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CONCESSION CORNER

THE FEASIBILITY STUDY: GUARD YOUR INVESTMENT FROM WISHFUL THINKING.
By Randy White

On my eight birthday, my parents gave me binoculars. Why? I was clueless. I hadn’t asked for binoculars. I tried to recall any conversations or any off-hand remarks that might have even suggested that I wanted binoculars. Nothing! Then, my parents argued over who would be first to watch the neighbor’s fluffy-tufted, red-billed pet bird, I realized that it didn’t matter whether I wanted binoculars. They did! They meant well; they just forgot to do their market research.

At the risk of stretching this metaphor to the breaking point, imagine that those nasty binoculars are an entertainment center (or concession track), and that instead of spending 40 dollars, you’ve spent millions of dollars to create something that you honestly believed would delight your customers. Now imagine that all your evaluations of your customers’ likes and needs are wrong, but you just don’t know it yet. You won’t know it, in fact, until it’s too late. Do you think it might have made sense to spring for a feasibility study?

A high-quality feasibility study is crucial to the long-term success of a family entertainment center (FEC or location-based entertainment (LBE). It makes sense that the best way to maximize the return on your investment is by giving people what they really want. But unfortunately, feasibility studies are often ignored, misunderstood or improperly performed. A good feasibility study becomes the marketing plan – the market-driven strategic plan and concept product design that is the road map for the FEC’s development and operations.

While feasibility studies do deal with demographics, that’s only one small part. A good feasibility study not only defines a project’s market area and analyzes both demographic and socio-economic and lifestyle characteristics of both residents and visitors, but it also analyzes the competition, the local culture, site constraints, and opportunities. From these, it crafts a detailed development program (the product specifications), the concept plan and the economic plan that will optimize the success of that project in that market and at that location.

Perhaps the biggest barrier to the proper use of feasibility studies is the mistaken belief that there is a generic formula for any FEC or LBE. Everybody know than an outdoor FEC should have miniature golf, go-karts, batting cages, and a game room, and that an indoor FEC needs rides, soft-contained play, laser tag, and games for all ages, right? WRONG! Starting with a stock formula dooms the project from the very beginning, since the product probably won’t fit the dynamics of that particular market or maximizes the project’s return-on-investment (ROI) potential.

Keep in mind that the generic formula was successful under different conditions. In the 1980s and early 1990s, demand for entertainment exceeded supply and any center could do fairly well. Today, consumers have more options as how to spend their leisure time and money. Consumers expect more and better; they expect an FEC or LBE that is customized to delight them. A feasibility study allows you to do that. What amazes our company is that many owners spend more money on advertising the grand openings of their centers than they spend to find out whether the center will survive the first year! A good feasibility study cost between ¾% to 1.5% of the total project cost. It can tell you not just whether to spend the other 98.5% of the budget, but also how it should be spent to maximize the ROI and long-term staying power of your center. A good feasibility study follows specific steps of product development.

MARKET AREA DEFINITION
It would be so easy if you could just draw a circle around the location, count all the people inside the circle, and call that the market area. But market areas for projects depend on many variables, and in real life, look more like amoebas. Market areas depend on the following:

a. The size of the project, which affects market draw
b. Length of stay and per capita spending
c. Competition and its location
d. The Exact location of the project
e. Its viability and accessibility
f. Patterns of travel
g. The location of the project in relationship to nodes of shopping and other forms of entertainment
h. Psychological barriers, including geographic features, socio-economics and adjacent uses.

Market areas are never a fixed distance or constant travel time from the site because consumers don’t behave that way. In one city, commuting to work is considered a chore. It’s hard to get to the interstate and there are psychological barriers around, say, crossing a river or state line. That market area will look very different than one where driving is considered pleasurable and people are used to crossing over physical and psychological barriers.

The difference between plotting concentric circles and true, amoebae-shaped market areas can have a dramatic impact on feasibility. Our company has plotted the market areas for many existing projects and has defined them for new projects. For centers of a similar type and size, we have seen market areas in densely populated areas extend to only three miles, and ones in sparsely populated areas that extend as far as 60 miles in one direction, yet only 12 mils in the opposite direction.

How do we know all of this? We conducted exhaustive reconnaissance throughout the market area, and we knew how to interpret what we learned. The stakes are too high to do anything less. An improperly defined market area can easily result in disaster, if the project is too large for what the market will support, too small and overcrowded to dominate the market, or if it’s the wrong product formula for its marketplace.

DEMOGRAPHICS
Once a primary, secondary and sometimes tertiary market area is defined, it’s time to interpret current year and projected demographic date. Again, amateurs beware. We have seen many prospective owners waving their demographic reports without the slightest idea of what they mean or how they relate to market demand, attendance, financial feasibility and project design. Even worse, they simply ignore the demographics altogether. They justify the center by saying, “There’s nothing in our town for families to do”, or “The Chamber survey shows that our town need entertainment for families". Both statements may be true, but they don’t mean a project is economically viable.

Another mistake is to look no deeper that population totals. A retirement city in Florida may have a population of 250,000, but fewer potential customers than a 150,000 suburban market area. All the variables have to be carefully analyzed as they relate to each other. Household incomes are not relevant if your target market is families, childless families or singles. And just looking at the number of children is meaningless unless their ages are matched to the ages of play that certain events attract. Also, prospective owners often assume that the family market includes parents and all children living at home. Not so! Teenagers rarely go out with families, and large numbers of teenagers intimidate mothers with small children. A facility designed for one will drive away the other (and teens usually win).

SOCIO-ECONOMICS AND LIFESTYLES
The best that demographics can provide is a picture of the population in aggregate and in averages and medians. Socio-economics and lifestyles (SELs) tell you more. SELs cross-math demographic variables to tell you what your potential customers are like inclusive of their values, their behaviors, and their lifestyles.

An essential part of a feasibility study, SEL analysis will tell you how your consumers behave so your project can be designed to appeal to them. You can’t be all things to all people, because the tastes, values and preferences from one SEL group are completely different from another, as different as a country club is from a blue-collar neighborhood bar. By using SEL analysis to target a niche market, you can create the high level of guest satisfaction that is required today to generate guest loyalty and repeat business.

SELs are one of four defining parameters required to target a niche market (others are age, the type of group that is coming, and the type of experience). SELs are important because people tend top choose one product over another primarily because the values of one reflect their own identity, a concept that retailers call “lifestyle marketing.” Unfortunately, most FECs and LBEs fail at SEL targeting, even if they don’t have direct competition. They build a generic center that doesn’t match the tastes, values and needs of any SEL group, and it can cost them their businesses.

COMPETITION
People see competition and they automatically assume a project is not feasible. It ain’t necessarily so! Look at whom the competition is attracting, by both age and SELs and compare that to the market area’s demographics and SELs. Are there niche markets the competition is failing to attract? It the competition mismatched to the areas SELs? Is the competition an outdoor center, leaving space for an indoor center? Is the competition capturing (or designed to potentially capture) special programming markets such as field trips, camps, fund-raisers, classes, picnics, etc.?

Conversely, the lack of direct competition doesn’t mean a project is feasible. There must be a target market of sufficient size to support the project. For example, just because a small town doesn’t have an enclosed mall or a fashion department store doesn’t mean one is feasible.

The demand for FECs and LBEs is elastic rather than fixed. When demand is fixed, such as with gasoline sales, gas stations compete for a slice of a pie that is always the same size. But the elastic demand of FECs and LBEs is quite different. The more the center matches the values. Tastes and needs of its target market, the more frequently the market will visit and the more money it will spend. You can see the same effect with movie theaters, where a blockbuster movie like “Titanic” spurs a jump in attendance.

PRODUCT FORMULA
Based upon an evaluation and analysis of the above factors, the next step is to determine if a project is feasible, and if it is, to craft the center to make the most of the opportunities in that market. This is where a standards generic mix formula can really shortchange the owner, because it ignores non-traditional but profitable options. For example, our company recently performed a feasibility study for a client who wanted to expand his FEC, which was anchored by a miniature golf course, to also include go-karts and bumper boats. Competition in the area nixed that mix. Instead, we recommended an indoor-outdoor expansion targeted to families with children 8-years and younger. That market niche, quite sizable, was not served by any leisure facilities in the area. The product formula includes much more than just a mix. It addresses every aspect of the guest experience from type of admission (gated or pay-per-event), the level of finish, the story-line and theme, specific design considerations for special activities such as school field trips and picnics, the type of food service – all the broad product specifications that need to be met during subsequent design and development stages.

ATTENDANCE PROJECTIONS
Once the product formula is finalized, attendance projections are made. Properly performed, attendance projections don’t look at the entire population and then project some overall rate of attendance. Instead, they look only at the targeted ages, type of visiting groups and SELs that will be attracted (the SEL niche market), and then determine the attendance by age and group for each activity, from general admission to birthday parties, field trips and special events.

OPERATING CAPACITY
Sizing the center to match attendance is critical to success. If the center is too small to accommodate peak demand, attendance is lost on those days and a reputation for being too crowded can diminish attendance at non-peak times. If the center is too large, then the ROI will be poor, or worse... the center could fail. Neither too small nor too large will do.

REVENUES
Annual revenue is determined by taking the attendance for each event times the price or per capita expenditures per event. The per capita expenditures can vary greatly among markets, types of centers and events, and with the time and day of the week. Many feasibility studies make the mistake of using some generic industry per capita figure multiplied by an overall center attendance to project revenue. This approach fails to account for all the components of attendance and the different admission or fees and related food service, game and retail revenue for each. The correct value equation is based upon the local market conditions and the make-up of the target market, especially their SELs.

EXPENSES
Again, annual operating expenses should be projected based upon the exact product specifications for the center and its location, not some industry average. Some types have higher labor costs than others. Real estate and personal property taxes, insurance, utilities and similar costs vary by locale. Some expenses are dependent on product mix and admission policies. With games, the mix of redemption to video needs to be examined to determine redemption prize costs. Additionally, free tokens included with admission and prepaid events like parties need to be factored into the equation. Whether games will be owned by the facility or supplied by a coin-operator also has a significant impact on expenses.

CONCEPT PLAN
Cost estimates that are not based upon a concept plan are only worth as much as the paper on which they’re printed. Whether the project is new construction or renovation, reasonable cost estimates depend upon a concept plan prepared by a design professional with the expertise in that type of project. A concept plan is vital. It verifies that the product specifications and mix will actually fit in the building or site. Ballpaking space requirements in square feet can be a fatal mistake. If all events, attractions and parking won’t actually fit in the project when it is later designed, then all the underlying attendance, capacity and revenue projection will also be flawed. By including a concept plan, you can ensure that projections will be realistic before financing is in place.

DEVELOPMENT COSTS
Even when all the preceding steps are executed perfectly, many a project has gotten in serious trouble at the stage of estimating the project’s cost. If you’re accurate here, you’ll know whether the project will provide a good ROI as well as whether the funds will be available to execute the project formula on which attendance and revenue projections are based. If you’re not accurate, you’re in trouble.

Owners use initial cost estimate as the foundation for raising capital and financing. All too often, however, owners will forgo the cost estimate and base the budget on what they think the center should cost. Even when the cost estimate is completed, it may be based on inaccurate or incomplete information.

There are several reasons for cost estimates being chronically unrealistic:
1. The individuals preparing the budget are inexperienced in all the components and complexities of building and opening a center. They include obvious items like ride and kitchen equipment, but often forget hidden costs such as use taxes, shipping and installation, office supplies, training and a host of other expensive necessities. Even at the initial feasibility stage, a properly prepared estimate could include one hundred or more line items. Because our company produces centers for clients, we have hands-on experience with the multitude of cost components. For example: one 30,000-square foot FEC we produced had 620 line entries.
2. Soft costs don’t make it into the budget. Soft costs are all the intangible items like real estate financing closing costs, points, and interest on loans, professional consulting and design fees, working capital, pre-opening costs and deposits. Soft costs can easily add up to 15-20% of the total cost.
3. The cost estimate is prepared using square foot or percentage approximations rather than detailed estimates based upon the unique nature of the project. Construction costs can never be square-footed with any reliability. Construction costs vary not only by locale based upon zoning and building (entitlement) codes, local codes and practices, but are also based upon the particular piece of real-estate. If it is raw land, the costs of preparing the site for development will depend on grading, infrastructure and utility issues including the costs of extending utilities and access to the site. Overlooking such items as storm water management, traffic lights and landscaping can be significant. If it is a building to be renovated a detailed examination of code and the degree of renovation needs to be made. Entertainment centers are dealt with more severely under fire codes than during the building’s previous uses.
4. The budget does not include a realistic contingency factor, especially if it includes renovation. Cost estimates at the earliest stage will never be as accurate as they are once construction plans are prepared.

A feasibility study is not magic, although it can have a magical effect on the success of your center and your return-on-investment (ROI). It makes the difference between decisions based on solid information and those based on wishful thinking, and it is the smartest investment you can make to ensure that all the investment and time you put into your FEC or LBE will pay off.

About the author: Randy White is CEO of White Hutchinson Leisure and Learning Group, Kansas City, Missouri. He can be reached by phone 816-931-1040 or on the web at: www.whitehutchinson.com. This article has been reproduced by permission of the author.

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Kart Marketing Group, Inc.
Post Office Box 101
Wheaton, IL 60189 USA
Telephone: 630-653-7368
Fax: 630-653-2637
Email: karting@msn.com

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