Trending towards Frivolity?
Good Times May Be Opening the Door to Poor Decisions
by Howard McAuliffe, Partner, Pinnacle Entertainment Group
Webster’s online dictionary defines a trend as “a prevailing tendency or inclination.” In thinking about trends, many people, including me, focus on new products, ideas or innovations. But recently, I’ve been struck –– and troubled –– by a potential trend I’ve noticed towards frivolity. It seems that good times and profits are giving way to a degree of frivolous behavior, which if not kept in check, can lead to major problems. Here are a few of the indicators I’m noticing in our industry.
Impulsive Spending on Big-Ticket Items
Operators have historically been very conservative when it comes to spending money, especially on big-ticket items. In the last year especially, I have seen far more operators spending tens or even hundreds of thousands of dollars on new, unproven equipment.
There are long wait lists and presales on games and attractions that are unproven. Of course, an operator with a very high-volume game room, especially if they have multiple locations, can –– and should –– take on the risk of purchasing cutting-edge equipment. However, many customers making only good or average sales are taking these risks, and in some cases, these are customers with no sales yet.
I saw a person brand new to the industry spend $500,000 at the IAAPA show on unproven technology for locations in which he had never operated a game himself. Our industry has expanded rapidly over the last 10 years, during a recovery and expansionist economic climate. Many of the new people haven’t operated in a recession or been through the major swings in fortunes which have historically been swift and severe. Other newcomers have heard about the potential for very favorable returns on investment in our industry and are entering the market place aggressively. Even if the economy stays strong, there is no question that competition is increasing.
Lax Crane Management
While many operational fundamentals are often neglected, cranes are probably the most visible and obvious area lacking proper management in most locations. Fundamentals, including keeping the machines full, product rotated and managing payouts for cranes and merchandisers is challenging. This is true even when using a card system because it remains largely a manual process. No machine can rotate the product that’s been ordered or fill the machine.
For ticket redemption, a card system will tell the operator what each game’s payout is, as well as the amount redeemed at the counter. But, the product put into cranes, and in most cases the product out, is tracked manually, which is harder to manage. Cranes and merchandisers are a relatively small, but significant, portion of an arcade’s revenue.
Even in street routes, the crane is often an afterthought and the sales and costs are simply lumped in with the jukebox and other location revenue. Of course, major crane operators, where a significant portion of their business depends on these machines, meticulously monitor their sales and costs. But, the majority of locations I visit just don’t know the cost of goods sold in their cranes. Additionally, the machines are not merchandised well. A payout that is too high or too low is destructive to revenues and/or profits.
Many locations are making money right now, and don’t want to be bothered focusing on details like managing crane revenues. Even the best run national chains are underperforming in crane operations. But, focusing on these fundamentals can add 5 percent or more to a game room’s revenues.
Rapid Expansion of New Locations
There is no secret that big money investors are attracted to the industry. Chuck E. Cheese’s, Dave & Buster’s, and Main Event are all owned by public entities. In addition to these public companies, hedge funds and other large investors are investing in our industry. None of this is bad, in fact it’s good that this capital is available for both the exit strategies of some business owners as well as for expansion for others.
However, there are many examples of expensive buildouts being added to already expensive real estate. While there are plenty of attractive real estate deals, “A” locations are still very expensive. This results in high fixed costs that can become toxic in a recession. Remember, entertainment is a discretionary expense for consumers!
The other model that is growing rapidly is to take advantage of favorable rents in anchor locations of “B” and “C” strip centers and shopping malls. Given that FECs are attractions that can bring customers to a location, they’re very attractive to landlords. As a result, rent offers to proven concepts are very favorable. However, operating multiple locations is more challenging than operating one or two because it requires layers of management. Successful individual locations (or very small chains) adding multiple locations at one time is concerning, especially when there are a lot of operators doing the same thing.
Times are good, no doubt about it, and I am by no means suggesting that there’s going to be an end to them any time soon. However, I do see a trend towards frivolous behavior in our industry, particularly among the newer folks. The best and most seasoned operators are diligent about their businesses, and most certainly are not frivolous…and many of our industry’s newcomers aren’t either. But even with a good economic climate, being somewhat careless in spending and operating can lead to unnecessary challenges or worse.
Clearly, innovation and investment in new technology and expansion of successful concepts is essential. There is inherent risk in all of this, which is natural. The key to long-term success, though, lies within the seriousness, forethought and educated decisions being put into those risks.
Howard McAuliffe loves to imagine and implement new products, business models, and ideas, and is a partner in Pinnacle Entertainment Group Inc. He’s an industry veteran who got his start in the business when he was just 16 and has 20 years of expertise in product development, as well as FEC and route operations. Howard’s wife Reem and young son Sami are the center of life outside of work. When he’s not working, Howard can be found enjoying the outdoors, hiking, fishing and mountaineering. Traveling anywhere new or to old favorites like the American West is a passion. Readers can visit www.grouppinnacle.com for more information or contact Howard at [email protected], he welcomes positive as well as constructive feedback and counterpoints.