The Marcus Corporation (NYSE:MCS), an entertainment & lodging company, is the country's fifth- largest theater chain with a footprint of close to 700 screens at 55 locations in seven states. It also has a hospitality arm, but theater operations account for about three-quarters of its operating profit. In the past decade, The Marcus Corporation has outperformed its cinema-operator peers and the U.S. film industry at large.
Year-to-date in 2014, The Marcus Corporation's revenue has grown by 8.7%, with a corresponding 7.8% growth in U.S. box office receipts. On a quarterly basis, the comparison is even more startling as The Marcus Corporation expanded its top line by 24% in the most recent quarter while its domestic box-office numbers only grew by 15%.
From 2004 to 2013, The Marcus Corporation also increased its per-person concession and ticket revenue in every single year. It generates superior profitability than its peers with an EBITDA margin in the 26%-28% range. In contrast, its larger competitors have achieved lower EBITDA margins of between 14% and 24%, according to its internal research.
Bigger fish in smaller ponds
The Marcus Corporation isn't a big-city circuit owner with a nationwide presence; instead, it's a regionally focused theater group with screens in only seven states. Notably, 83% of its screens are located in states where The Marcus Corporation is among the top two players.
There are two advantages associated with strong market leadership in local markets. Firstly, The Marcus Corporation has stronger bargaining power with movie companies, local concession distributors, and landlords.
Secondly, The Marcus Corporation benefits from economies of scale in marketing expenses, given the localized nature of movie advertising. The results speak for themselves, as The Marcus Corporation has maintained an EBITDA margin in the 26%-28% range for the past five years.
Carmike Cinemas capitalizes on its dominance of local markets in a different way. It calls itself 'America's Hometown Theatre' and targets small- to mid-sized rural markets. By avoiding crowded urban markets, Carmike Cinemas boasts two advantages over national theater chains.
Firstly, fewer competitors compete in these markets for wallet share, as there are usually less than 10 cinemas in each of these locations. Secondly, a more limited number of entertainment options exist in these markets, which could potentially act as substitutes for movies. These include things like fancy restaurants and live concerts & sporting events.
Enhancing the moviegoer experience
As more moviegoers are faced with many attractive forms of alternative entertainment, theater operators have to significantly improve the moviegoer experience. The Marcus Corporation is investing about $50 million in recliner seating and expanded food and beverage concepts this year.
The Marcus Corporation has introduced its premium DreamLounger leather recliners in eight theaters in six states. The DreamLounger recliners will provide moviegoers with enhanced comfort and approximately seven feet of legroom (coupled with auditorium remodels). According to The Marcus Corporation, customer feedback has been positive, and this has led to increased attendance.
The company has also launched several food & beverage concepts to cater to the varying needs of consumers. One of them is its Take Five Lounge, which provides a place for moviegoers to gather before and after a movie. Take Five Lounge comes with a full bar and also has TV screens equipped at certain locations for sports events.
Another one is Big Screen Bistro, an in-theater dining concept where food is served to moviegoers at their reserved auditorium seats. For those who prefer something lighter it has Zaffiro's Express, a lobby-dining amenity which makes freshly prepared pizza, sandwiches, salads & desserts available for in-theater carry-in.
Similarly, AMC Entertainment has worked on improving the seating experience and growing concessions sales. It replaced two-thirds of its traditional seats with recliners in some of its theaters this year, and anecdotal evidence indicates that movie-goer numbers increased by 100% on average at each location.
Furthermore, great minds think alike. Like The Marcus Corporation, AMC Entertainment also introduced a bar & lounge concept branded as MacGuffins. MacGuffins comes complete with a cocktail bar and a wide range of wine & beer offerings, which allows moviegoers to interact with their friends in a relaxing environment.
Real estate strategy
The Marcus Corporation also stands out among its peers with its real-estate ownership strategy. It owns 85% of its theaters, which compares to ownership ratios of 13% and 5% for Carmike Cinemas and AMC Entertainment, respectively. This allows The Marcus Corporation to minimize its rental expenses (fixed costs) and lower its operating leverage.
For a similar decline in revenue, The Marcus Corporation will see a lower decrease in net profit than its peers (which primarily operate on a leased-theater model) because of its lower operating leverage, so its net profit will take a lesser hit. In addition, The Marcus Corporation boasts tighter control over its prized locations and has the flexibility to effect capital improvements to its theaters without seeking landlord approval.
Foolish final thoughts
With more consumers seeking a variety of entertainment alternatives apart from movies, me-too cinema operators with no competitive advantages won't survive. My bet is with The Marcus Corporation, a market leader in its local markets which has differentiated itself with its real-estate ownership strategy and enhanced moviegoer experience.
After delivering record revenue and operating income through its movie-theater arm, The Marcus Corporation should continue to drive future growth through new marketing initiatives and a strong slate of new films lined up.