The E.S.P. Interview

 

 

DAVE & BUSTER’S (NYSE: DAB) recently opened its 20th arcade and amusements restaurant in St. Louis, Missouri. The 55,000-sq.ft. unit cost $8 million to $10 million to build, and corporate officials expect $12 million to $15 million in first year revenues. While most other themed entertainment eateries struggle to meet growing debt, DAVE & BUSTER’S keeps rolling along at a phenomenal pace. The company announced that the new St. Louis restaurant opened to record revenues for the first week, surpassing the previous first-week revenue winner, the 19th unit in the international chain, which opened in San Antonio, Texas only a few months ago.  The company has also reported that the average check is about $20 and that the average unit sees approximately 750,000 customer visits per year, of which 70 percent are from repeat customers.

 

And this is just the tip of the good fiscal news for DAVE & BUSTER’S:   Total revenues for the quarter ending May 2, 1999 increased 53 percent to $59.7 million compared to $38.9 million for the quarter ending May 3, 1998.  DAVE & BUSTER’S aggressive domestic expansion plans include openings slated for Austin, Jacksonville, Providence and San Jose before the end of this year. Seven more stores are planned in 2000 and eight will go on line in 2001.

 

International expansion is just as ambitious.  Currently, there are two units operating in the United Kingdom  (with plans for immediate expansion) under a licensing agreement with Bass Plc.  DAVE & BUSTER’S also has international licensing agreements with TaiMall Development Co. for seven units in the Pacific Rim and with  S.T.A. Salmann Trust Co. for seven to ten restaurants in Germany, Austria and Switzerland.  Agreements are also in place for up to five restaurants in Canada with W.I.N. Gaming Corp.  and with ECE for five units in Mexico.  The company has said it anticipates opening almost 30 international units over the next decade.

 

How does DAVE & BUSTER’S do it? 

 

Dave Corriveau and Buster Corley

 

To find out the answer, E.S.P. submitted a series of questions that were reviewed by a variety of corporate departments, including the CFO, and then we had a friendly chat with Bryan Spain, vice president and director of real estate development.

 

We asked Spain how the concept originated (see sidebar) and why it is so successful.  “It is successful because Dave and Buster had a dream and they have stayed close to their original vision of good food, fun, and good service.  We are very careful about training our people to be customer-focused.  We are very careful about the quality of our food.  And we constantly explore new ideas and technologies for keeping our customers coming back for new kinds of amusement experiences.  Our goal is to have every customer leaving with a smile ­- so they’ll come back again.”

 

Spain explained that the DAVE & BUSTER’S (D&B) concept works off of two conflicting goals for customer satisfaction.  The restaurants must deliver consistent food and service, while the arcade and amusements must constantly change to offer new enticements.

 

We asked about concept fatigue, the idea that themed environments soon lose their novelty and, like most arcade attractions, quickly run out of drawing power.  “The concept for DAVE & BUSTER’S has proven itself over time.  It is true that we have to keep up with new technologies and trends for the game and amusement side of our operation, but we have always been very good at that.  And remember, we also feature classic activities like world-class pocket billiards, champion-style shuffleboard, virtual golfing, and even the traditional board games remain popular.”

 

“We don’t focus on sports.  We’re not a sports bar.  You can’t hear the scores on our TVs.  We are what we’ve always been – a good restaurant with added entertainment attractions.”

 

Spain noted that Reggie Moultrie, who became vice president of amusements in January 1999, deserved much credit for keeping the amusements fresh and exciting.  After a number of false starts with various high-tech virtual thrill ride manufacturers, D&B reached an agreement at the end of May 1999 for iWERKS Entertainment (818-841-7766) to provide ride simulation attractions for new locations as well as converting several current D&B’s 2-D attractions to 3-D systems.  The iWERKS Turbo-ride Theater is an 18-seat, theater-style simulator ride, with seats that gyrate in sync with the action movie shorts programmed to play on a giant high-resolution screen.  One advantage of the iWERKS proprietary system is that it is easily programmable for different virtual thrill experiences.  Spain admitted that the game and amusement sector of the operation needed to look new on short cycles so that returning customers could see and play with something different each time.

 

When we asked why Sega GameWorks is struggling, Spain diplomatically declined to comment.  He did suggest that GameWorks was not competition for D&B because “they’re really for a younger crowd.”  Of  ESPNZone, he observed, “I don’t really consider them a major competitor, either.  They’re a sports bar kind of thing, with sports-themed activities.  We’re a really good restaurant with interesting entertainment.”

 

We asked Spain what the prototype footprint was for the concept.  “We have two footprints, depending on the site and demographics of the targeted market.  The larger design is about 55,000 sq.ft. with parking for about 800 cars.  The smaller footprint is about 40,000 sq.ft. with room for about 700 cars.  There is no set pattern for parking and building ratios.  We’ve built them larger and we’ve built them smaller, but these two formats are what we have moved toward.”

 

Spain says that in his exploration of potential markets he does not rule out refurbishing existing structures.  “We prefer to be freestanding because we feel as if we are a destination in our own right.  But we will consider malls, power centers, and we are open to all major entertainment specialty projects like those you cover in E.S.P. because our concept works in all these retailing environments.  We don’t need co-tenancy sites, but we like them.”

 

What does Spain look for in a market and a site?  “We need at least one million people in a 10-mile radius.  We want at least an average income of $60,000 a year.  Our target age is 33 years old.  We attract an older crowd than that, and families, too.  But demographics is like ‘shooting at a moving target.’  I also look at the transportation system.  People will drive to come to our facility.  And I look at the surrounding co-tenants.  We like to be near offices, hotels, and retailers.  I like a good mix near the site.”

 

How does Spain feel about being near casinos?  “It is okay, I guess.    As I said, we don’t need to rely on co-tenancy.  I’ll let you know how I feel about casinos after St. Louis is in business for awhile.”

 

The typical D&B requires $6 million to $10 million to build.  How much does Spain require from the developer in tenant incentives?  It all depends.  “We have no hard and fast rules about financing,” Spain said.  “Any type of creative financing can be done.  Each site has to be analyzed on its own merits.”

 

Many of D&B’s leases are 15 years and up, Spain admitted, but told us additional leasing information was proprietary.  Why the 15-year-plus leases?  To help with financing?  “Well, yes, the 15-year-plus leases do help with financing, but they primarily allow us to protect our investment.  And costs are amortized over time.”  He told us that he does ground leases and still purchases land if the deal seems right.

 

Expansion?  D&B is putting on a tremendous push.  “We will open six new units in 1999, including Austin, Jacksonville, and Providence (under construction), and at least seven new units in 2000, including San Jose; Woodland Hills, California; north of Denver in Westminster; Pittsburgh; San Diego; another Dallas venue; and Miami.”  Half of these sites are signed deals.

 

We noted that recently D&B’s occupancy cost was around 35 percent with rent expense for 1999 about $9,047,000.  But figures for 2000 on go down to about $7,873,000 despite expansion.  When we asked about these declining leasing costs, Spain observed: “I asked our chief financial officer, Charles Mitchel, about that question you raised and he said not to answer it.”  Some strategies for financial success must remain secret.

 

D&B’s leases have minimum rent structures, but the percentages also will remain secret.  “All our leasing structures vary.  There is no available formula,” Spain told us.  We tried another leasing question.  “Do you intend to renew your lease in Dallas that expires in December 2002?  Spain laughed.  “Tell you the truth, I didn’t know the answer to that one so I asked the chairman of the board and he told me we weren’t going to release that information.”

 

Undaunted, we tried one last leasing question.  “Do you always sign your initial leases through a D&B shell corporation organized in the state where you are locating?  We noticed leases that use ‘DAVE & BUSTER’S of Illinois, an Illinois Corporation,’ and so on.  Is this the norm?  Does the parent corporation provide a limited guarantee of some kind for the state affiliate?  What kind of protections are there in this arrangement?”  Spain merely said: “Our chief financial officer said there would be no response to that question.”  Enough of leases.

 

Spain told us that D&B doesn’t concern itself very much with competition in its planning.  He did admit that Jillian’s came closest to a competitor among the GameWorks and ESPN Zones we mentioned.  “We don’t focus on sports.  We’re not a sports bar.  You can’t hear the scores on our TVs.  We are what we’ve always been – a good restaurant with added entertainment attractions.”

 

As director of real estate development, Spain travels all over the United States scouting sites and markets.  He informs us that in the next five years he expects to have a total of 50 units operating in the states.  Spain told us, “Growth will come from both major markets and from intermediate and smaller markets.”

 

What about the concentration of D&B units in an area?  We noticed that your sites in Illinois are 20 miles apart, but your sites in Dallas are only 10 miles apart.  What is your ideal distance strategy? Spain seemed to like this question.  “Well, I keep tweaking the distance factor.  Atlanta’s about 25 miles.  North Denver is 31 miles.  Illinois at 20 miles is a good average.  I think the 10-mile distance between the venues in Dallas is closer than we would want to do again in the future.”

 

We had two more questions, and Spain graciously obliged.  We understand your revenue is derived about 50/50 percent from the food and beverages sector and from the amusements sector.  Do you expect this equal division of income to continue?  Spain thought for awhile.  “It will probably continue.  The food is very important.  It anchors the concept.  The distribution of income between the two sides of the concept is pretty constant, but like everything else, it changes by market.  I think that what DAVE & BUSTER’S proves is that if the basic concept works, everything else will keep falling in place.  You’ve got to have good people and good management, but the underlying vision for the place has to be right.”

 

What do the folks at DAVE & BUSTER’S think their success has to say about the general state of the entertainment retail real estate industry?  We asked Spain why he and his team thought there was this explosion of entertainment retail projects and what the industry might learn from the dynamic success of his organization.  “You know, Dave Corriveau and Buster Corley didn’t just decide to put together games and arcade entertainments with a fine restaurant.  Back in the 1970s, they operated two independent venues next door to each other.  It was their customers who showed the way.  They kept going back and forth between the two businesses until the traffic convinced our co-founders that something was going on here.  The customers wanted the linked experience.  That’s what I think is important.  Retailers found out that they’ve been deluding themselves with a price or selection option.  Retailers need more than the store.  People want more.  To enhance the draw, you must provide your customers with entertainment.”

 

For more information, contact: Bryan Spain, VP, director of real  estate development, DAVE & BUSTER’S, INC., 2481 Manana Drive, Dallas, TX 75220; 214-357-9588.