The boom in ‘tourist traps’ – here’s a way to play it

Lausanne’s Olympic Museum (built in Britain)

Leaving the new Olympic Museum in Lausanne, Switzerland, you’re left in no doubt about how well you compare to an Olympic-standard athlete. You can lose a race to a hologram of Usain Bolt, test your hand-eye coordination against Roger Federer or compare your diet to that of Michael Phelps.

If sport’s not your thing, why not try the Museum of Broken Relationships in Zagreb, the Museum of the Holy Souls in Purgatory in Rome, or the Museum of Burnt Food in the US?

They’re all part of a global trend: tourist attractions are getting fancier, and they’re attracting lots more visitors.

The number of new museums has jumped by 111% in the past 20 years, and about 850 million people visited American museums in 2012. That’s more than all big-league sporting events and theme parks combined.

Today, I want to tell you about a York-based company which is profiting from this global boom.

The museum factory

Paragon Entertainment (PEL) won the £7m contract to completely revamp the Lausanne Olympic Museum site back in 2012. With more than a quarter of a million annual visitors, it’s Lausanne’s most popular museum.

The IOC wanted a single project manager to oversee the rebuilding and redesign of their museum and Paragon took the project all the way from concept to hand-over. The entire museum was built off-site in the UK and then trucked down to Switzerland, where it was put together over five months.

One of the reasons why Paragon wins this type of work is because it’s got over 25 years’ experience in designing and building visitor attractions. The Jorvik Viking museum in York was one of its early projects and is no doubt familiar to many families with young children.

It’s also a good example of how museums have changed since I was a child. The educational element is still there, but it’s presented in a much more entertaining way. Full use is made of design and technology to produce an engaging, interactive experience.

Paragon has worked on over 1,000 attractions and occupies a specialist niche within the construction and fit-out industry. About half their work involves implementing a client’s designs. The other half involves varying degrees of creative input, using Paragon’s experience of what works well in this sector. As a result, Paragon tends to earn better margins than a regular building industry contractor.

The bulk of Paragon’s £10m revenues comes from this work. Last year was strong and the order book is healthy. But the company has ambitions to move up the value chain.

Why has the share disappointed?

Operating a successful attraction can be very lucrative, if you get it right. At the pinnacle, there is Disney with decades of experience in managing huge theme parks based on their own intellectual property.

Closer to home, Merlin Entertainments recently listed in London with a £3bn-plus valuation. Merlin operates a hundred attractions including Legoland, Madame Tussauds and the London Eye.

Unfortunately, Paragon’s early move into the attraction business has been less successful. It operates the Quest family leisure attraction in the Merry Hill shopping centre in Birmingham.

This consists of five separate attractions which have experienced mixed results. The capital investment has been written down and the facility is not profitable yet.

CEO Mark Pyrah thinks he has a couple of concepts that will prove to be winners, however. Yu Kids is a Japanese soft play concept for young children. This is a classier alternative to the rather smelly ball pits and safe climbing areas I remember enduring when our boys were toddlers.

There are 350 Yu Kids in Japan and Paragon is planning a chain of them in the UK, having operated one at the Merry Hill site. Rolling out a successful consumer concept can be very lucrative; but it costs money – so Paragon will presumably have to raise funds at some point.

Paragon holds the rights for the Yu Kids brand in Europe and Russia. So as well as developing its own sites, it can license the product for other people to operate. Paragon also holds the rights for Hasbro’s Nerf combat game – another attraction at their Merry Hill Quest site. Three adventure parks in the UK have already bought a licence.

So, Paragon has some interesting prospects for building new revenue streams alongside its established visitor attraction design and fit-out business.

Currently trading at 4.4p, the shares have been a disappointing investment though. This reflects the poor performance of Quest. Management will need to prove it can open and operate successful Yu Kids in order to attract the capital needed to fund a full roll-out.

But this is a growing sector and we’re happy to open our wallets and treat the family to a good-quality experience. The opportunity is there for Paragon, if they can get it right.

This article is taken from our FREE penny share investment email Penny Sleuth.
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