Exhibitors try new strategies as margins decline

Earlier this year, Michigan-based film fan Joshua Thompson demonstrated he had had enough of paying high prices for theater concessions: He filed a class-action lawsuit against his local AMC Theater.

Moviegoers have grumbled about prices for years, noting that concession prices — and on some level ticket prices — feel out of whack with reality. But scratching beneath the surface of that sentiment reveals the underlying problem: The symbiotic business model between the theater owner and studio that has supported both for decades is eroding, and may prove unsustainable soon without changes.

There are fewer customers every year, a fact easily hidden by revenues. With ticket prices climbing every year, it’s easy to read record box office headlines as the whole story. But last year theaters sold the fewest tickets since 1996 (1.28 billion), a drop of 4.2% from 2010, according to Nash Information Services. “The Hunger Games” and “The Avengers” have turbocharged year-to-date box office, but whether the trend continues is anybody’s guess.

Nomura Securities analyst Robert Fishman released a report in March noting that while there will be record levels of box office and admissions in 2012, for the next three years, theaters will likely see any gains slip away. “It comes back to attendance,” he says. “If attendance isn’t growing, theater chains are going to have a difficult time expanding profits.”

With studios taking a big cut of every ticket sold, the only fixed income a theater owner can count on is his concessions. In the past, the studio cut, while always a hurdle, could be offset by a film with legs that would stay in theaters for weeks and weeks, with exhibs taking home a greater percentage the longer it remained onscreens. But these days, studios are pressing to shrink the release window to bring in ancillary coin more quickly.

“With a good theater, you look to have 10% profit at the end of the year,” says Jon Goldstein of Highlight Investments, which oversees seven theaters via its stake in Emagine entertainment.

And while National Assn. of Theater Owners director of media and research Patrick Corcoran says those who buy concessions do so regularly, reportedly fewer than half of patrons buy anything other than a ticket. “Without those sales, you’d have to cover your expenses with a higher ticket price,” Corcoran says.

Indeed, theater owners have a particular amount of overhead that needs to be covered by concessions, no matter the number of people who go to the stand. “All the people who say ‘I bring my own food,’ well, that’s great, but you’re causing the people around you to shoulder the burden of the cost of the business,” Goldstein says. “I don’t like that model, because you’re punishing your best customers.”

Getting most of theatergoers to regularly buy popcorn and Raisinets in the lobby is a concern of Craig Chapin, CEO of Allure Global Solutions, a provider of digital signage and other software. He says theater owners need to accent the positives of stopping by the concession stand by using signage that shows customers how many points they’ve accumulated when they swipe their loyalty cards.

“We’re in a very unique space of being a single-visit, dual-transaction business,” Chapin says, referring to box office and concessions as the two primary purchases of the moviegoing experience. “How do you have a cohesive message? The people who are doing it best are the ones thinking about (moviegoing) as one congruent model.”

Goldstein sees a solution in a one-price model, by charging each patron $15 for admission and unlimited concessions. It didn’t fly, he says, because the studios stepped in. “When they see ‘bundling,’ they want their percentage from that one price,” he says.

Theater owners who redefine the movie experience may have more luck hitting building a better revenue model, but franchises like Brooklyn’s Rerun Gastropub Theater or the Alamo Drafthouse (which recently announced plans to expand into New York City) are more restaurant than moviehouse. The percentage profit may be higher in such places, but they have bigger staffs and higher expenses. AMC Entertainment, too, which was just acquired for a record-setting $2.6 billion by Chinese investor Dalian Wanda, is looking to delve into the wine-and-dine sector — and the company’s latest cash infusion will make that easier. Cinemark has also made forays into the movie tavern approach, with varying degrees of success.

Then there’s the luxury theater market. Chains like Arclight and Landmark offer reserved seating, a retail connection (books, memorabilia) and memberships.

Tim League, founder and CEO of Alamo Drafthouse, says that while that model can work, those houses are just as reliant on the success of the industry as bigger chains. “It’s dangerous to press concession and box office prices up to the point where you’re getting a significant number of your customers who find it untenable,” he says. “The reality is that the overall industry has to be healthy, even for us who offer alternatives.”

Increasingly, filmgoing alternatives include renting out empty theaters midweek for group meetings or special events. Many theater owners are expanding their programming to include more than just movies, adding streamed performances of concerts, sports, town hall meetings, rotary gatherings and even giving individuals the ability to program — and pre-pay for — screenings via Tugg.com’s crowdsourcing approach.

For his part, Joe Paletta, CEO of Spotlight Theaters, says he has aimed to make the exhib a “community meeting place,” not just a space for movies.

But success really boils down to showing a film that’s so good customers don’t notice how much it costs to go, and those don’t come around every week. Once customers pay attention to prices, increasingly, they’re opting out.

“It’s a very delicate balancing act to get to the price point where we sense that the customer is getting value for what they’re buying,” Paletta says.

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