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Why EveryProject Should Have a Market Study and Feasibility Aanalisys: Peter M Kaanapu Chief Economist, Apogee Attractions

This paper is presented to outline in some detail the methodology that Apogee employs in conducting a feasibility study for a tourism and entertainment themed project. It is given with the intent to provide an explanation of the process so that our clients can have a clearer understanding of what a marketing/feasibility study involves and how important it is to any project.

The dictionary defines feasible to mean “able to complete”. Given this definition, feasibility can refer to many issues. It can refer to issues such as political feasibility, physical feasibility, timing feasibility, etc. In this discussion, we will only consider two types: market and financial feasibility.
A feasibility study for a themed attraction gives us two essential pieces of information

(1) what is the attendance potential; and

(2) what is the likely financial performance.

The first issue is addressed in the market study segment of the feasibility study.

MARKET STUDY

The market study focuses on the attendance potential of the proposed themed attraction. It has two objectives: (1) to derive physical planning parameters for the facility; and (2) to provide a major factor that forms the basis for revenue projections in the financial analysis.
These key factors are evaluated in a market study:

A. Site features
B. The resident market
C. The tourist market
D. Competition
E. Weather
F. The school year schedule/holiday schedule

 

A. Site Features

There are a number of site features that need to be evaluated in assessing the suitability of a site for a themed attraction.

a) Purchase Price Relative to other land uses such as retail, offices and hotels, themed attractions do not rank as one of the highest and best uses of real estate. Consequently, the search for a suitable site for a themed attraction should not include what would normally be considered a prime site unless, of course, the themed entertainment component is part of a larger mixed-use project and acts as an anchor or major draw for the entire project. Themed attractions cannot compete[compete for what?] with most commercial uses. As will be noted below, site prerequisites for themed attractions do not require prime sites.

b) Site Size and Configuration: The amount of land required to accommodate the facility core, parking lot and support facilities will depend on the scale of the facility development envisioned. Commercial themed attractions require a site in the range of 50,000 m2 (12acres) to 400,000 m2 (100 acres), while public facilities (government sponsored) require smaller sites, perhaps in the range of 20,000 m2 to 50,000 m2 (5 to 12 acres). In any event, our feasibility study will provide general guidelines regarding square meter requirements. Regarding configuration, a square parcel is preferable to an elongated rectangle.

c) Access, Ingress and Egress: Good regional access is a prerequisite for a themed attraction. Proximity to a major thoroughfare is highly desirable. By contrast, superior ingress and egress are not a high priority if these affect the purchase price. For example, if two sites have freeway frontage but one is located at the base of an exit ramp, while the second is located 300 meters (1,000 feet) from the exit ramp, the second site is likely to be preferable since it will probably have a lower purchase price.

d) Visibility: Visibility is desirable but not mandatory. Research has proven that people do not visit themed attractions on impulse; rather, they know beforehand that they are going to attend a themed attraction. The advantage to having good visibility from a major thoroughfare is increased public awareness. Facilities without good visibility are usually required to spend extra marketing dollars to achieve public awareness.

e) Site Constraints: Any potential site should be evaluated to insure that there are no physical constraints that could inhibit or prevent development of the proposed themed attraction. Examples of site constraints include the presence of wetlands, shallow bedrock, and rough terrain.

f) Surrounding Land Uses/Neighbors: A good deal of time and expense can be saved by checking out the environs of a proposed themed attraction site. Some land uses do not make good neighbors, especially if they generate excessive noise, smoke or traffic congestion. Also, the experience of many themed attraction developers has revealed that homeowners do not welcome the presence of a themed attraction in their neighborhood, fearing traffic congestion, noise and light pollution.

 

B. Resident Market

The demographics of a themed attraction’s resident market area are the major factor in generating attendance. Generally, we define the market area for a moderate commercial themed attraction to be a 50-kilometer radius from the proposed site. For public themed attractions, which are often called “family centers, we employ smaller radii, usually 25-kilometers. There are two factors that combine to determine the size of the market area: Facility size and psychographics.

a) Facility Generally, the larger the facility (scale, size and total investment), the longer the attendees’ length of stay (LOS) at the facility. An industry rule of thumb: attendees will travel up to one-fourth of the time that they spend in the facility. Thus, a four-hour length of stay will result in a one-hour drive, or roughly 80 kilometers. Moderate sized attractions usually engender a shorter length of stay, resulting in a shorter driving time.

b) Psychographics or guest mix. Research has revealed that pre-teens and young teens make up a disproportionate percentage of attendance at themed attractions and family aquatic centers. This is also a segment of the population that cannot drive a vehicle, making it dependent on parents or older adolescents for transportation. Moreover, if the driver of the vehicle is not also attending the facility, they will be required to make two trips: one to the facility; and one back home. It is not hard to imagine that the propensity of the driver to provide transportation will decrease as distance between home and the facility increases. In fact, research has revealed that market penetration for themed attraction attendance tends to drop in half for every five miles of distance from home to the facility. This phenomenon, called the “distance decay” factor is not new or unusual: most people are more inclined to patronize shops in their neighborhood more frequently than shops located across town.

In addition to defining a themed attraction’s market area in terms of distance of radii, we also segment the market area into distance bands, making adjustments for the project’s market to compensate for the distance decay factor cited above. For example, if only the total market area is employed in the market study, a single market area penetration rate would be applied to the market area’s population. This calculation would ignore the distribution of the population within the market area and would give equal weight to population densities located 50 KM from the facility and those located 5 KM from the facility. Segmenting the market area into distance bands allows us to adjust market penetration rates according to distance. Thus, the population in the 0 to 5 KM band would be assigned a much higher penetration rate than that in a more distant band.

Having defined the market area and its segments, the market study can proceed with an analysis of demographics. The demographic factors most commonly included in the analysis include the following:

a) Population levels and trends
b) Incomes
c) Age distribution
d) Ethnicity

a. Population The significance of population as a demographic factor is self-evident. More than any other demographic factor, population dictates the attendance potential of a themed attraction. In our analysis, we array population data by distance band based on the recent 2010 Census, with estimates for 2020. Of particular interest in an analysis of population are total market area population, distribution among the various distance bands and the rate of growth or decline in market area population.

b. Income Despite a common assumption, the propensity to attend a themed attraction does not correlate positively with income levels in the market area. Unlike golf, for example, themed attraction attendance is not greater among the more affluent income brackets. If anything, the reverse is the case. Simply put, themed attractions appeal to lower level income families to a greater extent than they do to higher level income families.

c. There is, however, a reason to evaluate income levels within the market area: affordability. Lower incomes may not limit the propensity to attend themed attractions, but the experience must be affordable, both in terms of admission and in-facility spending. We will provide guidelines regarding pricing, based on market area incomes.

d. Age Distribution Again, the need to evaluate age distribution should be self-evident. As previously noted, the young teen and pre-teen age groups are a target market for themed attractions. Consequently, it is imperative that the age distribution of the market area be determined, especially if more than one site (and market area) is under consideration. Of course, a market with a high level of persons under the age of 25 is a positive attribute.

e. Ethnic Composition Ethnicity can be an important issue to analyze. Ex-patriate service personnel in some countries have different income characteristics and time availability compared to local populations. Some ethnic groups, for example, tend to attend themed attractions as family units. Their needs differ from those of other ethnic groups who tend to come in smaller groups. We are of the opinion that it is important to know the ethnic composition of a themed attraction’s market if we are to make sound recommendations for the needs of attendees.

 

C. The Tourist Market

Every themed attraction, regardless of location, is likely to draw some portion of its attendance from the tourist market. For purposes of analysis in our studies, we define a tourist as a person that spends at least one night in the market area with proximity to the themed attraction. Included in this definition are leisure travelers as well as persons visiting friends and relatives in the area. For most themed attractions, tourists account for a relatively small percentage of total attendance, although there are a number of tourist destination areas, such as Dubai and Orlando, where tourists account for the majority of attendees at a themed attraction.

Measuring the size of the tourist market is not an exact science; however, an order of magnitude can be derived by applying a little common sense. To begin with, if tourists are staying overnight, they must have a place to stay. By compiling an inventory of overnight lodging accommodations, we can determine the holding capacity of the area for tourists. Some organizations such as Smith Travel Research provide lodging room sales summaries tailored to a defined area that provide room sales by month. With this information, we can get an indication of the magnitude of the market during the effective operating season of our themed attraction. The Tourism Division of most governments will usually provide initial data for this exercise, though we often find we must request them to refine this data so that we can make a more precise estimate. This exercise does not take into account those persons staying with friends and relatives, but often that figure can be determined by reviewing studies and surveys of travel patterns in the market area. Failing that, we can estimate the friends and relatives market as a percent of the local resident market.

 

D. Competition

Competition is a complex issue that is ever changing. The themed attraction industry was born in the mid-1950s. The first facilities to be developed did not have to be concerned with direct competition from other themed attractions, since there were not any. That situation has, of course, changed in many markets. Outdoor themed attractions are now receiving competition from themed attraction resorts (hotels with indoor/outdoor themed attractions). Clearly, attendance projections for a new themed attraction must take these themed attraction resorts into account when they are within the same competitive market area. The studied concept must overcome this initial market competition.

On another level, competition can be considered beneficial. This is certainly true in tourist destination areas that depend on the critical mass of attractions to draw the market to them. In these instances, an area’s attractions work as allies to induce tourists to come to their area rather than a competing area. Once there, however, the various attractions must compete among themselves for the tourists’ leisure dollar.

 

 

E. Weather

Themed attractions are probably more sensitive to weather conditions than any other type of leisure attraction. This experience is only possible if the weather cooperates. If temperatures are too hot or too cool, if the sky is overcast, the themed attraction experience is diminished. Therefore, in evaluating attendance potential for a themed attraction, all of these factors need to be taken into account. In our studies, we include a table that shows monthly weather data for the local area, including normal high and low temperatures, rain days, cloudy days and relative humidity.

The project concept may utilize an indoor facility. This will mitigate temperature issues but will require construction cost and operational adjustments.

 

F. The School Year Schedule

The schedule for local schools is perhaps the most important factor in determining the operating schedule for a themed attraction. As a consequence, the typical operating schedule for a themed attraction consists of less than 100 days per season. Themed attractions are usually open on weekends and holidays, with daily operations throughout most of June, July and August, which correspond to typical world-wide school holidays.

Given an indoor facility that can be operated year-round, an incremental operations season may be required.

Staffing is also a matter of consequence as young adults age 16 to 21 typically provide the majority of part-time staff at themed attractions. Whether in public schools or college, availability of qualified staffing and employment costs will be a concern.

Attendance Projections All of the factors discussed above have a bearing on the attendance potential of a themed attraction. After a thorough analysis of these factors, the market study enters a subjective phase, one that involves estimating market penetration for the defined market area segments and the tourist market. In this process, we construct a model with three sections: (1) an array of population projections for the market area segments and the tourist market; (2) estimates of market penetration for each market segment; and (3) the product of multiplying market segment populations by the corresponding market penetration rates. The model includes projections for five years, beginning with the first year the proposed themed attraction is assumed to open. Usually, first and second year penetration rates are lower than subsequent years, based on the assumption that at least three years are required for the facility to reach stabilized penetration.

Projected Attendance Patterns As previously noted, attendance projections have two purposes: (1) to provide a basis for sizing the facility; and (2) as one of the factors in projecting revenue.

Regarding facility sizing, total annual attendance needs to be reduced to so-called design period attendance. This process involves identifying the facility’s peak month of attendance, usually July, and estimating attendance for that month, which is usually 30 to 35 percent of annual attendance, depending on local conditions. Next, attendance for the peak month is converted to average weekly attendance, usually by dividing monthly attendance by 4.43, the number of days in July. Next, peak day attendance is estimated. The experience of existing facilities has revealed that the peak day, (usually a weekend day), will account for 25 to 30 percent of weekly attendance.

Finally, design period attendance is calculated. Depending on the size of the facility and the anticipated length of stay, design period attendance will equal 50 to 60 percent of peak day attendance. This figure, then, is the factor that is employed to derive facility requirements for the themed attraction. For example, we know that the facility will require at least one parking space for every four people in-facility, plus an allowance for employees and extreme peak days. We also know that the facility will need sufficient food and beverage serving capacity to accommodate 30 to 35 percent of peak in-facility attendance. Most importantly, we know that we will need sufficient entertainment capacity to accommodate up to 80 percent of peak in-facility capacity. It should be noted, however, that capacity calculations may need to be exceeded in smaller facilities to achieve the critical mass of entertainment value and diversity.

 

FINANCIAL ANALYSIS

 

With the derivation of attendance patterns, the market study is complete and the findings can be turned over to the client’s designers so that the site planning process can begin. However, the feasibility analysis is not complete until the financial analysis has been conducted. This analysis involves projections of revenue, operating expenses, net operating income and an assessment of overall feasibility.
A. Revenue Projections

Themed attraction revenue is a product of two factors: (1) attendance; and (2) per capita spending. Attendance projections were discussed above, leaving per capita spending to be discussed here.

The most important point to be appreciated about per capita spending is that the objective is to optimize rather than maximize total spending. In accomplishing this objective, it is critical to understand that entertainment has a measurable value that can be expressed as a per hour cost (six hours multiplied times an hourly rate for an adult ticket price). As an example, most movie theaters in (local city charge) for an adult ticket. Most movies are timed to accommodate a 2 hour block of time thus one entertainment hour is valued at approximately a 2 hour block x cost of ticket.

Simply said, a themed attraction that has the size and scale plus entertainment value to hold attendance for six hours should be priced at approximately (six hours multiplied times an hourly rate for an adult ticket price. The challenge is engendering this level of spending, not greatly exceeding or undershooting it.

We stated above that the object in managing per capita spending is optimization. We need to provide fair value for the price, therefore, to continue to earn the market’s visitation. This is especially critical when we remember that most themed attractions are located in residential markets and depend on repeat business to survive. Thus, it is only prudent to keep the cost of a visit to your themed attraction at a reasonable level. But how is this accomplished?

To answer this question, it is useful to break per capita spending into two generic categories: admissions and in-facility spending. These will be discussed, in turn.

Admission
All themed attractions charge admission as a condition of entry, however facilities almost never have just one admission rate. The top rate is the general admission rate, which is charged to “adults”, or anyone over a certain age limit. In addition to the general admission rate, there are a number of discounted rates, including a child’s general admission, group rates, promotional rates and season passes for individuals and families.

The purpose of having multiple rates is to maximize attendance. Our research has shown that less than half of all attendance at themed attractions is accounted for by general admission entries. Therefore, to maximize attendance, the various discounted rates cited above are offered. In the hotel industry, this practice is called “yield management.” It means that if the customer won’t buy the rack rate room, sell him or her something cheaper. Similar practices are employed in other industries such as the airlines and telephone companies. In the themed attraction industry, it is common practice to formulate a ticket mix budget before the start of the season that lays out the facility’s ticket pricing and objectives for the mix of ticket sales. Generally, the object is to achieve a weighted per capita expenditure for all ticket sales that is 65 to 80 percent of the general admission price.

As previously stated, a themed attraction with a six-hour length of stay should have entertainment value of x dollars. A typical breakdown for percapita spending at a themed attraction is as follows:

General Admission 65% – 80%
Food & Beverage 20% – 35%
Other Rentals 5% – 10%
Merchandise 5% – 20%
Other 5% – 10%
Total 100%

Having estimated the level of per capita spending for the themed attraction, we now need to multiply spending by projected attendance to arrive at projected revenue.
B. Operating Expenses

Operating expenses for a themed attraction are those expenses incurred in the day to day operation of the facility. Operating expenses do not include capital charges such as debt repayment, interest on loans, depreciation or business/income taxes. We usually base operating projections on operating expenses ratios derived from facilities of similar scale. We have found that operating ratios among various facilities are similar, with labor accounting for 20 to 30 percent of revenue, 5 to 10 percent of revenues for marketing, and total operating expenses of 60 to 75 percent of revenues. For indoor facilities however, utilities/power is expected to be a larger element of the expense budget. All of the expense ratios will need to be adjusted to the unique needs of the regional market and business model.

C. Net Operating Income

Net operating income is simply the difference between revenue and operating expenses for a themed attraction. Thus, net operating income is usually 25 to 40 percent of revenue depending on operating issues.

D. Tests of Feasibility

There are several ways to test the feasibility of a proposed themed attraction. The method employed depends on the amount of information available for the feasibility study and the type of project being evaluated, commercial or public.

Measures of Commercial Feasibility
There are several common means of testing feasibility for a commercial themed attraction. These include estimated present value, or IRR, and warranted investment level. Of course, if Sharia financing methods are used, then a unique solution will be required according to the terms of such an agreement.

Warranted Investment Level
A common means of providing a test of feasibility is to calculate the project’s warranted investment level. This methodology is similar to estimating present value except that it only captures the value of a single year, while the estimated present value captures both the income stream of a number of years plus the assumed sale of the property. This method is useful when initial planning estimates are required because capital costs, land assemblage, design plans and construction costs are not known as yet.

Estimated Present Value
A more detailed method is to calculate the project’s present value using either NPV or IRR techniques. This method requires only that we have (1) net operating income projections plus assumptions regarding the applicable capitalization rate to be applied to projected net operating income, and (2) a terminal capitalization rate to be applied to the sale price of the themed attraction after a specified number of years. The estimated present value figure provides the developer with an indication of the level of investment that can be committed to the project and still meet investment objectives.

It becomes obvious that a market/feasibility study is important to any project. Knowing the attendance potential and likely financial performance helps developers determine a project’s viability and gives investors confidence in a project. Without this information, the success a project becomes a more tenuous proposition.

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Peter M Kaanapu
Peter specializes in content, structure, feasibility, strategy, and financing for the real estate, leisure attractions and recreation industry. He is the copyright holder of the Strategic Renewal Process SRP 3 ©, a leading-edge business strategic process that leads to impressive gains in revenue, profits, and market share.
He has assisted numerous clients, both public agencies and private land owners, with market and financial studies for projects as diverse as agricultural development, transportation, real estate, tourism, expansion planning, valuation, bond underwriting sufficiency studies, warranted investment studies, pricing analyses, market assessments, and natural resource development.
Peter is currently Chief Economist for Apogee Attractions