Cineplex looks to channel Dave and Buster’s with “The Rec Room”

On Monday, Cineplex (Cineplex Stock Quote, Chart, News: TSX:CGX) announced it will take a left turn from its theatre business and open a string of entertainment destinations called “The Rec Room”. The venues, which the company expects to roll out in about 10-15 locations in Canada, will feature “luxury bowling, billiards, shuffleboard and ping pong”, as well as musical acts and a sports bar style atmosphere to watch games.

The first “Rec Room”, a 40,000 sq foot location adjacent to the Cineplex theatre in Edmonton, will open later this year.

“While variations of this concept have been rolled out on a wider scale in the U.S., our research shows a significant opportunity to develop and grow this business on a national scale in Canada,” said Cineplex Entertainment boss Ellis Jacob. “Cineplex is well positioned to leverage existing entertainment, gaming, food service, digital media and operational capabilities to bring this concept to life.”

So will Canadians flock to the Cineplex’s “Rec Room’?

“In our view, this initiative makes sense,” says Canaccord Genuity analyst Aravinda Galappatthige, who thinks the idea “…fits well with the company’s modus operandi. It leverages Cineplex’s expertise in gaming, food service etc., to exploit a larger opportunity.” In a research update to clients this week, Galappatthige said he expects that Cineplex will roll out about four “Rec Rooms” a year, and that each will generate about $10-million in annual revenue.

Last year, the Wall Street journal reported that Cineplex had partnered with private equity firm Onex Corp. to submit a (US) $1-billion offer for Dave and Buster’s.

Instead, Dave and Buster’s decided to launch its second attempt at an IPO. Its October offering raised the company $94.1 million in a transaction that valued it at $625.4 million. The company’s valuation has since ballooned to more than $1.1-billion on the back of a share price that has nearly doubled in the weeks since its IPO.

Dave and Buster’s management thinks the market for its offering has room to grow both in the U.S. and Canada. In its most recent annual report, the company said it saw runway to nearly triple its footprint.

“We believe the Dave & Buster’s brand is significantly under-penetrated, with internal studies and third-party research suggesting a total store universe in the United States and Canada in excess of 200 stores (including our 68 existing stores), approximately three times our current store base”.

Dave and Buster’s was launched in Dallas in 1982 by David Corriveau and James “Buster” Corley. Currently, the company has just one location in Canada, a 65,000 square foot Vaughan, Ontario space.

The move by Cineplex could be seen as seizing a clear market opportunity, but it must also be regarded as a response to a core business that is struggling. The company’s third quarter profit fell 39% after a weak summer box office that saw attendance fall by more than 5%.

Cineplex could learn from Dave and Buster’s rollout to date. That company’s expansion shows that while it is happy to open a location in Hollywood or Miami, it is also not afraid of smaller towns such as Addison, Illinois, Maple Grove, Minnesota, or Hilliard, Ohio. Cineplex could presumably do well in locations in which entertainment options are limited.

There’s also another thing going for Cineplex’s venture: weather. “We do believe we have experienced some unfavorable impacts due to the mild winter experienced in many parts of the country,” said Dave and Buster’s in response to a Business Insider piece on the mild winter of 2011.

It’s currently minus 19C in Fort McMurray, Alberta.It’s minus 7C in Kanata, Ontario. And it’s minus 14C in Chicoutimi, Quebec, all numbers that bode well for those selling indoor entertainment.

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