U.S.A. - America's distributors say that today's amusements industry represents one of the most difficult markets in a generation. As a group, they are concerned about lack of high-demand product. They are concerned about manufacturers who (in some instances) have become over-zealous about credit. They are concerned about the continually shrinking operator base. Distributors also admit they're nervous about the shrinking number of fellow distributors , a trend which most leading survivors predict will continue.
But distributors also agree that distribution still has a vital role to play, albeit a changing one, in the amusements industry. Furthermore, the nation's leading distributors by and large agree on a broad consensus for how to maximize their business in today's shrinking market. The strategy calls for dealers to diversify; to maintain multiple branches while cutting overhead; to impose tighter credit discipline (both on themselves and their customers); to work closely with their operator customers, especially on financing; and to offer service, service, service.
"I think it's pretty true that distribution is a rough place to be in the coin machine business today," commented H. Betti Industries chairman Peter Betti (Betson Enterprises, Carlstadt, NJ). "To a certain extent we're like car dealers," Betti continued. "We're selling a commodity product that has an imbalance between supply and demand. There is very rarely a situation where we have a hot new model that will get us more than a few hundred dollars over cost. Margins historically and volumes historically were better than now."
Today's distributor segment is dominated by chains, leading dealers agree. Betson Enterprises lists 13 outlets (including a couple of depots in Phoenix and Portland) on its website; Atlas Distributing runs five offices; Mountain Coin comprises seven offices including its recent acquisitions in Portland and Seattle. Brady, Birmingham, Shaffer, and many other leading dealerships also run multiple offices. Examples of single-site distributorships today are rare and getting rarer.
Manufacturers, operators, and other industry members find distribution an easy target and are not shy about criticizing dealerships. "Distributors are focusing on the hot ticket items like golf and countertops," charges one top association executive. A leading jukebox manufacturer contends: "My opinion is that distribution today is totally stagnant. Operators are much more profitable than distributors. As we all know, a number of key distributors have shut down, merged or sold in recent years." A longtime distributor who exited the industry recently had been known to say: "Distribution several years ago was the best place to be in this business. Today that's not true anymore."
Distributors don't entirely dispute these views, but they do point out that the cashbox drives the market. Given this fact, they say, then the ultimate responsibility lies with manufacturing to create more high-demand products. "It's true that countertops and golf games dominate the market," agreed president Jerry Marcus of Atlas Distributing (Elk Grove Village, IL). "Our main problem is the same one operators have on their routes: lack of good, new, high-ROI equipment. It becomes a struggle to get profitable equipment. Our salesmen are on the phone all day long and they still tell the guys what to buy. Hot games move but it's been very difficult for the newer manufacturers to get into the marketplace."
IT'S WHAT'S FOR SALE
According to Chris Vecchione of Deith Amusement Vending (Bensalem, PA), today's operators are focusing on the top three products.
"Nobody wants your fourth-best game," Vecchione said, "The percentage of operators who look for new products and try to stimulate the location into trying it is very small. Most operators only buy when they are forced to do so, by location demand. The amount of operators who buy something just because their distributor recommends it is smaller than people think."
Likewise, Betti explained weak demand by pointing to a shrinking manufacturing sector, rather than lack of effort on the part of distribution. "We have a large machine to feed here and that requires product," he said. "There are fewer manufacturers today and those that are still there don't produce the number of titles or quantity of those titles that we need to keep this structure going. If you look at arcade video, obviously 20 years ago that was 80% of a distributor's business. Today that's fallen to less than 20%. The arcade business in the U.S. that was once $1 billion plus is now probably somewhere south of $150 million. While countertops and golf have filled some of that void, there is nothing that's really come in and totally replaced it."
One solution to today's tough market, distributors agree, is diversification. "A successful distributor today cannot be a distributor solely," said Jerry Marcus. "He has to have other venues, be it operations or manufacturing. He has to have something besides distribution because there just isn't enough product to sell."
Betson is an obvious example of distributor diversification with its traditional manufacturing function, starting with cranes in the early 1980s and continuing through the gun games ("Mad Dog McCree") of the early 1990s and the reprised Midway driving games of today. "We've been active in remanufacturing and reprising old Midway titles," Betti said. "That's provided us as well as some other distributors with some additional equipment to sell. A little here and a little there; every bit helps. We anticipate doing more manufacturing in the future, licensing some old titles from Midway and maybe from other manufacturers. We'll be looking at new software also."
Betson has also diversified by putting greater emphasis on parts and service. In fact, these sectors are now bigger profit centers than new equipment sales for the company. "We make most of our money on parts, service and financing," said Betti. Betson's most important internal upgrade in recent times, said the HBI chairman, was "the integration of all our parts departments and creation of Betson Imperial Parts & Service, where we have focused much more management energy and time on development of our parts business."
Betti explained: "We've identified 5% of our inventory skews that produce 80% of our dollar business. We now work on making sure those products are continuously available and in quantity. Our analysis now of our parts and services business are equal to, if not superior to, our analysis of overall inventory, purchasing and credit. Previously we didn't have that type of focus and expenditure of management talent in that area and it's paid off tremendously. We have increased sales and profitability very significantly. Betson Imperial Parts & Service is a success story: we provide our customers better service at better prices. I think our operators expect us to be efficient and competent; we strive to fulfill that and do a bit better."
"Since everybody has the hot products and the price competition is strong, the distributor has to diversify," Vecchione agreed. "We're spending more time on used equipment than new games. We're getting into vending and bulk vending, novelties, bubble gum machines. I don't really care about waiting for hot products; we've been waiting for the next 'Double Dragon' or 'Mortal Kombat' for eight years. Diversification is working for us. There just isn't enough to support a full service distributorship if you don't have more to offer , including very competitive financing. The average operator still relies heavily on the distributor for financing, either the distributor's money or a partner's money."
When it comes to financing, distributors agree one of their key strengths continues to be intimate knowledge of the credit history and strength of the local customers , the operators. This knowledge puts the distributor in a much better position to qualify operators for sales and credit than any manufacturer could be, particularly with smaller customers.
"One of the main problems for distributors is the number of manufacturers who sell direct these days," said Jerry Marcus. "Factories are bypassing distribution in a big way. Too often, they don't seem to realize manufacturers can't survive without distributors: they certainly can't provide financing or service to that smaller customer."
"We spend a lot of time getting to know our customers from a financial standpoint," said Betti. "Experience has a great deal to do with that. But we also want a lot of credit information from our customers. With State Sales disappearing, there are a lot of customers who bought a similar amount from them and us. We're used to being at a certain credit level; now they want to readjust their purchases. We have to readjust our thinking and get used to them carrying more debt than in the past. That requires a lot of focus on our finance department to go out and get that info so we can accommodate their increased credit request."
Some operators today are very cautious about increasing their debt. But Betti maintains that financing of new equipment is , or should be , a highly attractive option today, both for the distributor and the operator. "As the industry contracts, obviously you've got fewer operators which means they tend to be more experienced and more financially stable," he pointed out. "This is probably the best time to finance equipment in the industry for a long time, especially for street operators and maybe for others, given the fact that the obsolescence factor has declined greatly in the last four or five years. Good equipment tends to stay on location for more years than in the past; and interest rates are so low that you don't pay much penalty for not using cash. Our purpose as a distributor is to constantly remind people of that!"
Betti also stressed that no matter how large a distributor becomes, it must still create and maintain personal relationships with its customers. "It depends on the size of the customers and what type of past relationship you've got, as to how much influence you have over his buying decision," he said. "To some extent it's a convenience store factor: if the 7-eleven is across the street and you can go over there to buy milk and bread, you may be willing to pay more than you would at another place 15 miles away. You don' t have to buy at bulk or certain hours, and maybe the 7-eleven runs a tab so you can pay once a month. And maybe the guy at 7-eleven is used to you coming across the street and stocks an item for you that he wouldn't normally have. Not every operator runs 1,500 units and has a staff of 25 to handle their operation; the smaller the operator the more important the distributor relationship."
"The role that distributors play, and should play, has changed," said DAV's Vecchione. "Well-financed distributors who can offer good terms and rates to operators can do what they want because so many operators don't know how to manage money. The ability to know a guy for 15 years and know he'll pay you, gives a significant advantage to distributors who offer in-house financing. Traditional financing is archaic. Personal knowledge of your customer is number one. If they don't like and trust you, you offer nothing but quoting prices. Most of the time our customers don't ask us prices; they trust us that prices will be right."
Yet while emphasizing that financing is important and desirable, many distributors also find they must stay on top of operator credit more severely today. "We are going after receivables faster; we have to," said Marcus. "Manufacturers used to give us an extra 15 or 30 days if operators were slow to pay us, but they don't allow an extra day now. We have to take the same approach to operators, who don't like it , but that is the reality of today's business." This view was echoed by Vecchione, who stated: "When it comes to financing, we want to do it. At the same time, we can't be indiscriminate. We don't want to have too much money on the street."
Following the closure of Sun Belt, World of Games, State Sales, and others, which left millions of dollars of debt in their wake, many amusement manufacturers vowed to tighten credit to distributors. Has it happened? In some cases, yes, but distributors vary as to whether the level of control is too much, too little, or just right. Not surprisingly, the biggest distributors get the coziest treatment, while smaller or newer dealers face higher hurdles.
"We've been amazed and continue to be amazed" at what a relaxed credit stance is taken by some manufacturers, commented Betti. "Granted we've been in business for many decades and have a reputation for financial solidity," he added. "But in many cases manufacturers have not asked us for financial statements. If you have six years of statements on a company you can look at balance sheets, P&Ls, see what the trends are, see if inventory is increasing or decreasing. Few of those manufacturers who lost money with World of Games, Sunbelt, and who have exposure at State, did a lot of due diligence when it came to credit worthiness. I think credit was an afterthought to sales, R&D, and perhaps in many cases not having an ownership interest in the business."
Yet not all distributors are amazed at factory laxness on credit. "Manufacturers have gotten simply awful about distributor credit," said Atlas's Marcus. "They are all afraid of losing 50¢ right now! Sometimes they even put us on credit holds for parts. Manufacturers have gotten over-cautious and it drives everyone crazy including operators. Eventually they will get the message because their sales volumes are decreasing."
DAV's Vecchione agrees the new fiscal discipline from factories is severe. "Yes, factories are much tougher on distribution today," he said. "Factories are going to reduce credit limits and start sending invoices by fax before they're mailed and following up after 30 days, not 60. We've been a top selling Merit sales force, to take one example, but they've put up certain parameters , new distributors have to do a lot to qualify. Other factories have also asked for a lot of financial information and sales projections that were never requested before."
Yet Vecchione believes that greater financial discipline ultimately benefits his company and his customers. "I welcome it," he declared. "Factories are getting burned financially by depending on a handshake. When a factory gets burned, who is at fault: the salesman who sold too many games to a shaky distributor, or the financial guy who approved the credit? They have had to come up with new rules. I can live with it because it will help me stay in the business and it will also keep unqualified wanna-bes from popping up. Tighter financial control means we'll do better , all of us."
Conventional wisdom holds that when an industry consolidates, "the big get bigger, the small find a niche or specialty, and the middle-sized companies get squeezed or disappear." That axiom appears to be holding true for distribution in music and amusements. At Betson Enterprises, the warehouses stock more products than ever.
"We're not working to keep fewer units in stock today; it's the opposite," said Betti. "We are the Wal-Mart of the industry; where else are you going to go? We do have competitors but most manufacturers in business today want us to carry their equipment. Aside from arcade video, we now have more lines today than five or 10 years ago. We got more skews, especially in vending. Our inventories are enormous because of that. Parts inventories, too, because we represent more manufacturers."
The advantages of size, obviously, include economies of scale. Betson exploits this strength as much as possible. "Through our buying power we hope to be in a position to make better deals than some of our competitors and, so far as we can, pass those savings on to our customers," Betti said.
THE TIGHT SHIP
The pressures of consolidation have prompted Deith Amusement and Vending to take an entirely different tack. "Either be the biggest or be a small, specialized niche," said Vecchione. "I've carved out a little piece I think is right for this organization to succeed. I think distributors need to narrow their focus. The supermarket mentality doesn't work; you can't be everything to all people. Sure, we'll sell almost anything, but we focus on what we know with our sales, service, trade-ins, and financing. Operators see through it if you don't know your product. How is it possible to handle four different glass front snack machines properly? It's not! You become just a price outlet.. We cater to what we know: tavern games, golf, countertops, music. People consider us tavern experts."
Medium-sized and smaller distributors say they have been forced to cut overhead and increase efficiency. That means fewer people with bigger workloads. "We did an organizational chart and the arrows pointed in every direction," chuckled Vecchione. "It's difficult to narrow down what one person does here; we've found it can be successful if the manager is also able and willing and available to load a truck or whatever. I wear three hats and it inspires the rest of our team to do a little more. As we speak, my sales manager is mopping the showroom floor! There's not a single person here who is not carrying two workloads. You've got to be faster and better, especially when you're competition is so huge."
For smaller and medium sized distributors, reducing overhead also means holding the line on inventory. "So far we are successfully ahead of schedule with our focused strategy," said Vecchione. "We have to find where our returns begin to diminish, and when we hit that limit, stop pushing. We can't afford to make mistakes in purchasing; we can't afford to let factories dictate what we stock. We've had to part company with some factories because we won't take nine games when we only want three. To control our inventory, I walk around! I know what I've ordered and can see what has sold. Anything older than 60 days, we flag and try to create a sense of urgency with the sales staff. We then use incentives and then we offer discounts. It's better to buy less and lose a few sales. Working with other distributors helps too. There is a network of us little guys out there. Five or six jobbers in our area, operators who also sell, are invaluable at times. We cross-ship."
While the number of high-demand products is smaller, the number of ways that operators can obtain products is larger. Distributor trans-shipping is at an all time high as is the number of direct sales from factories to operators or even locations, according to many distributors. "It's a bit of a free for all," said Marcus. "There are still a lot of operators who are loyal to their local distributor and many who aren't."
Yet here again, a consolidating market means more power in the hands of the larger distributors. Thanks to its size and market clout, Betson is more able than most dealers to insist on, and get, exclusive lines. "In our distribution area, yes, there is absolutely still such a thing as an exclusive line," insisted Betti. "Some manufacturers will sell to anybody who puts 'distributor' after their name but that doesn't generate a great deal of enthusiasm on our part. If we're going to commit a lot of resources to marketing and servicing a product in our area, we'd like to feel there is a mutual commitment."
Distributors agree that while the used game market is important today, it is also uncertain since operators are hanging on to some equipment longer, and selling other used products into the home market. "Sales of used equipment are good to very good depending on availability," said Betti. "Naturally the prices are very attractive compared to buying new pieces, especially in relation to earning potential."
"I take a ton of trades," said DAV's Vecchione. "By taking trades, we put credits on the operator's accounts and that prompts them to buy from you when the hot new game does come along. So even if I turn them for a small margin, I'm always keeping the back door busy! But at the same time, the number of trade-ins has gotten smaller, because so many operators sell their old games to the home rec-room market these days."
Distributors themselves offer mixed opinions as to whether more distributorships will close their doors in the months and years to come. "The number of distributors serving each market has shrunk considerably and you may see distributors downsizing more in the future, but I think it's pretty much happened in terms of offices closing," Betti forecast.
An alternate view comes from Marcus: "In our region we have too many distributors," he said. "I think you'll see some additional fallout in distribution."
Vecchione agreed: "You will see fewer distributors this time next year," he predicted. "Some more whittling-down is yet to come. There are fewer operators and certainly less factories, so there have to be fewer distributors , but I look at that as a positive. Certain distributors are really suffering, some from poor local markets and some from failing to evolve beyond waiting for that next hot game to arrive. It's a selective process. If you're a good distributor, you'll be around. I think distribution will always have a role because too many operators want to use our services."
Educating the operator remains a prime function of distribution, said Betti. "Education and then support after the sale with parts and service: that's what we do," he declared. "One of the reasons why, especially on the East Coast, our markets remain relatively strong perhaps to other markets, is due to the fact that we have a strong operator base. To a certain extent that is a reflection on good distribution practices having prevailed here in the past. It makes the operator stronger."
The bottom line for distribution, as with much else in life, seems to be that the business is what you make it. All agree that that it requires more and harder work to succeed in distribution today. And few distributors disagree with Marcus, who says: "What we need to make distribution healthier today is more equipment, more innovation, and more reasonably priced equipment. The cost of equipment to the operator should be more in line with the cost of production and the return on investment."
Some distributors sound discouraged about the industry and their place in it. They describe the market as "dismal" and admit frankly that "business stinks." Many add: "This is supposed to be a fun business, but nobody seems to have fun anymore."
A thoughtfully balanced view comes from Betti, who says Betson's strategy of leveraging its size and diversifying where possible "is working to some extent" to overcome today's market challenges. "I won't kid myself or anyone else by saying business is as good as six years ago," he smiled. "But it's not so bad. I've seen better, and I've seen worse! We think we have a good plan to be successful going into the future."
Still others like DAV's Vecchione are determined that their attitude will drive the market rather than the other way around. "We are having fun with a capital F!" Vecchione insisted. "Yes, you have to work hard today. Wearing more than one hat can take its toll on you. We come in early and stay late, but my people compete on the games on the showroom floor. We enjoy it and that's why we're able to push ourselves to the limit."