Mergers and new technology have dominated the U.S. arcade scene over the past year. From Dave & Buster's acquisition of the cream of the Jillian's chain, to continually evolving video and simulator products, change is rampant. Momentous as these changes are, however, the larger picture for the fun center market is one of robust financial health. As reported in last month's VENDING TIMES, the latest survey by the International Association for the Leisure and Entertainment Industry indicated that FEC owners are even more upbeat now than a year earlier.
More importantly, perhaps, this optimism is upheld by generally strong earnings figures reported by publicly held arcade industry leaders like D&B's and Chuck E. Cheese's parent company. The steady expansion of both of these high-profile chains provides further evidence that the state of the U.S. arcade industry today is strong.
The real question, then, is not whether the sector is thriving, but which of the successful existing chains will be most likely to dominate the expansion markets beyond their own well-established niches. For example, D&B's has a seeming "lock" on the adult bar-restaurant-arcade combination (also known as location-based entertainment), and Chuck E. Cheese's overwhelmingly dominates the kiddie arcade niche. But the future of mixed-use sites (such as arcades based in movie theaters and other types of retail venues) is still up for grabs. Playdium, Namco and possibly GameWorks are all eying the multiplex movie theater sector in particular as the next great expansion opportunity.
With all of this in mind, what follows is a review of the status of leading operators in the U.S. fun center market.
Dave & Buster's/Jillian's: Perceived as the gold standard in the amusement industry's entertainment facility spectrum, the operation celebrates more than 22 years of operation with a new financial strength. Since opening its first venue in 1982, much has changed in the habits of the visiting audience, but also the market acceptance of this style of site. 2005 finds the operation with 43 locations including American and Canadian sites. More importantly, the financials look rosy with a 21.4% increase in annual revenue reaching $121.4 million last year. The venue's robust food and beverage sales increased by 26%, while the amusement's segment grew by more than 15%.
More importantly, investor interest has grown as the competition in the field has been whittled down. The collapse of the Jillian's chain benefited D&B's significantly as it acquired nine of Jillian's flagship sites. At the same time, D&B's has upped its spending on its food and bar areas. The company has also continued its relationship with Virtual Worlds Entertainment LLC and its uniquely themed robot combat simulators.
Jillian's: The once-promising Jillian's operation filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court in the spring of 2004. As noted, fallout from the filing saw nine of the chain's key venues sold to the company's largest competitor, D&B's. But from the ashes of the collapse the remaining 19 facilities may rise again thanks to their purchase by Gemini Assets LLC, a firm backed by Jillian's former management, including its CEO. The group hopes to revive the upscale, urban brand, which marries a restaurant with billiards rooms. Though it will take some time for the smoke to clear, the original Jillian's brand and concept still enjoy a strong following.
Chuck E. Cheese: The clear leader in the family entertainment class is Chuck E. Cheese's with its more than 420 directly operated venues spanning 48 states and four countries, plus dozens of additional units operated by franchisees. A significant presence in the industry, parent company CEC Entertainment Inc. remains a decisive force in establishing the amusement venue concept for younger audiences. Its successful formula has brought in strong financial returns with first quarter 2005 revenue increasing to $214.1 million (from $206.9 million). Net income has also grown, leading to a drive to update the brand. However, when CEC executives speak of "modernization," they are referring to relatively minor adjustments in their successful formula. Don't look for pizza to disappear from the menu or for an end to the automatronic musical show. Do look for CEC to continue expanding its chain with as many as 32 new stores per year, which would represent a red-hot 8% growth rate.
Palace Entertainment: One of the largest operators of amusement and water parks in the U.S., this operation has developed a number of brands among its 33 pocket parks. The company focuses on incorporating amusements into a family-friendly environment that includes mini-attractions. Building from its 1998 roots, when it initially acquired four independent family entertainment companies, the Palace group has become a powerhouse in the field, experiencing increased revenue from the combined operation.
Namco Cybertainment: The North American amusement operating arm of the giant Japanese amusement manufacturer Namco maintains a large presence in the amusement facility scene in the U.S. The chain has been moving away from its original base, which consisted of classic, mall-based arcades, and toward what many operators regard as "street" locations including movie theaters and hotel game rooms. The company operates a vast number of games in more that 1,200 entertainment sites under the brand names Time Out, CyberStation, Aladdin's Castle, Diamond Jim's, Space Port and Pocket Change. More recently the company has upgraded its investment in the XS experimental facility in Orlando, FL, now re-branded the Pac-Man CafĂ©. Once chiefly based in malls, the Namco operation continues to evolve toward a restaurant / bar mix with amusements being the glue holding the concept together.
Namco Cybertainment's parent company recently announced a merger with leading Japanese toy manufacturer Bandai. The merged entity would have deeper pockets and a wider range of brands through which it could exploit cross-marketing opportunities. As a result, increased investment will likely flow to the whole Namco family of operations in Japan and the U.S.
GameWorks: With names like Sega, Spielberg and Universal, it's no wonder that the birth of this chain created white-hot publicity. But GameWorks never lived up to the fanfare, despite several re-launches and repeated revampings of the basic components and marketing strategy of the chain. Following last fall's merging of the chain's majority owner Sega with Sammy Corp., the combined entity also acquired the 14 GameWorks flagship sites, along with the smaller GameWorks Studio venues.
At the time of the merger, there was talk of selling off the chain's assets, and at least one buyer was known to be keenly interested: Paradigm Entertainment Group, best known for the acquisition of the Sony Metreon Portal One venue in the heart of San Francisco. However, Sega's SS Entertainment division leveraged its link with Sega Amusement USA to keep control of GameWorks. Sega will therefore have a chance to refocus the chain yet again. Look for Sega's corporate leadership to get more closely involved with GameWorks management. It's also reasonable to expect continued emphasis on more food and beverage sales, a bright spot for GameWorks in recent years. In addition, the GameWorks management team has stated interest in broadening the operation to include branded mini-arcades in large multiplex movie theaters.
Playdium: One of the up-and-coming brands in the mixed-use sector, and especially multiplex cinemas, is Playdium. The Canadian operation starts from a power base of more than 60 Cinemark movie theaters in its home country, and has acquired Premier Amusement, which has 165 sites throughout the U.S. The company has had to restructure its original flagship venues in Canada because they heavily emulated the initial GameWorks chain due to a previous relationship with Sega. Now under new management, Playdium is focusing on operating multiple sites to establish a mixed-use amusement brand to the market as a whole.
Canada's Playdium is not to be confused with the Pakistan-based company of the same name, which opened a LAN arcade in College Park, MD, earlier this year. Despite high-profile coverage by USA Today, as well as a seemingly natural base of computer-savvy students nearby, the site folded just five months later. Quite a few other lesser-known LAN arcades have also come and gone in the past year nationwide. LAN arcades, once touted as the "next big thing" in video arcades, continue to have spotty records at best.
LUCID Entertainment: The difficulty in supporting mixed-use entertainment venues has been best illustrated by the LUCID Entertainment Inc. projects. The company, founded as MagiCorp in 1993, grew from remnants of the Edison Brothers and Virtuality LBE of the 1990s. After a number of projects in the entertainment venue field, MagiCorp attracted investment from British mega-brand Virgin Entertainment to develop an entertainment venue that blended high fashion and the latest technology. The result is LUCID. The first site, in Manchester, England, opened in 2003; another location sprung up in Toronto, Canada. The operation also expanded into venue management, bringing its style of entertainment to London and Hollywood.
Despite this promising start, the company defaulted on a number of agreements and leases during 2005. As a result the Manchester operation was abandoned, along with plans for new sites in Atlanta, GA, Warsaw, Poland and additional UK sites. Management is now struggling to restructure the company and springboard back into the scene.
Malibu Grand Prix: Still active despite years of financial ups and downs that led to ownership changes, MGP operates seven sites throughout the U.S. The FEC's specialty is custom-built, 3/4-scale Indy-style racing cars running on half-mile tracks. Rounding out the concept are gamerooms featuring up to 80 or so video and redemption games, batting cages, mini-golf and a menu that's heavy on birthday party fare (pizza, ice cream).
SpeedZone!: With two venues (Dallas and greater Los Angeles), this brand is now owned by Palace Entertainment. Focusing on specially developed motor sport-based mini-attractions, this brand offers a controlled but realistic outdoor drag racing experience along with a heavily themed facility offering fun food and a gameroom. As such, SpeedZone! creates a bridge between the family entertainment venue and the sports bar.
Interactive Motorsports and Entertainment Corp.: IMEC is the creator of NASCAR Silicon Motor Speedway location-based entertainment racing centers, which was launched in the 1990s and now boasts 19 U.S. venues, including sites that feature company products under revenue-sharing agreements. Following a restructuring and new investment, the operation has achieved a financial turnaround. After losing $3.5 million in 2003, IMEC roughly broke even in 2004 and saw last year's fourth quarter net income hit one million. However, much of the improvement was due to a sale of 34 simulators to a single buyer, rather than massive increases in location earnings.
KEVIN WILLIAMS is founder and director of the out-of-home leisure entertainment consultancy KWP Ltd. His many years in the global video amusement and hi-tech attractions industry includes top management and design posts, with special focus on new technology development and applications. A well-known speaker on the industry and its technology, he also pens extensive articles for leading trade publications. Williams is editor and publisher of The Stinger Report, a leading industry e-newsletter and Web-based information service that can be found at thestingerreport.com.