Cineplex Odeon on the Brink

6. Cineplex Galaxy Limited Partnership

The movie theatre industry in North America succeeds or fails on the quality of films available for showing. For that reason it is difficult to compare financial results from one year to the next, especially if a lean movie year follows a boom movie year.

Record-high sales at theatre concession stands couldn’t offset a poor showing at the movie box offices for Cineplex Galaxy Limited Partnership, operators of Cineplex Odeon and Galaxy theatres throughout Canada. In the first quarter of 2005 (ending March 31), there was a net loss of $199 000 compared with a profit of $4.2 million in the same period in 2004. Revenue dropped to $78.3 million from $79 million, hit by a 1.8-percent decline in attendance and a 4.5-percent decline in box office income.

Company executives attribute this recent stumble on the “lacklustre” film lineup. Even the popularity of Meet the Fockers couldn’t compare with the previous year’s turnout for The Passion of the Christ. Cineplex is banking on a blockbuster summer lineup to help push revenue up in the remainder of the year.

The Company

Cineplex Galaxy Limited Partnership was formed November 26, 2003 to acquire the theatre business assets and liabilities of Cineplex Odeon Corporation and all of the shares of Galaxy Entertainment Inc. The partnership represents Canada’s second largest film exhibition organization, with theatres in six provinces. The Partnership serves both major metropolitan and mid-size markets, with principal geographic areas being Toronto, Montreal, Vancouver, Calgary, Edmonton, Ottawa, and Quebec City. Through Cineplex Odeon and Galaxy theatres, the partnership operates 775 screens at 86 locations. There are 64 Cineplex Odeon theatres and 22 Galaxy cinemas.

Currently, the Partnership is in a healthy financial situation, though there is always room for improvement. The annual figures ending in 2004 show total revenues at $353.7 million and net income at $30.2 million. In 2003 the corresponding figures were $355.7 million in sales and $39.3 million in net income. See Figure 1 for a comparison of the latest financials available.

The Movie Theatre Market

The mid to late 1990s saw a multiplex building frenzy for both Cineplex Odeon and archrival Famous Players theatres. It was, literally, out with the old and in with the new. At the time Cineplex Odeon was owned by Loews Cineplex Entertainment. The building boom was costly and forced a restructuring of the company under bankruptcy protection. The late 1990s and early 2000s were periods marked by theatre closings all over North America. Cineplex Odeon closed 40 locations in 1999 and 2000. Small and medium- sized theatres were replaced by larger, modern, multiple-screen houses. Various investment groups bought theatres at deep discounts.

Lowes Cineplex Odeon was bought by Gerry Schwartz of Onex Corp. With the acquisition Onex absorbed $289 million of Loews’ debt. Onex investors were very astute.

Copyright © 2007 Pearson Education Canada 1 They understood that the movie business was cyclical and that while it was going through a rough period, ultimately movie-going wasn’t going to go away. A better flock of movies in 2003 and 2004 helped turn things around.

Currently, the Canadian market is controlled by two large companies. Famous Players has a 51-percent market share, followed by Cineplex Galaxy at 26 percent. All others, including AMC and independents such as the Montreal-based Guzzo chain, comprise the remaining 23 percent of the market.

The Customer

Movie content definitely influences who attends movies. About 50 percent of movie- goers are younger than 25, while the 26- to 39-year-old group accounts for 33 percent of movie-goers. Do these statistics indicate that older age groups do not attend movies that frequently, or are the movies of today so tailored to younger age groups that older people are not interested in attending? Would the availability of movies tailored to older audiences bring in more people? Shouldn’t the industry acknowledge that baby boomers comprise the largest segment of the population, yet they are sitting on the sidelines with entertainment dollars to spend? Granted, this situation is beyond the control of the theatre chains.

Pricing and the Consumer

Two tickets to the movies: $28. Popcorn and drinks: $10.50. Profit for Cineplex? Thank goodness for the concession stand.

This is an odd business. When you look at the income statements of theatre operators, revenues are increasing at a time when attendance is dropping off. It is the combination of higher ticket prices and expensively priced snacks and foods at the concession stand that continue to generate increased revenues from year to year. Markups at concession stands are as high as 100 percent on some items. Revenue statistics can be misleading Despite the gains in revenue, profits are declining as annual performance is being affected by the debt load carried forward from the mega-complex expansion era, long leases on smaller theatres that almost no one goes to anymore, and overly enthusiastic expectations for increased attendance at the new theatres.

Consumers are feeling the fallout of the financial crunch. Reacting to ticket prices as high as $12 to $14 in some locations, consumers are starting to question the value of the theatre experience. “I think it’s a rip-off. I remember going to the movies in the evening for $6.50” said one typical consumer. Another consumer disagreed, because “the wider screens and bigger seats at the megaplexes are worth the extra cost.” A good many consumers try to beat the high prices by saying they go to the movies only on discount Tuesdays when ticket prices are lower, or they go to matinees to save money.

Barry Paterson of Famous Players in Canada discounts the viewpoints expressed by movie theatre patrons. He says, “We feel we are providing excellent entertainment value. People would pay a lot more to watch a hockey or baseball game.”

To put it bluntly, an oversupply of multiplex theatres combined with too few customers to go around is placing a hardship on Cineplex Galaxy. The present financial situation is adequate, but there is long-term debt to contend with. Additional revenue is needed to help alleviate the situation. The mega-theatres have to produce more revenue somehow.

What about the supply and demand situation? There are still too many cinemas chasing too few patrons. One industry analyst believes that one in five theatres should be closed in order to even up supply with demand. What’s the point of having mega-theatre complexes only kilometres away from each other in large metropolitan cities? Should more be closed? Should they be used for purposes other than showing movies?

Cineplex Galaxy continues to experience significant challenges due to the overbuilding in the industry and the declining attendance pattern that has surfaced over the past five years.

While Famous Players remains profitable in Canada, the latest news from its owner, Viacom Inc, indicates the Canadian operation is for sale and the expected buyer is Cineplex Galaxy. The pending sale for $500 million will give Cineplex Galaxy about 70 percent of all box office revenues in Canada. To satisfy federal competition regulators, Galaxy will have to sell off about 35 cinemas—but it will definitely remain in control of the theatre business in Canada. The combined company will have 132 theatres and 1300 screens across Canada. Ownership on such a large scale will create new marketing challenges for Cineplex Odeon.

The Famous Players theatre portfolio includes distinctive brand names such as the Coliseum (round theatres), Silver City (rectangular theatres with 3D and IMAX technology), Colossus (an intergalactic-themed theatre), and Paramount (urban flagship theatres located in the heart of a city). Famous Players operates 110 theatres and 868 screens in Canada. Viacom has decided it wants to remain focused on the market in the United States. Does this present a new opportunity for Cineplex Galaxy in Canada?

The Challenge

A new, more customer-focused marketing strategy is needed to differentiate Cineplex Galaxy from the other competitors. The primary objective is to “put more bums” in the seats in order to generate more revenue. In doing so, the expectations of the primary target audience (under 25) have to be addressed. This group has a variety of options for spending its entertainment dollars. Anything from renting DVDs to video on demand at home and just watching television can be a less expensive and more satisfying experiences than attending the movies. A new means of motivating this age group to attend more frequently is crucial to the future growth of Cineplex Galaxy.

Other target markets must also be given consideration. As indicated in the case, older age groups are being neglected. Are there any new strategies that can be recommended to get this group back to the theatres?

Copyright © 2007 Pearson Education Canada 3 What elements of the marketing mix have to change, and what will those changes be? Be as specific as you can in terms of establishing objectives, strategies, and tactics. The primary objectives are to increase attendance and generate additional revenue. Consider revenue-generating ideas beyond simply showing movies when solving this problem.

Figure 1

Cineplex Galaxy Limited Partnership

Consolidated Statements of Income: 2004 and 2003

Revenue and Expenses 2004 2003

Revenue

Box office $235 446 225 304

Concessions 95 478 89 559

Other 22 814 20 889

Total Revenue 353 738 335 752

Expenses

Film cost 121 276 117 309

Cost of concessions 18 983 18 138

Occupancy 53 238 51 535

Other theatre operating expenses 71 077 65 136

General and administrative (includes 13 983 15 173 marketing)

Management fee 650 7 664

Total Expenses 279 207 274 955

Income before adjustments below 74 531 60 797

Amortization 23 736 20 113

Gain on disposal of theatre assets (111) (92)

Interest on long-term debt 8 280 4 020

Interest income (473) (922)

Foreign-exchange gain — (3,696)

Income Before Income Taxes 29 099 39 993

Provision for (recovery of) income taxes (1149) 366

Net Income 30 248 39 323

Discussion Questions

1. How important is the target market issue mentioned in the case? Should additional targets be considered in order to generate new revenue for the company?

2. How important is the pricing issue? Are there new pricing strategies that could be recommended to encourage higher rates of attendance? Will prices increase as a result of the acquisition of Famous Players?

3. What new strategies can be recommended to motivate the primary target (under 25 years) to attend more frequently?

4. Should the company consider closing more theatres? What impact will the closings have on the financial situation?

5. The company is looking for new sources of revenue. What recommendations do you have for the company to generate new revenue?

Adapted from Rick Westhead, “Cineplex swallows rival,” Toronto Star, June 14, 2005, pp. C1, C9; Richard Blackwell, “Concession stands add fizz to Cineplex’s bottom line,” Globe and Mail, May 4, 2005, p. B2; “Box office showing batters income fund,” Toronto Star, May 4, 2005, p. C4; Melissa Leong, “Cinemas are raking in big fat sales,” Toronto Star, December 31, 2002, pp. D1, D10; “Loews Cineplex Entertainment emerges from bankruptcy,” press release, March 21, 2002; “Loews Cineplex announces theatre closings in Canada,” press release, February 16, 2002; www.cineplexodeon.com; Robert Sheppard, “Trouble at the Megaplex,” Maclean’s, January 22, 2001, pp. 28, 29; Jesmin Seputis, “Theatre goers resign themselves to higher ticket prices,” CBC Radio News Report, May 3, 2000.