Although still one of the most popular forms of entertainment, bowling seems to be one of the least popular businesses for commercial lending. Bowling attracts a remarkable customer base: more than 70 million people bowl at least once every year and about 3 million of those actively participate in league play. By improving their facilities, launching aggressive marketing programs and adding complementary activities, many bowling centers have redefined themselves as neighborhood "family entertainment centers,” which has made them more effective competitors for their customers’ entertainment dollars and scarce spare time. Despite this, potential problems such as special purpose buildings, difficulties in finding qualified appraisers, perceived problems in selling bowling collateral, and an overall lack of knowledge about the industry contribute to lenders’ lack of enthusiasm for financing bowling centers. This report will identify characteristics of the industry that may help lenders analyze bowling loan requests.
Ownership of bowling centers is remarkably diverse. The majority of bowling centers in this country are individually or family owned. Indeed, as a business, bowling is unusually family oriented. Compared to other similar small businesses, a disproportionately high number of bowling centers are passed down from one generation to the next. It is not unusual to find second, third and even fourth-generation owners actively involved in this business. This industry also is marked by fragmented ownership. The two largest companies, AMF & Brunswick, only own about 400 centers between them, while the next three largest companies (Bowl New England, Bowl America, and Strike and Spares) together own only about 50 centers. As of November, 2011, approximately 5,200 centers with about 110,000 lanes were operating in the United States. Of that group, about 4,650 facilities were commercial centers. The others were operated by the military, colleges, fraternal organizations and private clubs. Based on this, the five largest bowling center chains had a combined market share of only 10%.
These small center owners generally are prompt on their bank payments. The SBA reports that the default rate on SBA loans to bowling centers between 2001 and 2011 was 16.4% and the charge off rate was 1.35%. The default rate puts bowling in the 26th percentile and the charge off rate put bowling into the 13th percentile of all industries receiving at least 100 loans during this period. The RMA Expected Default Frequency shows bowling with a median rate of 5.5% for the year ending 4/30/09, dropping to 3.44% at 4/30/10 and 1.82% for 4/30/11. Moody’s EDF percentages were 16.34% for 4/30/09, falling to 11.32% for 4/30/10 and 8.73% for the year ending 4/30/11. Both RMA and Moody’s show a declining default rate over this three year period, which would indicate a healthy industry gaining financial strength.
Although primarily a small retail business, bowling can generate substantial revenue ($1,000,000 or more per location) and considerable cash flow before debt service (25% to 35% of revenue). Because many costs are fixed or fixed within a range of activities, additional incremental revenue from food service, bar, parties, vending, and arcade games will have a larger impact on a bowling center’s bottom line than many other retail businesses. Conversely, a relatively small loss of revenue can devastate cash flow since it is hard to quickly adjust fixed costs to offset a decline in revenue.
Several national studies have shown that bowling participation is dropping (10% between 2007 and 2011) based on the number of people who bowled at least once per year. Most of this decline was attributed to the "avid bowlers” who bowl more than twelve times per year, of which that vast majority are league bowlers who bowl more than 25 times per year. In the past, league bowlers made up as much as 85% to 90% of bowling revenue. Today, open play, including birthday parties and special events, generates approximately 55% to 60% while leagues make up 40% to 45%. Food and beverage income can contribute as much as 40% of gross revenue while arcades may account for 25% to as much as half.
Adults 25 -34 are the largest demographic age group of bowler with children under 18 making up the fastest growing segment. Households with incomes over $100,000 annually are the largest income segment of bowlers and most of this group have white collar, college educated, professionals as the head of the household. Today, the traditional blue collar bowler of the 1950s and 1960s make up a minority of bowlers.
The following breaks down the various sources of revenue for modern bowling center:
- League bowling revenue follows the bowling season, which begins in late August or early September and lasts until late April or early May. These leagues are certified by the United States Bowling Congress (USBC) which regulates the physical conditions of the lanes. Traditional leagues normally bowl a 36 week season while short season leagues bowl 4 – 16 weeks. Traditional leagues generally start in the fall and can be difficult to add new teams or members to existing teams during the year because scoring averages are maintained throughout the season. Short season leagues are becoming more popular as a non-sanctioned "fun league” and can be started in any part of the year. Many bowlers progress from casual bowler to fun leagues to sanctioned leagues as interest in the sport builds. Marketing to this group is primarily done through the use of in-house flyers, in-house advertisements, personal contact with bowlers, and direct contact with local businesses and organizations. Many teams come entirely from one organization such as an employer or church group.
- Open play is traditionally one or more people bowling without any social structure such as a league or fundraiser. Bowling has become a popular outing for date night for teenagers through young adults. Families find this an enjoyable and cost effective opportunity to do things together. Alternative activities, such as movies, are passive and do not allow a group to talk and share the experience. Many bowlers come in as an impulse after driving by the center. This makes a high traffic location a desirable attribute. Promotions involving free bowling cards given out to children prior to the end of school as well as commercial promotions such as Groupon often bring in new bowlers and bring back former bowlers. Open play can be billed by the hour rather than by the game, which helps to eliminate downtime between one group getting off lanes while another is getting on. Hourly billing can also make it easier to schedule the lanes since the ending time is clearly known. Open play revenue is often higher during the summer in areas that have high temperature and humidity and lower in northern climates where cold winters make summer outdoor activities more attractive. Likewise, southern states that have mild winters may have lower open play revenue while northern centers with cold winters often have much stronger open play.
- Cosmic bowling is open play bowling in an environment with black lights, strobes, laser lights, and music, where surfaces such as lanes, table tops, and carpet have patterns are revealed and glow under black light. Even bowling balls and pins glow under these lights creating action and fun aimed at younger crowds. Attracting people to cosmic bowling is generally through word of mouth, in-house advertising, or cable TV spots. These cosmic sessions are often sold per person by the hour instead of by game.
- Shoe rental is a major part of a bowling center’s income. Most league bowlers bring their own bowling shoes but open play and special events normally generate additional revenue from shoe rental. Some open play package include shoe rental along with a limited number of games or hours of bowling plus food and arcade tokens.
- Fundraisers provide help to the community while generating revenue for the bowling center. The primary benefits to the center are to expose new potential customers to bowling and to capture the names and contact information for the attendees. Bounce-back coupons given out at the event and invitations via e-mails or regular mail to bowl again maximize the center’s impact on the attendees. Most fundraisers come as a result of personal contact with the non-profit sponsor by the center or, in some cases, a call from the non-profit as a result of the success of a fundraiser for another group.
- Birthday parties are one of the fastest growing segments of the bowling market and normally include one to two hours of bowling, birthday cake or pizza, plus a grab bag for each attendee that includes tokens for the arcades and a coupon that can be used at a subsequent visit. Advertising for birthday parties comes from word of mouth, in-house flyers, and cable TV spots.
- Corporate events focus on team building within an organization, an opportunity for members of an organization to socialize off site, or a way to couple a business presentation with team building and a social event. Most corporate events come from personal contact with the event coordinator and the center.
Other than cost of goods sold for food and alcohol plus expenses such as payroll, most bowling expenses are relatively fixed. Utilities, insurance, property taxes, and advertising are generally the same regardless of the number of bowlers. Supplies and repairs are somewhat variable with volume, but do not change significantly through a large relevant range of revenue. Although some expenses, such as insurance and property taxes, vary from one part of the country to another, expenses such as utilities and advertising are more consistent with higher heating and lower cooling bills in the northern part of the county with lower heating and higher cooling bills in the southern part.
Food and alcohol costs are similar to restaurants as a percentage of revenue: food is around 35%, beer is also around 35%, while mixed drinks are approximately 25%. Some centers include supplies in cost of goods sold which can distort these percentages. Determining these costs and the impact of food and bar income on the operation is helpful in reviewing performance.
The biggest challenge in underwriting a bowling loan is often getting good comparable data. RMA often provides financial data that is too summarized for detailed analysis, and no other resources are easily available. A bowling industry report, the BPAA Benchmark Study, provides the best data from inside the industry with data derived from a nationwide survey of bowling center owners. Information is broken down based on the size of the centers and categories including revenue from league bowling, open play, food, bar, as well as several expense categories. Key areas of focus for underwriting should include the population to lane ratio, revenue per lane, the division of revenue from league and open play, payroll as a percentage of gross revenue, the cost of goods sold percentage, and cash flow as a percent of gross revenue. All of these categories can give insight into the strength of the center and its market.
The minimum amount of working capital for a successful bowling center can be much less than that required by other businesses. Indeed, many bowling centers show negative working capital after consideration of the current portion of long-term debt. In fact, nominal working capital is more reflective of its retail service nature. Very few centers have receivables, and most have very small inventories. Since most of the expenses are either occupancy or payroll, they are very predictable. Leagues provide a dependable source of revenue. Most special events (fundraisers, birthday parties, tournaments, etc.) are often scheduled well in advance. Although evaluating cash sufficiency includes both cyclical as well as seasonal calculations, the stability or at least, lack of volatility, in most of the revenue and expenses makes the assessment simpler than in many other industries.
Underwriters should certainly take replacement reserves for equipment into consideration in calculating debt service ability, but the good news is that bowling equipment has a very long life. Pinsetters are often the most expensive equipment in a center but have a thirty to forty year life. Many pinsetters from the 1970s are still in use today. Most centers have converted from wood lanes, which do need maintenance every few years, to synthetic lanes which can last twenty to thirty years or more with only minor maintenance. Scoring systems are typically replaced every ten to fifteen years but new modular designs allow hardware and software upgrades that can prolong the effective life of the original system. Seating is often replaced when it begins to look dated rather than when it wears out and is normally after fifteen to twenty years. Kitchen equipment can also last ten to twenty years or more. As a result, typical replacement reserves of a five year cycle can be overly conservative.
New competition is a harder risk factor to quantify. However, a new ground-up construction project with equipment can cost $250,000 per lane ($6,000,000 for a twenty-four lane center) or more. Retrofitting an existing building can reduce this cost, but it is still a major investment. As a result, few new bowling centers are built – even in areas with a high demand.
Most appraisers are trained to provide a valuation of real estate, but very few are trained to provide a going concern valuation of a business. Indeed, some appraisers rely on real estate records to determine the value of going concern comps, which often excludes the value of the equipment as well as the value of any goodwill.
Those appraisers capable of analyzing the going concern value need access to revenue and expense figures for comparable sales in order to provide a realistic opinion of value. Finding this information requires (a) identifying a true comparable sale, (b) getting information regarding the operation of the business, and (c) verifying the data. This is particularly difficult for the bowling industry due to the small number of centers that change hands. There is little accurate data available other than through direct contact with the buyer, seller, or broker involved in a bowling sale. This limits the scope of a bowling appraiser and can lead to alternate-use evaluations and incomplete reviews of operating performance. However, information is available from industry sources including brokers who sell centers and advisors who finance them.
Different sizes of centers have different revenue and expense characteristics. For example, a small center (less than twenty-four lanes) is generally more of a lifestyle investment than a larger center (twenty-four lanes and up). As a result, small center owners (typically a husband and wife team) commonly work long hours because of their love of the sport. In addition, small center owners generally perform most of the key functions themselves. A larger center owner tends to spend more time on administrative functions with employees performing duties such as staffing the front desk, repairing equipment, and doing the books. Thus, it is not unusual for a larger center to have a higher payroll as a percentage of revenue than a small center. Since most appraisers look to sales in close geographic proximity to the subject as the best comps, an appraiser may use a geographically appropriate comparable which is not a true economically comparable sale. By comparing big centers with little centers, such "market” data may result in inappropriate conclusions.
Like any other industry, even the best managed bowling centers can have occasional cash flow problems. However, most centers find the resources to solve their problems before it affects the payments to their lender. There are a number of industry consultants with backgrounds in marketing as well as in operations that are available to help identify solutions to problems. In addition, the Bowling Proprietors Association of America (BPAA) annually sponsors a national convention and trade show in which a variety of speakers give free seminars on a wide range of topics of interest to center owners. Vendors at the trade show display products available to help upgrade a bowling center and exchange ideas that have been successful at other centers. One of the most beneficial aspects of the convention is the opportunity to visit with other center owners and informally discuss various topics including problems and potential solutions. In addition to the national convention, there are a number of state and regional conventions that are also available with similar formats and benefits. Two trade journals directed towards center owners publish articles each month that provide helpful information on how to identify solutions to problems.
Once a problem expands beyond the proprietor’s ability to solve it, selling the center may be the best solution. Sandy Hansell & Associates is the largest and best known broker of bowling centers in the country, and it maintains a database of more than one thousand potential buyers for larger centers (24 lanes and larger). Smaller centers are often sold to local people who often are league bowlers at the center. Some are represented by local real estate brokers but many are sold by the owners with help from their attorney or accountant. Ads in the industry trade journals have also been successful in generating leads for small and large centers. As a result, it is often possible for the center owner to find a buyer before becoming a significant problem to its lender. However, it is not unusual for it to take nine months or longer to find a qualified buyer and work through an offer and the buyer’s due diligence.
Few banks have the knowledge in-house to cover every industry and help their borrowers work through short-term difficulties or to help them decide when to cut their losses and move towards a foreclosure. In these situations involving bowling centers, many lenders have consulted with bowling industry experts to help bank management define the problem and help formulate a solution. Using a management company with experience in bowling to oversee the bowling center either as a receiver in bankruptcy or when the center becomes a subsidiary of the lender often results in the best recovery for the lender.
Some lenders find the risk of center ownership too great due to the potential liability for serving alcohol. However, forming a new subsidiary and purchasing an adequate insurance policy can minimize this risk. A good management team with strong internal controls and good staff training and accountability also reduces this exposure.
Some bowling centers were built in areas that are now experiencing intense commercial development. Less successful centers have sold out and their buildings have been converted to other uses, most often retail or other commercial use. In some situations, the underlying land has been used for new residential or commercial development. Frequently, the size, layout and structure of the bowling buildings, together with large parking lots and strong locations on major arteries, make conversion an attractive alternative to refurbishing an older facility. Several examples are included in this report along with a list of alternative uses that have been made of bowling buildings.
From a lenders’ perspective, one of the first decisions after a foreclosure is how to maximize the value of the collateral. For some, the decision is to close the center to avoid the liability exposure to a business that serves alcohol. This choice eliminates the potential for a sale of the business as a going concern and generally results in the sale of the real estate for an alternative use. Other lenders form a new corporation or LLC and operate the business as a subsidiary of the bank using an experienced bowling management company. While this option can generate a much higher sale price, it also can involve a significant amount of management time. At issue is whether the going concern value of the bowling operation remains viable or if an alternative use provides the best value. Lenders have often watched an operator struggle during the months prior to foreclosure, and this observation period helps determine whether an operator problem or a market problem has caused the foreclosure. A good bowling management company will help monitor costs for improvement as well as operations to allow the lender to determine the best actions to preserve its collateral value.
Sunk costs added to a perceived high alternate use value may cause a lender to shut the operation and try to sell the land and building for its real estate-only value. Alternatively, cash flow from a management company turnaround may recover such costs quickly and produce better value in selling the property as a going concern. In some markets the sale time for an operating business with positive cash flow is far shorter than for empty buildings. All of these elements must be considered when weighing the best recovery option.
Successful going concern sales include:40 lane center, Texas
This center went into foreclosure despite the owner’s extensive industry management experience as a result of his medical problems coupled with inadequate insurance coverage for hurricane damage. The bank completed their foreclosure and retained an experienced management company to operate the business as a subsidiary of the bank while listing it for sale with a broker who specialized in bowling centers. Since the management company had been involved prior to the foreclosure date, the center opened the first day of bank ownership with no loss of income. Over the nine months that the bank owned the center it generated a substantial positive cash flow, which helped to recover value. The final sale price was close to returning the bank their principal and accrued interest. Other collateral was also involved, which allowed the bank a complete recovery.
24 lane center, Oklahoma
This center was purchased by a first time owner and, after a series of management errors, was given to the bank through a deed-in-lieu of foreclosure. The borrowers closed the center, the utilities were shut off for non-payment, the building was extremely dirty, and a good portion of the equipment did not work as a result of a lack of maintenance. A staff consisting of former employees as well as a new general manager was hired by the receiver to reopen the center along with help from a former owner. Once the center was generating stable revenue and cash flow, it was sold to the general manager. The bank recovered their principal and accrued interest but was unable to recover all of its attorneys’ fees from the sale price and operations.
By contrast, other banks have chosen different paths, as these examples illustrate:36 lane center, Arizona
Following a foreclosure, the lender closed the center and sold the liquor license. In Arizona liquor licenses can have significant value and are very liquid. This one raised over $300,000. The real estate was listed for sale at $2,350,000 with a local real estate broker. Although it was marketed as a bowling center, there was little demand at the price being asked since the center no longer generated any revenue. The price was reduced twice and three years later, the property was still unsold with an asking price of $1,690,000.32 lane center, Oregon
This bank was concerned about the potential liability from alcohol sales, so the center reopened for bowling but without a liquor license. In Oregon the state licenses video poker machines, which can be very profitable but are not available to businesses that do not have liquor licenses. A national management company was retained to manage the business. However, the management company had little or no experience with bowling. Without alcohol sales and without video poker and without industry experience, this center was in a negative cash flow position each month under the bank’s ownership.
Other lenders have successfully sold bowling center buildings for conversion to alternative uses:31157 Woodward Ave., Royal Oak, Michigan
This was a 36 lane bowling center but had limited revenue potential since Royal Oak did not allow liquor licenses within its boundaries. The 1961 vintage building consists of 27,267 square feet on 2.25 acres. It was sold for $1,970,000 and converted into retail use. In 2006 it was sold again for $4,350,000 and converted into a medical office building. The high traffic count on Woodward Avenue contributed to the value for a retail user and the close proximity to a hospital added value for a medical use.
7425 W Clearwater Avenue,
This 29,645 square foot building and 2.13 acre lot was originally built as a 24 lane bowling center. It was later sold and redeveloped into a multi-tenant commercial space. It is currently leased to a church, an office furniture store, and an executive office business.6438 College Grove Way, San Diego, CA
This 51,826 square foot building on 3.56 acres was built for a 54 lane bowling center adjacent to a shopping mall on a busy intersection. It was converted into a multi-tenant commercial space that currently leases to 24 Hour Fitness, a Japanese restaurant, Verizon Wireless, Quiznos, and Yo Fresh.6800 Orchard Lake Road, West Bloomfield, Michigan
Between 1976 when it was built and 1994 this building was used for West Bloomfield Lanes, a 46 lane bowling center. Following its sale, it was converted into a 41,336 square foot retail store and leased to Barnes & Noble.
Closing and Summary
Bowling, while popular with its customers, has had a much more reserved response from lenders. The industry has been on a diversification movement over the past decade to reduce its reliance on traditional league bowlers. An emphasis on open play including birthday parties, corporate events, fundraisers, and other special events has changed the customer base. New bright colors, glow-in-the-dark carpet and furniture, specialized lighting, and music have transformed the bowling environment. Today, the average bowlers is more likely to be a college educated professional than a blue collar factory worker. Many of the older traditional "bowling alleys” have closed with most of the remaining facilities upgrading into "bowling centers”. New "family entertainment centers” with bowling as their main venue have been built with laser tag, mini-golf, redemption games and other attractions to attract the upscale customers.
These changes have had a positive impact on the health of the industry. The default rate as measured by the RMA statistics, shows a decline from 5.5% to 1.82% between the year ending 4/30/09 and 4/30/11. Over the ten year period ending 9/30/11 the SBA reported a default rate on its bowling loans in the 26th percentile and a charge off rate in the 13th percentile.
Underwriting bowling loans remains challenging and going concern values are difficult for appraisers to determine due to a lack of easily accessible data. The small size of the industry also limits internal data for most underwriting departments. However, the BPAA Benchmark Study provides the good detailed data and there are other national studies that provide useful information.
Resolution of defaulted bowling loans is also a challenge. Liquor license liability, if a center remains open while owned by a bank, can be a serious obstacle. There is also the risk of loss to collateral value and a longer marketing period for a closed center compared to one generating revenue and cash flow. Several lenders have operated a bowling center followed by a successful sale and others have closed a defaulted center and successfully sold the building for conversion to an alternative use. There have also been centers closed that have remained unsold for an extended period time. A lender may want to have an industry expert provide advice prior to making this decision.
Overall, bowling centers can provide profitable loans for most lenders. The risk of default is low and has been improving. In addition, there is a strong demand for operating bowling centers. Finding enough data to make an informed decision may be the biggest obstacle to understanding the industry.