Plan Before Your Leap: An Entrepreneur's Guide to the Feasibility Study

By Randy White

Let's hear it for the headstrong entrepreneur. Propelled by a bold vision, the entrepreneur seeks to shape circumstances to fit his picture of what should be. He leaps forward where others, the timid and weak, would hesitate. He follows his gut, secure in the knowledge that he knows what people want. And if the people disagree, he follows his gut straight into bankruptcy,

It takes a certain wisdom to ride the horse the direction it's headed. It takes patience to answer the questions, "Is my vision feasible? Should I proceed?" This kind of common sense hasn't always been reinforced in entrepreneurial circles, where action has been valued more than planning. Bold action is important. It should, however, come only after an entrepreneur is sure that the leap forward won't propel him or her right off a cliff.

The secret to moving forward with confidence is to start with a market and financial feasibility study. Nothing is more important to the development of family entertainment centers, or any location-based entertainment venue. The study is the foundation on which the FEC is built, yet it is amazing how many FECs have been developed with near-useless data or no study at all.

Most entrepreneurs spend more money adver-tising their FEC's opening day than on deter-mining whether and how the FEC should be developed in the first place. Full-blown feasibility studies typically cost no more than 1% to 1.5% of an FEC's total cost, and tell you whether you should proceed and how to make the most of the money you'll spend on the FEC's development. A proper feasibility study tells you:

• who the target market (niche) should include;
• what the FEC should contain (the concept and mix) and its size;
• design and operational factors critical to turning the target market into loyal repeat guests;
• how much the FEC will really cost; and
• the income, expenses, and return on invested capital.

Case Studies: FECs Built on a Shaky Foundation

Both owners and lenders have asked our company, the White Hutchinson Entertainment Group, to analyze ailing FECs to determine if they can be healed and, if so, what it will take to make them healthy. During our studies, we've examined their files to see the basis for their development. What we've seen shows the power of wishful thinking to obliterate common sense. In the examples that follow, drawn from the original feasibility studies for these FECs, the names of the centers and owners aren't mentioned to protect the foolish. Keep in mind that with the exception of the first two centers, where the owners had deep enough pockets to renovate or continue to subsidize operations, these centers have closed or been foreclosed upon.

"It's a densely populated, upper income area, so we targeted teenagers and families." Our study showed the owners that there weren't many teenagers. While the under 6 age group was by far the largest target market, the existing FEC mix didn't attract them. After $500,000 of renovations conducted six months after opening, the center was a success.

"We already owned the real estate and thought an FEC would be a good use for it." To use all the real estate, the owner overbuilt by about 50% more than the market could support. The mix was flawed because the owner tried to mix two different and incompatible target groups. The center is losing $300,000 a year.

"It looked like a growing community." While the area was growing, it still was only about half the size market needed to support the FEC. The center's mix also was wrong for the area.

"The market area had similar demographics to our other center, which is successful." While the populations and average incomes of the two areas were very close, 30% of the households in the market area for the second center were below the poverty level. The location posed a socio-economic barrier, too, as affluent families would not visit the second center. The owner also was wrong to assume that the county in which the FEC was located was its market area. In fact, the market area was far smaller.

"The building could be rented cheap." Unfortunately, the owner got what he paid for. The FEC was on the side of town that contained the 15% of the target market that was in the middle to lower socio-economic bracket; the other 85% that was wealthy or affluent didn't want to visit that location. To add to the problem, the center did not have a balanced mix of anchor attractions.

The owners of these FECs spent anywhere from $700,000 to $8 million to develop their projects. They failed or struggled because entrepreneurial zeal blinded them to the due diligence and wisdom of proper business procedures.

Lies, Damn Lies, and Demographics

The FEC industry is relatively new, and many owners have little experience with feasibility studies that are standard in other industries. Feasibility studies, which include site selection, market analysis, concept and mix development and financial feasibility, have long since replaced intuition as the prime decision making tool in long-standing industries like retail, hospitality, restaurant and entertainment venues. Professionally performed feasibility studies are equally reliable for the new FEC industry.

Unfortunately, many FEC owners who do some research settle for faulty or incomplete data. They take the course of least resistance and least cost, either not using any feasibility studies or relying on canned profiles prepared by demographic vendors, chambers of commerce or governmental agencies.

There's nothing wrong with demographic data as an element of any feasibility study. With advances in complex modeling made possible by the computer, demographic data vendors now offer fairly reliable, inexpensive data. Used improperly, though, demographics are an unedited, uninterpreted bunch of numbers that can be very misleading.

Most often, for example, demographic data are compiled as ring radii (i.e., concentric circles 5 or 10 miles around the site) or for the city or county as a whole. This can provide a pretty impressive stack of paper. In the real world, though, consumers are not attracted to a site equally from all points of the compass. Our company has performed guest origination studies on many existing FECs of all types, and found that the market areas never were neat concentric circles or identical to city or county boundaries. Instead, they were determined by consumer behavior and irregularly shaped, more like an amoeba than a circle (see bellow).

The Right Way to Identify the Market Area

So now that you know how it shouldn't be done, let's look at what goes into a proper analysis of the market area.

Every FEC will have a market area that accounts for most of its business. Typically, the residents in an FEC's primary and secondary market areas will account for about 80-85% of its business; the other 15-20% will come from residents living outside the secondary market area or visitors to the area. The amount of business generated within the primary market area (the market penetration) usually will be much higher than in the secondary market area.

Any thorough feasibility study will first evaluate multiple factors to find out the size and shape of the FEC's market areas and then the amount of business the FEC will generate. Here's what those factors include:

• The proposed FEC's exact location and site. Keep in mind that a difference of as little as several blocks can have a huge impact on the size of the market area and the amount of business. Five site-specific factors must be taken into account when evaluating the location and site:
  

1. visibility of the signage, storefront and any outdoor FEC attractions from the road on which the FEC fronts and from other major arteries;
2. traffic counts on arteries from which the FEC is visible;
3. accessibility from the arteries, which includes how easy it is for guests to find their way to the FEC and its ingress and egress;
4. co-tenancies, which includes other tenants or uses in the shopping center or in surrounding properties; and
5. the layout of the site and relationship of the entrances and parking to the building's entrance.

• A weak or poor location is a permanent handicap for a FEC's success that no amount of advertising can ever overcome.
• The nature and location of competition. If the feasibility study properly evaluates the competition, it can recommend a strategic development direction for the proposed FEC that can make the most of the market area and give the FEC a unique market position.
• The physical features and barriers, like rivers, mountains, lakes, valleys, freeways and major land uses like military bases, cemeteries and industrial areas. Populations only a few miles away may actually have to travel miles more to get around physical barriers, which often create distinctive submarkets within a metro area.
• The psychological barriers that comprise the "other-side-of-the-tracks syndrome." Physical features often create psychological barriers based upon how areas grow. Lower socio-economic areas also can become psychological barriers.
• Regular patterns of travel. If the population normally travels north for shopping and entertainment, they may resist going south or west to get to your FEC.
• The relationship to nodes of shopping and entertainment. These nodes, which include malls, restaurants and cinemas, create patterns of travel and also influence the FEC's exposure to residents in their non-working hours. While the nodes are important, being improperly located within one will be a problem. For example, being located in a mall can be a disadvantage because the FEC is no longer as convenient to visit.
• Travel times rather than travel distance. Travel times are affected by density of development, road design and capacities, and traffic. In a dense area with traffic lights and congestion, it can take 10 minutes to go two miles. In rural areas or on an interstate, the same 10 minutes will get you 10 miles. Regional attitudes about driving also influence how long people are willing to drive to reach a destination. Driving 10 minutes in high-traffic, high-stress areas can be psychologically equivalent to driving 20 minutes where driving is pleasant. Where driving to work is not considered a chore, consumers are willing to drive farther for leisure activities.
• The mix and critical mass of the FEC. The guests' perceptions of the size and variety of the FEC (critical mass) is affected by the FEC's mix and physical size and has a direct impact on:
  1. market reach (the size of the FEC's geographic market area);
  2. who is attracted;
  3. the frequency of visits; and
  4. per-capita expenditures.

The first three elements result in attendance. Attendance multiplied by per-capita expenditures equals revenue. The mix and critical mass must be skillfully tailored to match the market area's target market and its expenditure potential. Too large an FEC will generate too little return on investment. Too small an FEC won't capture all the market potential due to too small a critical mass, and leaves the FEC vulnerable to competition. A good feasibility study recommends a concept mix and size that allows you to shoot with a rifle rather than a shotgun.

• Socio-economic/lifestyle characteristics and affinities. It's amazing that one of the most crucial factors is so often overlooked. The downfall of many FECs is that they have failed to properly determine the socio-economic/lifestyles (SEL) of the market area, take it into account when calculating attendance and spending, and match the design of the FEC to a targeted affinity grouping of SELs. Clearly, demographic data alone are insufficient. We'll spend more time on this topic later in the article.
• The design of the FEC. Design includes more than the layout of the parking lot and interior and the mix of attractions and events. It includes the theme and atmospheric design, level of finish and service, and every physical and operational aspect of the facility that directly or indirectly (emotionally and psychologically) affects the guests and staff. Like restaurants, hotels and motels, and retail outlets, the design of FECs affects business. FECs that are designed like warehouses with rides and games are guaranteed to fail. For some target groups, the correct design would resemble a Kmart or Shoney's. Members of higher income SELs, on the other hand, would only feel comfortable if the design reaches the level of Nordstrom's or Macaroni Grill. A feasibility study that dissects the market area's SELs and identifies the targeted affinity grouping will give your design team the information it needs to delight the people you need to attract.

There Is No Such Thing as the Average Customer

The problem with demographics is that the best they can give you is a picture of the population in aggregate and in averages and medians. They don't tell you what these people are like, their values, their behaviors, their lifestyles. Demographics don't tell you which SEL groups make up the population, and which groups tend to associate and which tend to avoid one another.

For example, knowing that the head of a family is a 40-year-old male with an income of $50,000 does not tell you how that person behaves. The family could live in the rural Rockies with an 8- and 13-year-old, an apartment in Dallas with no children, in a high-rise in downtown Chicago with a 3-year-old, or in a two-story house in suburban Indianapolis with a 14- and a 17-year-old. The adults in the family could have different levels of education, and each family will have different values and tastes, purchase different products and be interested in different types of leisure activities. Not only do demographic studies fail to cross-match the demographic variables so you know how many college-educated, $50,000-income families with 2-5 year olds exist, but they don't tell you about the families' lifestyles.

At this point, you may be thinking that you know your own community. You already know your 40-year-old man doesn't live in Indianapolis, that he lives in a middle-class neighborhood near where you want to build your FEC. We're constantly amazed, however, at the number of times an FEC owner misjudged his or her own community, or failed to accurately identify the tastes and values of the individuals who make up their target market.

Different SEL groups have different tastes, values and expectations of what the FEC should contain and how it should be designed. Different SELs respond different to design, service, mix and price. What attracts one group can repel another. It is impossible to design an FEC that will appeal equally to all SELs. Without knowing who these groups are and picking the ones the FEC will try to attract, it is impossible to customerize the FEC to attract them and keep them coming back. In the restaurant industry, for example, Shoney's attracts a different SEL group than TGI Fridays, which attracts a different SEL group than Bennigan's. Each has a different level of service, pricing, design, and even different colors. Each is successful at pleasing its target market because it is focused on that SEL group or cluster of groups.

The alternative is less pleasant. If an FEC is not proactively designed for target SEL groups (this is critical with indoor FECs), then less-desirable SELs often are attracted. If they're lower or incompatible SEL groups, the target SEL groups will most likely avoid the FEC.

So What's This FEC Gonna Cost?

An owner has the right to expect a feasibility study to give an accurate picture of the cost of the FEC. Too often, though, proper market analysis is performed and the net income and cash flow is compared to an inaccurate cost figure. Typically, the inaccurate figure is a ballpark or per-square-foot or event estimate. So the owner arranges investor and lender financing based on this estimate only to find that it's not nearly enough to complete the FEC as designed or that even if more money is available, the return on investment is reduced.

Was there a cost overrun? Not really. The owner is the victim of a cost underestimate. A proper feasibility study avoids this problem by including development of a concept design plan that not only assures the mix will fit the site, but also identifies all cost components, including the often-overlooked regulatory ones like storm water management ponds, landscaping, and traffic lights. Cost components also include every single hard and soft cost including inventory, supplies, deposits and operating capital. Construction costs should be based on actual cost estimates by contractors and subcontractors. A detailed FEC cost estimate easily includes 600 or more line items. This level of detail assures that real numbers, not wishful thinking, are at the owner's disposal.

Exploding Two Feasibility Myths

The FEC industry is so new, it's hard to believe how many myths already have popped up about feasibility. In addition to the myths that market areas are concentric circles, populations are homogeneous, and demographic reports tell the whole story, two other myths will trip the unsuspecting owner.

All FECs have the same size geographic market area.

In fact, the market area's size is a function of multiple factors. We reviewed our files of the last ten FEC market studies that White Hutchinson Entertainment Group performed. Many of these were conducted for existing FECs where their existing market areas were determined through guest origination surveys. All of the market areas were irregularly shaped like amoebas, so the minimum and maximum distances and drive times from the sites are shown for the primary and secondary market areas:

An FEC requires a standard size population

Trying to use rules of thumb like 100,000 population per miniature golf course or 250,000 per indoor FEC is just plain dangerous. The total population has nothing to do with feasibility. Sometimes, for example, a market area with a larger number of children is less feasible than an area with fewer children but more homogeneous socio-economics and lifestyles. The only thing that matters is the potential number of guests for your FEC after giving the competition its market share.

We have performed feasibility studies for markets of 250,000 that had only the equivalent number of families with pre-adolescent children of the average U.S. population of 110,000. We've also seen market areas with an overall population of 150,000 that had the number of families with children equivalent to a U.S. average population of 225,000. The outcome also depends on what group you want to attract. If you are targeting college-age young adults, you're better off in a town of 120,000 with a university of 40,000 students than in a town of 250,000 with the U.S. average number of college students.

A feasibility study isn't magic, although it can have a magical effect on the profitability of an FEC. Rather, a feasibility study provides you with data that replace wishful thinking. The study gives you a rich, detailed and accurate picture that includes information you really need to know, rather than information that's just easily available. After the feasibility study instead of before is the best time to take that bold leap forward into FEC ownership or expansion.