2022: The Year in Review

by Howard McAuliffe, Partner, Pinnacle Entertainment Group

This year started with record numbers for most FECs with sales up over 2021 for most. However, as the year comes to a close, there’s a clear downward trend, indicating that our industry may be in for a tougher 2023. The good news is that we can fall back from record-high revenues and still do well. This month, I would like to focus on what we see as the most pressing issues facing our industry: revenues, supply chain, staffing and the new challenges of higher interest rates and inflation.

Revenues

While most suffered in 2020, 2021 was up over the last pre-pandemic year of 2019. This year, we saw a leveling off of walk-in sales over the summer with numbers slightly below 2021 on average, but still very strong. Much of this was offset by a resurgence of group and party business. We expect to see even stronger group and party business through the end of the year. We think this will more than offset the downturn in walk-in business for those fun centers with a strong group and party business, which we feel can generate from 20 to 30% of revenues for the typical FEC. Those that can, should end the year strong, but those who are weak in groups and events will suffer for it.

Supply Chain

“Well, I can tell you it’s not getting worse,” said LAI Games’ Chris Brady when asked about the supply chain during AAMA’s Annual Meeting in September. While that is certainly great to hear, the last couple of months have brought even better news: Factories are catching up on their backlogs, freight costs have come down and distributors are stocking more product than they have for many years. 2023 should see fewer delays for parts and equipment.

A question does remain: Will manufacturers remove their “freight surcharges?” I think we should all ask them. I’m certainly sympathetic to factory struggles. The supply chain challenges have wreaked havoc on their efficiency as they have had to stop and start production based on availability of parts and components. This has added expense which needs to be recovered and so prices have gone up accordingly. That being said, freight rates are stabilizing, albeit at higher rates than pre-pandemic. I think it’s time to adjust pricing as needed and remove the freight surcharges. On the prize side of things, Rhode Island Novelty has lowered its prices to adjust for lower freight rates and hopefully others follow suit.

Staffing

As of this writing, unemployment rates have remained between 3.5% and 3.7%. I expect turnover to slow down as workers seek stability going into what could be a tougher economic climate. Large tech firms have frozen hiring and appear to be starting significant layoffs. We will likely see unemployment rise in 2023 which should improve the workforce in our facilities. However, with inflation continuing, workers will likely not be able to accept lower wages.

Look for staffing costs to stay about the same, but the quality of the workforce to improve along with a decrease in turnover within our industry. If your business is profitable, this environment will create a great opportunity to take care of and keep your best employees, as well as attract new strong performers.

Higher Interest Rates/Inflation

We’ve all had plenty of struggles over the last couple of years, but now we get to add higher interest rates and inflation to the list of core challenges as we end 2022. Since these work inversely, higher interest rates will theoretically result in a decrease in inflation, but at least for the short term, we get to deal with both. This is going to limit new projects, which should keep some competition out of the marketplace and be positive for existing operators. This also will provide opportunity for route operators willing to step up and invest in redemption arcades and attractions because location owners will need to stretch their dollars.

Both higher interest rates and inflation will squeeze profitability for those with variable rate loans or who need to refinance. This makes focusing on fundamentals all the more essential. We have been riding a 10+ year wave of low interest and a strong macroeconomic environment and many operators have gotten lazy. Now is the time to focus on reducing shrinkage, dialing in cost of goods, finding efficiencies with labor and through automation, and otherwise tightening operations.

As we move from record sales to tougher (but not bad) sales, we will surely face challenges. The good news is that from these challenges, come opportunity. Companies that have been in the industry for a long time have been through recessions before and understand and prepare for inevitable downturns. Those that are overleveraged and have slim profit margins, will struggle or go out of business. As is often the case, the strongest will survive so as you prepare to start the new year, look for ways to make your business stronger and more resilient.

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.