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2 Companies That Make Money Despite Declining Movie Admissions

Source: AMC Entertainment

It's an open secret that fewer people are going to the theaters to watch movies. According to data released by the Motion Picture Association of America, or MPAA, North American movie admissions have fallen from 1.50 million in 2004 to 1.34 million in 2013.

But this doesn't automatically mean that movie-related companies are making less money. In fact, movie theater operator AMC Entertainment (NYSE: AMC  ) and National CineMedia (NASDAQ: NCMI  ) have proven that the opposite is true.

Making more money from the same movie-goers
With the increased availability of both legal and illegal means of video streaming & downloading, movie theaters can't just be pure exhibitors to compete. Instead, they have to evolve into providers of complete leisure experiences.

AMC Entertainment is the second-largest exhibitor in the U.S. with close to a fifth of the market and it boasted a footprint of 341 theaters and 4,945 screens as of May 2014. It has set its sights on maximizing revenue per customer visit to fight declining admissions. AMC Entertainment has introduced varied F&B concepts (F&B Kiosks, Marketplace, and MacGuffins) to grab a bigger slice of the movie-goer's wallet share.

There is nothing new or unique about the F&B kiosks you see at most theaters, but AMC Entertainment has expanded its product range to take advantage of impulse-driven purchases.

Marketplace is a concession built with a convenience store model in mind, offering a variety of made-to-order drinks & foods such as steak sandwiches, pizzas, and gourmet espressos & lattes. Marketplace currently appears in 16 of AMC Entertainment's theaters, and it plans to expand the concept to another 16 by the end of this year.

Another new F&B concept is MacGuffins, a bar & lounge establishment that comes complete with a full alcohol menu. AMC Entertainment plans to increase the number of MacGuffins locations from 66 to 93 within the next 12 months.

Furthermore, it has taken the concept of 'food & movies' to a different level with its 13 dine-in theaters, which accounted for an estimated 10% of circuitwide F&B revenue. AMC Entertainment estimates that an average patron spent 172% more on F&B at a dine-in theater than at a run-of-the-mill theater with F&B offerings.

The results speak for themselves. AMC Entertainment has improved its F&B revenue per patron both in historic terms and on a peer-comparison basis. For the first quarter of 2014, AMC Entertainment's F&B revenue per patron of $4.05 represented a 3% year-on-year improvement. In addition, its F&B revenue contribution is the highest in the industry, 11% more than that of its nearest competitor.

Source: National CineMedia

Profiting from movie-goers in another way
Companies that spend money on advertising have traditionally faced issues in reaching out to consumers.

Firstly, it isn't easy to target desired audiences with ads. Secondly, the company has no guarantee that consumers will watch the advertisements.

In a way, movie ads beat their traditional media counterparts because they provide better audience targeting and viewers can't skip them. The different movie genres provide good clues as to the interests and buying habits of individual movie-goers; also, no patron will intentionally arrive late to avoid advertisements at the expense of missing the opening minutes of a movie.

National CineMedia makes profits by selling cinema advertising across the country's largest theater network, which comprised 3,378 screens as of the first quarter of 2014. Its dominance in the space is further entrenched by the fact that the country's three largest theater circuits, including AMC Entertainment, are locked into two decade-long agreements with National CineMedia. It also has an asset-light business model, so National CineMedia requires limited capital expenditures (historically under 5% of sales) to grow.

Currently, cinema advertising represents less than 0.5% of the U.S. advertising market, which was valued at $157 billion in 2013. As time-shifting digital video recorders and video-click fraud become more prevalent, more advertisers will look to National CineMedia's cinema advertising services as a new outlet for media budgets where viewers can't skip ads.

According to Kantar Media, media advertising spend has been flat for the past five years from 2008 to 2013, with cinema advertising and outdoor advertising gaining at the expense of newspapers and network television.

National CineMedia's financial performance has been nothing short of impressive. As movie admissions in the U.S. and Canada fell from 1.40 million in 2006 to 1.34 million in 2013, National CineMedia grew its revenue and operating income before depreciation and amortization by compound annual growth rates of 7.7% and 7.9%, respectively.

This validates my view that National CineMedia is growing its advertising share at the expense of traditional media and declines in the number of movie-goers haven't affected its fortunes.

Foolish final thoughts
In my opinion, movie admissions will continue to decline gradually as consumers' lifestyles evolve. But this doesn't mean that all movie-related companies are unattractive. National CineMedia and AMC Entertainment represent such investment opportunities which might have been overlooked by those who are negative on the film industry at large.

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Mark Lin

Mark is a private value investor and is the author of website which uses a systematic quantitative screening approach to filter the global stock markets for cheap cigar-butts and wide-moat compounders.

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8/31/2015 4:02 PM
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National CineMedia… CAPS Rating: **