These Movie Theater Groups Will Survive the Next Decade

It’s worth taking notes from Darwin’s theory of evolution, when one is considering the fate of a movie industry disrupted by technology and changes in consumer preferences. As long as cinema operators evolve and adapt to changes, they have a good chance of survival.

Feb 5, 2014 at 3:33PM

According to data released by the Motion Picture Association of America (MPAA), movie admissions in the U.S. and Canada have dropped significantly over the past ten years from 1.52 billion in 2003 to 1.36 billion in 2012. Based on these numbers, it seems easy to pronounce a death sentence for all motion picture exhibitors. However, movie theater groups like AMC Entertainment (NYSE:AMC), Carmike Cinemas (NASDAQ:CKEC), and Cinemark Holdings (NYSE:CNK) have their own strategies to fight the industry gloom.

Playing a different ball game
Multiplexing, the act of building a movie theater complex with multiple screens, has been one of the traditional methods used by motion picture exhibitors to increase operating efficiencies. Given that the costs of operating any single theatre are largely fixed, it makes perfect economic sense to maximize the number of screens per location.

As one of the early pioneers of multiplexing, AMC opened its first two-screen theatre in Twin in Kansas City in 1963. Its Ontario Mills 30, a 30-screen multiplex, was the largest globally among its peers in 1996. However, multiplexing has ceased to be a competitive advantage for AMC Entertainment (or any theater group for that matter) as it has been widely adopted. Instead, AMC has shifted from an efficiency-driven strategy to one based on redefining the movie-goer experience.

Firstly, AMC is relying on increasing concessions sales to offset the decline in box office admissions. Beside improving the overall quality of foods and beverages through the inclusion of more premium items, AMC also launched the concept of dine-in theaters at 11 of its locations. These dine-in theaters come with a bar and lounge which AMC brands as MacGuffins, allowing movie-goers to interact with friends before and after the show.

Secondly, AMC has replaced two-thirds of its seats with more comfortable seating such as recliners in some of its theaters. Based on AMC's experience, such changes can almost double the number of movie-goers for a single location.

Lower threat of substitutes
The threat to motion picture exhibitors comes from all forms of entertainment that can be potential substitutes. That's where Carimike has an edge over its competitors. It brands itself as "America's Hometown Theatre" and its locations are in small to mid-sized rural markets. The people living in Carimike's target markets tend to have less entertainment options relative to their urban counterparts. These include potential substitutes for movies such as food and beverage premises, concerts, and live sporting events. Furthemore, competition is less intense in these locations where there are typically less than 10 theaters competing for movie-goers.   

The results speak for themselves. While industry attendance was up by 5.6% in the third quarter of 2013, Carmike's admission numbers increased by 23.3% over the same period.

Exploring new frontiers
There is no denying that U.S. is a mature market for movies, so it is logical to venture overseas. Cinemark stands out from its peers for its geographical diversification efforts. It has over two decades of experience operating in Latin America and currently boasts of a broad footprint of more than 1,300 screens in 13 countries. Cinemark is the number one ranked operator in Brazil and Argentina with market shares of 30% and 40%, respectively. It is among the top three in countries such as Chile, Colombia, Peru, and Ecuador.

As a result, Cinemark is well-positioned to capitalize on the tremendous growth opportunities in Latin America. Based on MPAA data, Latin America was the fastest growing region in 2010 and 2011. In 2012, Latin America's box office growth of 7.7% was also above that of U.S.'s growth rate of 5.9%. Moreover, Latin America is significantly under-penetrated compared to developed countries such as the U.S. For example, the United States' attendance per capita ratio is 4.1, while the attendance per capita ratios for most Latin American countries hover around the 1.0 mark.

Foolish final thoughts
It is easy to tar all movie-related stocks with a single brush, but that will mean giving up on a lot of profitable investment opportunities. The above mentioned movie theater groups have managed to successfully navigate the difficult U.S. movie industry by adopting varied strategies such as product differentiation, niche market focus and overseas expansion.

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