The Plight of Movie Business

Go Upscale to Survive Comfiest Seat in the House: Struggling Movie Theaters Go Upscale to Survive By Erich Schwartzel | Apr 10, 2018

QUESTIONS: 1. According to the statistics, most of you do not go to the cinema very often. Why not? What do you have against movie theaters? 2. What are movie theaters trying to do to lure you back? Are people like you actually who they are targeting? What seems to be the main demographic that movie theater chains are targeting with their latest refurbishments? 3. In fact, from what you know, how do movie theaters make most of their money? Why do they make so little money from ticket sales? In fact, from a basic Five Forces perspective, why are movie theaters in such a weak position strategically? Explain why all five forces are rather unfavorable! 4. Do the latest changes in movie theaters address this underlying issue? For example, are movie theaters trying to morph into something beyond just being movie theaters? Can they? If so, do these latest attempts offer some prospect for turning the business of cinemas around? Cine Comfiest Seat in the House: Struggling Movie Theaters Go Upscale to Survive PRAIRIE, Wis.—The past and future of moviegoing can be found within one Madison, Wis., highway exit. The abandoned Eastgate Theatre, a 16-screen multiplex where teenagers once lined up on opening night, represents the industry’s struggles. Today, there is an empty Pepsi cup stuck in a dead tree outside and a neighboring Mazda dealership uses the parking lot to store new cars. The Eastgate Theatre in Sun Prairie was closed in 2015 when its owners opened the Palace. PHOTO: LAUREN JUSTICE FOR THE WALL STREET JOURNAL Three miles away, the new Palace Cinema of Sun Prairie features 14 auditoriums equipped with recliners wider than La-Z-Boys, large-format screens and a restaurant that serves entrees such as pesto primavera pasta during movies. The Eastgate squeezed patrons into seats measuring 22 inches across; the Palace has loveseat-style seats close to 5 feet wide. New movie theaters like the Palace feature luxury recliners, dinner options and high-tech sound and screens.PHOTO: LAUREN JUSTICE FOR THE WALL STREET JOURNAL Theater attendance last year fell to its lowest level since 1995, a crisis propelled by the rise of streaming. That is spurring the industry’s biggest changes since the multiplex building boom of the 1990s, when suburban sprawl and a cash-rich Hollywood erected cavernous auditoriums in every kind of neighborhood. Looking for the Next Hit Movie ticket sales are falling, while the growth in screens and ticket prices is stagnating. Sources: National Association of Theatre Owners; Labor Department (inflation adjustment) Today, exhibitors are tearing out seats and replacing them with luxury recliners—fitting fewer overall seats, but creating steadier revenue at higher prices. They’re adding highend drinks and dining options, and sophisticated sound and screens that no home theater could replicate. Special attractions such as virtual-reality sections and child-friendly play areas are extras to entice people to leave their living rooms. “There’s the face of what theaters were at one time,” said Rolando B. Rodriguez, the chief executive of Milwaukee-based Marcus Theatres, gesturing toward Eastgate. “If you’re building a product for the next 20 years, you need to either renovate it or you build new.” Marcus, the nation’s fourth-largest circuit, closed the Eastgate location in 2015 and opened the Palace. The internet has forced nearly every mall-based retailer to retool. Many, from handbags stores to pet foodsellers, have moved upmarket in search of growth. Coach Inc. cut ties with hundreds of department storesand shifted its focus to selling fewer but higher-priced handbags. Starbucks Corp. is building high-end coffee shops that will charge as much as $12 a cup in response to competition from specialty roasters. Boutique clothing stores, facing heavy pressure from the internet, have been turning themselves into destinations, offering everything from high-end restaurants to meditation classes. Movie theaters need to lure customers who have plenty of options to watch at home, and increasingly need a special reason to come out—a big-screen blockbuster or a date-night occasion. Big-budget productions are available onNetflix Inc., and studios continue to shorten the amount of time a movie stays in theaters before becoming available at home, which threatens to push numbers down even more. The nation’s three largest movie chains— AMC Entertainment Holdings Inc.,Regal Entertainment Group and Cinemark Holdings Inc. —have each dedicated hundreds of millions of dollars to the reseating efforts, saying between 40% and 55% of their auditoriums will be eventually renovated. AMC, the world’s largest exhibitor, said 247 of its 640 locations were outfitted with recliner seats at the end of last year. The lobby bar at the Palace. PHOTO: LAUREN JUSTICE FOR THE WALL STREET JOURNAL AMC has reported increased attendance in renovated theaters, especially for weekday screenings that used to play to empty houses. Regal, which has focused on offering moreprofitable food and alcohol options, reported in January that while 2017 box-office revenue fell 2.6%, sales of concessions slipped only 0.3%—a sign that adding chicken panini sandwiches and Stella Artois beer to some locations was working. Investors wonder if consumers will ever return to the movies in the same numbers they once did. People have access to deep libraries of entertainment through Netflix, which plans to spend $8 billion on original and acquired content in 2018 and has indicated it doesn’t view theatrical release as a necessary part of making movies. Other streaming services are gaining popularity, and quality scripted television offers more competition for entertainment hours. Sold OutShares of the biggest movie theater chainshave struggled this year.Sources: FactSet (stocks); the companies (number ofscreens)Note: Screen counts are estimates. %AMC—11,250 screensCineworld (owner of Regal)—9,500screensCinemark—6,000 screensMay ’17Oct.March ’18-70-60-50-40-30-20-10010 Ron Horton, former chief executive of Kansas-based Dickinson Theatres, sold his 169- screen circuit in 2014 after calculating it would cost about $50 million to renovate his 15 locations and keep up with the trends. “It was an expense I wasn’t willing to do,” he said. Dickinson was sold to B&B Theatres, a larger regional chain that has closed underperforming locations and put recliners and fancier food options in more successful auditoriums. Studio Movie Grill , with 30 locations in nine states, is buying dying multiplexes or bigbox locations left behind by bankrupt chains such as Circuit City and Sports Authority and retrofitting them with movie screens, in-theater dining and full-service bars. “You break it down to the studs,” said Brian Schultz, the chief executive. “The Toys ‘R’ Us closures have us super busy right now.” Studio Movie Grill, above in Marietta, Ga., is buying and retrofitting dying multiplexes or big-box locations left behind by bankrupt chains. PHOTO: MIKE MARTIN/SMG In locales such as Monrovia, Calif., near Los Angeles, where Studio Movie Grill retrofitted an older movie house, “People are staying for hours,” he said. Since the newer auditoriums have higher ticket prices and pricier food and drink options, the trend began in affluent neighborhoods but has since migrated to smaller communities where moviegoers treat the outing as a luxury. “You might not be able to go to the Bahamas, but it’s a staycation,” Mr. Schultz said. Regal was acquired by U.K. operator Cineworld Group PLC in December for $3.6 billion. Former No. 4 chain Carmike Cinemas Inc., sold itself to AMC after seeing its market share fall any time a splashier theater opened nearby. VIP Cinema Seating, a New Albany, Miss.-based company, now controls 80% of the market for theater recliners in the U.S. Co-founder Stephen Simons started the company in 2008 after walking the show floor at an exhibitor convention with a friend and noticing that there were few options for auditorium seats. “The U.S. market knew nothing of the premium seat,” and recliners were reserved for special-event sections of auditoriums, he said. The company started with 25 employees working in a 40,000-square-foot facility. Today it has 550 workers in a 600,000-squarefoot space, and has plans this year for a second headquarters in the U.K. and a 150,000- square-foot manufacturing facility in Eastern Europe. The company has installed more than 600,000 recliners around the world in the past decade, at a cost of $600 to $900 per single seat. Annual revenue hit $130 million last year, up from $48 million in 2014, Mr. Simons said, forecasting higher revenue in 2018. Creating the company “was my 17th midlife crisis, so I just gave it a shot,” said Mr. Simons. “As luck would have it, we were prepared to handle” the demand. Some iPic theaters feature lounge seats with wraparound sound technology. PHOTO: JAIME GUILLEN In the 1990s, U.S. theater chains built sprawling multiplexes in response to increased competition from VHS rental stores such as Blockbuster. The number of screens ballooned to more than 36,000 from 25,000. The AMC Grand 24 opened in 1995 in northwest Dallas, a 24-screen, 85,000-square-foot colossus with stadium seating that was once the biggest theater in the country. Moviegoers drove three hours to visit. The layout reinvigorated the industry, and multiplexes with one or two dozen screens sprang up across the suburbs. In many cases, securing a multiplex as an anchor tenant enabled developers to build an entire mall. But overbuilding quickly led to a bust. A wave of bankruptcies hit around 2001, and amid consolidation AMC, Regal and Cinemark emerged as the three biggest chains. The financial crisis in 2008 froze financing for new malls and shopping plazas that would house new theaters. “Our approach used to be, add new and take away the underperforming,” said Mark McDonald, AMC’s executive vice president of global development. “The real-estate crisis told us we need to do more with the real estate we have.” Lounge King VIP Cinema Seating controls 80% of the U.S. market for luxury recliners for movie theaters. Source: the company In early 2011, AMC decided to try out a concept it had seen in some European chains. It added plush recliners into four of the 12 auditoriums at the AMC Lakewood Mall theater outside Tacoma, Wash., reducing capacity in each by two-thirds. The reconfigured auditoriums operated alongside unrenovated ones, as a controlled experiment. Ticket prices initially remained the same. AMC noticed that some customers were deciding what to see based on which auditorium it was playing in, rather than the movie itself. Ticket sales rose for weeknight showings, a typically dead time for most theaters. A traditional movie theater sees attendance decline 1% or 2% a year as the facility ages, Mr. McDonald said. Attendance overall at Lakewood doubled within 18 months of all auditoriums getting the recliners. In 2014, AMC said it would take the reseating strategy nationwide and spend $600 million to revamp 1,800 auditoriums, about a third of its total at the time, backed by its new majority shareholder, China’s Dalian Wanda Group Corp. Many of the multiplexes built in the late 1990s were operating with 15-year leases that came up for renewal as the renovation trend was taking off. Exhibitors cited the success of redone auditoriums in negotiations with landlords, exhibitor and real-estate executives said. At Regal, executives held meetings they called “catch-up” sessions to discuss how to replicate AMC’s model, according to a former Regal executive. Josh Erdman and Angie Welch looked at the menu at the Palace Cinema in Sun Prairie. PHOTO: LAUREN JUSTICE FOR THE WALL STREET JOURNAL AMC is now exporting the design to London-based Odeon & UCI Cinemas, the theater company with about 2,200 screens across Europe it bought in 2016. (The U.S.’s busiest theaters, such as those found in New York’s Times Square or Los Angeles, are unlikely to ever get the luxury-recliner treatment since they regularly sell out hundreds of seats.) Smaller chains with even more luxurious offerings have expanded in the past three years. iPic Entertainment has 15 locations in nine states, with 115 screens. It charges as much as $32 a ticket, and members get extra perks, including cast Q-and-As and food tastings, and logoed blankets to use at the seats. Even single-screen houses like the Diamond Theatre in Ligonier, Pa., a tiny community about 60 miles east of Pittsburgh, are getting in on the concept. Leigh Ann Rice-McCulty and her husband purchased the 1930s theater in 2015 for $225,000. They couldn’t get a loan for the purchase—banks said it was a money loser— so they cashed in their savings to buy it. They spent an additional $15,000 to install two rows of what she calls “sweet seats” from VIP covering about 10% of the auditorium’s 200 seats. Most tickets cost $8; the recliners cost $12 and must be reserved in advance. “A lot of people didn’t know what they were” at the time, said Mrs. Rice-McCulty, but now they often sell out first. “They were smitten with them.” Corrections & Amplifications Netflix Inc. is spending $8 billion on original and acquired content in 2018. A previous version of this article indicated the amount was only for original content. (April 12, 2018)