"Robin Hood," "Iron Man 2" and "Shrek Forever After" were the major summer releases thus far, while expected blockbusters such as "Toy Story 3" and "Twilight Saga: Eclipse" will be released in upcoming weeks. Although "Iron Man 2" had the fifth largest opening weekend of all time, grossing nearly $130 million, and "Shrek Forever After" brought in $71 million during its first 3 days, the major summer films have not attracted the expected number of viewers. Failure of upcoming releases to attract desired audience levels will not only have negative consequences on production and distribution companies, but on movie theaters as well.
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The Movie Theater Business
Like any other type of business, a certain level of foot traffic is required to keep a movie theater viable. Theaters are heavily dependent on movie watchers purchasing "secondary items" in addition to the actual movie tickets. According to research conducted at Stanford and the University of California, concession sales represent 40% of a theater's net income. Despite that ticket sales are the prime revenue driver, they have a very small markup. While movie tickets are becoming increasingly expensive, theater operators attempt to keep them as low as possible to bring in audiences, audiences who will hopefully purchase popcorn and beverages.
Regal Entertainment (NYSE:RGC), a theater operator in the United States, had $506 million in revenues from admissions and only $185 million in concessions for the quarter ending April 1, 2010. After other operating revenues are factored in, admissions make up 70% of total revenue, while concessions are only 26% of the total. However, film rental and advertising costs were $266.7 million while the cost of concessions was only $26.7 million. Thus, admissions are marked up by 89% and food items are sold at 600% above cost.
If film rental and advertising costs were the only expense, then move theaters would be profitable without the adding the expensive price tag on concessions. However when looking at Regal Entertainment, other operating expenses such as wages and electricity amount to nearly $200 million. After accounting for other income statement items, the quarterly net income was only $16.4 million - a profit margin of only 2.3%. Concession based revenue is essential.
Movie theater attendance is somewhat cyclical. Although movie goers attend films throughout the year, the highest attendance is achieved in the summer months, when the most anticipated films are typically released. Of the top five opening weekend movies of all time, two of the films were released in May, two in July and one, "New Moon," in November.
In order to attract the largest number of audiences in any season, movie theaters are set up in high population density regions. Cinemark Holdings (NYSE:CNK), which operates 424 theaters across domestic and international regions, has a large market concentration in such areas as Dallas, San Francisco and Houston. Internationally, it operates through a similar strategy of focusing primarily on high population density markets around Brazil, Mexico and Chile. As a result of aggressive expansionary projects, CNK has experienced a compounded annual growth rate of 12.4%.
The reason movie theater operators such as Cinemark, Carmike Cinema's (Nasdaq:CKEC) and the Marcus Corporation (NYSE:MCS) can continue to expand and operate is due to the profit generated from concession sales. High population density areas increase the number of movie goers, and that helps to increase the concession sales required to drive the business. (For more stock analysis, check out Is Finance Ruining Movies?)
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