Published in the June 1995 issue of Play Meter magazine.

Like Any New Industry, FECs Are Evolving

by Randy White

The family entertainment center industry is now in about its fifth year as a recognized industry. Prior to the 90s, most FECs were mainly outdoor miniature golf anchored facilities. Societal changes and the baby boomlet or echo boom of births set the stage for the current industry growth. Most of the growth has occurred with two categories of FECs--indoor children's entertainment or pay-for-play centers and broader age indoor FECs. Soft modular play equipment played a major role in the children's market segment with the growth of Discovery Zone and Leaps & Bounds (now owned by Discovery Zone) who legitimized the industry. However, the majority of FECs continue to be owned by independent operators or small chains.

Like any new industry, indoor FECs are continuing to evolve. Many early models have already proven flawed and either closed their doors or undertaken serious revamping. Specialization is occurring with both niche market segments and event content. Much of this is being prompted by heavy competition in many markets, some already over built. The early generic FECs worked when they were the only game in town. More focused and better executed FECs give a choice to consumers who love to vote with their pocketbooks on the concepts that please them the most.

The FEC industry is but one part of a much larger and rapidly growing industry called out-of-home or location based entertainment (LBE). LBE venues include everything from arcades to theme parks, zoos to aquariums (the kind with sharks, not the kind with guppies), movie theaters to concerts, bowling alleys to sporting events. LBEs are becoming more difficult to define due to a hybridization that is occurring between entertainment and the retail, education, restaurant and hospitality industries. Entertainment is becoming an important ingredient to these industries with combinations now called such terms as edutainment, eat-ertainment, fantasy vacations andthemed or entertainment retail; in fact, so much so, that it is becoming increasingly difficult to tell whether entertainment is the primary or secondary reason for visiting the facility.

The FEC boom began in the Chicago and New York markets, quickly spread across the U.S. and into Canada, and is now occurring throughout the world. Two years ago I never dreamed that our company would be contributing to the international balance of trade. Today, almost half our work is international. Last year our company produced a 35,000 square foot indoor FEC in Mexico. We are currently producing a 40,000+ square foot indoor children's entertainment center in Caracas, Venezuela and have a client preparing to develop an FEC in Warsaw, Poland.

Today, everyone wants to cash in on the family boom by calling themselves "family." This includes Las Vegas, cruise boats such as Big Red, resorts, restaurants, etc. However, using the term "family" in your marketing or name does not create a family entertainment center. The term FEC designates an industry as a whole as well as defines a specific segment of the same industry. The FEC industry includes 10,000 square foot indoor pay-for-play centers, multi-acre outdoor centers and 30,000+ square foot indoor centers. It encompasses entertainment centers that target families, adults and children. True FECs target and have multiple anchor activities for families, which means children accompanied by their parents, and possibly also unaccompanied pre-teens and teens. All segments of FEC industry are characterized as being community based recreation/entertainment destinations, having a length of stay around two hours, and being dependent on regular repeat guests.

In addition to Viacom/Blockbuster, the FEC industry is now attracting many larger players, including theme park companies, game or technology manufacturers, and mall arcade chains who are all trying to develop the perfect FEC formula that can be successfully cloned throughout the world. Many, such as Edison Brothers, and even Discovery Zone, have learned by the expensive route that this is not all that easy. The problem is, that being community based, the FEC industry does not lend itself to fixed formulas. Each center must respond to local demographics and socio-economics, customs, weather, tastes, and competition. Such customization, or as our company calls customer-zation, is more easily produced by small entrepreneurial companies, not mass marketing giants.

The other problem with many of the big boys' approaches is that they think technology and access to proprietary technology will give them a competitive advantage. When it comes to FECs, high tech, including so called virtual reality, isn't necessarily all that it is promoted to be. One problem is that the latest technology quickly becomes yesterday's obsolete technology. Its high capital cost and short life requires a pay back that prohibits its use as anchor attractions where FEC repeat appeal necessitates low admissions. Additionally, the family market is seeking an out-of-home, socially interactive experience, not necessarily one that is competition based. Young children have little interest in technology. They are far more interested in the actual reality of the world. Children's imaginations make them virtual reality machines. They don't want or need help from machines. Go ahead and laugh, but young children are much happier getting their silicon as sand rather than computer chips. Yes, technology has application in FECs with some ride simulator games, or with point-of-sale systems, or debit cards. But technology lays a bomb when it tries to become the foundation of the FEC experience. It is for these reasons that the FEC industry will continue to offer good opportunities for entrepreneurial individuals and small companies.

If those aren't reasons enough for the entrepreneur to take a hard look at the industry, consider that even today, Blockbuster video stores only control 17% of the video rental market in the U.S. Independents and small chains own the other 83%. And video rental stores are much easier to clone and Blockbuster has the advantage of mass buying economies, which isn't as true with FECs.

The FEC industry is still young. With its high returns, often exceeding 30% per year, come risk. The smart will prosper. The unwise, which often includes the arrogance of big corporations and big money, will not.

The cost of entry into the industry has grown. The early $700,000, 10,000 square foot centers have not proved to have legs. Our company is advising our clients not to even consider development in a market that cannot support at least a 20,000 square foot center. Minimum development cost is around $2 million with many concepts now under development costing $3 million or more.

FECs offer street or coin operations two excellent opportunities for business expansion. One avenue is to either develop on your own or joint venture an FEC. However, FEC development and management takes more diversified skills than the game or arcade business. Also, FECs cater to a different market than the typical unaccompanied youth player. Young children and parents are two completely different cultures with different needs, wants, tastes and expectations. Mixing all these different cultures in the same facility with an adequate variety of entertainment events that will satisfy them all is a major design challenge. Another issue is that teenagers and families are generally incompatible in indoor environments. Coin operators planning to develop an FEC should seek out consultants and designers with specialized experience and expertise in FEC feasibility and design rather than shoot from the hip using a different business-based experience.

The other avenue for business expansion is for coin operators to supply the FECs in their territories with games on a revenue share basis. Games, predominately redemption, ride simulators and kiddie rides typically produce 25%-30% of an FEC's revenue. Small centers might only contain a dozen or so games. Large FECs contain one hundred or more. Because of the large investment required to develop FECs, many FEC owners prefer not to buy games, but rather have them supplied by a coin operator. Many owners are intimidated by the shorter lives of games versus rides, soft modular play and other equipment, and prefer to have an experienced, knowledgeable operator pick, supply, rotate and service the games in their FECs. We have seen situations where an FEC owner, after originally owning his own games, brought in a coin operator to supply the games and netted more money from the revenue split than when he owned 100%. Good coin operators bring a lot of value to the table in excess of just their capital to buy the games.

A number of operators saw the opportunity with FECs in the early 90's, moved into redemption, carved out a niche in the FEC industry and have since grown their companies to operate thousands of games. The FEC industry is nowhere near maturity. Ample opportunity still exists for knowledgeable, aggressive operators who are open minded to learning and developing new expertise.