Strategy for Accountants Winter 2021 - Part 2

1. University of Winnipeg

Strategy For Accountants Winter 2021 - Part 2

Michael Breward BUS-4920

Strategy For Accountants Winter 2021 - Part 2 BUS-4920 Michael Breward University of Winnipeg

Table of Contents

CircusTrix: The Ups and Downs of International Expansion...... 5

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CIRCUSTRIX: THE UPS AND DOWNS OF INTERNATIONAL EXPANSION

Simon Greathead, Case Lawrence, and Jonathan Richards wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality.

This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com.

Case Lawrence founded CircusTrix Trampoline Parks (CircusTrix) after first experiencing an indoor trampoline park in San Francisco, California, in 2011. Less than five years later, his business had grown to more than 28 facilities worldwide, grossing US$24.5 million1 in 2014 alone (see Exhibit 1). Lawrence had originally expanded internationally to maintain his first-mover status in the emerging extreme recreation industry, but now he was facing a problem that could derail the company’s international growth for years to come.

It was the end of February 2015. Earlier that month, a customer in the brand new CircusTrix park in Edinburgh, Scotland, had injured himself and blamed CircusTrix. As a result, city officials had demanded that Lawrence close the facility and file for additional permits—a descent into a bureaucratic nightmare that Lawrence was sure would never end—effectively shutting him down. Worse still, he had another park in Glasgow, Scotland, scheduled to open in just over two weeks, on April 15, 2015.

In reviewing the situation, Lawrence realized that he needed to amend his strategy for entering new markets. Use outside these parameters is a copyright violation. He needed a better way to analyze foreign markets to identify the young, trendsetter crowd that formed his target audience. He also needed to understand how to work with the customs and cultures of different people, and he needed to act right away. The public relations issue was threatening to cost him not only his brand new operations in the United Kingdom, but likely also the additional upcoming locations in Germany, France, and Holland.

CASE LAWRENCE

Lawrence grew up in Central California but left to attend college at Brigham Young University (BYU) in Provo, Utah, where he majored in American studies. After BYU, Lawrence attended Duke University in North Carolina to study law. He graduated in 2000 with a doctorate in jurisprudence. For use only in the course Strategy Accountants at University of Winnipeg taught by Michael Breward from January 01, 2021 to April 30, 2021. Realizing that he missed his childhood home, Lawrence decided to move his family back home to California. In the Silicon Valley area, Lawrence signed on with a venture law group in Menlo Park, where

1 All currency amounts are in US$.

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he gained hands-on experience with growing businesses. Then, as real estate values across the nation started to rise in the early 2000s, Lawrence saw an opportunity in commercial real estate development and made immediate investments that saw great success.

Unfortunately, the Great Recession of 2008 wiped out his property development company in a matter of months. For the next two years, Lawrence was on the edge of bankruptcy, spending much of his time negotiating with banks. During that time, Lawrence also recognized warning signs that property values weren’t going to rebound quickly, so he decided to find a new outlet for his skills.

After two years of fighting bankruptcy, Lawrence took a break from business to spend some time with his boys. He took his kids to see the San Francisco Giants play baseball at their home park. A good friend recommended that during the trip, Lawrence also take his boys to a trampoline park that had opened recently. Lawrence revised his plans, and he and his boys went to the park before the baseball game. They had so much fun that they returned to jump again after the game. Lawrence recalled the experience:

I’d never experienced anything quite like it before. The best part was the endorphin high of the physical effort combined with the socio-emotional connection with my boys. But I could also tell that this had the potential to be so much more than that. My creative juices immediately began to flow as I envisioned a version of the trampoline-park experience that was even more eclectic and could simultaneously combine physical, social, aesthetic, and musical experiences. I recognized the building blocks of a novel, winning formula.

His boys were equally enthusiastic about the experience and talked about it the whole way home. That was when Lawrence decided on his next business move.

CIRCUSTRIX TRAMPOLINE PARKS

In 2011, Lawrence founded his new company, CircusTrix, and with investment backing from friends, family, and a few angel investors, opened his first trampoline park in Fresno, California. The park was an instant success, earning almost $2 million dollars in the first year. The park was so successful, in fact, that

Lawrence was able to open a second park in Durham, North Carolina, just six months later. Use outside these parameters is a copyright violation.

Rolling the investment from each successful park into the next, Lawrence was able to leverage the investments of friends and family into five separate, strategically placed parks. Then, through a mutual acquaintance, he met Jason Peery of Peery Partners, a venture capital firm in Palo Alto, California. Peery took an interest and became CircusTrix’s first institutional investor. With that investment, Lawrence had the necessary capital for rapid growth, and CircusTrix spread from state to state, cherry-picking affluent, metropolitan areas and opening a total of 23 different parks in just three years (see Exhibit 2). Each of the parks was opened according to specific selection criteria (see Exhibit 3).

Drawing on his legal training, Lawrence strategically founded each location in the United States as a different limited liability company (LLC) in order to protect himself, his investors, and the rest of the business umbrella from legal problems at any of the individual parks. He knew how prone to lawsuits

Americans could be, and he wanted to minimize any issues before they could even occur. For use only in the course Strategy Accountants at University of Winnipeg taught by Michael Breward from January 01, 2021 to April 30, 2021.

This individual-LLC approach also gave Lawrence the chance to experiment with different branding techniques and theming elements at each new location. By the time he had jumped from the west coast to the eastern states and spread through the southern states, he had a wealth of insight and experience in the

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trampoline park industry. He also found that having separate LLCs for each park gave him the opportunity to develop a separate social media presence for each. That meant more social media hits, likes, tweets, and shares for the overall portfolio of businesses, which was important for the target audience.

Meet Landon

One of the key factors to CircusTrix’s success came through heavy market research into the target audience. Lawrence went so far as to put a name (Landon) and face on the target demographic. Landon was a young man (16–25 years old) with few responsibilities and a healthy appetite for adventure.

The obvious question was: Why Landon? Why not Wyatt (male, age 8), Emma (female, age 12), or Robyn (soccer mom, age 37)? After all, Robyn held the purse strings for the family, so should CircusTrix not go after the money?

The reasoning was that Landon was the trendsetter, the influencer. He was the guy who tried something new and then raved about it online to his family and friends. Once Landon was sold, he would bring his friends—or maybe Wyatt and Emma (his siblings)—along for the fun. Landon also established the norms of pop culture, and pop culture determined what Robyn did with her kids. Landon may have been fictitious, but he was also one of the key elements to CircusTrix’s success.

The Next Move

With so much success in his domestic market, Lawrence felt like he had the experience and knowledge to go global. Trampoline parks were a huge success in the United States, but the best markets were being taken quickly. CircusTrix’s competition used a franchise model that encouraged independent operators to open new parks in heavily populated areas, and the only real barrier to entry was the necessary capital infusion to lease a building and purchase equipment. This left second-tier locations largely available, but entering those markets required additional research and planning to ensure success.

With the domestic market slowing down, Lawrence decided to put additional domestic expansion on hold Use outside these parameters is a copyright violation. and get ahead of the competition by taking the parks international. To enter this next phase of growth, he went back to Peery Partners to show them that there was money to be made on riding the wave of what Landon liked.

GOING GLOBAL

When looking at how to move into the international space, Lawrence took a moment to consider his options in terms of entrance strategies. The major options available to him were foreign direct investment, joint venture, or franchising. Each approach came with its own set of pros and cons, but none of them seemed like it would be a make-or-break decision for the company.

Lawrence decided to take the foreign direct investment approach. He felt like his personal experience would For use only in the course Strategy Accountants at University of Winnipeg taught by Michael Breward from January 01, 2021 to April 30, 2021. give him the agility to react to different conditions and anticipate issues before they became problems. He also wanted to maintain control of the brand and the growth strategy. He knew what it took to reach Landon, and that competitive advantage was not something he was willing to give up.

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The Rise of Ryze Trampolines

Lawrence did try something new with the international parks. In the past, each park had been branded individually (see Exhibit 4). That had worked well in the United States where there was a growing buzz around trampoline parks, but that same buzz had not yet reached outside the United States.

For the foreign venture, Lawrence decided to build a unified, global brand: Ryze. He wanted to concentrate all his international resources into building hype around just one brand, rather than two dozen. He also saw it as an opportunity for such a young industry to legitimize trampoline parks in general.

In addition to deciding how to enter a foreign country, Lawrence needed to decide which country to enter. Drawing on his experience with Landon as a trendsetter, he decided to go to an international business nerve centre. He wanted to enter a city that had an active, young population that followed pop culture— specifically U.S. pop culture. In particular, he wanted a destination where he could avoid localization as much as possible, so the local population needed to be fluent in English so that branding and marketing could all be done in English. Hong Kong was the answer.

Going Far East

Having a unified brand meant that Ryze could not afford mistakes as it entered foreign markets because a misstep could tarnish the global brand. At one point, Lawrence worried because he could not get a Hong Kong official to come and certify the building for occupancy limits. When he asked his builder, however, he found out that the general contractor made that certification; the culture was unexpectedly welcoming for business, even more so than the United States.

Once construction was underway, Lawrence started an Internet and social-media campaign to stir up interest in the park ahead of its opening. Ultimately, Ryze of Hong Kong opened its doors in July 2014, as Lawrence remembers:

I was sitting at a little café across the street just before the grand opening, watching the subway

entrance. We were getting ready to open the doors, and I was getting ready to panic—nobody was Use outside these parameters is a copyright violation. waiting. Then, just minutes before the opening, a surge of people came up from the subway to check out the park.

Ryze of Hong Kong broke all Lawrence’s previous records, earning over $500,000 in just the first month. The people of Hong Kong seemed to love the concept, and their love helped to heighten the energy and buzz surrounding Ryze and its mission to “create and operate the world’s most awesome trampoline parks.” Boosted by that success, Lawrence knew it was time to push forward and continue to expand—this time to a country more like his home market.

THE EUROPEAN MARKET

The next target for the global Ryze brand was Europe, again focusing on places where people spoke For use only in the course Strategy Accountants at University of Winnipeg taught by Michael Breward from January 01, 2021 to April 30, 2021. adequate English. Leveraging his understanding of, and experience with, real estate markets, Lawrence began scouring the continent for suitable locations. As with Hong Kong, he wanted places with good traffic, good visibility, and the right blend of young people with disposable income. He started looking in Madrid, Paris, London, Berlin, and more.

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Ultimately, he decided to start with locations in Edinburgh and Glasgow, Scotland. Both fit the target for the kind of metropolitan area necessary to make the investment worthwhile, and Scotland was an English- speaking country that would require little-to-no localization. With the two sites chosen, Ryze went to work in getting them developed.

Construction went smoothly, and the Edinburgh site opened its doors on schedule in January 2015 to a wave of hype similar to Hong Kong. Around 26,000 people showed up in the first three weeks. Just like with Hong Kong, the formula was a rave success.

Trouble across the Pond

The success was short lived. Three weeks later, Lawrence received a call from a reporter at the British Broadcasting Corporation. His first thought was that they wanted to spotlight the new phenomenon, but that changed when he was asked what he knew about the serious injury at his facility the week before. Nothing came immediately to mind.

As it turns out, a man had gone to the park and injured his neck while jumping. According to the victim, Ryze employees had lifted and moved him after he had lain down to recover from the pain. He claimed that those employees had actually further injured him and that the facility was a danger to society. Lawrence recalled:

At first, I couldn’t believe what was happening. We’d documented everything—all 102 incidents— from rug burns to sprains and strains. There just wasn’t anything that serious going on, and our incident rate was way lower than “normal” sports like baseball or soccer. I couldn’t figure out what merited a call from the news.

That call turned into a news article that misrepresented the statements Lawrence had made on the phone. In response, Lawrence pulled surveillance footage that showed the alleged victim jumping, then pausing with a look of pain before walking himself off the trampolines, out the door, and into his car. Confronted with the evidence, the so-called victim recanted his attack, but the damage was already done.

Shortly thereafter, the Edinburgh city council showed up to perform a spot inspection of the facility. They Use outside these parameters is a copyright violation. found a drink machine in the building for which Ryze had failed to submit proper permitting paperwork. Rather than issue a fine to the company and demand that the drink machine be licensed or removed, the city council demanded a complete shutdown of the facility. Lawrence had no choice but to comply.

Was Landon Not Enough?

Lawrence had gone into Europe via Scotland because it seemed similar to the United States. Lawrence knew who his target audience was, Scotland seemed to fit the bill, and the opening numbers proved that he was getting through. Landon was working just as well in Edinburgh as he had in Hong Kong or the United States—as proven by the demand—but it was not enough. Was there something else in the United Kingdom that was different than in the United States?

For use only in the course Strategy Accountants at University of Winnipeg taught by Michael Breward from January 01, 2021 to April 30, 2021. What Lawrence found was a populace that spoke the same language but had an entirely different culture. Unlike the individualistic Americans he was used to, it seemed that the Scots deferred to a very paternalistic government backed by a very hostile, almost anti-American media. Lawrence felt blindsided by the anger that people expressed, especially considering that the so-called victim had been exposed and retracted his claims.

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The social media fallout was equally complicated. Lawrence found a roughly equal split between Scots who were for or against him. About half seemed to consider Ryze to be just another greedy, American company that had come to steal the hard-earned dollars of the British without concern for customer safety. The other half felt like the first half was overreacting and needed go actually try out the trampoline park.

Tactical Retreat

As he sidelined Edinburgh, Lawrence realized that there were more dimensions to consider about a location than just whether the people spoke the same language. The citizens of Hong Kong were very different from Americans, yet had been open to the business and new experience. The Scots, on the other hand, seemed more like Americans on the surface but were proving to be antagonistic and hard to work with.

The problems in Edinburgh showed Lawrence that he hadn’t been focusing on a broad enough picture of foreign markets. He’d looked at the economic status of the area and the available technology for the business, but he’d grossly underestimated the political environment and socio-cultural reality of the area. Now he was realizing that all four factors needed consideration in successful foreign ventures. If he was going to be successful, he needed to do a more thorough analysis of all four factors before he entered any new markets—or tried to re-open in Scotland.

LOOKING AHEAD

Lawrence considered his situation and sighed. Demand in Scotland had been proven in those first few weeks, and Edinburgh was just the first in a number of different European markets that Ryze was already entering. To lose out now wouldn’t just cost CircusTrix the Scottish market; the public relations issue could also cost him the additional three European locations (Germany, France, and Holland) that were already under development—a crippling blow that would set the business back years and erase its first-mover advantage.

He had to gather more information, and he needed to move quickly before his window of opportunity in Europe closed—maybe forever. If he wanted to wrest success from the jaws of defeat, he was going to need

to know where he was going, and that meant more than simply choosing ideal real estate and planting an Use outside these parameters is a copyright violation. awesome idea on it. He needed a better understanding of the British (the Scots in particular) and how he could interact with them in a more positive way, despite the cumbersome bureaucracy and distrustful culture.

Choosing new markets in the hopes of finding more Americans was not the right way forward. He needed to develop a strategy for identifying the markets where he could find the international Landons. Most importantly, he needed to take that information and use it to reformulate his expansion strategy before it was too late.

For use only in the course Strategy Accountants at University of Winnipeg taught by Michael Breward from January 01, 2021 to April 30, 2021.

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EXHIBIT 1: SELECTED FINANCIAL DATA (US$ MILLIONS)

Income Statement 2013 2014 Revenue $11.0 $24.5

Operating Expenses Salaries and Benefits 2.1 5.1 Lease Expenses 0.9 3.1 Insurance 0.6 1.6 Advertising 0.2 0.2 General and Administrative 1.3 2.0 Miscellaneous 1.2 3.6 Corporate - 0.9 Total Operating Expenses $6.3 $16.5

EBITDA $4.7 $8.0

Balance Sheet 2014 Assets CURRENT ASSETS Cash $3.0 Accounts Receivable 0.3 Other Current Assets 0.7 Total Current Assets $3.9

OTHER ASSETS Property and Equipment, net $19.0 Other Assets 1.6

Total Assets $24.5

Liabilities and Equity CURRENT LIABILITIES Use outside these parameters is a copyright violation. Accounts Payable $0.4 Deferred Revenue 0.6 Other Current Expenses 2.9 Total Current Liabilities $3.9

OTHER LIABILITIES Capital Lease $0.6 Deferred Rent 1.6

Members’ Equity $18.4

Total Liabilities and Members’ Equity $24.5

Note: Figures given as totals are accurate; apparent summation error is due to rounding; EBITDA = earnings before interest, taxes, depreciation, and amortization. Source: Company documents. For use only in the course Strategy Accountants at University of Winnipeg taught by Michael Breward from January 01, 2021 to April 30, 2021.

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EXHIBIT 2: MAPS, LOCATIONS, AND OPENING DATES FOR PARKS

Park Branding Month/Year Opened Fresno, CA Skywalk October 2011 Durham, NC DefyGravity May 2012 Albuquerque, NM Gravity Park December 2012 Birmingham, AL Airwalk January 2013 Richmond, VA Jumpology March 2013 Knoxville, TN Jump Jam July 2013 Greenville, SC Gravitopia September 2013 Chesapeake, VA Cloud9 October 2013 Columbia, SC Hiwire November 2013 San Antonio, TX Thin Air May 2014 Raleigh, NC DefyGravity June 2014 Huntsville, AL Shakalaka July 2014 Chattanooga, TN Superfly July 2014 Charlotte, NC DefyGravity July 2014 Hong Kong, China Ryze July 2014 Rogers, AR Highrise October 2014 Las Vegas, NV Gravady November 2014 New Orleans, LA Sector 6 November 2014 Wilmington, NC DefyGravity December 2014 Edinburgh, Scotland Ryze January 2015

Glasgow, Scotland Ryze April 2015 Use outside these parameters is a copyright violation. Baton Rouge, LA Area 51 April 2015 Louisville, KY House of Boom May 2015 Augusta, GA Air Strike May 2015 Nashville, TN Above All June 2015 Jackson, MS High Heaven October 2015

Source: Company documents.

EXHIBIT 3: PARK SELECTION CRITERIA In the United States:  Market service areas (MSAs) with population above 400,000 that do not currently have a park  MSAs with population above 1,000,000 with no more than one existing park

 MSAs with population above 2,000,000 with no more than two existing parks For use only in the course Strategy Accountants at University of Winnipeg taught by Michael Breward from January 01, 2021 to April 30, 2021.

Internationally:  MSAs with English as primary or secondary language

Source: Company documents.

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EXHIBIT 4: SAMPLE PARK ATTRACTIONS

Gravady in Las Vegas, Nevada

Aerial Ninja Obstacle Course

Use outside these parameters is a copyright violation.

Source: Company documents. For use only in the course Strategy Accountants at University of Winnipeg taught by Michael Breward from January 01, 2021 to April 30, 2021.

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