The worst economy in decades is sinking industrial icons and closing doors of businesses left and right. Does that same doom and gloom hold true for location-based leisure venues? Read on for an industry expert's detailed prediction that may shock you - and renew your hope.
"The future ain't what it used to be."
-- Yogi Berra
In just a few months, many of the underlying economic assumptions we have used for years for the feasibility, development and management of location-based leisure (LBL) venues are no longer valid. Home values have fallen. Consumers' retirement and stock market investments have plummeted. Unemployment is rising. Home foreclosures are at record high levels. The ability to borrow is a distant memory. Retail and service industry sales are dropping. The news is doom and gloom on TV, radio and newspapers every day. Many consumers are hurting economically, and the rest are experiencing stress, anxiety and uncertainty about their economic futures. This affects all their purchase decisions, including visitations to and spending at leisure facilities and restaurants. In fact, we may be at the beginning of a major consumer paradigm shift where thrift is trendy, saving is savvy and search for true value is time well spent.
We have no magic crystal ball to predict how the downward recessionary spiral the world economies are in will unfold, but we thought we'd share some of our thinking on how economic conditions may impact the LBL industry, both in the short and long term.
First, let's look at existing LBL facilities. Generally, you can break LBLs into two categories - community-based and tourist-based. Tourist-based LBLs require the largest expenditure for travel, lodging, entertainment and dining. They will probably be hardest hit, as consumers for forgo major discretionary expenditures. The trend started not long ago with high gasoline and energy prices, and it will continue and accelerate. Vacations are being replaced with stay-cations. This is not good news if you have a hotel, cruise ship or an LBL in a tourist area. PKF Hospitality Research forecasts U.S. hotels will experience a 7.8% drop in RevPAR (revenue per available room) in 2009, with the seasonal leisure locations hit the hardest: Miami, 12.9%; Orlando, 11.1%; and Ft. Lauderdale, 10.3%.
The shift to stay-cations is good news for community-based LBLs. Community-based LBLs such as FECs, bowling centers, eatertainment venues and children's entertainment/edutainment centers are generally considered affordable, just like the movies. Per capita expenditures are generally in the $12 to $20 range. The recent substantial drop in gasoline prices helps, as consumers will have less reluctance than they did just a few months ago to drive those miles to visit. You can stay home only so long. Many homeowners are also refinancing their home mortgages at today's historically low interest rates, putting a few more dollars in their pockets.
People still need some relief from their anxieties and will go out for some indulgencies to get away from it all. Yes, they may trade down a little, just like consumers are trading down from white tablecloth restaurants to casual restaurants and perhaps forgoing the appetizer. But they will still go out to eat.
Several recent surveys indicate that although consumers are trading down in many categories, there are still some luxuries they won't go without, especially ones that soothe the spirit. Consumers trade down to save money for the little luxuries they continue to trade up on. A late October 2008 survey by The Boston Consulting Group of households with incomes over $35,000 found that 62% of Americans say they trade down "so I can spend it elsewhere," and 61% say they do it because they "enjoy the feeling I get when I am able to save a little money." The good news is that only 27% say they do it because they cannot afford to buy the more expensive products. And 70% say they'll still trade up for added technical or emotional benefits. A more recent survey by the Washington Post indicates consumers find the prospects of spending money on friends, family or a small boost to their wellbeing was still worth it.
Experts who study happiness have consistently found people get the most joy out of time with family and friends or activities that provide personal enrichment, such as hobbies. Daniel Gilbert, a Harvard psychology professor, says, "Human beings are social animals, so it is no surprise that our greatest sources of happiness and unhappiness are our social relationships." Any out-of-home activity that creates a positive social experience will get priority from consumers.
The Boston Consulting Group concluded the following in a major survey and analysis it recently conducted on trading up and trading down: "The appeal of emotional benefits, in particular, is likely to remain strong (and may even intensify) in troubled economic times, as consumers defer big-ticket purchases and embrace affordable luxuries in place of luxuries they can no longer afford."
A study of the 1990-1991 and 2001-2002 economic downturns by McKinsey & Company showed U.S. consumers prioritized spending rather than cut it across the board. Consumer expenditures for discretionary categories like dining out dropped, while expenditures for options that substitute for more expensive ones such as groceries and reading materials actually rose. In fact, food-away-from-home had the largest percentage drop of all categories. The study showed entertainment spending during those two economic turndowns actually decreased less in percentage terms than all overall spending. (This bodes well for eatertainment, where the entertainment becomes the attraction and the food and beverage enjoys better sales than at stand-alone restaurants).
Consumers will keep coming to affordable LBLs that offer good perceived value (more about that later), a short respite from economic stresses and anxiety, and a social experience for family and friends. In fact, a little fun, a positive emotional experience, an escape with family or friends has an even higher value during times of stress and uncertainty. No, sales may not be at historic highs, but those LBLs, just like casual dining restaurants, won't get hurt to the same degree as more expensive restaurants or LBLs that aren't perceived as a good value.
With consumers watching their spending, they are going to be even more selective in which LBLs they choose to frequent. Only those that offer a compelling reason to visit -- a great perceived value -- will win consumers' dollars. Unfortunately, there are a number of marginal LBLs that have been able to survive, but now they'll be bypassed for better facilities. We're going to see most of those marginal LBLs join the roadkill graveyard. What's bad news for them is good news for the better LBLs. There will be reduced competition for the reduced-size market.
Now, about perceived value. Many LBL owners think perceived value is all about price. To survive in tough times, their strategy is to discount their prices, thinking that will drive business. Perceived value in the eye of many consumers, however, is not all about price - even in times like these. Perceived value deals with price, the total experience, and the expenditure of time. The issue of time can sometimes be even more important than price. Assuming the price is affordable, there are often more important elements to value than price. If admission to a cinema is $10, but there are no good movies playing, $10 is too expensive to go see a so-so movie. But if there is a great movie showing, then $10 is considered a decent value (assuming you're not jobless and totally broke). In fact, the success of IMAX and 3-D movies indicates consumers are willing to trade up to a higher admission price to have an even better movie-going experience. As we have noted in past issues, many movie theaters have upped the ante by adding dining, both in the auditorium and in restaurants, to create even greater value. Many of those dinner-and-a-movie auditoriums have an even higher ticket price, and many movie goers are willing to trade up for that higher value.
When businesses discount too much and too consistently, what they do is teach their customers the regular price is too high. Years ago, the pizza delivery business got itself in trouble with 50% off coupons. They taught customers that pizzas weren't worth full price, so if you didn't have a 50% off coupon, you didn't buy. Many of the automobile companies have gotten themselves in the same predicament. Consumers put off buying until there is an "employee price," no interest, large cash rebate or other substantial promotion. Discounting, if not handled property, can destroy long-term success. Once you teach the consumer your full price is not a good deal, you can never go back.
There's a second problem with discounting for the short term. It can change your customer base and drive away your loyal core customers. Like it or not, we are socioeconomic creatures. We like to be in places with our own tribe. If an LBL that traditionally attracts higher socioeconomic customers suddenly lowers prices, which in turn attracts lower socioeconomic customers, or if a family-oriented LBL suddenly attracts teenagers, then it drives away its core customers. This not only can hurt sales short term, but long term, as well.
Knowing and targeting your core niche market is a powerful strategy in both good and challenging times to gain market share and improve profit margins. This is sometimes referred to as market segmentation or niche marketing. It basically boils down to leveraging whatever differentiates your LBL to target a distinct market segment that has common customer attributes. According to Bill Davidow, author of Marketing High Technology, "Segmentation lets Davids slay Goliaths." Goeffrey Moore, author of Crossing the Chasm, says, "Trying to cross a chasm without taking a niche market approach is like trying to start a fire without kindling."
There are only five ways that any location-based business can grow. In increasing degree of difficulty and in decreasing return on investment of money and effort, they are:
The first three, which focus on existing guests and their experiences when they visit, are the easiest to accomplish in both good times and bad. Research shows that for most businesses, the top 30% of customers generate 50% or more of revenues - and an even greater proportion of profits. The last two are focused on attracting new guests and generate a much lower return on investment. And as mentioned earlier, changing the value equation for your offering can actually result in a loss of revenues from existing guests.
Kamor Karington, a Las Vegas-based marketing consultant, puts it this way, "If you're going to give anything away, give it to someone who's already been to your place. Taking care of those who've already come to you is a much more effective long-term strategy than doing two-for-ones and trying to attract strangers." This of course, means LBLs need to maintain a customer database, so they know who their existing customers are.
There are ways to offer deals in tough times and not hurt your business, both short and long term. One recent good example we noticed was John's Incredible Pizza in California with a 12 Days of Christmas promotion. There was a different coupon deal for each of 12 days. This targeted the slower period before Christmas, and in most cases, rather than discount the business' core product buffet price, it added value with entertainment (with its higher margins). The company created higher value without changing the public's perception of the buffet and entertainment prices. They did another thing that was really smart. The offer went out only to their core customers, their VIP members. So rather than advertise to everyone, they offered the special deals to their regular, loyal customers, making them feel special and appreciated. Click here to see a PDF of their 12 coupons.
We recently had the opportunity to analyze the existing customers for two LBLs. What we found in the first case was the existing market niche was completely different than the owners thought. Often, owners don't know who their core customers are, so it is impossible for them to craft their offerings to have greater appeal to them. It's like trying to hit the target on a dart board blindfolded.
In the second instance, the owner retained our company to design an expansion for an existing FEC. For the expanded business to be successful, you need to know what niche of customer you are designing for, as it affects the mix of attractions and activities, food offerings, type of theme, level of finishes, customer service and pricing. Our research defined a clear market niche that is now the filter through which all design and operations decisions are being made.
To survive in today's economy, you need to offer customers a compelling reason to visit. If you offer that so-so movie or operate a non-stadium seating theater, even if you discount the price by half, it is unlikely customers will come. If you offer a popular movie in a theater with stadium seating and state-of-the-art projection, they'll come and be willing to pay full price or even more for an upgraded IMAX or 3-D movie or dinner and a movie.
The formula for survival in today's challenging times is no different than it was not that long ago. Know who your customers are and design your business to offer them a good value. The only difference now is you need to sharpen your act to make sure it's a great value as your customers perceive it. So-so movies have low attendance and old seating style theaters will lose market share and close. Popular movies and stadium seating theaters will continue to succeed.
For entrepreneurs planning to develop an LBL, this is a great time of opportunity that comes along only every few decades.
LBL entrepreneurs will be able to profit from the retail industry's woes. As Paco Underhill, founder of Envirosell says, "Come February, as the holiday numbers come in, the American retail landscape will undergo a titanic shift. More than a few major chains are going under - including some that have been household icons for decades. Very few will emerge from bankruptcy, and most will join the roster of past brands that include E.J. Korvette, Gimbels and Crazy Eddie - names kept alive only in trivia contests." We've already seen Sharper Image, Circuit City, KB Toys, Linens 'n Things, Mervyn's and Whitehall Jewelers go bankrupt.
2009 also will see many retail chains shutter poorly performing stores and cancel leases for stores in shopping centers currently under construction. AlixPartners LLP, a Michigan-based turnaround consulting firm, estimates that 28% of the large retail chains it tracks have a significant risk of filing for bankruptcy or facing financial distress this year. The International Council of Shopping Centers estimates that 148,000 stores will close in 2009. Consulting firm Strategic Resource Group puts the estimate at 200,000 stores, the biggest retail contraction in 35 years. The firm also projects as many as 3,000 malls and shopping centers in the U.S. could declare bankruptcy by mid-year.
Landlords will be hungry to fill their dark stores. And it isn't too likely they will be able to do this with conventional retailers, as most chains have severely cut back their expansion plans. Some of the vacant stores will have been anchor tenants, so landlords will be looking for new anchors. LBLs can offer the solution. Also, with landlords hungry, many will be willing to accept a start-up tenant, which they wouldn't have done in normal times, and at attractive lease terms.
Although the lending markets are still basically frozen, that won't last forever. Banks and other financial institutions need to lend money to make money. The federal government is pouring trillions of dollars into the financial system and economic stimulus to get the financial markets working again. From initial concept ideation, most LBLs take anywhere from one to three years to open. Starting now most likely means by the time the LBL is ready to go to the financial markets, financing will be available, and probably at record low rates. That has now happened with the reopening of the home mortgage financing. Home mortgage interest rates are at historic lows. Also, the LBL will be opening during the upswing in the economy, a great time for any business.
This is also a great time to build. The price of many building products such as steel and lumber have fallen, and contractors are hungry for work, resulting in reduced construction costs.
One thing the 2001-2002 and current recession have taught businesses is that over leveraging, financing too much of the business with borrowed money, can prove fatal during bad times. The first businesses to fail are the ones that can't meet their debt payments. The lesson for new LBLs is that borrowing needs to be more limited than in the past, maybe no more than 50% of cost, if that much. More of the cost needs to be financed with capital from both the owner and investors. The current economic climate is perfect for raising money from investors. Many investors have been burned in the stock market and are looking for alternative and more tangible ways to invest their money. There is currently a lot of investor money sitting on the sidelines looking for a new home.
All this adds up to the current economic turndown being a very opportune time to start planning to open an LBL. As they say in the retail industry, "Location, location, location." In the LBL industry, location is likewise important. However, for LBL entrepreneurs, so is timing, timing and timing and understanding how to capture the moment.