Cineplex: Serving Up Academy Awards

Understanding trends in socialization can help Cineplex smooth their blockbuster bets each year
0 - Cineplex Lounge

Understanding trends in socialization can help Cineplex smooth their blockbuster bets each year.

Not Academy Worthy

The North American motion picture industry is a prime example of how strategic decisions from the top of the value chain can trickle down and affect the end retailer. The top of the chain starts with production studios that release a majority of movies in the summer and holiday months, leaving low-budget independent films to be screened in the off-season.

This structure leaves the financial success of movie theatres heavily dependent on the success of blockbuster box office performance which can cause large volatility in theatre revenues. For instance, the summer of 2015 was a fruitful one for Hollywood as major films like Jurassic

World, Inside Out, and Straight Outta Compton contributed to a total of $4.48 billion domestic box office, marking the second highest grossing box office performance in the history of cinema. Conversely, the summer of 2016 was a disappointing one with box office revenue declines of 22 per cent compared to 2015 due to underwhelming Hollywood sequel attempts and poor critic ratings. Compounding the movie industry’s reliance on volatile blockbuster films is a declining annual ticket sales per person, which has fallen from 4.4 in 2006 to 3.8 in 2015.

Simply put, movie theatres are struggling to develop a sustainable business model to attract more attendees, in particular millennials who have chosen to rapidly adopt home entertainment services like Netflix. This is due to the personalization capabilities, content exhaustiveness, and affordable pricing that Netflix offers, compared to the traditional movie theatre and cable television experience. Capturing millennials is especially important as they are expected to have the most annual spending power out of any generational cohort at $3.39 trillion by 2018. In order for theatres to re-engage the valuable millennial segment, they must re-position their value proposition to maintain relevance in this generation’s eyes. Currently, major players in the movie theatre industry have struggled to achieve this.

Cineplex

Play Fights

Major movie theatre chains have attempted to combat the declining moviegoer interest by using a variety of unsustainable growth methods and lacklustre strategic decisions. Several attempts have been made to improve the theatre viewing experience in an effort to stimulate foot traffic. Internal developments include a push by major theatres to provide a “premium theatre offering” that operates with current offerings. Some examples include Cineplex’s VIP Theatres and AMC’s high -tech ETX theatres. Although the features range anywhere from “Breathtaking Sound” to “Incredible Screen Resolution”, the intent is identical across competitors: to enhance the viewing experience and attract viewers.

With these premium features, theatres have experimented with tiered pricing strategies to increase the average margin per patron. The rationale here is that movies are priced based on supply- demand dynamics and the value of unique offerings like 3D or IMAX screens. A perfect illustration of tiered pricing is Paramount’s $50-ticket package for the action movie World War Z, which included early screening in 3D and a digital download of the movie. While tiered pricing strategies can be used to unlock value for specific consumer segments, they are considered unsustainable for the long term.

Inorganic methods of solving the theatre attendance volume problem have also made headlines in the industry. Notably, AMC’s pending acquisition of Carmike will make it the largest theatre chain in the United States. In this example, horizontal integration is used to increase market share. While this type of strategy is possible within the United States, the Canadian landscape only has one dominant player.

These attempts by major movie theatre chains to combat the declining moviegoer interest have been largely unsustainable. Although the addition of premium theatre infrastructure helps to justify ticket price hikes, movies are inherently a luxury good. As such, there is a ceiling as to how far ticket prices can be increased before loyal customers begin rejecting the theatre experience. Additionally, relying on growth by acquisition is also unsustainable, as it does not target the core issue of declining moviegoer interest.

Cineplex’s Battle

One of the companies that has been employing these unsustainable growth strategies is Cineplex, the largest Canadian movie theatre company with an 80-per-cent share of the Canadian market. This large existing market share makes it unlikely that Cineplex will be able to grow through inorganic methods such as acquisition. Despite this, Cineplex appears to maintain the ability to grow revenues and profits with strong sales CAGR of 5.9 per cent and EBITDA CAGR of 5.7 per cent from 2011–15. However, this growth can be largely attributed to unsustainable ticket price increases and the growth of ancillary revenue streams.

Additionally, examining the demographic breakdown illuminates the negative effects of increasing ticket prices on the highly valuable millennial segment, which has experienced a significant decline at a -6.7% CAGR in attendance per capita from 2012–2015. Decreasing millennial theatre attendance can also be attributed to the meteoric growth of home entertainment services such as Netflix that have dominated this demographic.

Cineplex is operating at a critical juncture as it continues to invest in theatre infrastructure to marginally increase average ticket prices. Unfortunately, this strategy fails to capture the millennial segment, which will become the largest and most lucrative customer segment by 2018. Inaction may result in further millennial movie theatre churn at a rate that may soon become unsalvageable. Additionally, successfully capturing this generation will lead to decades of stable revenue as millennials displace older “Generation X” and “Baby Boomer” cohorts. While major competitors are cognisant of the importance of regaining millennial attendance, it will take much more than low-impact strategies such as tiered pricing to attract this unique generational cohort.

A New Age For Film

Born in the age of rapid digital change, the millennial cohort has a sharply different set of priorities and needs than previous generations. Millennials are the largest generation in North American history at a population of 92 million, 28 per cent larger than the baby boomer generation. As this generation begins to enter its prime earning years, this presents a unique opportunity for Cineplex.

When it comes to priorities, 78 per cent of millennials would choose to spend money on experiences rather than material things and 82 per cent currently spend money on at least one live event per year, ranging from concerts to festivals to sports events. The underlying theme is that millennials are invested in social and event-driven experiences which movie theatres are failing to provide with their existing infrastructure. This is illustrated by a research study that noted that only 10 per cent of millennials go to movies to connect with friends.

Empirically, millennial expenditure on movie theatres represents a small portion of their yearly media content budget. In fact, movie theatres only account for 10 per cent of annual media content expenditures, trailing Pay-TV at 42 per cent, music at 13 per cent, and video games at 13 per cent which dominate more of the average millennial media content budget.

Although millennials’ values are rapidly shifting, Cineplex is doing little to accommodate these trends. Similar to its major competitors, Cineplex is primarily focusing on increasing the value of its least price-sensitive customers by providing premium services such as Cineplex VIP, 3D, IMAX, and preferred seating for an increased ticket price. Although this may increase the revenue potential of older customers aged 25 and older, this strategy does very little to attract millennials who are in search of social experiences and events as their peak spending years approach.

Feeding The Millennials

With a dominant 80-per-cent share over the Canadian theatre market, Cineplex owns 164 incredibly large retail spaces in prime metropolitan locations. However, a lack of focus on social experiences means that Cineplex remains unable to capture the millennial market.

In order to capture this lucrative market, Cineplex should transform into a food and beverage social destination where millennials can engage socially. Firstly, Cineplex’s large atrium space should be leased out to local established restaurants in order to attract the high millennial spend on casual dining restaurants (CDR). Secondly, live sports content rights should be licensed and select theatre space should be renovated into a sports bar to offset the volatility of the blockbuster off-season months from September to April and appeal to the millennial spending preferences on live event experiences.

The systematic fit of full theatre restaurants and bars can be better understood with a wider lens on the typical moviegoer process. Movies are usually a component of a fairly interconnected social experience; a group’s typical evening might consist of going to a restaurant before the movie and a bar afterwards. There are inherent logistics and planning difficulties associated with this social process: a group of friends must agree on a specific time and destination that fits with everyone’s preferences and schedule. By offering an all in one package, Cineplex will be able to offer and capitalize on what the millennial segment is seeking – a more convenient and comprehensive social experience that is free of complicated logistics and planning.

Fortunately, the precedent to expand into the restaurant space has been proved by Nordstrom, a company that also depends heavily on retail space. “Nordstrom Restaurants” has more than 200 locations in North America and provides food services by leasing out retail space to existing restaurant chains. Cineplex should follow this same successful leasing strategy to reap the benefits of an established restaurant brand without losing focus on its core competency of providing media entertainment. In addition, Cineplex should collect a monthly percentage of restaurant sales per square foot, a commonly used financial metric in the food and beverage industry. Given this implementation, there would be significant strategic advantages for both parties: restaurants would be able to reap the benefits of theatre foot traffic and Cineplex would be able to position itself as a social destination with an established restaurant brand to attract millennials.

Increased foot traffic in the proposed Cineplex restaurant and bar space translates into higher movie ticket sales if significant crossover synergies can be realized. The average millennial visits CDRs such as Olive Garden 12 times a year as opposed to going to the movies a mere six times a year. If Cineplex can capture even a small percentage of millennial CDR foot traffic, this would skyrocket annual foot traffic for the business.

Happy Hours At Cineplex

On the beverage side, underutilized theatre space should be renovated with removable seats to transform into a full -service bar when needed. Design wise, pre- existing full length bars in Cineplex VIP Lounges will be moved directly under theatre screens similar to the Real Sports Bar & Grill floor design. Cineplex’s current “VIP Cinema” expansion plan shows that the company already has the existing expertise and logistic operations to support a food and beverage service. In fact, food service revenues have grown to $418 million in 2015, 11.6 per cent higher than 2014, shows that Cineplex is already making effort to pursue this vertical. The average millennial spends 44 per cent of their food and drink budget or $2,921 eating out compared to only a $75 in annual expenditures at movie theatres. Evidently, with the right investments in offering a full-service bar, Cineplex can be well positioned to shift millennial spending and capture a greater portion of disposable income.

Secondary to this proposal is the streaming of live event content which is highly valued by the millennial segment. Particularly, major sports games should be licensed from the NBA, NFL, and NHL as the sports season falls within the blockbuster off-season months from September to April. Logistically, the NFL season runs from September to February, while both the NHL and NBA season runs from October to May. To mitigate the risks of unsuccessful content right negotiations, Cineplex has a precedent of successfully licensing sports content to host NBA and NHL “viewing parties”.

By pursuing this strategy, Cineplex can strategically diversify its revenue segments to hedge against the volatile performance of Hollywood blockbuster seasons.

Specifically, underutilized theatre space in poorly performing box office months can be transformed into sports-themed bars by leveraging Cineplex’ pre-existing liquor licence and exhaustive content licensing relationships.

By investing in food and beverage offerings and live content streaming, Cineplex will be able to drastically enhance the social experience for millennials. In launching this new concept, Cineplex should transform a few of its theatres located in major commercial areas as a pilot program. It is important to note that while some theatres within a location may be transformed, others will retain the existing infrastructure to continue to appeal to the existing consumer base. If Cineplex is able to introduce this concept to half of its theatre locations by 2020 and begin to reverse the downward trend of millennial attendance, this would contribute an additional $330 million to the bottom line. In the long term, the proposed strategy provides three key advantages: increased growth, new profit opportunities, and business model sustainability.

Firstly, by reversing the declining millennial theatre attendance trend, this provides Cineplex with a significant foot traffic growth opportunity. Secondly, expanding into full-fledged beverage and restaurant integration provides new profit opportunities for Cineplex and helps enhance revenues in the blockbuster off-season from September to April. Lastly, the proposed strategy adapts Cineplex’s business model into a sustainable one by shifting away from a pure-play movie theatre that depends heavily on Hollywood secular trends. Instead, it positions Cineplex into an all-in-one social destination for millennials to meet.

Clearly, only the movie theatres that are able to understand millennial preferences will be able to capture this generation’s anticipated record-breaking spending power. Perhaps the key takeaway is that a company that is heavily exposed to the cyclical booms and busts of an industry like cinema must incorporate revenue diversification as part of its long-term strategy.

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