It wasn't so long ago that children's entertain-ment and pay-for-play centers were as scarce as a babysitter on New Year's Eve. Just since the late 1980s, at least 500 CECs have opened in the U.S. and Canada. And, almost as quickly, markets have become saturated and overbuilt. Growth has slowed and existing centers are closing. Does this signal the end of the CEC industry? No. What it means is that the inevitable CEC shakeout has begun.
It's clear the industry has entered a new phase. Discovery Zone, the dominant industry player, dropped its U.S. center opening rate to about 10 percent of the past year's. Independent stores also are opening at a slower pace, and many CECs--both Discovery Zones and independents--have shut down altogether.
What does this mean to such a young industry? Will existing CECs survive? Will new ones drive the old CECs out of business? What the Sam Hill is going on here?
While there are no easy answers, looking at similar industries gives a clue as to what CECs can expect.
There's a pattern to location-based industries like fast food and video rental that is playing itself out within the CEC industry. It goes like this: A new idea pokes its head over the horizon, and begins a period of slow growth. Slow growth is followed by explosive growth, and soon the landscape is covered with outlets. Explosive growth leads to over-building and a shakeout, followed by a period of sustained growth and prosperity for companies that find formulas that are much improved from the initial concept.
Let's take the fast food industry for example. McDonald's started things rolling, and most of the early restaurants--McDonald's and other chains, and independents--were pretty generic. Everyone jumped on the bandwagon with what they thought was the winning formula, and fast food chains were everywhere. Then there was the shakeout. Even huge chains, like Burger Chef, were casualties when they didn't innovate to stay competitive. The loss of Burger Chef didn't mean the end of the industry, just a readjustment before a period of increased growth.
The shakeout proved that you can't have a bazillion restaurants all functioning with the same formula. With readjustment came fast food places targeted to a specific niche. The first formula was simple--inexpensive fast service built around a menu of burgers, fries and shakes. With saturation, smart chains held onto the "inexpensive fast service" part of the formula, but built a menu that appealed to different parts of the market. Thus, Wendy's, Taco Bell, Subway, KFC, and Arby's, among others, specialize in a particu-lar kind of food or in serving a particular customer.
Another example is the video rental market. Video rental stores started as small corner shops that were swamped with customers. Wannabe entrepreneurs saw video rental stores as The Next Big Thing, and jumped on the bandwagon. Stores blossomed on almost every corner, until the market was saturated and the shakeout began.
Meanwhile, some smart businesspeople looked at the early formula and saw it was lacking. They planned improvements in merchandising, selection, location, parking, cleanliness and service. Mega stores popped up even in markets that were overbuilt with corner shops, and began drawing customers. Then Blockbuster appeared and took the mega store concept nationwide. While few of the early stores survived, those that followed the later formula continue to be built. In fact, while Blockbuster is the largest player, most video rental stores are owned by independents and smaller chains. That's right, Blockbuster just controls 17 percent of the market, and new formulas are showing up that include other media, like music cassette tapes and CDs, video CDs, game cartridges and computer CD-ROMS along with videotapes.
Most other location-based concepts have hit a similar cycle of slow growth, fast growth, saturation, and specialized evolution. The same pattern can be seen within the motel/ hotel industry, specialty clothing industry, and even toy stores.
A closer look at the origins and evolution of CECs shows whether the same cycle is in effect. And, if it is, it opens up some interesting questions about what it will take to survive the coming shakeout.
The foundation of CECs were the outdoor family entertainment centers with miniature golf, go-karts and game rooms. The FEC formula shoots for broad appeal, not unlike early motels, fast food places, and retail clothing stores. Then, driven by growth, societal changes and the echo baby boom, some outdoor FECs added new attractions like kiddie rides, redemption games, or two-seater go-karts to broaden their appeal to families with younger children.
Meanwhile, several entrepreneurs saw that children accompanied by parents--the true "family" unit--was a substantial segment of the FEC market and had the potential to be a profitable niche for specialize centers. The real estate recession of the late '80s and early '90s simultaneously made good retail space available cheap; the indoor centers had the added bonus of attracting families year-round rather than the outdoor FEC's Memorial Day to Labor Day season.
The first CECs fit within one of two formats: 1) larger 20,000+ sq. ft. centers with children's rides as the main attraction, like Jungle Jim's Playgrounds in San Antonio in 1988; and 2) smaller 10,000+ sq. ft. centers with soft modular play as the prime attraction, like Tickles Fun Factory in Colorado Springs in 1986 and the first Discovery Zones in 1989 in Kansas City. When no-hassle birthday parties were added, both concepts were instant hits and the pay-for-play industry took off.
In particular, aspiring entrepreneurs, including many laid-off corporate middle managers with savings or severance bonuses, quickly opened up soft modular play [SMP] centers. What made that format so popular? First, the entry cost was from about $500,000 to $700,000, far more affordable than the $1.5 million needed for the larger CECs. Second, vacant 10,000 sq. ft. stores were far more plentiful than ones upwards of 20,000 sq. ft. And third, the original founder of Block-buster Video latched onto the concept as one that could be rolled out rapidly nationwide to give them "first mover" advantage. They acquired the capital-strapped Discovery Zone [DZ] company and through their capital and chain expansion expertise into the ring.
Unfortunately, the early concepts for any new industry rarely are the long-term winning formula. In other words, there's no advantage to being the "first mover" with a flawed concept.
Why wasn't this evident with soft modular play? It's common sense. When the SMP centers opened, they were a novelty, and usually the only game in town. Naturally, customers checked them out, like they did Burger Chef and corner video rental stores. The mistake came when Blockbuster's/ Discovery Zone and copycat independents stuck with the first, flawed concept rather than find the later, more viable version. What made the situation worse for DZ was that it was so obsessed with gaining first mover advantage in all major U.S. markets, their sole objective was rapid expansion. They paid little or no attention to perfecting the concept first, in part through the arrogance that came from Blockbuster's success.
"A long habit of not thinking a thing wrong gives it the superficial appearance of being right."
Today, most of the 400 or so SMPs are in deep trouble. Many have closed, including many Discovery Zones. The DZ company has never made money, has cut back expansion, and seen seven of its top execs recently fired by Viacom, Inc., new owner of Blockbuster's. (DZ's response has been to experiment with different concepts, including laser tag, electronic bells and whistles added to SMP equipment, and strategic marketing alliances like Mighty Morphin Power Ranger themed birthday parties.)
Saturation is only part of the problem. The root cause is that the initial concept was seriously flawed. Children require environ-ments with wider and more age-appropriate varieties of play and entertainment than just the gross motor (physical) play offered by SMP. The current market for SMP centers is limited, basically, to kids from six to nine years old, when pre-adolescent children include at least four ages of play--toddlers, early pre-schools, late pre-schoolers, and ele-mentary age children. Research shows that these four sectors don't mix in the same environment and in the same play events, especially physical play.
The problem with physical play is that children from pre-school through six years, given a variety of options, will choose physical play only about 15-20 percent of the time. SMP centers don't offer the kind of variety that brings kids back. It's like having a restaurant with only meat loaf on the menu. It may be the world's greatest meat loaf, but eventually you gotta branch out. Children are no different. They want variety and they want play options that meet their needs. Also, SMP centers focus almost exclusively on the SMP equipment and fail to address the needs of children and parents for comfort and enjoyment, and a market-appropriate level of atmosphere and service.
Two new competitors--the "super CECs" and free play--threaten to shut down the small SMP operator.
Newer and larger children's entertainment concepts are appearing that better capture the imagination and magic of children. These third-generation "super CECs" are carving out unique niche market positions based on hybrid combinations of children's ages, socio-economics, and play and entertainment events including rides, edutainment and program-ming. These centers are much larger--from 20,000 to 30,000 sq. ft.--and development costs exceed $1.5 million. While many include SMP, it's just one item on the menu.
At the same time, free children's entertain-ment is growing more prominent. Fast foot chains, McDonald's in particular, are adding larger free children's play areas featuring SMP units. Newer McDonald's include "glass boxes," indoor play ares of 1,200-3,000 sq. ft., some of which include three-story, $100,000+ SMP units. These new indoor units narrow the customer's perceived gap in value between free play at McDonald's and $5 or $6 for a ticket at a pay-for-play SMP center.
SMP centers are being squeezed between two options: bigger and free. What can they do to compete? Unfortunately, not much. Most are functionally obsolete because they lack the physical space needed to add new play options. Making it worse, many SMP centers are following Discovery Zone's lead and adding laser tag and electronic gizmos, a move that blurs a center's image right when a focused market position is essential. Even attempts to survive by increasing service are likely to fail if the root cause of the problem, a faulty mix, can't be addressed.
The problems with SMPs don't mean death to the CEC industry any more than the demise of Burger Chef signalled an end to fast food. The same catalysts in society that began the CEC industry, like concerns about safety and the continuing high birthrate (about 4 million births per year), will sustain it far into the future.
Most that survive into the third millennium (less than 5 years away) will be different than current CECs. They'll be based much more on fun with educational (edutainment) and high-touch interactive and hands-on events instead of technological hardware. There are four emerging trends that make this so: 1) parents' increased desire to expose their children to enriching learning experiences; 2) a craving for community-based, shared family experiences; 3) the fact that true play oppor-tunities are becoming a luxury for American kids; and 4) the growth of an entirely new aspect of leisure.
Let's look at leisure. It used to be that people thought leisure was the reward for hard work. Work was associated with self-improvement and leisure with relaxation that had no prac-tical use. Today, people with the least leisure time--educated white-collar and knowledge-able workers, which includes most harried parents--are using their scarce leisure hours differently. They see leisure as another avenue for improving themselves and doing worthwhile things, rather than popping a brewsky and reading a trash novel. And this carries over to their children.
Parents are choosing to spend their limited time with their children in activities that they see as enriching their children's lives and the bond between parent and child. New research showing that children through age six learn best by play will reinforce this trend.
"Anyone who thinks education and entertain-ment are different doesn't know much about either."
Given that, the White Hutchinson Entertain-ment Group has its own vision for the many CECs we are producing for clients. Although that vision hasn't been fully achieved (and maybe never will, since the ideal is a moving target), we believe it captures the essence of the successful formula.
In our vision, CECs have a diverse yet focused mix of age-appropriate, high-touch and hands-on interactive edutainment fun and play. They have quality, thematically-integrated designs where all components--events, programming, environment and operations--are woven into a seamless whole that is targeted and tailored to the needs and tastes of the center's market niche. Natural spaces and components provide comfort for parents and, more importantly, satisfy a bio-logically programmed need for children to interact with and explore the natural world. The dominant form of entertainment and play is not events, like rides, that children experience passively, or that force children to conform to adult ideas of appropriate play, like games and SMP. Instead, children have a rich environment that they can act upon, manipulate and control, allowing them to enjoy the playful magic of childhood through their imaginations and sense of discovery, both as individuals and with others. In our vision, children are given the tools and license to play and be children.
Randy White is CEO of White Hutchinson Leisure & Learning Group, a Kansas City, Missouri-based consulting and design firm that assists children's and family entertainment centers with market feasibility, concept development, design and operations consulting services for new starts, remodels, and expansions. Randy can be reached at +1.816.931-1040.