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Theme Park Development Costs: Initial Investment Cost Per First Year Attendee – a Historic Benchmarking Study

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Theme Park Development Costs: Initial Investment Cost Per First Year Attendee – a Historic Benchmarking Study Theme Park Development Costs: Initial Investment Cost Per First Year Attendee – A Historic Benchmarking Study Kelly T. Kaak Rosen College of Hospitality Management University of Central Florida ABSTRACT There is an industry “rule of thumb” that when planning for the construction of a theme park, developers should anticipate investing $100 per expected first-year guest. In other words, if the goal is to attract a million paying guests per year, the total investment needs to equal $100,000,000. This ratio is quite common in the literature, but it has never been investigated formally. This study collected the initial investment costs of 52 parks built in the United States, converted that investment into modern dollars, and then divided that dollar cost by the first-year attendance figures. The overall mean or average among the subject parks was $109.61 invested per first-year guest. This figure is very close to the industry “rule of thumb” of investing $100 in construction costs for every desired first-year guest Keywords: theme park, development costs, attendance INTRODUCTION There is an industry “rule of thumb” that when planning for the construction of a theme park, developers should anticipate investing $100 per expected first-year guest. In other words, if the goal is to attract a million paying guests per year, the total investment needs to equal $100 million. This ratio is quite common in the literature, but it has never been investigated formally. This information is easily available. Theme parks, as a part of the development approval process, are required to disclose what the expected attendance will be, so that the surrounding infrastructure needs can be expanded to accommodate the growth. Additionally, as part of the pre-opening publicity campaign, the parks frequently cite the attendance figures they are expecting and dwell on the additional tax revenues and spending these tourists will inject into the surrounding economy. Similarly, the cost of the development is frequently distributed via press releases and as part of the financial prospectus. Obtaining the measure is as simple as dividing the total investment cost by the projected first-year attendance. Background / Literature Review The study of the finances surrounding theme parks is a relatively selective field. There are just not that many total theme parks in existence and the frequency of their opening is quite limited. Nonetheless, they represent significant investments by their developers and, due to their vast startup costs, they are typically preceded by numerous feasibility studies. The most important factor to determine is the potential attendance for the venture—all other factors (design capacity, revenues and expenses) are dependant on the projected attendance. A body of literature has developed in this area. The issue of initial investment dollars per anticipated first year guest is not typically singled out for examination ( that is the justification for this study) but other financial benchmarks are provided that help a theme park operator anticipate revenues, expenses, and plan for the future expansion/reinvestment needed to ensure repeat attendance over the lifespan of the parks. Harrison “Buzz” Price is the world’s foremost authority on performing theme park feasibility studies. He was the individual hired by Walt Disney in 1954 to run the numbers that showed that Disneyland could be successful, ultimately resulting in the funding that was required to bring Walt’s dream to reality and usher in the new theme park industry. After performing the feasibility and location studies for Disneyland, Mr. Price went on to perform similar studies for almost every other major theme park built in the past 50 years. His 1999 book, Walt’s Revolution by the Numbers , details his experiences. Price demonstrates how to determine approximate attendance based on the surrounding population (market) size, and how to calculate the capacity analysis (how many activities there will need to be and how much space needs to be devoted to each) based on that projected attendance. With this information in hand, he shows how to determine how much should be spent on development. He segments these development costs into: cost per annual attendee (the focus of this study), cost per square foot and cost per acre (1999, p. 229). Another seminal reference book for the industry is Entertainment Industry Economics . This volume has chapters addressing economic and financial issues in all sectors of the entertainment industry. Chapter 14 presents the “economic outline” of the amusement/theme park sector (Vogel, 2004). Vogel attributes the difficulty in estimating the value of a theme park property to the multiple factors that weigh on its performance: the region in which it is located, weather patterns, the number of days it can operate, local demographics and incomes, and the amount of capital invested (p. 454). At the macro-economic level, Vogel notes that theme park admissions can be positively correlated with consumer credit as a percent of personal income, and negatively correlated with the unemployment rate. Other factors influencing attendance are ticket prices, fuel prices, airline fares, foreign exchange rates, and demographic shifts over time (p. 455). Vogel acknowledges that real estate is the key asset of any park; however, the more typical way of valuing a park property is to use some multiple of EBITDA, adjusting for the age and condition of the park, income/demographic trends in the region, its potential for expansion, its ability to raise prices and/or per capita spending, and its location relative to transportation facilities and other similar destinations (p. 456). Another large part of the theme park financial literature focuses in on strategies for valuing or appraising theme parks. Since parks are rarely sold, attaching a suitable value to the operations is problematic. Nonetheless, the issue is one of concern for both operators and investors. Hester and Roddewig are professional appraisers and, at length, detail the peculiarities of assessing the worth of theme parks. Much of Hester’s analysis explains the distinction between real property and tangible property. Real property is essentially real estate: all land and permanent buildings. Major theme park assets such as the rides are considered to be tangible personal property and should be assessed as such. A building that contains a ride is to be considered real property, assuming that it could still have a use if the ride/attraction was removed (Hester, 1995). Roddewig, Schiltz, & Papke (1986) attempt to distinguish between the concepts of purchase price, sale price, asset value, and operational value when considering the value of a park. To obtain the raw data for the study (the initial-investment costs, the projected first-year and actual first-year attendance figures) required significant research. A great source of this was the New York Times , which often covered the business dealings of the parks being constructed by major corporations. In the 1970s, a handful of guidebooks were authored that described and located the numerous theme parks that were under construction at that time. In addition to providing the admission prices, a description of the attractions, and directions on how to get there, these books often provided data on attendance and investment costs. These were used as sources for many of the early theme parks built before 1980. Hunter’s 1975 book, A Family Guide to Amusement Centers , presents a state-by-state description of numerous attractions of the time. When detailing a theme park, she often mentioned the year it opened and the investment dollars sunk into the venture (Hunter, 1975). Kyriazi provides an account of the early amusement park industry and then in a later section of the book presents detailed information on their successors, the theme parks. His description of the theme parks indicate who built them, when, how much they cost to construct, and what the attendance figures were (Kyriazi, 1976). Another book in this vein is Onosko’s Fun Land U.S.A . Much like Hunter, he provides a state-by-state description of the attractions awaiting the theme park visitor at the height of the industry’s growth period (Onosko, 1978). To perform the translation of historic invested dollars into modern dollars, the website www.Measuring Worth.com was used. This site provides a conversion tool that enables the user to enter a dollar amount and a year and then computes the “relative value of a U.S. dollar amount” at some future point. For this survey, the historic dollar figures were converted into 2007 dollar amounts, using the CPI (Consumer Price Index) as the means for inflating the currency. Research Design The sampling procedure was to collect this information on as many of theme parks as possible. There were some parks for which this information was unattainable; however, the ultimate sample size exceeded 50 percent of the target population at 52 “cases” out of a potential of 75 total theme parks. Some parks posed too many problems when determining initial investment costs to be included. This was due to factors such as the land already being owned by the developer prior to theme park construction; so the initial investment does not include the land acquisition costs. Several theme parks were amusement parks or themed attractions before they were expanded into theme parks; so the initial investment cost reported only includes the renovation/expansion costs. Then there were some properties that evolved into theme parks over time; so there was not a single, large initial investment in any one year that can be compared against attendance for that same year. Findings & Analysis Table 1 – Theme Park Initial Construction Costs per First Year Attendee lists the 52 subject parks, provides the initial construction cost in dollars for the year the park was opened, shows the conversion of the initial construction costs into current dollars (2007), and provides the projected and actual first-year attendance, when available.
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