The Feasibility Study: Guard Your Investment from Wishful Thinking
By Randy White
On my eighth birthday, my parents gave me binoculars. Why? I was clueless. I hadn't asked for binoculars. I reviewed recent conversations for any offhand remark that might have been used as evidence that I wanted binoculars. Nothing. Frankly, as a present, binoculars stank. Then, as my parents argued over who would be first to watch the neighbor's fluffy-tufted red-billed car-pooper, I realized that it didn't matter whether I wanted binoculars. They did. It's not like I was going to divorce my parents over a stinky present. They meant well, they just forgot to do their market research.
At the risk of stretching this metaphor to the breaking point, imagine that those nasty binoculars are an entertainment center, and that instead of blowing 40 bucks, you've spent millions of dollars to create something that you honestly believed would delight your customers. Now imagine that everything you think about what your customers want is wrong, and you just don't know it yet. Won't know it, in fact, until it's way too late. Think it might have made sense to spring for a feasibility study?
A high-quality feasibility study is crucial to the long-term success of a family entertainment center (FEC) or location-based entertainment (LBE). It makes sense that the best way to maximize the return on your investment is by giving people what they really want. But unfortunately, feasibility studies are often ignored, misunderstood or improperly performed. A good feasibility study becomes the marketing plan - the market-driven strategic plan and concept product design that is the road map for the center's development and operations.
While feasibility studies do deal with demographics, that's only one small part. A good feasibility study not only defines a project's market area and analyzes both demographic and socio-economic/lifestyles characteristics of both residents and visitors, it also analyzes the competition, the local culture, site constraints and opportunities. From these, it crafts a detailed development program (the product specifications), the concept plan and the economic plan that will optimize the success of that specific project in that market and at that location.
Perhaps the biggest barrier to the proper use of feasibility studies is the mistaken belief that there is a generic formula for any FEC or LBE. Everybody knows that an outdoor FEC should have miniature golf, go-karts, batting cages and a game room, and that an indoor FEC needs rides, soft contained play, laser tag, and games for all ages, right? Wrong. Starting with some stock formula dooms the project from the very beginning, as the product probably won't fit the dynamics of that particular market or maximize the project's return-on-investment potential.
Keep in mind that the "generic" formula was successful under different conditions. In the 1980s and early 1990s, demand for entertainment exceeded supply and any center could do fairly well. Today, consumers have many more options for how to spend their leisure time and money. Customers expect more and better, and they expect an FEC or LBE that was "customerized" to delight them.
A feasibility study allows you to do that. What amazes our company is that many owners spend more on advertising the grand openings of their centers than they spend to find out whether the center will survive the first year. A good feasibility study costs between 3/4 percent to 1.5 percent of the total project cost. It can tell you not just whether to spend the other 99 percent of the budget, but also how it should be spent to maximize the return-on-investment and long-term staying power of your center.
A good feasibility study follows specific steps of product development.
Market Area Definition
It would be so easy if you could just draw a circle around the location, count all the people inside the circle, and call that the market area. But market areas for projects depend on many variables, and in real life look more like amoebas.
Market areas depend on:
- the size of the project, which affects market draw,
- length-of-stay and per-capita spending;
- competition and its location;
- the exact location of the project;
- its visibility and accessibility;
- patterns of travel;
- the location of the project in relationship to nodes of shopping and other forms of entertainment; and
- psychological barriers, including geographic features, socio-economics and adjacent uses.
Market areas are never a fixed distance or constant travel time from the site because consumers don't behave that way. In one city, commuting to work is considered a chore, it's hard to get to the interstate, and there are psychological barriers around, say, crossing a river or a state line. That market area will look very different than one where driving is considered pleasurable and people are used to crossing over physical and psychological barriers.
The difference between plotting concentric circles and true, amoeba-shaped market areas can have a dramatic impact on feasibility. Our company has plotted the market areas for many existing projects as well as defined them for new projects. For centers of a similar type and size, we have seen market areas in densely populated areas extend only to three miles, and ones in sparsely populated areas extend as far as 60 miles in one direction, yet only 12 miles in the opposite direction.
How do we know this? We got off our tushes and conducted exhaustive reconnaissance throughout the market area, and we knew how to interpret what we learned. The stakes were too high to do anything less. An improperly defined market area can easily result in disaster if the project is too large for what the market will support, too small and overcrowded to dominate the market, or the wrong product formula for its marketplace.
Demographics
Once a primary, secondary and sometimes tertiary market area is defined, it's time to interpret current year and projected demographic data. Again, amateurs beware. We have seen many prospective owners waving their demographic reports without the slightest idea what they mean or how they relate to market demand, attendance, financial feasibility and product design. Or worse, they simply ignore the demographics altogether. They justify the center by saying, "There's nothing in our town for families to do," or "The Chamber survey shows that our town needs entertainment for families." Both statements may be true, but that doesn't mean a project is economically viable.
Another mistake is to look no deeper than population totals. A retirement city in Florida may have a population of 250,000, but have fewer potential customers than a 150,000 suburban market area. All the variables have to be carefully analyzed as they relate to each other. Household incomes are not relevant if your target market is families, and neither are the incomes of childless families or singles. And just looking at the number of children is meaningless unless their ages are matched to the ages of play that certain events attract. Also, prospective owners often assume that the family market includes parents and all children living at home. Not so. Teenagers rarely go out with their families, and large numbers of teenagers intimidate mothers with small children. A facility designed for one will drive away the other (and teens usually win).
Socio-economics/Lifestyles
The best that demographics can provide is a picture of the population in aggregate and in averages and medians. Socio-economics and lifestyles (SELs) tell you more. SELs cross-match demographic variables to tell you what your potential customers are like: their values, their behaviors, and their lifestyles.
An essential part of a feasibility study, SEL analysis will tell you how your consumers behave so your project can be designed to appeal to them. You can't be all things to all people, because the tastes, values and preferences of one SEL group are completely different than another, as different as a country club is from a blue-collar neighborhood bar. By using SEL analysis to target a niche market, you can create the high level of guest satisfaction that is required today to generate guest loyalty and repeat business.
SELs are one of four defining parameters required to target a niche market (the others are age, the type of group that is coming, and the type of experience). SELs are important because people tend to choose one product over another primarily because the values of one reflects their own identity, a concept that retailers call lifestyle marketing. Unfortunately, most FECs and LBEs fail at SEL targeting, even if they don't have direct competition. They build a generic center that doesn't match the tastes, values and needs of any SEL group, and it can cost them their businesses.
Competition
People see competition and they automatically assume a project is not feasible. Ain't necessarily so. Look at who the competition is attracting, by both age and SELs, and compare that to the market area's demographics and SELs. Are there niche markets the competition is failing to attract? Is the competition mismatched to the area's SELs? Is the competition an outdoor center, leaving space for an indoor center? Is the competition capturing (or designed to potentially capture) special programming markets such as field trips, camps, fundraisers, classes, picnics, etc?
Conversely, the lack of direct competition doesn't mean a project is feasible. There must be a target market of sufficient size to support the project. For example, just because a small town doesn't have an enclosed mall or a fashion department store doesn't mean one is feasible.
The demand for FECs and LBEs is elastic rather than fixed. When demand is fixed, such as with gasoline sales, gas stations compete for a slice of a pie that is always the same size. But the elastic demand of FECs and LBEs is quite different. The more the center matches the values, tastes and needs of its target market, the more frequently the market will visit and the more money it will spend. You can see the same effect with movie theaters, where a blockbuster movie like Titanic spurs a jump in attendance.
Product Formula
Based upon an evaluation and analysis of the above factors, the next step is to determine if a project is feasible, and if it is, to craft the center to make the most of the opportunities in that market.
This is where a standard generic mix formula can really shortchange the owner, because it ignores non-traditional but profitable options. For example, our company recently performed a feasibility study for a client who wanted to expand his FEC, which was anchored by a miniature golf course, to also include go-karts and bumper boats. Competition in the area nixed that mix. Instead, we recommended an indoor-outdoor expansion targeted to families with children 8 years and younger. That market niche, which was sizable, was not served by any leisure facilities in the area.
The product formula includes much more than just a mix. It addresses every aspect of the guest experience from type of admission (gated or pay-per-event), the level of finish, the storyline and theme, specific design considerations for special activities such as school field trips and picnics, the type of food service - all the broad product specifications that need to be met during subsequent design and development stages.
Attendance Projections
Once the product formula is finalized, attendance projections are made. Properly performed, attendance projections don't look at the entire population and then project some overall rate of attendance. Instead, they look only at the targeted ages, type of visiting group, and SELs that will be attracted (the SEL niche market), and then determine the attendance by age and group for each activity, from general admission to birthday parties, field trips to classes and special events.
Operating Capacity
Sizing the center to match attendance is critical to success. If the center is too small to accommodate peak demand, attendance is lost on those days and a reputation for being too crowded can diminish attendance at non-peak times. If the center is too large, then the return-on-investment will be poor, or worse, the center could fail.
Revenues
Annual revenue is determined by taking the attendance for each event times the price or per capita expenditures per event. The per capita expenditures can vary greatly among markets, types of centers and events, and with the time and day of the week. Many feasibility studies make the mistake of using some generic industry per capita figure multiplied by an overall center attendance to project revenue. This approach fails to account for all the components of attendance and the different admission or fees, and related food service, game and retail revenue for each. The correct value equation is based upon the local market conditions as well as the make-up of the target market, especially their SELs.
Expenses
Again, annual operating expenses should be projected based upon the exact product specifications for the center and its location, not some industry average. Some type centers have higher labor costs than others. Real estate and personal property taxes, insurance, utilities and similar costs vary by locale. Some expenses are dependent on product mix and admission policies. With games, the mix of redemption to video needs to be examined to determine redemption prize costs. Additionally, free tokens included with admissions and prepaid events like parties need to be factored into the equation. Whether games will be owned by the facility or supplied by a coin-operator also has a significant impact on expenses.
Concept Plan
Cost estimates that are not based upon a concept plan are almost worth as much as the paper on which they're printed. Whether the project is new construction or renovation, reasonable cost estimates depend upon a concept plan prepared by a design professional with expertise in that type of project. One reason a concept plan is vital is to verify that the product specifications and mix will actually fit in the building or site. Ballparking space requirements in square feet can be a fatal mistake. If all the events, attractions, and parking won't actually fit in the project when it is later designed, then all the underlying attendance, capacity and revenue projection will also be flawed. By including a concept plan, you can assure that projections will be realistic before financing is in place.
Development Cost
Even when all the preceding steps are executed perfectly, many a project has gotten in serious trouble at the stage of estimating the project's cost. If you're accurate here, you'll know whether the project will provide a good return-on-investment as well as whether the funds will be available to execute the product formula on which attendance and revenue projections are based. If you're not accurate, you're in trouble.
Owners use initial cost estimate as the foundation for raising capital and financing. All too often, however, owners forego the cost estimate and base the budget on what he or she thinks the center *should* cost. Even when the cost estimate is completed, it may be based on inaccurate or incomplete information.
There are several reasons for cost estimates being chronically unrealistic:
The individuals preparing the budget are inexperienced in all the components and complexities of building and opening a center. They include obvious items like rides and kitchen equipment, but forget hidden costs such as use taxes, shipping and installation, office supplies, training and a host of other expensive necessities. Even at the initial feasibility stage, a properly prepared estimate could include 100 or more line items. Because our company produces centers for clients, we have hands-on experience with the multitude of cost components. For example, one 30,000-square-foot FEC we produced had 620 cost line entries.
Soft costs don't make it into the budget. Soft costs are all the intangible items like real estate and financing closing costs; points and interest on loans; professional, consulting and design fees; working capital, pre-opening costs and deposits. Soft costs can easily add up to 15 to 20 percent of total cost.
The cost estimate is prepared using square foot or percentage approximations rather than detailed estimates based upon the unique nature of the project. Construction costs can never be square-footed with any reliability. Construction costs vary not only by locale based upon zoning and building (entitlement) codes and local costs and practices, but are also based upon the particular piece of real estate. If it is raw land, the costs of preparing the site for development will depend on grading, infrastructure and utility issues including the costs of extending utilities and access to the site. Overlooking such items as storm water management, traffic lights and landscaping can be significant. If it is a building to be renovated, a detailed examination of code and the degree of renovation needs to be made. Entertainment centers are often dealt with more severely under the fire codes than during the building's previous uses.
The budget does not include a realistic contingency factor, especially if it includes renovation. Cost estimates at the earliest stage will never be as accurate as they are once construction plans are prepared.
A feasibility study is not magic, although it can have a magical effect on the success of your center and your return-on-investment. It makes the difference between decisions based on solid information and those based on wishful thinking, and it is the smartest investment you can make to ensure that all the investment and time you put into your FEC or LBE will pay off.
