This article is scheduled for publication in Entertainment Management magazine.
When I was a boy, when I wanted to do something a little risky, a little daring, a little.well.wrong, I carefully considered the approach I would use when seeking permission from my mother. "Everybody's doing it," I would say, acting oh so nonchalant. "You don't want me to be different, do you?" My mother, I found out the hard way, was lacking in the herd instinct. "If your friends wanted to jump over a cliff, would you do that, too?" she would say, rolling her eyes. At the time, that sent me into fits of exasperation at her pitiful lack of coolness.
Today, I think of that shopworn maternal response when I see what's happening to FECs and LBEs around the country. Many members of the industry are, in effect, joining hands and jumping off a cliff together.
The industry has been around long enough to accumulate an impressive collection of "things everyone knows." Outdoor family entertainment centers (FECs) have existed for decades in the US. In the early 1990s, indoor FECs started appearing in the northeast US. Since then, both outdoor and indoor FECs have evolved and grown in number, type and size, with many niche concepts from children's edutainment centers to sports-oriented complexes. Versions have appeared in urban settings and entertainment districts as anchors, which have been named LBEs (location-based entertainment). FECs and LBEs are now found worldwide.
Amazingly, or maybe not so amazingly if you consider human nature, the industry abounds with myths that continue to hamper the success of most centers. Most of these myths, considered by many to be the conventional wisdom, have resulted from practices that on the surface appear logical. However, the truth is more often counterintuitive. I've selected the 10 most common myths, in no particular order, with the correct answer to each.
This myth got its start from the early indoor FECs. By the end of their first year or so, their business would start to decline. To keep business up, owners would change much of the equipment or events each year to keep the facility attractive to guests. It just seemed like the logical thing to do.
But they fixed the wrong problem. The real problem was that their formulas were flawed at the very start-their mix formula lacked repeat appeal. Repeat appeal is built upon a foundation of the right mix of events and equipment, programming and a quality presentation. A flawed mix of attractions will never succeed. The mix needs to be based on a unified selection of time-tested attractions, not fads.
Just as important, many FECs failed because they did not deliver a quality experience, which requires an integrated combination of the physical facility, programming and operations. The key to keeping a center fresh? Programming. Programming includes all the "software" side of the guest experience, the organized and scheduled activities that are offered on a changing basis. This can range from special activities to storytelling to contests to seasonal activities to food-and-beverage themes and specials. Some successful FECs generate more than 50 percent of their business from their programming.
Most FEC/LBE operators are totally intimidated by the food service side of the business, so, at best, most offer little more than a snack bar with a very limited selection with mediocre quality and presentation. Many outsource or sublease food service and receive minimal returns. The truth is that food service can be very profitable, if professionally run, generating at least 25 percent of an FEC's/LBE's revenues and even more of its profit. Even after cost of goods and labor, food service has 50 percent and higher gross profit margins. Good food, with a pleasant seating area where guests can enjoy it in a relaxing atmosphere, increases per capita sales as well as repeat appeal.
This myth sprang up because FEC owners were loathe to hand over half their game revenue to a coin operator. In reality, owning your own games makes sense only if you have multiple LBLs with a thousand or more games. Otherwise, it is next to impossible to be an expert in both the FEC/LBE business and the game business. FEC owners who do not own their games will usually make more profit and definitely earn a higher return on investment - the true measure of profitability - because their capital needs are greatly reduced.
Most good game (coin) operators will generate twice the revenue from their games as an FEC operator who owns his own. How? They know the business. They can fine-tune the mix by swapping out games with other locations they operate. They have access to the newest games and will not hesitate to jettison a game when it's no longer profitable. And, through years of experience, they know how to rotate games on a regular basis and how to adjust the pricing and redemption payouts to maximize revenues and profits and please guests.
Not to mention the impact that revenue sharing has on the capital needed to open and operate a FEC/LBE. Today, a quality mix of games costs $6,000 or more per game. Do the math. Even if the FEC revenue is the same, the return on invested capital will always be higher by not owning the games. (See sidebar)
Cloning dinosaurs worked for Jurassic Park, but, let's face it, you ain't Spielberg. The world has changed dramatically since FECs hit the scene, and antiquated old formulas don't meet the demands of today's leisure consumer. Truth be told, they didn't then, either. Not that long ago, demand exceeded supply, so even a so-so leisure concept could succeed. In today's world, where supply exceeds demand, where time is increasingly precious, and where guests' expectations are rising, the old formulas just don't cut it.
One example of this is batting cages. They have always been considered an essential anchor to any outdoor FEC. But, over the last decade, baseball and softball have lost much of their popularity as recreational sports. Since 1990, the combined participation in both has dropped by 16.1 million, or 33%. Today, most FEC batting cages barely earn enough revenue to cover their operating expenses, yet just about every new outdoor FEC continues to install them. Even the original outdoor FEC formula of go-karts, miniature golf, and bumper boats, plus an indoor game room, is struggling in many areas due to shifts in consumer expectations and preferences. Imitation, in this case, is the fastest form of bankruptcy.
This myth continues to be the root cause of many FEC/LBE failures. A corollary myth to this is, "You need to appeal to all ages to be successful."
The members of a family who are willing to be seen in public together are most often limited to parents and their children aged 9 and younger. Tweens and teenagers prefer to hang out with peers, far from those embarrassing parents and younger siblings. Just as important, the tastes and preferences of teens and their parents and younger siblings are miles apart. It is impossible to please both in the same facility unless the center is very large and zoned into two areas. An FEC that tries to be all things to all people can easily end up alienating the whole crew.
The answer instead is to focus on one segment so you can delight them and make them loyal guests. The three basic target age segments are:
Pick one and offer a focused assortment in a facility design that is tailored for that market niche, and your probability of success will be exponentially higher.
Teens are not the largest segment of the under-18 market, and, even worse, they cringe at being seen in public with their personal bankers (i.e. parents). If you look at market segments of children based upon ages-of-play compatibility groups (the ages that have similar tastes in leisure and are compatible), the demographics in the US generally break down as follows:
2 - 9 years old
10-12 years old
13-17 years old
The two-to-nine age segment is by far the largest. In many countries outside the US, with a tradition of large families, the percentage for this youngest age segment is even higher. Members of this age segment also will boost an FECs attendance by dragging their parents (and their parents' cash) along with them. And it's no surprise that younger children are the primary market for birthday parties, which can generate 25 percent or more of revenues. Yes, teenagers can be a niche market, but they're not the largest or the ones with the most spending money. Moreover, while younger children like repetition and the familiar, teens tend to be fickle, quickly abandoning a center for something new.
Architects are wonderful people, really. But asking your local architect to design your FEC is like expecting your family doctor to perform a triple bypass. In both cases, generalized knowledge does not translate to specialized knowledge.
Architects are necessary for structural and other design issues that deal with codes and regulations, but most know nothing about the FEC/LBE business. An FEC's success depends upon design factors that require specialized knowledge that only comes from years of work in the industry. There's the issue of adjacencies - what is placed where. There's theming. There's designing to minimize staffing at slow times. There's queuing, traffic flow and way-finding issues. There's peak period demand, capacity and through-put calculations. There's atmospherics, which deals with the psychological/emotional feel of the center.
Architects are not trained in either designing guest experiences or profitable businesses, which depends in a major way upon your facility. The answer, then, is to use a FEC/LBE producer, a term for a multi-disciplinary firm that specializes in an integrated approach to both designing the facility as well as the business. FEC/LBEs are very specialized animals. Everything affects everything. Producers understand those relationships and can help you design a business and its supporting facility to maximize the guest experience, attendance and revenues and minimize cost and expenses.
FECs, like malls, require a critical mass to work. Downsize them to fit a very small market, and they no longer work. Many small markets lack fashion malls because the market is simply too small to support one with enough variety and selection to appeal to customers. For the same reason, a town of 50,000 will never support a profitable FEC unless it can also draw a million tourists. Lack of competition does not equate to feasible.
This is true if the FEC/LBE is designed and operated on this premise. The bad news is, operating on this premise does not result in much, if any profit. To succeed, to prosper, FECs/LBEs need to be designed and operated to maximize non-peak revenues. This is much more difficult to accomplish after the center is built, as often the design will not support the non-peak activities and programming. Non-peak programming needs to be an integral and important aspect of the center's original programming and supporting design.
Again, this also is true if the center is designed to be seasonal. (There's a reason that "self-fulfilling prophecy" rarely connotes good news.) The main problem with a seasonal FEC/LBE concerns staffing. The labor market these days is tight, and seasonal workers are very hard to find. Moreover, they have to be trained each year if you expect to offer a guest experience that creates repeat appeal. And this can be especially difficult with seasonal employees. Definitive studies have shown that there is an inverse relationship between employee turnover and guest satisfaction. Southwest Airlines, despite being a budget airline, consistently receives top ratings for its customer service. One reason is its employee turnover of only 9% a year, extremely low by any standards. Loyal employees equal loyal guests equal profits.
So there they are-ten of the most common myths that produce poorly performing FECs/LBEs. They're sturdy, long-lived myths, although FECs and LBEs based on them are not so lucky. The world is constantly changing, or, as Yogi Berra said, "The future ain't what it used to be." Then there's what my mother would say: "If your friends jump off a cliff, would you jump off, too?" For your own sake, make sure the answer is no.
Sidebar - The Economics of Using a Coin-Operator
It certainly is conterintuitive to think that giving half your game revenue to a coin-operator can be more profitable than owning your own games. The example below shows how. Although your annual profit and cash flow will be less, so will your invested capital. As a result, your cash-on- cash return on investment will be greater. The first two columns assume the same annual revenues. The 3rd column shows what will occur if the game operator increases game revenues by only 15%. More often, a game operator will increase game revenues much more than 15%.
Annual Cash-On-Cash Return for a Generic LBL
|REVENUE||FEC/LBL Owned Games||Games Supplied by Coin-Operator||Coin-Oper Games 15% Increase in Game Revenue|
|Parties & Groups||500,00||500,000||500,00|
|Food & Beverages||400,000||400,000||400,000|
|COST OF SALES|
|Parties & Groups||110,000||110,000||110,000|
|Food & Beverages||88,000||88,000||88,000|
|- Tickes & Prizes||100,000||50,000||57,500|
|- Labor for Games||35,000|
|- NetGame Purchases||116,667|
|- Coin-Operator Split||260,000||299,000|
|Total Cost of Sales||564,667||508,000||554,500|
|Other Operational Expenses||1,160,000||1,160,000||1,160,000|
|Annual Operational Cash Flow||374,333||332,000||360,500|
|Annual Loan Payment||185,700||160,200||160,200|
|Annual Cash Flow After Debt||188,633||171,800||200,300|
|CASH-ON-CASH RETURN on Invested Capital Before Taxes||14.8%||15.6%||18.2%|
Randy White is the CEO of the White Hutchinson Leisure & Learning Group, a Kansas City, Missouri, U.S. firm that specializes in market feasibility, consulting and design of FECs and family and children's venues. The firm has won many awards for the design of its domestic and international FECs. Mr. White can be reach at voice: +1.816.931.1040, fax: +1.816.756.5058, or via e-mail or on the web at <www.whitehutchinson.com>