Eric Langan Sold His Baseball Card Collection and Went Into the Strip Club Biz, Voila: Rick’s Cabaret

Wonder what my Pete Rose rookie card is worth nowadays… – When Eric Langan was 19 years old, he and his wife divorced. They had been married just a few months and had a daughter together. Langan was devastated.

To cheer him up, his friends took him to a table-dance bar in Fort Worth, Texas. Soon, Langan was spending every night there. He started dating one of the dancers, or “entertainers”, as he calls them. His flatmate did the same, and soon, six of the women regularly hung out at Langan’s apartment. The divorcee drove them to work and picked them up. After a while, Langan says, “I realised it was crazy to let somebody else make the money”. He sold his baseball card collection for $40,000 and used the sum to open his own club.
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“I was interested in the money as well as in the girls,” the 41-year-old Texan says. “As I got older, I focused more and more on the money.”

Langan is now chief executive and the largest shareholder of Rick’s Cabaret, one of the biggest strip-club chains in the US. The company is listed on Nasdaq and operates 20 clubs in seven states. In 2008, revenues were nearly $60m and net income $7.7m. Langan was paid $509,918 last year – not a bad income for a high school dropout.

There are only estimates on the overall revenue of the sex industry. But according to Adult Video News, an industry trade magazine, US customers spent $12.6bn on DVD rentals, pornography websites and strip club visits in 2005. How those figures have changed since then is less clear. While porn production companies have suffered because of the abundance of free content online, strip clubs still tend to be profitable businesses. “Our clubs provide a steady cash flow,” says Langan.

There is money to be made out of sin. Breweries, arms manufacturers and tobacco companies are not the kinds of businesses in which socially responsible funds would invest. But they provide opportunities for investors unconcerned with social mores.

According to a study by Frank Fabozzi, finance professor at Yale University, the average sin stock produced an annual return of 19 per cent from 1970-2007; in comparison, the average stock produced only about 8 per cent a year. Prof Fabozzi also discovered sin stocks outperformed the average stock market in 35 of the 37 years he tracked.

Jeremy Siegel, professor at the Wharton School at the University of Pennsylvania, found Philip Morris, the tobacco company now renamed the Altria Group, was the best-performing stock among the original members of the S&P 500 index from 1957-2006. “Philip Morris has ­offered better long-term returns to its stockholders than any other stock, nearly doubling the returns on the market over the last half century,” says Siegel. (It was also the only stock Ben Bernanke owned when he became the chairman of the US Federal Reserve in 2006.)

And yet, for all the value created, people who work in so-called “vice” industries have to contend with constant criticism.

Langan learned the hard way. In 1989, when he opened his first club in Fort Worth, Texas, a neighbourhood association lobbied against it. Langan was arrested 13 times because he violated ordinances that were ater proven to be unconstitutional. The authorities enforced them anyway. “It was annoying,” he remembers. But it also helped his club. The protests turned out to be the perfect marketing tool. “We were busy until we closed and moved to a larger location.”

Nevertheless, the arrests taught Langan a lesson: never get in trouble with the law, especially if you own a strip club. He says he always plays by the rules. People may associate strip clubs with prostitution, money laundering and gangsters, but Langan says he has never, for example, had to deal with mobsters. “Our business is so regulated [and] there are so many background checks that it is not functional for them,” he says. “These guys prefer garbage and other businesses nobody cares about.”

About 2,500 entertainers work in Langan’s clubs. They pay a fee to dance and get the tips and fees for private dances and two-thirds of the fees for private audiences. All of them receive two pages of house rules when they start at a club. Because prostitution is illegal in the US, ­Langan throws out dancers who breach the “no sex policy” of his clubs. He takes the same approach to drugs.

To control the revenues, Langan set up a so-called “cage system”, which he adopted from the casino industry. At the beginning of a shift, bartenders and waitresses pick up the cash drawer from a cashier in a heavily secured room. At the end, they return, tally sales with the cashier and match them to the receipts. The money is then sent to headquarters. Sixty per cent is paid by credit cards. Tax fraud and money laundering are nearly impossible.

In spite of fights with neighbourhood associations, Langan thinks his business is becoming more socially acceptable. In the past, the only women showing up at his clubs wanted to catch their husbands red-handed. Now, on Saturdays, up to one in three customers are women.

The staff are changing, too. Because of the recession and rising unemployment rates, paralegals, bankers and estate agents have started to work as dancers. “We are out of the alleys, but not on main street yet,” Langan says. “We are somewhere in between.”

Since the onset of the recession, Langan has also changed his target market. Instead of focusing on the high rollers who spent $30,000 a night, Rick’s Cabaret now concentrates on smaller transactions by more customers. Langan extended the happy hours in the afternoons to lure the unemployed into his clubs. “Our business is not recession proof, but recession resistant,” he says.

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