A-1 Lanes and the currency crisis of the East Asian tigers *.

On July 2, 1997, Rick Baker, the president and founder of A-1 Lanes (a manufacturer and an international supplier of wood and synthetic bowling lanes), was having his morning coffee when he was devastated to learn that Thailand had devalued its currency, the baht, by 11%. Baker had an uneasy feeling there would be a domino effect across all countries in Asia because their economies were interrelated. If that happened, Baker wondered how it would affect the future of his company.

Baker realized that the company faced several critical issues. First, 80% of A-l's sales were derived from countries in and around the Asian Pacific Rim. Second, the company had over $1 million in accounts receivable from this region. Third, in 1996 the company had taken out a loan for $500,000 on a new manufacturing facility to capitalize on the popularity and growth of bowling centers in Korea, China, and Taiwan.

The combination of the above issues, in conjunction with the cut-throat competition within the bowling equipment industry, placed Baker in a position to make a critical decision about the future of his company. He narrowed his decision to three options: (1) liquidate his company, (2) sell the company, or (3) stay in business and try to weather the impending storm.

Company Background

In 1985, Baker and two investors founded A-1 Lanes in a chicken house and barn in Rusk, Texas. The company's main products were high-grade wood and technologically advanced synthetic bowling lanes for domestic and international markets. According to Baker, "The key to our success is the quality of the wood and the advanced synthetic design of our bowling lanes, supported with responsive service, operational efficiencies, and proven accomplishments at penetrating international markets."

Although the company began with high expectations, A-I Lanes quickly discovered that locally owned bowling centers across the United States did not have the financial resources to replace existing lanes. Instead, owners would simply sand the lanes. To complicate matters, competitors within the industry developed a synthetic overlay for existing lanes. For example, Brunswick developed a cost-effective way of refurbishing worn and damaged wood lanes that prolonged their service life by as much as 10 years. Rather than tearing out and replacing existing lanes, bowling centers could sand them down and overlay the wood with a synthetic resin, thereby restoring the old lanes to industry standards.

Because of the weakened demand for wood replacement of bowling lanes, A-1 began to concentrate on new bowling lane sales in international markets. According to Baker, "We pursued international markets because the margins were better, receivables were more reliable, and the additional volume meant a healthier bottom line." As a result, A-1 grew and moved operations into a vacant 34,000-square foot metal building in 1987.

In the same year, A-1 Lanes began to establish relationships with distributors in other parts of the world (e.g., Mendes, a Canadian marketer of bowling lanes). In 1988, Baker and his investors forged a partnership with a company called Dacos, an established distributor of bowling equipment and accessories that was based in Europe and Korea. With a source for U.S. manufactured lanes, Dacos could offer a complete turn-key package to bowling center owners and developers all over the world. In turn, the arrangement enabled A-1 to compete directly with the largest firms in the industry, Brunswick and American Machine Foundry (AMF). It also gave A-1 an advantage over smaller competitors in the United States because those firms lacked similar distribution channels and presence in Europe and Asia.

The Bowling Industry

Archeologists discovered when they found pins in a child's tomb that bowling dates back to ancient Egypt. The sport expanded in Europe in the early 1900s, but its popularity in the United States did not thrive until after World War II. In the 1950s, television embraced bowling and the automatic pin spotter was invented. The game grew dramatically in the United States and eventually peaked in the 1960s. New markets emerged in Australia and Mexico, as well as in other Latin American countries. By the mid- 1970s, the bowling boom had spread into Japan. Russia followed suit by opening its first bowling center in 1976. Interest in bowling also grew in China. The bowling boom spread into Thailand and the Asia Pacific regions during the early 1990s.

By the 1990s, bowling comprised two main industries. One involved the ownership and operation of bowling centers. The other was the manufacture of bowling equipment used in bowling centers or by bowlers. These manufactured items included automatic pin spotters, computerized automatic scoring systems, wood and synthetic bowling lanes, lane maintenance systems, masking panes, ball returns, seating, bumper bowling systems, replacement and maintenance parts and operating supplies such as spare parts, pins, lane oils, bowling balls, bowling shoes, and other bowling accessories.

In 1996, estimates were that more than 100 million people in more than 90 countries bowled at least one game a year and bowlers in the United States spent approximately $4 billion annually on lane fees, equipment and supplies, uniforms, and food and beverage purchased within bowling centers. (1) More than 53 million Americans patronized the country's bowling centers every year, making tenpin bowling the number one indoor participation sport in the United States. (2)

The Bowling Industry in the United States

During the peak years of bowling in the 1960s and early 1970s, bowling centers were being constructed almost overnight across the country. During the early to mid-1970s, white American blue-collar workers (the primary clientele of the bowling industry) moved to the suburbs, away from the city neighborhoods, where most of the bowling centers had been built. Bowling began to open facilities in the suburbs while maintaining their existing centers in the cities. This strategy was not successful due to the lifestyle changes of the blue-collar workers. (3) They were simply less interested in bowling than they had been. (4)

As a result, the new suburban bowling centers were not as successful, while existing bowling centers in the cities became only marginally profitable. The number of bowling centers gradually declined, but the number of lanes increased due to the construction of large new centers and the remodeling of surviving ones. (5) Table 1 shows the historical relationship between the number of centers, lanes, and population in the United States. (6)

In response to the decreasing popularity of bowling, many bowling operators started differentiating their image by renovating their alleys into entertainment centers in the early 1990s. (7) Their strategy was to market to families with children and teenagers by offering childcare, video games, laser lights, lightweight neon-glowing bowling balls, and fog machines. They also devised bumper bowling, in which gutters are filled with plastic tubes to keep the balls on the lane. This strategy proved to be profitable and operators were able to restore their revenues to the levels of the 1960s. (8)

Many analysts thought operators had created a "double-edged sword" by pampering one market segment and alienating another. The upgraded facilities with flashy, loud, and modern atmospheres were the opposite of the dark, quiet, smoky lanes to which league bowlers were accustomed. Evidence indicated that league bowlers, a steady source of revenue for bowling centers, further dwindled due to these changes. (9) A league bowler commented, "The centers have all of these great gimmicks and are giving financial breaks to families and people that really do not bowl that much. Meanwhile, they're raising the prices for league bowlers, the true loyal customers, and driving them away." (10)

The U.S. bowling center industry (see Table 2) was highly fragmented. The top eight operators, including AMF, accounted for less than 10% of U.S. bowling centers. The two largest, AMF and Brunswick Corporation ("Brunswick") owned approximately 340 and 111 U.S. bowling centers, respectively. (11) Four medium-sized chains together accounted for 70 bowling centers. Over 5,300 bowling centers were owned by single-center and small-chain operators, which typically owned four or fewer centers.

By 1997, the U.S. bowling center industry was considered mature and was characterized by a continual contraction in the number of bowling centers. Nevertheless, the decreasing lineage (games per lane per day) was offset by an increasing average price per game and by revenue from ancillary sources. Bowling centers derived their revenues from bowling (60.2%), food and beverage (25.4%), (12) and other sources such as rentals, amusement games, billiards, and pro shops (14.4%). (13)

According to the 1997 Economic Census, 619 establishments existed with 17,109 employees in the hardwood dimension and flooring mills classification (NAICS 321912). (14) However, there were few companies in the bowling lane and equipment supply business (see Table 3). (15) Some of the competitors manufactured a broad range of products; others produced only a specific line of equipment. All competitors were active in both the domestic and the international markets.