Cinemas
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Cinemas

Wheeling, Dealing and Reeling
Into the 21st Century

Momma never told them there’d be days like this. As the cinema exhibition industry is pulling in record box office attendance and revenue figures, it seems like it is on a rocket ride into the 21st century. But the ride, while moving at warp speed, is a little rocky. The development of megaplex theaters, which are sweeping the country, has been a mixed blessing for theater operators. Megaplexes are highly efficient to operate and moviegoers have indicated a clear preference for them. But these many-screened wonders are also driving myriads of older, smaller theaters and operators out of business. Even large chains are experiencing financial headaches as they face the need to close their older theaters and move them off bleeding balance sheets.

Ralph Cram, executive vice president and chief investment officer of Theatreplex Entertainment Properties, Inc., makes some interesting predictions for the cinema exhibition industry. Although the industry has been stable, with no major chain in bankruptcy recently, he feels it will be less stable in the near term.

In general, Cram says the future will see fewer but larger new theaters. “Megaplexes will drive smaller theaters out of business. It’s the bullet you have to bite,” he says. Older-style theaters will literally become obsolete as major markets and many secondary markets will be rescreened with state-of-the-art facilities. Although there will be fewer locations, in total there will be more screens as the megaplex becomes the facility of choice. However, within these megaplexes, there will be more niche theaters and ‘theaters within theaters.’

Megaplex construction is being driven because multi-screened facilities promote customer selection and service, which Cram feels are becoming key issues. “The customer is demanding better selection, a better experience, and more convenience. The newer theaters provide these,” he says. Part of providing good customer service will involve providing adequate lobby space and managing concession lines so customers can get through them quickly. Theaters that make this a priority will have an edge on the competion. “Customers don’t like to wait in line,” Cram feels. “Anything to reduce that time is a major
benefit.”

Among operators, Cram says there will be fewer exhibitor chains due to consolidation and bankruptcy. Those remaining will be stronger financially but there are some tricky waters ahead. “A major issue for larger chains will be to manage obsolete theaters and to move them off their balance sheets,” Cram says, noting that theaters in the worst position right now are those built from 1985 to 1990 with 4 to 10 screens and non-stadium seating. “Their rents are high, they’re underperforming, and they have 10-15 years left on their leases,” he points out. “They are likely to be highly leveraged, facing a major format change and built to last 20 to 30 years but only lasted five.” These factors are driving consolidation,” he says, noting, “If someone can figure out what to do with 4-8-plex theaters, they’ll make a fortune.”

Among the players remaining after the inevitable market fallout, new venture-backed companies will become a major force in theater operation, primarily because they entered the fray later in the game and are not plagued by older units. Venture-backed companies that are likely to grow include Movie Cow, AmStar, Destina and Consolidated.

Due to approaching saturation in some U.S. markets, Cram thinks that major chains will be turning their attention from domestic to international expansion. Within the U.S., theater operators need to make sound business decisions in order to expand profitably. “Like all real estate markets, you have to look at it market by market. Some are overbuilt, some can support new development.” Miami and Ft. Lauderdale are reaching the saturation point, he feels. Decisions about whether and where to build a new theater can be made by looking at what exists within a five-mile radius of a potential site. If the site is in the suburbs, there should be a population base of 100,000 within a 20-minute drive time to the site. If there is already more than one screen per 8,000 people, be careful. If there is a new state-of-the-art theater within the ring, don’t do it. Also be aware of what other chains are operating nearby.

In the next five years, Cram says that Theatreplex will be looking to buy more existing theaters instead of financing new construction. “We will continue to look for new state-of-the art theaters that can generate significant cash flow at the theater level, in dependable trade areas, and operated by savvy exhibitor chains,” he says.

“Older theaters are being hit hard because they need to be converted and this will be ongoing with big companies. There will be a slowdown in the number of screens being built in the short term while everyone digests what is happening.”

Consequently, Cleveland thinks that future megaplexes will be somewhat smaller than the monster 20-plus facilities that have gotten so much press recently. On average, Hoyts likes 10-16 screens with about 250 seats in auditoriums in a facility ranging in size from 40,000-75,000 sq.ft. However, a mix of auditorium sizes is desirable within a megaplex in order to be able to handle large crowds for initial film presentations and then back off into smaller auditoriums as demand dwindles. Hoyts is also flexible on total square footage depending on local market.

Cleveland notes that theatersare proven traffic driversand that it is of greatadvantage to both thecinema operatorand mall or shoppingcenter management for a theater to be placed in a shopping environment. But theaters are well able to stand on their own. In the race to get a new theater up and running in today’s competitive market, sometimes it may be quicker for cinema exhibitors to build their own facilities.

Since most future theaters will offer state-of-the-art facilities, amenities will become the point of competition, including seating, sound, larger concessions with expanded food offerings, and
bigger screens. “We want to get people in the habit of going to the movies— not just Star Wars,” Cleveland says. “Service is extremely important. The experience at a theater goes a long way to determining where a person will go the next time they go to the movies. We want to make sure they come back,” he explains.

Hoyts is testing a new ultra-service concept, the “VIP” theater, in Australia and Europe. These theaters have a separate auditorium reserved for “VIP”s with ultra-comfortable lounge chairs, tables for food and drink, extra space between chairs (50 inches or greater), and a VIP lounge. Patrons will have to pay a premium price to avail themselves of these white glove’ services, but Cleveland feels the concept may work in certain demographics. In addition to customer service, “Innovations and pizazz will also give an edge in future competition,” he says.

In making decision about where to locate new theaters, Cleveland says key criteria are the population of the trade area and existing theaters in that area. “Each person goes to the theater about five times per year. You want 100,000-150,000 in the trade area,” he says. “The site should be a financial consideration— not an emotional one.” In constructing new theaters, Hoyts’ preference is a build-to-suit arrangement. The company can finance new construction itself but prefers long-term leasebacks.

“There is no doubt that future theaters will be technically advanced,” Cleveland says, noting that digital sound has quickly become the norm and digital reproduction will take over within the next five to seven years. The use of visual digital formatting will happen because it offers significant savings to cinema distributors. However, it is likely to put a real burden on exhibitors because of significant costs to switch projection equipment over to the new format. Cleveland feels that the lion’s share of that cost should be borne by distributors because they will reap the benefit of cost savings. He predicts that the implementation and rollout of digital reproduction will soon become a major issue in the industry, to be discussed by national organizations such as Motion Picture Association of America and the National Association of Theater Owners.

Although the cinema industry faces some significant challenges in the next few years, Cleveland believes that the industry will survive and that going to the movies will remain a part of American life. “How many times have ‘experts’ signalled the death of theater industry?” he asks. “It’s a great form of entertainment for the money.”

“Now, the number of initial releases is much larger and there is a faster play-off of the product due to videos, pay and free cable and hotel offerings,” he says. The cost to rent a film has become much higher, but that will decrease over time, he feels.

Benjamin thinks the industry will see a consolidation of players, a falling out of companies with a weaker or inferior product. But this may not be as bad as it sounds. Pointing to Loews’ recent merger with Cineplex, Benjamin says, “We’re a stronger, more dynamic company because of that.”

Some other changes in the industry have been positive. For instance, Benjamin feels that the first multiplexes were of poor quality and did not offer a pleasing experience. But today, the emphasis is on quality and comfort. All new theaters will be built with stadium seating as a minimum, and many are incorporating larger seats, rockers, loveseats, and more leg room. “These all make a happier experience,” he points out. “People have to enjoy the theater— not just the film. People will make the choice to go to a better theater, one that is comfortable, safe and clean. They are busy and don’t have time to fool around.”

Benjamin says that cinema exhibition is still a film-driven industry. “It would be a real problem if quality films weren’t available,” he feels. “But this is also a service industry with a very demanding customer. We pride ourselves on service and spend an enormous amount of time, money and effort to provide it.” He thinks that revenue from concession sales will become a very important part of income for theater operators. “Expect an expansion in types of food offered,” he predicts.

Some markets are overserviced, and in the recent rapid expansion, Benjamin thinks theaters have been built too close to each other. Because of this, even some new theaters may not make it, and there will be continued closings of older leases. “Other properties will hope to be lucky and let their leases run out. Those built five to 10 years ago are in trouble— they’re old before their time,” he says. But, he also feels that just because a theater is old, it doesn’t always have to be closed. “If it is still serving the community, you can still do well,” he says, adding that theaters have a lifespan of 15-20 years, but they must be maintained.

The keys to a successful location are residential population and nearby competitive theaters. Loews prefers to make its own money, Benjamin says— not hurt the competition. Loews’ current prototype is 20 screens, but in selected sites it would do more or less, depending on demographics and competition. “When you get up to 20 screens, you’re pretty much out there. There are only so many films out there. You have to find ways to do it and make it work economically,” he advises.

With all it is facing, Benjamin thinks the cinema industry will survive the rough weather ahead. “Our industry has survived a lot of things people thought would kill it,” he says, pointing to television and movies on video cassettes as past threats to industry health. “But with the way things are today, with both males and females working, people still want to get out of the house and have a social experience. Also, videos on TV don’t offer the same quality. In something like Star Wars, the quality and the sound will never be the same.”

“Within the next five years, the majority of theaters in major markets will be stadium-seating megaplexes. Unfortunately, these types of theaters drive everything else out of business,” he says. As well as a consolidation of players on the national level, there will be another shift in power to super regional powers and this will continue.

Examples of mature theater markets in this country are Houston, Dallas and Phoenix. Harris says that the bulk of future expansion will take place in markets with availability of land and liberal
zoning restrictions. Because land is not as widely available in the older, more developed Eastern regions of the U.S. and because zoning restrictions there tend to be tougher, the East is behind the rest of the country in megaplex development and probably also will see less development in the future for the same reasons.

Statistics show that people go to the movies five to six times per year. Harris thinks that megaplex availability may increase that frequency to eight to ten times per year because they are more fun. “The 8-10 plex will not go away soon,” he says, “But they are going to hurt the worst. Megaplexes, for the first time, have caused people to drive past a theater playing the same movie.”

Harris says that megaplexes are a “superstore concept” and describes their operations as “the retailing of seats” because they allow more choices in times and films. “Going to the movies has always been like a riddle,” he describes. “You open the newspaper to find out what’s playing, where to go. The megaplex solves the riddle— people just go.” He says the industry has always been film-driven, but that people will now say they are going to the ‘megaplex’ instead of saying they are going to the ‘movies.’

Digital distribution is a foregone conclusion, but how?’ is the question. It will happen sooner if distributors help fund capital improvements in theaters. But Harris feels that film studios may also have to help finance the turnover, saying that kind of backing helped facilitate the switch to digital sound. Although digital distribution will offer the greatest benefits to distributors because of greatly reduced costs, it may also help cut down on film piracy and will help exhibitors by offering more flexibility in program building. “For now, 35mm film is still better quality-wise, but that’s just a function of time and money,” Harris says. “Eventually digital will be better.”

Entertainment Properties Trust is only interested in acquiring theaters in major markets. Theaters must have 100 percent stadium seating, at least 14 screens and 3,000 seats. Operators must have a desire to build dominant theaters in large markets.

Although his company requires a minimum number of screens in a theater, Harris warns, “People get too caught up in screens. The number is misleading— seats are more important and studios are
more interested in seats.” Within the the same megaplex, there need to be auditoriums offering different numbers of seats in order to deal with public demand for popular showings. “You need to develop efficiency in seats,” he says.

Industry analysts predicted trouble for the theater exhibition industry when late 1998 and early 1999 quarterly attendance figures weren’t living up the the previous year’s record box office due to the blockbuster Titanic. But Harris says that Wall Street forces these quarterly comparisons when it is the previous 12 months that are a more valid measure. And he says that 1999, with a wide variety of smaller hits instead of one mega record-buster, is already ahead of 1998.

The consensus of the experts is that there are some dicey times ahead for the cinema exhibition industry. There will undoubtedly be some mix-ups, make-ups, fix-ups and shake-ups. But the theater operators and owners who survive the megaplex melee and the traumas of technology will be strong captains of a growing industry that has, after all, made it to a new century.

For more information:
Theatreplex Entertainment Properties, Inc., 30 South Wacker Drive, Suite 2811, Chicago, IL 60606, 312-454-8328.

Hoyts Cinemas, 1 Exeter Plaza, Boston, MA 02116, 617-646-5700.

Loews Cineplex Entertainment, 711 Fifth Avenue, New York, NY 10022; 212-833-6200.

Entertainment Properties Trust, 2029 Century Park East #422, Los Angeles, CA 90067; 310-286-9955.

The Other End of the Megaplex Market