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Toronto Mayor John Tory plays air hockey with Cineplex CEO Ellis Jacob at the opening of the new Rec Room entertainment centre in Toronto.

Cineplex Inc. threw a bash to open the Rec Room entertainment emporium in Toronto last Monday that featured 1,200 guests, a virtual-reality game starring Ghostbusters' Stay Puft Marshmallow Man and an air hockey match that pitted CEO Ellis Jacob against Mayor John Tory.

The party was a hit and Rec Room facilities the size of suburban supermarkets are showing every sign of being Cineplex's next blockbuster, expected to generate 20 per cent annual returns on the company's $150-million investment over the next five years.

So after beating Toronto's mayor in that air hockey match, Mr. Jacob quietly went to work behind the scenes on plans to launch a scaled-down version of The Rec Room concept in a dozen smaller Canadian cities. The growth initiative is all part of Cineplex's strategy of evolving from theatre chain to what Mr. Jacob describes as "an entertainment destination."

The Rec Room combines state-of-the-art electronic games with proven favourites such as pinball and ping-pong, plus crowd-pleasing cuisine that include custom-made doughnuts, wood-cooking pizza and gourmet poutine. Cineplex plans to open 10-15 facilities in Canada's largest cities. The target audience ranges from families to millennials to corporate crowds.

The first Rec Room location, a 60,000 square-foot facility adjacent to a theatre complex in Edmonton, debuted last September and is posting sales that Mr. Jacob said exceed forecasts. The downtown Toronto facility, located in a historic railroad roundhouse from the Rogers Centre, is already booked through 2018 for corporate events. There will be Rec Rooms in Calgary, London, Mississauga and Vancouver by 2019.

Based on strong interest in the initial Rec Room locations, Mr. Jacob said in an interview that Cineplex plans to launch a scaled-down version of the entertainment centres, under a different name, in 10-15 smaller Canadian cities over the next five years. Kingston is likely to be home to the first of these facilities.

"We plan to customize the entertainment experience to our audience," Mr. Jacob said. He said the company's ability to introduce gaming and dining facilities draws on management skills developed as a theatre operator, where Cineplex has increased revenue despite relatively low growth in box-office attendance by rolling out VIP movie screenings and a deeper menu of concession offerings.

Each Rec Room costs between $6-million and $10-million to develop and the experience in Edmonton shows the facilities generate sales of $7-million to 10-million a year. Revenue are equally split between games, which cost anywhere from a buck or two for air hockey and pinball to higher prices on virtual car racing simulators, topping out at $24 for a lengthy session in the Ghostbusters Stay Puft man.

Cinpelex looked to movie tickets and concession sales for $1.2-billion of its $1.5-billion of sales in 2016. Over the next five years, the Rec Room and other non-theatre initiatives, including digital media and gaming, are expected to account for up to 50 per cent of revenue, with profits that match or exceeded the 15 per cent-plus margins that Cineplex earns from its theatre business.

"Cineplex will continue to evolve as growth investments continue to contribute to revenue and cash flow," said a report from BMO Nesbitt Burns analyst Tim Casey that called the Rec Room "Cineplex's next blockbuster." Mr. Casey said: "Digital signage, advertising, Rec Room, gaming, and, in time, eSports will become important drivers."

Cineplex's major competitor in entertainment venues is U.S. chain Dave & Buster's, which has operated in Canada for more than a decade and currently has two locations in the Toronto area. Media reports project the company is considering building up to 14 Canadian facilities. Mr. Casey said Cineplex holds significant advantages in any direct competition with Dave & Buster's, as the Canadian company owns its own game developer, Player One Amusement Group, and Cineplex "enjoys strong and long-standing relationships with Canadian real estate companies, [giving it] first choice on the best locations or new sites."

Cineplex is building the Rec Room and its planned smaller venues at a time when many of the shopping centres that house its theatre complexes are looking for big-names tenants, as big-box retailers close outlets. Mr. Jacob said this dynamic gives Cineplex considerable clout in negotiations with landlords, as opening a new, large entertainment facility brings additional traffic to an established mall.