ATLANTA - David Capilouto is the vice-president of sales at Greater Southern Distributing Co. After more than 25 years in the coin-operated vending and game businesses, his major areas of responsibility include music and game sales and marketing, and overseeing amusement service and collections.
Sporting a ready smile and a friendly, relaxed manner, Capilouto is a walking, talking example of old-fashioned Southern charm. He says his favorite part of the business is quite simply, sales , by which he means interacting with people in such a way so he can share knowledge that helps them improve their businesses. He's a man who laughs easily and often, but also one who works hard to learn every aspect of the business. He also takes pains to consider issues from all points of view , including the operator's and the manufacturer's, as well as the distributor's.
The latter is one reason why Capilouto is said to be so widely respected by his peers. For the last two years, he has served as vice-chairman of the American Amusement Machine Association. Recently he was asked to consider running for the chairman's job, but he declined, citing the demands of business on the home front. VT's Marcus Webb spoke with Capilouto about the state of distribution today and its ever-changing, ever-steady role in the amusements industry.
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VENDING TIMES: How is the amusement machine business for Greater Southern this year?
CAPILOUTO: Business, to sum it up in one word, is flat and has been for the past three years. In one sense, that's good , stability is certainly preferable to the long period of industrywide consolidation that preceded it. But we're working hard to grow our markets, and I'm encouraged because we're finding some response, particularly among younger operators, and also because we are seeing indications of more interest this year from family entertainment centers.
Does "flat" mean unchanged gross revenues, or unchanged volume of machines shipped?
Gross revenues have held fairly steady since 2002, but the margins have shrunk and the numbers of machines sold has gotten smaller. We have supplemented our coin-op sales with a robust retail business that we never had before to make up the difference in lost coin-op sales. From a distributor's viewpoint, we've seen no real growth in our coin-op amusements marketplace. The biggest issue is that we have yet to make up some of the lost volume from video game sales with other types of equipment sold to operators. For many years, video was a major part of our business; Midway Games and Williams Electronics alone represented more than 50% of our sales at one time. When they and others closed within the space of a relatively short time, it was a serious challenge to replace those sales.
What sectors are performing best?
We have seen a definite increase in the crane and merchandiser market and our countertop and pool table sales remain strong. Cranes have been well received by what we consider the amusement operators. Many of the cranes we sell are going into a variety of street locations, from bars to movie theaters. Downloading music has achieved mild acceptance in our market but has not caught on as quickly here as in other regions of the country.
Why do you think that is so?
We need to do a better job selling the product. The downloading concept is very different from conventional CDs; we (Greater Southern) must educate our customers so that they can do the same with their locations. Those operators that have purchased the Rowe-AMI downloading jukebox are telling us that the payback is impressive and they have taken an aggressive approach to upgrading their best locations and are securing new locations. Our current Rowe/AMi Music promotion has the operator's attention. Several customers have begun to purchase their first downloading jukeboxes; and several others are beginning to investigate the potential of this format. We are confident that our jukebox sales will be a bright spot in 2005.
How is the video golf sector doing in your territory?
Video golf games have seen revenues drop significantly. Any operator who speaks with you candidly is concerned about investing in new equipment. The new state-of-the-art equipment offers some great improvements. At the same time, the higher prices for this sophisticated technology can tie up an operator's investment budget for the larger part of the year. Operators are looking at the trade-offs between advanced features and the softening of the genre's overall popularity. We're all about casual play and cheap entertainment, and it can be costly from a player's standpoint to play these games today. The new generation is generating good earnings, but not yet on the level of when the original games entered the market.
Like anything, operators have to move slowly. Ultimately the market will dictate the pace of their move into this field. Some operators are willing to sacrifice locations while they hold off for a time. As distributors, we know this is a product-driven industry and new products are what it takes to move the market.
How's the touchscreen video niche performing?
Countertop video games remain a very strong part of our sales. We have done a very good job with this business, although sales remain relatively flat in 2005 compared to last year. Still, I'd have to rate the countertop business as one of the bright spots of distribution. The reason why we haven't seen more growth could be that we have reached a point of market saturation, or at least some operators seem to think so. Many operators say they feel they have filled the void and placed enough units in what they consider to be "deserving" locations. Until a compelling reason comes along to buy a new countertop, these operators will wait until a new location opens.
Are mom-and-pop bars disappearing or holding their own in your region? And, how aggressive are operators about seeking new sites?
[Operators] have become more selective about what locations they do take. You have a lot of chain business that takes traffic from typical local spots, and the constant expansion of new development accelerates that trend. Every chain location you can think of goes into these newer communities and it's hard for mom-and-pop bars to compete with them on price. At the same time, I believe the independent tavern market is holding its own. I would say that sports bars control much of the business in the Greater Atlanta region.
Greater Southern also sells vending equipment. What's happening there?
On the vending side, consolidation among routes and the advent of large operator buying groups in recent years have challenged distribution. But the rebounding general economy has helped and Greater Southern has had significant increases in our vending sales in the last few months. Recent food supplier promotions have led to some real surges in sales of food venders for fresh and frozen selections, too.
What has been the most positive trend or development in the industry in the last year, in your view?
Harbour Group's purchase of Rowe was very good for a Rowe distributor because it brings financial strength to a company that was known to have a weakness in that area. It was hard to sell Rowe product when operators didn't know if Rowe would be a viable company or who might purchase them. Harbour's financial resources create confidence and strengthen Rowe's ability to develop product and get the music library we need as soon as possible. They will help stimulate sales through their financial capabilities.
A second big positive development, in my view, is the return of Eugene Jarvis to coin-op video game design with his new company, Raw Thrills. How can you not say that is a bright spot for distribution? We're lacking video products and we're lacking coin-op R&D. The Raw Thrills "Target Terror" was a great game for us and we are doing well with "The Fast and the Furious." We need to attract more people of talent into our industry. We have many qualified manufacturers that have done a tremendous job developing product; we all know that anything less than very good product won't cut the mustard in today's environment.
Internally, Greater Southern's most positive recent development has been developing our retail business. We look forward to continuing to grow this sector. If you have the warehouse and showroom capability, it's a natural for distribution. Like everything else, having qualified personnel will determine how much success you can achieve. We spend up to 10% of our retail sales in advertising each year. We have retained a professional advertising agency to advise us on maximizing our exposure for each dollar we spend. Currently we are using print media and direct mail. We also exhibit at the fall and spring home shows and set up displays in the high-end "Tour of Homes." We network with interior designers and we give tremendous customer service to generate good word of mouth. We believe there is serious growth potential.
Another positive development for GS: a new company has been formed to manage amusement games for Hooters of America, the corporate chain of 120 stores with headquarters in Atlanta. Rollout for the first store's installation of countertops is underway.
What is your greatest concern about the distribution business today, and what can distributors do to address that issue?
My biggest worry today is for our business tomorrow. When I look around our industry today, I am most concerned about the ongoing consolidation of operators. The process has stabilized somewhat, but it's a slow process to get new blood into our business. We've had some very bright young people enter the business who are willing to try some new things, but they are far and few between.
Some distributors tell us arcades are doing well and buying briskly in their territories. In other regions, distributors say arcades have mostly closed and street operators are their main business. What's the situation for Greater Southern?
We have been doing much better with street operators for the last several years. We are constantly talking to manufacturers about video game prices and products, reminding them they must be in line with street requirements. We still have non-domestic companies building video games that do not meet these requirements on a regular basis. That said, this year we've seen more activity from the FECs than in the past three or four years, so that is encouraging.
Does GS still hold regular open houses?
Yes; however, we are more selective as to the frequency of holding these types of events. We have evolved into a pattern of having the main show either in the fall or spring, depending on the availability of the new equipment. In addition, we provide many spotlight shows and educational seminars throughout the year to introduce new products and ideas.
When was your last open house and how were attendance and sales?
Our last show was a post-AMOA open house in the fall of 2004. Attendance has been very good by most standards. We have many local owners that make every effort to see the new equipment, but we are not drawing as many operators from long distances as we would like to see. We have also held mini-shows in smaller markets where we take the product directly to our customers.
When my grandfather was in this business, I remember as a kid going to Sunday afternoon open houses. We may try that again, with an eye toward bringing in more families. We feel like open houses are very valuable because we can set the right tone and demonstrate products that we feel operators need to see. I've talked to many factories regarding this issue and I don't think they realize the challenges we have in showcasing equipment in these tougher times.
Does GS staff visit operators in their offices these days?
More than ever. When the phones aren't ringing like they used to, you've got to put more people in the field and be in the customer's face. So we have more folks on the road all the time. Nowadays, we even try to get our inside sales force out on the road as well. The typical operators don't come by the office to see new equipment as frequently as they used to. When new equipment was arriving more frequently, operators stopped by all the time, not just to buy parts or get service, but also to look at the new equipment. That doesn't happen nearly as frequently as it used to. The cost of gas is a major concern and all indications are that it is going to get worse. But nothing keeps us in touch with our customers like that face-to-face contact. Putting our sales team on the road really keeps us in tune with what is happening in the market.
What is your assessment of the range of amusement product available on the market today?
I think there are a wide range of product choices and many opportunities for the operators today. Digital music, merchandisers, redemption opportunities, pool, air hockey, countertops, I could go on and on. However, there is a shortage of video games; and by that I mean there is a shortage of both new and used video games. If a customer needs to buy six new videos, it is hard to fill the order. Many truck stops and other types of locations are still video-dependent.
Do you see a widespread attitude of "operator sales resistance," or do you find operators are selective but eager to buy the right product?
First let me point out that adult redemption in Georgia is legal on an amusement basis and very profitable. Many operators are focusing on this aspect of the business. Beyond that, some operators tell me: "Money that I don't spend with you is money that goes straight into my pocket." So yes, there is operator sales resistance.
At the same time, there are also operators who know that in order to be successful, they must invest to grow their businesses. But the pattern of "how" they buy is different from just 10 years ago. When new product is seen for the first time, operators move with tremendous caution. First they must learn how it fits into the scope of their business. For example, operating a merchandiser that features high-end prizes costing $100 and up requires careful selection and handling. That is not set in motion overnight for small or large operators.
You mentioned concern about the continually shrinking operator base; can you expand on this?
The situation does seem to have stabilized a bit. This year we have not seen any real change in our customer base. I don't know what tomorrow will bring. We see consolidation of operators who become more selective about which locations they will serve. Outside of the metropolitan areas, and even within some larger Georgia cities other than Atlanta, there is little competitive pressure between operators. They seem to get along with each other very well.
We've been in a long period of distributorship consolidation, too.
I certainly hope we don't see any more change there. I am not expecting further consolidation in our particular region of the country. I talk to our fellow distributors in this area and they're facing a similar situation: flat sales and determined efforts to generate growth.
Some distributors tell us that parts, service and financing are now their key profit centers, not sales. Do you think this is true for some but not others?
Sales are still the main engine driving the business for Greater Southern. We still focus primarily on finding new markets and trying to get healthy margins. We have very knowledgeable parts experts who understand the operator; and we try to give strong customer service in our parts and service departments. We also try to give more personal attention to our customers than they can get by dealing with national suppliers, by knowing exactly what they need. And especially for local customers, we like to be able to provide that part on-demand when they have a crisis. But the big parts houses have priced their goods at very competitive rates. At the end of the day, our parts department is basically a function of our sales. Selling more machines means selling more parts.
How would you assess the success and impact of Incredible Technologies' venture into direct sales to operators?
I have great respect for the talented people at Incredible Technologies. I remember every detail of the conversation when they informed us of this decision. Personally, I felt devastated by IT's decision to sell direct. It was like losing a member of the coin-op family. For me it has been a tremendous disappointment to have such a capable maker of coin-operated amusements decide to market its products through that method. I don't believe it serves the industry as a whole well; and it's difficult for me to understand how it could result in greater sales for IT, and certainly not in more profitability, given the increased overhead they've taken on. The pricing structure they are using now is not realistic for distribution to make the margins we need, given today's cost of doing business.
Defenders of this policy say that plenty of direct sales have always taken place, it's just been more behind the scenes.
First, our industry is too small to operate under the radar. Distribution is a small group and many long and trusted relationships exist. We are all aware of the direct sales that have taken place in our respective markets over the many years and the reasons for them. I do think several manufacturers are selling product to operators directly when they don't feel they are getting proper representation from distributors. In my view, however, IT's approach brings tremendous risk to our industry. And I believe this continued policy, if taken on by others, would set our industry back to the point where we will be half the size we are today.
Do you see direct sales as a growing trend, then? For example, Greater Southern has always been one of the real redemption experts among distributors, but you are still exceptional in this regard. Consequently, we've heard some old-line, very well established redemption manufacturers say they are disappointed with distribution as a whole and thinking of selling direct.
Let's say it is a concern and I think we at the distribution level all have our guards up. But I hope we will not see more manufacturers announcing a policy of direct sales. We do a lot of business with a lot of redemption companies, and I am confident that our suppliers believe in us and know how effective we can be. For every company that likes the idea of direct sales, I believe there are many more companies that appreciate the contribution Greater Southern makes to their bottom line.
What progress is the AAMA Distributors Committee making on warrantees and communication with manufacturers?
Progress is coming, but somewhat slowly. I've attended some meetings of that committee and we'd all like to see it become even more active.
What is the mission of the AAMA Personnel Committee, which you co-chair?
It's a backstop for the AAMA staff. Dave Drouillard of Signature Sales and Service is my co-chair on that committee. I'm pleased to say we've had very solid personnel at AAMA. President Mike Rudowicz and his team do a fine job; Mike knows the people and the business like few others.
You have been AAMA vice-chairman for the past two years. Are you available to move up and serve as chairman of AAMA for next year?
I was asked to take on that position, and I feel that just being considered for it is quite an honor. But for personal reasons , we have a lot going on with our business here at Greater Southern , I have decided to forgo that opportunity. I am certainly pleased to have been solicited, but I am pleased that we have some excellent candidates and I know AAMA will continue to enjoy strong leadership.
Topic: Music and Games Features
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