the biggest risks LAZ takes on with this bid: betting that both the financial climate and academic appetite will remain strong for the next 50 years. With education costs continuing to rise at astronomical rates and the emergence of alternative education methods through the Khan Academy, iTunes University and others that we expect to pop up, LAZ is going all chips in that student enrollment will continue to rise, the economy will thrive and they will be able to leverage operational efficiencies. That’s a pretty big wager.
OSU has obviously taken a risk here themselves. A diversified portfolio is a good thing to have, and one could argue that OSU’s parking revenues are a great diversification tool. They represent a steady revenue stream even in an economic downturn. There are also questions about goal alignment. Is the goal of parking at OSU to maximize revenues? If so, then selling off parking is not a problem. But, if the goals are elsewhere, then selling off parking is a dubious decision.
In the end, after balancing all of the issues presented and money trading hands, we think the deal came out right about where it should. If the market treats OSU kindly, they will come out on top. If we face rough head winds in the next few years, OSU will be wishing they held onto those steady revenues. LAZ created a high hurdle for themselves, but we think they are privy to some knowledge that we are not. Starting revenue 10% higher by adjusting rate structures and lowering costs and capex by 10% can significantly improve their situation. If they can accomplish these tasks, the deal would end up great for LAZ as well.
Check back with us in 50 years for the final analysis.
As Dennis Burns points out in his recent blog post at Parking Matters, technology is changing fast. Fifteen years ago you probably didn’t have an email account. Ten years ago you probably didn’t have a laptop, and you probably didn’t have a home internet connection. Five years ago you had probably never heard of Facebook. Three years ago you probably didn’t have a smartphone or watch any streaming movies on your computer, and last year you had probably just heard of pay-by-phone parking. The times are changing fast in the world of technology, but it’s quite a bit of fun to watch it happen. As a company in these times we believe it’s very important to stay on the leading edge of where things are headed, because even the most respected and trusted technology brands can tumble with a misstep.
As we follow tech and business in our efforts to stay ahead, we often have lively discussions on what technologies and what businesses will win. A few months ago we had some internal debates regarding who would win the internet war between Google and Facebook (did you even realize there was a war?).
Google is obviously the entrenched giant, but we came to the conclusion that Facebook would win because their tech had given them a strategic advantage. Facebook was riding the strength of their technology and the “Network Effect”, whereas Google has been treating their search business much like a cash cow in the hopes to fund other profitable ventures. Both strategies should be lauded, but in the end, Facebook’s will win.
The reason we believe the tide will shift towards Facebook is because of the inherent network effect. Facebook has high switching costs for the customer (moving pictures, setting up friends again, losing history with friends and wall post history), whereas internet search has low switching costs (switch the URL that you go to). We have actually seen this in the past. Starting in 1996 Altavista was the dominant search engine. They held this post for a year or so - right up until Google launched and took over the search world. Users updated their search bookmarks and the once dominant Altavista disappeared. It was just that quick.
After Google took a swipe at Facebook with Google+ in an attempt to create a social network, the retaliatory motion by Facebook would be obvious, and far more effective. They would create a search engine. The advantage that their search engine would have though, would be that it could search their social network as well as the internet. So when you searched for the “Drake Hotel” you’d see your normal internet search results along with your friends posts on the subject. Facebook could search the social grid, but Google could not. This would be a huge advantage.
This functionality has recently been integrated into Bing’s search engine through a partnership with Microsoft. Google is in trouble, and Microsoft is back on the rise with the help of Facebook.
We think this is a perfect example of the breakneck pace of change in the technology arena and a reminder that you should always ensure that your operations are flexible enough to move with the rapid pace of technology. We must all be cognizant of the tech around us to stay ahead of the game, both strategically and technologically.
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Parkers want electronic payment and are in fact willing to pay more for this option!
How many times have you been in a meeting with a client or within your own company and folks start making claims and taking stances on topics that leave you slightly nodding (not in agreement but in acknowledgement that you are hearing them) thinking you would love to see the backup? You don’t call them out on it because you don’t want things to get awkward or counterproductive. We’ve all been there!
Our company loves numbers and we are a bunch of nerds so before putting stakes in the ground we like to see what people are actually saying and try to test our hypotheses. About three years ago we set out to see if the parking community was ready to abandon cash so we took to the streets of Minneapolis, MN and surveyed people on the following focus points:
To ensure results remained independent we handed out surveys that were folded neatly in a pre-stamped envelope ready for delivery.
Below is a summary of one part of the survey. Participants were asked to rank on a scale of 1-5 the importance of each parking facility feature with 5 being ‘Most Important’ and 1 being ‘Least Important’.
Additional data points worth highlighting from the survey:
The results do not come as surprising. What is shocking is the responses we hear from parking providers when discussing adding electronic payment options to their facilities - especially in situations where they currently have cash only operations (meters, cash drop boxes, envelopes…yes there are still lots where you write your LPN and place the cash in an envelope!!).
20 years from now we can’t envision a parking world with all this cash floating around, nor an environment dealing with those tickets that you can never keep track of. There has been a big push toward electronic payment in the parking industry moving away from cash; however, the majority of providers we have spoken to are reluctant to make the move towards adding electronic payment even with keeping cash as an option.
We have heard a wide range of concerns and comments. Here are a few quotes:
Yes, we know that there is added costs that you must face with the merchant processors as we wrote in a prior post. In the end, some folks will see that adding electronic payment will enhance customer satisfaction, increase transparency, and most of all boost revenue! We spoke to one municipality in Florida that said its revenue went from $900k per year to $3.2mm by adding electronic payment as an option and keeping everything else the same in terms of rates. Among other points, they mentioned that parkers started to think of parking in terms of how much time they need not how much change they had in their pocket.
We would love to hear from you. Why are parking providers reluctant to make what we believe is a necessary change to adding electronic payment to their facilities? Help us comprehend this dynamic, despite all the empirical evidence and consumer feedback, why we don’t see adoption happening much faster.
Also, if you have other data points you want to share with the broader parking family, send them along!
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Recently, many operators have been taking the plunge out of the Stone age and into the 21st century by accepting plastic. Based on a recent study, the cost to handle cash was 6.5% of gross revenue. We agree that this is much higher than any credit card fee but will explain why the merchants are still hesitant to go away from cash despite this recent stat.
Adding electronic payment options to your parking facility(s) seems simple enough, right? Well maybe not as simple as you thought thanks to merchant processors.
In order to accomplish this goal, we have to pass through the oligopoly gates of Visa and Mastercard.
The irony behind the premise of moving towards electronic payment is that although all signs tell us to move in this direction, the payment processors are forcing people to stay in the Stone Age through their high fees, which make taking electronic payment on small charges nearly impossible.
As a quick 101, the fees that businesses pay when they accept a credit and debit card are called interchange fees. An interchange fee generally consists of a percentage and flat transaction fee, such as 1.51% plus $0.10.
Visa, MasterCard and Discover collectively have several different interchange fees for their respective brands, and each determines under what circumstances a particular fee applies. Variables such as card type, card brand, processing method, loyalty rewards, and transaction amount are all considered when determining which interchange fee will apply to a particular transaction. On top of this fee the gateway you use will take their skim as well adding to the overall fee.
These high fees have always been a complaint of merchants. And because of the oligarchical nature of the industry, and also the high fees that this created, the government decided to try and step in and help correct the situation. In late 2011, Senator Durbin (D-Ill) put action forward to help resolve the issue but failed to see what implications this amendment would create for the many merchants that take electronic payment on small dollar transactions. The government, in their attempt to regulate the industry, has taken electronic payments a step backward.
With good intention, the Durbin Amendment capped the fee that businesses pay banks when they accept a debit card. The cap is 0.05% plus a flat $0.22 cent transaction fee for cards issued by banks with $10 billion or more in assets.
A cap sounds good right? Not when you see that the rate before the amendment was 1.55% plus $0.04 that applies to swiped transactions of $15 or less. On a transaction of $4 the fee was just raised from 10 cents to 24 cents. Thank you government!
As you can see the cost of processing low value debit card sales (transactions less than $15) has now dramatically increased for businesses with small tickets. While this new regulation caps the interchange fees for regulated transactions and has saved billions of dollars for most U.S. merchants, it has created an unintended consequence of doubling, and in some cases, tripling the cost of interchange fee for small ticket transactions.
The table below shows the effective interchange cost based on average ticket sizes. As you can see, tickets below $12 were hit the hardest.
Knowing this information, I don’t find it surprising that we started seeing a sentiment shift among businesses. Have you hopped in a taxi lately, or tried to buy a soda at the gas station? You may have noticed a small change. Check out a picture my colleague took while paying for gas recently.
This amendment has recently passed, and merchants are slowly finding out about the significantly higher effective fees on their smaller ticket transactions. As time passes and merchants become aware and react, we believe consumers will be seeing these restrictions more and more.
Parking operators are reacting with their hesitation to add electronic payment and with the convenience fees that are often tagged along with electronic payment options. When you have a 50 cent processing fee tagged to a $3 parking fee it is hard to blame them for their actions.
In the end, the consumer is getting the short end of the stick in the parking industry and many others. We should all take a deep look at this and do our part and lobby for change.
Sustainability is the capacity to endure. For humans, sustainability is the long-term maintenance of responsibility, which has environmental, economic, and social dimensions, and encompasses the concept of stewardship, the responsible management of resource use.
For some time now, the movement toward sustainable business practices has made itself as prominent in the Parking industry as it has in similarly pervasive industries. Unfortunately, many “sustainable” applications are fiscally unsustainable. Sustainability is about much more than green stamp on marketing materials; green investment decisions should have positive and lasting environmental effects without negatively impacting the bottom line. In an industry where margins are already slim, it only makes sense to take a finer-toothed comb to the software and hardware that is utilized on a day-to-day basis.
The only way to continue to advance sustainability in the Parking industry is a grassroots movement toward sensible innovation that makes “going green” an easy decision for the Parking Provider. Innovation that has long-term responsible environmental impacts while proving to be an easy implementation decision for parking providers whose allegiance is in maximizing stakeholder value. “Green” technologies should never come at the expense of parkers.
Sustainable solutions should be cash flow positive from the start.
Far too often, companies choose to implement a “green” technology that proves costly and inefficient with payback periods that extend far beyond the benefits of implementation. We need to rethink sustainability with progress and long-lasting fiscal and environmental benefits at the core.