AN EXPLORATION OF ITS USES AND LIMITATIONS
Stefan Toepler, Ph.D.
George Mason University
My research project addresses the implications of the growing merchandising trend in the museum field--drawing on and extending earlier studies that I conducted with a number of colleagues in recent years. Merchandising is defined here as retail activities in the form of on-site and off-site museum shops, the operation of mail-order catalogue businesses or websites selling products that closely or loosely relate to the core mission and activities of the museum. For large and smaller museums and other cultural institutions alike, merchandising activities seem to have become an important revenue generation strategy, which is currently further fuelled by advances in e-commerce.
The appeal of merchandising is dual: On the one hand, whereas donative revenues (that is private gifts and grants, sponsorships, as well as government subsidies) often come with "strings attached," merchandising profits can be used at the institution's discretion and constitute a ready source of funds to cross-subsidize museum functions that are less appealing to outside funders. On the other, merchandising can contribute to the educational mission and enhance name recognition and reach of the organization. Unfortunately, the actual effects of this strategy on the revenue mix or the perception of museums as nonprofit, educational institutions have not been studied in-depth so far.
In fact, given the attention that the merchandising activities of larger museums occasionally draw in the media, there is a surprising dearth of analytical literature on this topic. Apart from "how to" works, 1 the arts management, marketing, economics and policy literatures have so far only dealt with pricing issues (i.e., the pros and cons of admission charges) or the relationships between public support, private philanthropy and earned income in general.
My inquiries into this topic began with a paper, co-authored with Helmut Anheier, that utilized Internal Revenue Service-Statistics of Income data on large museums to investigate whether museum revenues had become more commercialized akin to trends in other nonprofit service fields. 2 Since the expansion of museum shops and the proliferation of blockbuster shows had been a fairly obvious phenomenon, our findings were somewhat counterintuitive in that admissions and auxiliary revenues remained fairly constant in relation to total museum revenues from the early 1980s to the early 1990s. We also found some indications that led us to expect that merchandising may not be quite the financial windfall that it is generally presumed to be.
In a more recent paper with Sarah Dewees, we followed up on this by comparing more recent IRS and Census data. 3 The IRS data for very large museums seem to indicate that merchandising revenues had become stagnant in the 1990s, but Census data still showed continued growth--suggesting that smaller museums continued to expand shops.
To move beyond highly aggregated data and better to understand the dynamics of merchandising, Volker Kirchberg and I assembled and analyzed a time-series data set of 15 museums. 4 While gross auxiliary revenues (and costs) in some instances equal the revenues and costs of running the museum proper, we generally found that the net contribution of merchandising and other auxiliary activities to the financing of museums is on average rather small. As shown in Table 1, merchandising gross revenues accounted
1 E.g., Theobald, M. M. (2000). Museum Store Management . Walnut Creek : Altamira Press. 2 Anheier, H., & Toepler, S. (1998). "Commerce and the Muse: Are Art Museums Becoming Commercial?" In: Weisbrod, B. (ed.), To Profit or Not to Profit: The Commercial Transformation of the Nonprofit Sector. Cambridge and New York : Cambridge University Press, pp.233-248. 3 Toepler, S. & Dewees, S. "Are there Limits to Financing Culture Through the Market? Evidence from the U.S. Museum Field." Forthcoming in the International Journal of Public Administration . 4 Toepler, S. & Kirchberg, V. (2002). Museums, Merchandising and Nonprofit Commercialization . National Center for Nonprofit Enterprise Research Paper [available at www.nationalnce.org]
for about one-fifth of total revenues and support in our sample, but net revenues amounted only to about two percent of museum revenues in the late 1980s and early 1990s and dropped to one percent in the late 1990s. Moreover, most museums do not appear to charge general administrative overhead expenses against their business operations. Adding a reasonable indirect cost charge would thus likely eradicate most net profits and raise the question whether the museums in our sample made any money on merchandising throughout much of the 1990s. In another paper with Barbara Morgan, using the same data set, we looked at the relationships between commercial revenues and public subsidies and private grants and gifts and found that extensive merchandising may have negative effects on contributed income. 5
Merchandising, net as % of adj. operating
* Adjusted operating revenues denotes total revenues and support minus auxiliary gross revenues. As such, it represents available revenues for the operation of the museum proper. Source : Toepler, S. & Kirchberg, V. (2002). Museums, Merchandising and Nonprofit Commercialization . National Center for Nonprofit Enterprise Research Paper, [www.nationalnce.org]
If the business activities of museums thus appear as a somewhat shaky proposition at
current, the question arises as to why museums have come to invest in merchandising in
the first place. Have revenue implications always be secondary? Are non-monetary
5 Toepler, S. & Morgan, B. “Crowding and Commercialization: The Effects of Nonprofit Commercial
Revenues on Donations.” Unpublished manuscript.
considerations, such as educational and public relations benefits or the need to comply with visitor expectations, the driving force behind the expansion of merchandising? While there are no easy answers to these questions, charting the history of business activities in the case of individual museums may hold some important clues. As an example, Figure 1 shows the operating margins (that is the annual surpluses or losses) of one major art museum with extensive retail activities from 1960 to 1999. Charting the operating margin before auxiliary activities, this particular museum essentially ran perpetual deficits since the late 1960s. Financial surpluses from retail operations, however, kept the museum afloat by reducing deficits in the early 1970s and early 1980s, keeping the museum at the break-even point for much of the two decades and even generating a substantial overall surplus in the late 1980s. During the 1990s, however, retail operations lost their ability to reduce operating deficits. What this case then suggests is that merchandising arose primarily for financial reasons, but that the financial rationale may have reached the end of its usefulness.
Figure 1: Operating Margin with and w/o Auxiliaries (constant $), major Art
operating margin w/o auxiliaries operating margin with auxiliaries
Taken together, the studies so far tell a story that is different from the usual success stories in which museum merchandising tends to be portrayed. At the same time, they point to a need for better understanding of the why and wherewithal of merchandising, and the development of guidelines and decision parameters that museums and other cultural institutions could use to inform their own plans for instituting or expanding shops and other auxiliary activities.
Study Purpose and Research Approach
If it were indeed the case more generally that that shops and retail activities may not quite be the financial boon for museums, significant investments in merchandising by museums and other cultural institutions might conceivably be ill-advised. However, as suggested by one of our studies, there may be significant differences between larger and smaller museums. With this as the general thesis, I will pursue two related research questions:
- When and why did museum merchandising originate as an accepted means of generating financial support among larger museums?
- What is the current experience of smaller cultural institutions in using
merchandising to keep the organization economically viable?
The research methodology for pursuing the first question will be to conduct a content and financial analysis of annual reports and financial data of three or four prominent museums over the past three or four decades. Such an analysis would allow a determination of when and for what reasons museums came to see the (re-)production and sale of collection-related items as a means of generating operating support rather than a primarily educational activity with only secondary monetary objectives. The selected cases should include two museums that were early on engaged in the reproduction of items and have since established a considerable merchandising presence; and, for comparison purposes, one or two other museums that chose to expand their merchandising only in the course of the last two decades or so. The second question would be pursued through site visits and exploratory, open-ended interviews with staff and trustees of smaller museums and cultural organizations in the Greater Washington, DC metro area.
Relevance of Topic to Advancement of Museum Operations
The museum field has experienced a significant expansion over the past two decades increasing the need for additional revenues beyond traditional private and public donative sources. Museum managers are therefore likely to further explore avenues to become "self-sustainable" and increase earned income. What is more, the current recession has already led to significant cuts in state and local support for cultural institutions all across the country and three states have so far floated the possibility of not only reducing, but completely eliminating state arts council budgets. With the recession and stock market downturn also affecting individual and corporate support and foundation grants, museums and other cultural institutions will feel considerable financial stress over the coming years and likely pursue commercial and earned income even more vigorously.
Merchandising is among the most prominent and appealing options available to museums in this respect, but it is also a financially risky option due to the significant investments necessary and the possibility of occurring sunk costs if the initial investments do not yield expected returns. A closer exploration of merchandising is thus both timely and of practical relevance and importance, as it may provide necessary guidance to the managers of cultural institutions and other nonprofits considering to embark on this revenue strategy.