Year in Review
2019 Trends and What to Look for in 2020
by Howard McAuliffe, Partner, Pinnacle Entertainment Group
It is no secret to experienced operators that merchandise games drive modern arcade sales in nearly every case. Ticket redemption games generate 60 to 70 percent of sales, cranes and merchandisers 15 to 25 percent and other games make up about 15 percent in most modern arcades.
As 2019 comes to a close and we begin to look towards 2020, it’s a good time to pause and reflect on this year and look towards next. There are a lot of opportunities in the out-of-home entertainment industry and deciding which to target is a difficult decision.
Opportunity cost is often underestimated –– it is certainly our biggest expense at Pinnacle Entertainment Group. We struggle to decide how much to focus our efforts on existing business models and trends, and how much to focus on trends that are on the horizon. I don’t know exactly what the correct balance is, but here are the trends we’ve seen in 2019, as well as what I believe will be some key directions in the coming year.
Slowing Growth of Large Format Concepts
The last eight years have seen rapid growth in the industry. There have been many new, large-format concepts in out-of-home entertainment that have proliferated. It has been a boom aided by broader factors: the economy has been good, interest rates are low and real estate relatively cheap as big box retail and mall landlords have scrambled to fill increasing vacancies.
This past year, we started to see some signs of this trend slowing. There has been a modest, but noticeable, increase in unsophisticated operators looking to enter the industry, as well as markets in which a new project would just not be feasible. We have suggested more clients not build their planned projects this year than in any recent years for the above reasons. In addition, we are seeing some signs of weakness in large players. Dave and Buster’s has seen same-store sales decline, iPic theaters has gone bankrupt and in November, the well-capitalized and -run chain Punchbowl Social closed its Ft. Worth location after being open just 10 weeks. All of this points to growth slowing in 2020, but certainly not stopping.
Increasing Growth of Smaller Format Concepts
While large-footprint location growth may be slowing, smaller footprint concepts are growing faster, for a few reasons. There is less saturation in smaller markets, and therefore more opportunity for smaller concepts to fit these markets. The advent in bowling of string pin setters and smaller lanes, like the Duckpin Social concept from Brunswick Bowling Products, has allowed the sport to be added in smaller spaces and with less maintenance. There are new card systems like the iTeller Element from Intercard that are very low cost but offer high quality, allowing card systems to be used in locations where it was previously cost prohibitive. We are seeing bars and restaurants adding smaller game rooms, often with string bowling, social games and virtual reality very profitably.
VR is another area of growth. Bob Cooney does an excellent job of covering this market in depth for RePlay, but I’ll give you some details from our experience. In our projects in 2019, most of them have a VR element. This was not the case as recently as 2018.
In the third quarter, we had eight projects open or remodel and seven have or are adding VR in the near future. Looking ahead to 2020, we are beginning to see clusters of VR attractions, so instead of a single VR attraction in a venue, we will start to add two to four depending on the concept.
VR is now being developed into a virtual escape room, as well as an eSports experience further evidence of the growth of this industry into ancillary industries. As the technology becomes better, cheaper and smaller, VR will continue to grow in share of the capital spend in an FEC and other location-based-entertainment concepts.
As competition in the marketplace increases, it will become increasingly important to maintain high operational standards. Companies that don’t execute a great customer experience will lose business to nearby competitors.
Capital reinvestment is essential in our business but many people new to the industry underinvest in their properties year after year. We typically list capital reinvestment as an expense item for customer proformas, because it must be done every year, unlike a typical capital investment like a new roof. As growth becomes more difficult or existing store sales suffer, as we have seen this year with Dave and Buster’s, investment will likely shift to existing stores.
Labor costs are rising, which means locations need to be more efficient. Redemption games and direct prize merchandisers still drive 85 percent of the revenue in a typical arcade. In 2020, look for locations to hone in on their redemption displays and prize assortments, as well as focus more on price savings to offset labor pressures. I see this trend towards focusing on existing location operations and investment as a positive trend that will build stronger companies.
The market for esports is clearly growing globally and most of the operators I’ve spoken to are considering investing in it. To my knowledge, there is no clear business model in out-of-home entertainment for it that is widely successful. In my view, esports today is much like virtual reality was five years ago. I believe it is growing in popularity and will be part of our industry, but don’t know exactly how yet.
We are working on several concepts to test esports concepts in various forms, and many others in the industry are as well. In 2020, we will see more esports concepts in the market and should start to see profitable business models emerge.
This is by far the most exciting time to be in this industry in the 20 years I’ve been working in it. My father, who enjoyed the heyday of the video game arcade in his 40-year career, maintains that we are currently in the best era of his career. There are clearly some shifts in the trends of our industry, but there always are and that is part of what makes it so exciting to be a part of.
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.