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A Solution to the Post Pandemic LBE Squeeze

White Hutchinson chart showing increase in construction costs since 2020

In his most recent newsletter, Randy White of White Hutchinson, a leading LBE design consultancy, shows how the current economic climate impacts family entertainment centers’ financial feasibility. And it’s not pretty.

Since 2020, the costs of construction have skyrocketed. Steel is up 60%, drywall 46%, and concrete 38%. Even lumber, which has lagged this trend for some reason, is up 25%. And this doesn’t include labor rates. Anyone who has tried to hire a contractor knows how hard it is to get someone to show up.

This has led to the overall cost of commercial construction increasing by 36% in four years—and this is the national average. I am sure that in some regions experiencing over-index growth, the costs are higher due to supply and demand.

Exploding cost of non-residential construction - courtesy of White Hutchinson

Randy points out that due to rapidly escalating costs, a feasibility study based on historical comparisons would have difficulty factoring in such a rapidly changing environment.

“Many new community leisure venues (CLVs), including family entertainment centers (FECs), are developed based on financial feasibility studies that use existing centers as comparable projects. However, although the existing centers may be financially successful, replicating the center might not make a new center financially viable. Why? Because the existing center was built several years ago at yesterday’s cost. In contrast, the new center will be built at today’s, more likely tomorrow’s cost, considering the time it takes to get a new center financed and open.” – Randy White, White Hutchinson

In addition to escalating construction costs, interest rates have exploded to the highest in decades. This increases the carrying costs of construction loans, so if expansion plans rely on bank financing, costs go even higher.

The Post Pandemic Pullback

In the post-pandemic rush to experience almost anything, many centers were able to raise their prices to help cover increased labor and food costs. This led to 2022 being a banner year for many LBE businesses. Since then, consumers have pulled back, with many centers reporting a decline of 20% so far in 2024.

I recently received data from Howard McAuliffe at Pinnacle Entertainment Group. They track weekly arcade revenue in more than 100 different location-based entertainment centers. Here’s the arcade revenue drop from March 2024 compared to 2023 in various location types.

  • Bowling Centers: down 10%
  • Pizza Restaurants: down 15%
  • Theaters: down 28%
  • Laser Tag: down 30%

Pete Stearns, the senior director of Midway Operations at Dave and Busters, predicted at the most recent VR Arcade and Attractions Summit that the industry was entering a period of pricing sensitivity.

I’ve spoken to executives at several chains with aggressive expansion plans who have slow-rolled new sites because their financial projections have fallen apart. Dave and Busters has the capital and scale to aggressively invest in designing new attractions, like The Arena, to offer something different.

But what strategies might apply to smaller LBE businesses that defend against the current economic trend of inflationary supply pressure and recessive demand?

The Challenges of Innovation

One of the challenges of being an FEC operator is relying on manufacturers for innovation. Unless you have the scale of Dave and Busters, who design their own attractions and negotiate exclusives for new games, what’s available to you is also available to everyone else. This makes differentiation challenging.

If you’re not offering something different from your competition, you can look like a commodity to your customer. Commoditization leads to price erosion. If everything else looks the same, consumers will choose the lowest price.

So, how do you differentiate from your competition to avoid price erosion? And what if that strategy enabled premium pricing beyond what you thought possible?

New Research Shows the Way

The new Immersive Audience Report, published this month, offers a clue. Researchers found that audiences that have already experienced a VR attraction are willing to pay as much as $125 for a VR-based immersive entertainment experience. Getting them in the door can be challenging, but once you do, the opportunity to upsell them to increasingly more expensive and compelling experiences is there.

And more good news: the cost of building a high-volume, high-impact VR attraction has plummeted in the last year.

If you read this week’s news below, you will find that museums and independent VR arcade owners have figured this out. Most new VR installations today are in cultural, art, and museum spaces or standalone free-roam VR arcades.

Free Webinar with Clues and Answers

If you’re interested in learning more about:

  1. How you can employ a strategy leveraging the latest innovations to differentiate from your competition,
  2. Tapping into new audience revenue streams and,
  3. Growing your top line during these challenging economic times…

…then I invite you to invest an hour with me next week on Monday, July 15th at 9 AM Pacific, (Noon Eastern and 5 PM GMT) for a FREE live webinar where I will explain:

  • What technology trends have led to this new opportunity
  • What are the top immersive developers offering for different types of locations?
  • How to set up an attraction that can handle over 1000 people per day
  • Why we undercharge for immersive VR, and what new research suggests consumers are willing to pay

I will be answering questions and bringing in some special guests. You can register at this link. See you next Monday.

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