The Economics of Working With a Coin-Operator
By Randy White and Frank "the Crank" Seninsky
The following article is a summary of a portion of a three hour seminar Frank Seninsky and Randy White presented at AMOA Expo 95 called "How Coin-Operators can do Business with FECs".
In little over five years, family entertainment centers have gained a significant market share within the location based entertainment industry. FECs include outdoor oriented family fun parks with miniature golf, go-karts, batting cages, bumper boats, other attractions and clubhouses with food and games and indoor FECs ranging from 10,000 square foot children's pay-for-play centers anchored with soft modular play equipment to 100,000+ square foot mega FECs. There is no formal census of the current number of FECs. Estimates in the US range into the thousands. New FECs are continuing to be developed at a rapid pace and are now appearing on every continent of the world.
Games, including stand-up and ride simulation videos, redemption, novelty, pinball and kiddie rides are an important part of an FECs economic equation. Gross game revenue typically represents between 20% and 40% of total FEC revenue. Games account for 10% or more of the cost of developing an FEC. There is considerable misunderstanding in the FEC industry on the economics of whether an FEC should purchase and operate its own games or enter into a revenue split alliance with a qualified coin-machine operator. The purpose of this article is to shed light on this issue.
Alpha-Omega Amusements, headquartered in East Brunswick, New Jersey, has been an active supplier of games to FECs since the industry's infancy. Alpha-Omega currently owns and operates over 6,000 games in more than 100 FECs throughout the US and is an active consultant and supplier to the international market. The White Hutchinson Entertainment Group, Inc., located in Kansas City, Missouri, assists its FEC owner clients who are located throughout North and Latin America with feasibility studies, concept and mix development, full design services, project production and consulting for expansion and FEC workouts. They have become a dominate respected player in the FEC industry. This article is based upon both company's experience, each having been on the opposite sides of the table in FEC owner and coin-operator supplier relationships.
Regardless of whether they are FEC owned or coin-operator supplied, there are four components to the economic equation of operating games in an FEC:
- the FEC's attendance and potential per capita game revenue
- the capital ($) required to purchase the games, both the original games as well as continual new replacements
- repair, maintenance and upgrade modifications to the games, and
- the expertise (knowledge) of game selection, set-up and operations
When the games are owned by the FEC, the burden of all four fall on the FEC owner. When they are supplied by a qualified coin-operator, the equation becomes a symbiotic relationship between the FEC and coin-operator that benefits both.
Although game selection can have some impact on a FEC's attendance, especially if the selection and maintenance is poor, the games are not typically the reason most guests visit an FEC. The basic FEC formula is to have anchor attractions that are the primary reason for coming, and then once the guest is there, impulse items that they purchase on a discretionary basis. Anchors include events such as rides, soft modular play, laser tag, miniature golf and go-karts. Impulse items are typically games and food and beverage. Attendance is not only driven by anchors, but also by group business such as birthday parties, camps, corporate parties, graduations, sleep-ins, etc.
The FEC formula is somewhat analogous to movie theaters. Few people go to the movies for just the popcorn, candy and snacks. Once they come for the movie, the anchor, they generally purchase popcorn and snacks. So although the quality of the popcorn and snacks can have an impact on how many attendees purchase it, especially if they are regulars who are aware of the quality, the size of the snack stand and popcorn popper will not affect food sales so long as it is adequate to meet demand. Great popcorn will not get attendees to purchase double size containers. The snack stands demand and sales potential is primarily governed by the movie's attendance.
The same is somewhat true with games in an FEC. The number of games does not affect game sales so long as there is an adequate number, appropriate mix and quality. The FECs attendance, driven by anchors and group business, determines the potential game revenue. That revenue is referred to as per capita, the average amount that a quest will spend on games on each visit. In any FEC, there is a potential per capita game revenue that will not be affected by the number of games. All things being equal, twice the number of games will not increase sales so long as the number, selection and quality of games is adequate to meet potential. Likewise, adding the hottest games may not increase overall game revenue so long as the selection was adequate. But the hottest games will keep gross per capita game revenue at its highest potential level and gives the guest an excellent experience. Typically, FEC per capita game revenue potential ranges from $2 to $4 per capita and can be even higher in large FECs.
A coin-operator who supplies games to an FEC can have a small impact on the attendance and per capita game revenue (unless the previous selection and maintenance was not top notch, which is more often than not the case). Attendance is primarily determined by the anchors and the FECs overall quality of marketing and operations. These factors are within the control of the FEC owner. When a coin-operator supplies games to an FEC, her/his job is to capture the per capita game revenue so none of it walks out the door. So in a revenue share arrangement, it is the FEC owner's responsibility to create the attendance and per capita game potential (the 1st component) and the coin-operator's responsibility to supply the games (capital -- the 2nd component) and the expertise and maintenance (3rd and 4th components) to capture all the potential game revenue.
When a coin-operator approaches a prospective or existing FEC to supply the games, the standard response from the FEC owner is "Why should I give you half the revenue?' Although coin-operators inherently understand the value added they bring to the table, it is sometimes difficult to quantity the economic benefits. The following financial model has been prepared to illustrate why the coin-operator's answer to the FEC owner's why question should be "Because your investment in the FEC will be more profitable." FEC owners typically fall into the paradigm of only focusing on the half the game revenue going to the coin-operator and not seeing the whole financial equation that includes:
- the coin-operator supplying the capital to pay for the games, and thus reducing the FEC's cost, borrowing and loan payments and the owner's and investors' required equity capital
- the coin-operator paying for all repair parts
- the coin-operator paying for 1/2 the cost of prizes, tickets, tokens, licenses, etc.
- the coin-operator contributing to the labor to maintain the games
- the coin-operator supplying the capital to purchase new games,
- the coin-operator's superior expertise in game operation and management that results in higher per game revenue
- the FEC's management is not burdened by game maintenance and management, allowing them to focus on the core business of delighting their guests, and
- The FECs return on owner equity (capital) which is the only real measure of an investment's profitability
The model is for a 15,000 square foot indoor FEC. The authors have analyzed the results under many other scenarios. The results are the same no matter what the size or type of FEC. Nor does the answer of the FEC's return on capital being higher with a coin-operator change when the individual assumptions change, so long as the model represents a reasonably well designed and operated FEC.
The numbers in the model are based upon the authors' experience for the purpose of illustrating the economics of FEC owned games versus coin-operator supplied games. The numbers are realistic, but are a generic composite of quality developed and operated, successful FECs. However, the numbers should not be used for purposes of projecting the financial feasibility of an FEC. Every FEC is unique, and its cost and performance will vary significantly from the example. Factors that result in differences include the market area and its demographics and socio-economics/lifestyle composition, competition, the FEC's location, the type of FEC, its mix, caliber of finish and theming, area of the country and quality of operations. It is unwise to develop an FEC or enter into an a relationship to supply an FEC with games without a market and feasibility study and mix and design advice from professional FEC experts.
Figure #1 is the assumption table. Figure #2 shows the annual revenue, expenses and return on investment (both cash and after tax) under three different scenarios. Column A is the generic FEC with all the games owned and maintained by the FEC. Columns B, C and D are for the same FEC, but with the games supplied by a coin-operator. Column B shows the games with no increase to per game or overall game revenue. This is rarely if ever the case, but the example is included to illustrate the economic outcome even under this scenario. Column C shows the coin-operator achieving a 33% increase in game revenue, but no change in the FEC's other revenue. Column D shows the coin-operator capturing the maximum per capita game revenue, a 50% per capita increase over when the games where owned by the FEC, and through superior operations, increasing the FEC's attendance and resultant sales 5%. Columns C and D illustrate the real world experience both authors have had when an existing FEC changes in mid-stream and contracts with a coin-operator to take over the games. The problem is that with rare exception, FEC owners do not have the experience, expertise and focus to manage the games to the FEC's full potential. In most situations, the FEC owner's game management is actually substandard which not only hurts the game revenue, but also hurts the FECs attendance and sales. (Imagine the results to a movie theatre that continually serves stale popcorn and poor quality snacks. It would probably drive patrons to a competitive cinema, even if it were further from their homes.)
Contracting with a qualified coin-operator to supply the games offers many benefits that are both monetary, as illustrated by the examples, and non-monetary. The following are the highlights of some of those benefits taken from a list developed by Alpha-Omega Amusements of the 50 ways a coin-operator can benefit an FEC:
- Keep the owner informed on coin machine industry trends.
- Rotate games in and out, including the newest and hottest games, on a monthly or more frequent basis to keep the game mix constantly fresh and appealing.
- Constantly upgrade existing games to improve game's operation, reduce downtime, and increase revenues.
- Recommend new attractions for the FEC.
- Share information on marketing and operations that the coin-operator learns from other FECs the coin-operator supplies.
- Set the ticket payouts (hit ratio and percentage) for each redemption game properly.
- Layout the games in an attractive and inviting manner.
- Keep changing the games position to give the FEC a new look.
- Help market the FEC to bring in more customers.
- Organize tournaments and contests to promote the FEC.
- Train the FEC staff to make minor repairs on games, load tickets, unjam coins, put proper balls back into proper games and properly clean the games.
- Make redemption prize recommendations and help find discounts for FEC owner from major merchandise suppliers.
- Remove stale games and replace with new games.
- Faster response time on game repair and replacement parts
- Improve traffic flow and way finding in entire FEC.
- Allow the FECs management to not be burdened by game management, purchases and maintenance, and therefor have more time to focus on their core business of serving and delighting their guests.
The bottom line is that with a qualified coin-operator, there is no reason due to the financial benefits of lower cost and higher return on investment (profits) or the many non-monetary benefits why an FEC owner should ever what to own the FEC's games.