2024: A Year of Transitions?
by Howard McAuliffe, Partner, Pinnacle Entertainment Group
Business is booming across the industry. While we saw a softening in arcade revenues during the second half of 2023, that was coming off record highs, so business is really good. That said, it does appear that tougher roads are ahead for many of our businesses. The good news is that even in more difficult economic times, opportunities will arise. I believe out-of-home entertainment will continue to be an important part of American life but also that we will begin to see some significant changes this year.
Permanent Workplace Shift
The Covid pandemic shifted workplace behavior. While many workers are returning to offices, many office workers now have hybrid schedules that allow for more time to work from home. This shift should lead to more company parties and team-building events, and also driving more people to go outside the home for entertainment. With less worker interaction in the office, it will be more important for teams to get together outside the workplace and our facilities are an excellent choice for these events! Furthermore, the lack of having to commute or spend as much time in the office drives the willingness and desire to go out more often. This should help increase consumer trips to our venues along with more group events and parties.
While consumers may desire to enjoy out-of-home for entertainment more often, there are some headwinds – predominately economic – preventing them from doing so. Savings rates are declining and credit card balances are increasing for American consumers. The effect of the massive government stimulus pumped into the economy during the pandemic appears to be coming to an end. As 2024 continues, this will likely lead to lower consumer spending. In addition, 2024 is an election year; we typically see consumers slow spending leading up to a major election. With these factors in mind, I expect revenues in most of our venues to continue to fall off as the year goes on (likely single-digit declines).
Big Money In Our Industry
The out-of-home entertainment industry has traditionally been a very fragmented industry with the vast majority of locations privately owned, most with single locations. The success of the industry has brought investment from private equity, hedge funds and public markets, as well as major corporations like Sony, Netflix and Hasbro. Many of the smaller businesses and chains are being sold to companies backed by major financial investment. This has brought higher valuations and nice returns for those looking to sell their business.
However, it also has brought major investment, which requires independent businesses to invest more to compete. If I am correct and revenues decline, this will drive these large financial entities to push for growth to keep their returns growing. This will include more consolidation, as well as growth of new locations. All of this leads to more and better competition.
What Can We Do?
Several of our clients have had large chains open brand-new facilities in their market. Inevitably, these new businesses impact their revenues, often resulting in 15 to 25% declines. However, it’s very difficult for a chain to deliver customer service and experience equal to that of a well-run private location. The initial hit hurts, but within one to two years, the independent location typically gets the revenue and profits back. Here are some tips for dealing with competition and/or the macroeconomic driven declines mentioned above.
Tip #1: Keep some cash reserved and have a laser focus on improving your operations and guest experience. Cash on hand is important, and while business is good it is essential to keep cash reserves strong.
Tip #2: Focus intently on driving bottom-line profitability. The last few years have brought record profits to most locations. It’s natural to have focused on generating as much revenue as possible, while losing track and focus on details that drive profitability. It’s time to focus on cost, theft, payouts and promotions, as well as group and event sales discipline.
Tip #3: Look to diversify your offerings. Many locations have used arcades to drive profits. This has been a great strategy and is a large part of how our business brings clients. There are few in the world who love the arcade business as much as I do. That being said, arcades have been growing in number and size greatly, and I believe we are seeing saturation of arcades in many markets. There are many new attractions and technologies available, and I suggest studying them intently, testing something new and talking with others. Amusement Expo in March is a good place to go start this research.
Tip #4: Be prepared to invest in your business when things slow. The large financial owners entering our industry are driven primarily, and in many cases singularly, by short-term returns. If there is a downturn, these companies typically cut costs in existing businesses to increase short-term profitability and redeploy capital into new locations. If you are competing with them, this is the perfect time to gain market share by investing in your business, driving customers back to you and away from their locations.
I expect 2024 to be challenging, but extremely exciting, for our company and the industry as a whole. Those who manage change, especially in a downturn, are the ones who thrive over time.
I would love to hear from you and learn what is working in your business, so please reach out. Also, if you think I’m wrong about any or all of the above, let me know that too. My email address is [email protected].
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.