LAN Center Financial Repayment
Welcome back to our LAN Center and Esports show for May 18th, 2018. This week’s main topic surrounds LAN center financial repayment which is always a question that we get through our consultations. It is a tough business that we’re in, and if you’re going to make a profit, sometimes it can be go big, or go home.
Topics on today’s show
On the show we discuss: LAN center financial repayment, HUGE ggLeap update about to happen, ggCircuit and Season 7 Updates, Epic Fortnite proposal review, and a very special League of Legends announcement.
LAN Center Financial Repayment Transcript
The last three weeks I’ve been really digging into LAN center financial repayment of an esports arena business, and as one of those things, a lot of people always focus on utilization; they focus on number of stations, and I think some of the stuff I’ll share today is going to become a pretty go-to method for us as we talk with new owners that are getting ready to get started. Any of you existing owners out there that watch the show, go through your calculations and see if these numbers match up for you, but it’s very interesting to me. What we’ll talk about here is the number of stations. Why does the number of stations matter? We’ve said in the past, don’t open up with less than 40 stations. Now I’m under the impression that it needs to be more like 80-plus stations. The exception to that, I’ll say before we get into this is, if you’re an existing business, a family entertainment center with bowling and laser tag and go-karts, you can add in a smaller footprint of these because you’re only trying to pay back your capital investment. You’re not trying to cover necessarily a full-store payroll and a full-store set of utilities and insurance and anything else, ’cause you’re already doing that with your other business.
This’ll chip into those fees, but what I’m using here as an example, the standalone esports area or LAN center. It’s uncanny, but it costs between three and five thousand per station to open up a center. That’s all the costs included. So the range is how nice you want your store to be. You might be in a nicer district and you have to put in certain walls for code that are different than another area of the world or another area of the country here in the US, but everybody falls in that range. Winger and I, as we were working through his new build-out in Utah–he’s a cheap-ass, and so his’ll be more close to the 3,000 per station. 100 stations at 3,000 per station is about 300,000 to build out that location. If you spend 5,000 a station and do it high-end, all E-Blue stuff and lights everywhere and extra screens on the walls, you can really spend a lot of money, so we’ve had a build-out in Toronto, and they’ve got to spend union labor on the build-out. THere’s a lot more cost for them. They’re at like 5,000 per station build-out, so they’re building out 100 stations. Their cost is going to be about $500,000 to build that out.
Now that seems like it may be to simple. Obviously that includes everything in that, so if you are one of those centers that have opened, go back and figure out what you paid and all of your cost to get open, divide it by how many stations you started with, and I guarantee you you’ll fall in that range, and you’ll be able to tell if you’re closer to 3,000, you’ve got kind of like just the basic necessities, and if you’re closer to 5,000, you probably did maybe a full kitchen or some other things that aren’t necessarily what everybody would do but are more expensive to do.
Now a typical stores makes about $4,000 per year per station, so if you think about this, okay, it’s going to cost me between three and five thousand to build this, I’m going to make about 4,000 a station gross revenue every years, then you’re going to see where I’m going with this. So what we did then is we put in in our chart a formula for an example of a small, a medium, and a large build-out. So a small build-out at 60 stations, so 60 stations built out at $3,000 would be $180,000 to build that out. It’s going to take you 4.3 years to pay that back. That includes expenses for reinvesting over the store in that time period, so you don’t to the end of 4.3 years and have to reinvest at that point–you’ve paid it off. The only time you have to reinvest in our model is every 10 years when you refresh the whole store: new carpet, new walls, new ceilings, new furniture. What we’re talking about is expensing the reinvestment in the store every year for new graphics cards, new headsets, new chairs, new keyboards, new games, all of those things are in our model and will be paid for while you’re paying back that initial investment upfront. So small stores about 4.35 years.
Medium stores, 120 stations, and again, you go high-end on that you’re going to spend half a million dollars. You go low end on that you’re going to spend about 300,000, in that range. That takes 3.27 years to pay back. So 4.3 down to 3.2, just by putting in more stations, based on the fact that we know you’re going to average about $4,000 income per station, so the more stations you have, the more income you have, and the more of that can pay back your initial investment more quickly.
Large centers at 180 stations. It only goes from 3.27 years down to 3.2 years. There’s not that much change. There’s this plateau where size does matter, so you’re going to get big enough where putting in 400 stations or 500 stations doesn’t increase that payback period. Now, you have to think about this, if you could fill up a thousand stations and pay that back in 3.2 years, you’re going to make a crap-ton of profit after that, more than someone with 120 stations. But the payback period on that initial investment is the exact same. So what we’re saying now is that 100-station range is more of the sweet spot in this industry, because Fridays and Saturdays you’re going to be at max capacity.
Everybody talks about utilization but you can’t just divide your number of store hours by the number of hours you sell because you sell all your hours on Friday and Saturday. What you don’t realize is that you may be at 100% on Friday night and 100% on Saturday night, but even Saturday during the day you’re maybe only at 40 or 50%. You open at noon, you’re not at max capacity on the minute you open on Saturday. So you go through a few hours and there’s 40%. During the week, you may cap out at 30 or 40% max, and there are some times when you’re at 1%. So interesting numbers is for eBash, what we do is we see about 4 to 5% utilization, and that’s over all of our open hours and the number of stations we have, which seems horrible when you look at it, but because we have 100 stations, we make enough on Friday and Saturday to help pay for the operations of the store and reinvesting in the store.
Winger, he’s closer out in Utah to 10%, and then we asked in a private group that we’re in with some long-time owners. Jon Simmons, who runs NetFragz, he’s at 30%. He’s probably the highest I know, and his model is all about 24/7/365, $3.50 an hour, and it gets cheaper from there. It’s all about filling the seats at that exact perfect price point to get that utilization up, and he has a great model, but not all of us can do that. He’s in an area of the country with a lot of people, a lot of people are up at 4:00, 5:00, 6:00 AM that have shift work so he has no trouble filling his store up. On different days we’re here in rural Indiana, if it is Easter, we close on Easter because there’s just not anybody that would come out at that point. The key here is that I want to make sure the number of stations is so important, not just for running tournaments, not just for being full on Friday and Saturday night, but being able to support enough income to be able to pay this back in a reasonable time. 3.2 years is not that good.
My goal would be to get the payback down … I just talked to a franchise that does trampoline parks all over the US, and their franchise cost to build a new store is two and a half million dollars, so it’s two and a half million dollars to open up one of their big parks, but it’s a 24-month payback, so they pay that back in two years, which is crazy. But that’s where we need to be as an industry. If we want this to grow, we’ve got to perfect this model and get it down to three years, to two and a half years, and down to two years eventually.
Yeah, trampoline parks blow my mind, and maybe because I’ve never been to one, but … I don’t know. Your aunt and uncle run one and they do a lot of great businesses, just because it’s a unique party opportunity for a birthday, or-
Yeah, so this particular group does like eight different things in the building, so trampolines, Ninja Warrior-style courses, laser tag, coin redemption ticket games, big arcade games, and they’re looking at dropping an e-sports model in there, and that’s what we’re trying to figure out. The payback period on this piece, it can’t run their overall model if they drop it. Now again, they could drop in 40 or 50 stations in that and still see a two-year payback because they already have a front counter, they already have food and beverage, they already have marketing, they already have a general manager. They just have to run a little bit of payroll to run that section, but it’s not like the rest of us trying to fire up our own business.
And again, I think those parks are unique in the fact that, it’s what we tell people all the time what we have to do at our centers, is you have to do something you can’t do at home. Nobody, even rich people, don’t have 15 trampolines all together that you can just bounce from one to another, trampolines on the wall you bounce off of, bungee, rope trampoline systems. It’s expensive to build these, but that’s the draw for the customers is … And it’s really not that bad. I looked at their rates, it’s like 25 bucks gets you two or three hours of running around in this place and playing these different things.
I just want to make sure that we put these numbers our there so anybody looking to start up, it’s very simple math to just … If you go out and look, a small store’s about 2,000 to 3,000 square feet, a medium is like 3,000 to five or six, and a large is 6,000-plus square feet, so once you find a spot, then you figure out, “Okay, can I get 60? Can I get 120? Can I get 180?” I would shoot for around 100 stations. That’s what I would recommend to everybody now is shooting for 100 stations. Hopefully working with us we can get cost down over the next six to eight months building a lot of these so that we can get the payback period under three years, and again, if you think about reinvestment at 10 years when you reinvest in the store, if you pay everything back in three years that means you’ve got seven years of making profit.
So if your investment upfront is $500,000, if you pay that back in three years, you have seven more years to make that, so you’ll make over a million dollars in profit in those next seven years before you’ve got to go back and put another three or four hundred thousand dollars into a rebuild of the space. Just like we’ve seen Dairy Queens and McDonalds and all these kinds of places, eventually they just tear them down and build a brand new one, because the old store for us and our business, instead of that being 20 or 25 years for us, it’s about 10 years that you need to go back and wipe it out and start again, so-