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August 2014

Frank SeninskyFrank Talk

Distributors Remain Vital to Our Industry

Distributors face considerable challenges in today’s marketplace. But there’s still a great need for distribution. In fact, I don’t see how our industry can survive without a level of distribution.

The challenges distributors face are the Internet and the willingness of some manufacturers to sell direct. Some operators think they are getting a better deal if they buy direct from a manufacturer, but they are not taking into account other costs and future indirect losses and other services they would lose if distributors were to disappear.

If you think about your typical operator, most of them don’t go to national trade shows so they have no way of seeing and playing new equipment unless they can go somewhere within driving distance like a distributor’s office or a regional showcase event. Many would have to wait until one or more of the local competitors placed the game on location.

They can read about games in the magazines, e-newsletters, and manufacturers’ websites, but without distribution they would be on their own to develop relationships with each of the manufacturers. A distributor can see the full spectrum of what’s available and provide a fair level of independent analysis of what product is appropriate for an operator’s business. Without that wider knowledge, an operator would really only be able to work with the major factories and maybe only discover the occasional niche product featured in the trade magazines. Otherwise, they wouldn’t know about many interesting new products unless they went to all the national and international shows. It’s particularly tough for a new operator trying to get a start in this industry, and I can’t really imagine somebody launching an FEC business without the help of a distributor (or at least a well-informed consultant).

You also have to think about parts and having to establish an account with each manufacturer with very little leverage or relationships with the parts departments of these firms. The manufacturers are just not set up to have relationships with every operator and location. It would be overwhelming for the manufacturers. Only the biggest companies could carry that burden.

Financing would also disappear or at the very least become more difficult. Manufacturers are not willing to carry reasonable recourse on the games they sell. Without the support of distributors, most manufacturers would have to be cash and carry. I don’t know if they could even afford the risk of large COD sales. Also operators are going to be paying through the nose for freight on single orders as opposed to distributors who can buy containers or in bulk and help lower the unit costs of shipping. I also see less incentive on the part of manufacturers to supply parts for long out of production games or source parts at lower prices to keep old games operating. This would open the door for small parts houses to spring up throughout the country (more on that coming), and those parts houses would ultimately likely soon become small distributors handling parts, service and ultimately some game sales.

Distributors also warranty products and handle service for operators. Many of them do extended warranties and even free warranty work to help keep their customers up and running and bringing in revenue for future sales. If there’s a dispute about a warranty claim, and an operator is dealing with a manufacturer from whom he only buys a few games annually, the operator invariably loses. If there’s a gray area with a distributor from whom an operator buys regularly, the operator usually wins, even if the distributor has to eat the costs.

The truth is that distributors don’t really make that much money on new game sales. The competitive pressures have driven down game prices. So the real value of doing business with a distributor comes in the realm of guidance, service, support, parts, financing, leasing, trade-ins, etc. By not supporting local distributors in favor of a slight discount from a direct sale, you are endangering access to these real values offered by distributors.Without distribution, our industry would be in chaos. Manufacturers need to spend full time developing games that generate revenues. That is the most difficult task in this industry. Asking them to take on all of the duties and talents of distributors is asking the impossible.

The reality is that margins for distributors are tight these days, and I think there will be even fewer in the near future. Moreover, distribution will have to continue to evolve in order to remain profitable. Ultimately, I see the industry being served by a small group of smart, savvy, diversified distributors.

In looking to the future of distribution, I believe the focus will be on financing, leasing, revenue sharing equipment with operators and FECs (which can be controversial), some operating (also controversial because it puts distributors in competition with their customers) and, of course, parts sales.

In fact, parts represent a critical element of the distribution business, both stocking parts for the convenience of customers and having that knowledgeable person who knows how to solve the many parts and service problems that come up for operators. I can’t imagine manufacturers being able to keep up with all the multitude of issues that come up with machines as they age. That burden alone would eat up their profit margin, and factories actually have an incentive (a slight conflict of interest) to see games eventually become obsolete so new sales can fill those voids.

My company had an example of keeping a particularly profitable model game running. We had more than 20 of them on our route. Eventually, the factory said that a part we were having frequent problems with was no longer available. We discovered we would have to source the part in China and essentially commission the production of that particular item to keep those games up and running. We have technical staff that does this kind of sourcing frequently, but a smaller operator couldn’t have done that. We make a lot of money on our used workhorses so it was worth it to us. A smaller operator would just have to scrap the game if they didn’t have a professional parts department looking out for them, helping them find a part that seems impossible to source. Most operators can’t really support the intense service and parts needs of their older equipment so they have to rely on their distributor to fill this gap as well.

This kind of of technical expertise is the true value distributors offer. I can envision some of them potentially offering these skills and values to other industries that have similar needs both in terms of sales, service and support. The explosion of ATMs is a good example of that kind of diversification. I expect we will see more diversification by distributors, who will seek out opportunities in other trades, as our industry is predicted to grow even smaller.

I also see finance as a real ongoing opportunity. I think Betson has done a good job with creating flexible leasing plans. Some of them even work well for larger, well-established companies. Operators are leasing games with little to no money down and low monthly payments, ensuring initial and ongoing positive cash flow. There are real tax advantages to leasing as well, with many of the more advantageous accelerated depreciation laws no longer available. Leasing make more sense these days, particularly in the video category.

I’m cautiously optimistic about the future of distribution even if it’s on a smaller size and scale and permeated with diversification into other industries. If all the distributors we have today went away, a vacuum would be created and additional small parts/service houses would spring up to fill the void, and those business would ultimately become a type of distributor. In some cases, a large route operation could fill some of the distribution void. In other words, you would see the whole distribution network spring up again because the industry simply needs the service and support they provide.




Frank Seninsky is president of Alpha-Omega Group of companies, which includes a consulting agency, Amusement Entertainment Management (AEM), and a nationwide revenue sharing equipment provider, Alpha-BET Entertainment; all are headquartered in East Brunswick, New Jersey. Along with industry consultant Randy White, Seninsky also heads up Foundations Entertainment University. During his 41 years in coin-op, Seninsky has presented nearly 250 seminars and penned more than 1,000 articles. He has served as president of the Amusement and Music Operators Association from 1999-2000 and is a past chairman of the International Association for the Leisure & Entertainment Industry. Seninsky can be reached at 732/254-3773 or by email at fseninsky@aol.com and www.AEMLLC.com.

 



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