“How Long Will This Last?”

Looking at the Booming FEC Market’s Potential & Threats

by Howard McAuliffe, Partner, Pinnacle Entertainment Group

The family entertainment center portion of our business is in the middle of a growth period. I hear a lot of the legends in our industry asking how long will this last and speculating about whether or not there will be contraction. The truth is that nobody knows the answer, but I think we can look at trends in our industry to create a standard “SWOT” analysis (a look at Strenghts, Weaknesses, Opportunities and Threats).

In this month’s column, I’m going to lay out some of the trends I see and put them into SWOT categories. I’d love to hear from anyone who thinks I missed something, has comments or disagrees.

Strengths

1) We are mainstream entertainment. As a society, we’re on the third generation of game players, so grandparents who played pinball or video games are happy to take their kids to an arcade. The old stigma of arcades being a low-class form of entertainment or something just for teenagers is gone.

2) There is still room for expansion and there are several markets that are still underrepresented.

3) The games that are being developed by manufacturers are the best ever. The really appealing games are fun, exciting and can’t be easily replicated at home.

Weaknesses

1) I’ve found that many operators are not sophisticated when it comes to understanding and closely managing their arcades, specifically when it comes to the numbers.   I believe a lot of problems are hidden by strong sales. As more competition opens or other pressures on sales increase, these underlying issues will reveal themselves.

2) I believe we still have games being sold and operated that don’t live up to a good fair play standard. I believe this is improving and that most games are skill games, but we need to go further as an industry to guarantee fair play (something  AAMA is working on).

3) Overly aggressive expansion into certain markets creating unprofitability. There are more and more big financial players entering our industry as lenders, investors  and operators. This is generally good for a variety of reasons, but much like strong sales, deep pockets can hide a lot of problems, too.

Opportunities

1) Technological innovation, specifically in the virtual reality space, is improving and becoming more affordable. I was shocked by the experiences that were presented at IAAPA and the affordability. There will be a lot of VR experiences coming over the next few years.

2) Although, I listed the lack of sophistication in operations as a weakness, it also creates opportunity. The expertise, proven best practices, and tools to efficiently and effectively manage facilities are there. Increasing operational sophistication will create a better guest experience and add more profits.

3) Marketing of our industry on a national level is a tremendous opportunity. Dave and Buster’s advertises nationally highlighting their arcades and I believe this benefits all of us. There must be other ways we can pool our resources, buying power, etc., to create PR and marketing for our industry. This is complicated, but I’m convinced it can be accomplished.

Threats

1) Gas prices directly impact revenues in arcades. It’s difficult to isolate this single variable, but I believe strongly that it’s important. If prices rise significantly, it will surely affect us.

2) The creation of new import tariffs. There is a strong national push towards limiting imports. Most of the prizes (as well as games) used in arcades are imported, so a major import tax would seriously impact profits.

3) Any large chain going out of business could be a major blow. It would impact lending throughout the industry, in addition to hurting a variety of vendors who would lose receivables, as well as a large customer.

Silver Lining

During the economic recession of 2008 when much of the world was hurting, I sat down with a family friend for lunch. I was looking at a few opportunities and invited him out to eat to help me make some decisions. He was excited and explained that a lot of people were making money during the bust because of all the opportunity. The point is that whatever the weaknesses, and even if the threats become reality, there is always opportunity.

In my opinion, operational excellence is the most essential thing you need in order to capitalize on opportunities and mitigate any threats that come your way. Having this level of excellence will help you maximize operations and profits regardless of what challenges the future brings.

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 howardmc@grouppinnacle.com, he welcomes positive as well as constructive feedback and counterpoints.