While most people have had great experiences visiting theme parks, they might not have invested in one before. Theme park operators like Six Flags (NYSE:SIX) and SeaWorld Entertainment (NYSE:SEAS) actually make for excellent investment candidates, as they are far more immune to competition than most companies in other businesses.
Huge entry and exit costs
Six Flags is the largest theme park operator globally, with 18 parks located in the U.S., Mexico, and Canada and annual revenues exceeding one billion dollars. If you are tempted to start your own theme park, you might want to take note of the price tag.
It takes approximately $300 million to construct a theme park comparable to one of Six Flags' parks and more than $5 billion to build a portfolio of theme parks to beat Six Flags and claim the title of world's biggest theme park operator. The development cycle for a theme park is also about two years long. This gives Six Flags ample time to prepare for any new competitors if they announce plans to start their own theme parks.
Even if the new entrants aren't deterred by the huge start-up costs and long development cycles associated with theme parks, they still have to contend with the issue of finding the right locations (or any locations, for that matter). Suitable locations for new theme parks are hard to come by due to zoning restrictions and the large amount of space required. Moreover, Six Flags already serves key markets and boasts prime locations in each of them.
Exit barriers for incumbents such as Six Flags also help to deter new entrants. Six Flags has already committed large amounts of capital to investing in the infrastructure and specialized equipment (such as roller coasters), giving it a high fixed cost structure. Every incremental visitor to Six Flags' theme parks costs little in terms of variable costs, and each sales dollar flows almost straight down to the bottom line.
On the other hand, Six Flags will find it difficult to find buyers for its fixed assets if it chose to shut down its theme parks. As a result, Sx Flags is unlikely to exit the theme park business, even if it faces stiff competition. This suggests that brutal competition to grab market share will ensue if new entrants choose to compete.
The results speak for themselves--Six Flags has increased its attendance numbers and revenue every year since 2009. Approximately 26.1 million people visited Six Flags' theme parks in 2013, compared to an attendance figure of 23.3 million in 2009. During the same period, Six Flags' revenues also grew from $913,000 in 2009 to $1.1 billion in 2013.
In addition, season pass and membership holders accounted for 48% of theme park attendance in 2013. This suggests that it will be tough for new entrants to "steal" market share from this group of customers with higher switching costs.
Furthermore, Six Flags benefits from its ability to spread fixed costs over a much larger revenue base than smaller competitors and any new start-ups. Its operating costs as a percentage of revenues declined from 75.6% in 2009 to 60% in 2013. As you can see, Six Flags enjoys a significant cost advantage over new entrants.
Strong intellectual property and brands
With a history spanning more than half a century, SeaWorld owns a portfolio of 11 marine-life and animal-focused theme parks with a collection of approximately 86,000 marine and terrestrial animals. As of the end of 2013, its intellectual property portfolio includes 200 brands & marks, 700 active U.S. trademarks, and approximately 400 foreign trademark registrations in more than 60 countries.
Apart from its corporate and theme park brand SeaWorld, some of SeaWorld's key brands include Shamu, Turtle Trek, and SeaRescue.
The term "Shamu" is now synonymous with SeaWorld's orca or killer whale shows, while "Turtle Trek" is known as a unique 3D 360-degree dome theater experience revolving around a sea turtle's journey. Turtle Trek enhances visitors' in-park experiences and can expand revenue generation opportunities. SeaRescue is an Emmy-nominated Saturday morning television show which tells the stories of how the SeaWorld rescue team and its partners rescue, rehabilitate, and return marine animals to the wild. This helps to build awareness of SeaWorld's theme parks.
SeaWorld is positioned in the minds of consumers as a destination attraction for marine life, and this brand equity is something that new entrants will find hard to build in a short period of time.
Strong brands still need to be nurtured and protected, of course. SeaWorld saw its attendance figures fall from 24.4 million in 2012 to 23.4 million in 2013, largely due to Blackfish. Blackfish is a documentary focusing on the captivity of Tilikum, a killer whale once held by SeaWorld. Blackfish suggested that whales in captivity fared worse compared to those living in the wild and were treated poorly.
In response, SeaWorld formed a "Truth Team" to reach out to the public via advertisements and social media, with the aim of correcting some of the misconceptions brought about by the Blackfish documentary. While the jury is still out on who is right, SeaWorld's public awareness efforts have led California lawmakers to put their "Orca Welfare and Health Act" on hold, according to reporting by the New York Daily News.
Notwithstanding the effects of Blackfish, SeaWorld has turned in a decent performance in the past few years. Between 2009 and 2013, it expanded its revenues and EBITDA by CAGRs of 6.9% and 8.6% respectively. Looking ahead, SeaWorld should have no problems leveraging on its brand power to grow visitorship numbers.
Foolish final thoughts
More companies have been destroyed by competition than went bust during the Great Depression. Theme park operators such as Six Flags and SeaWorld are less affected by competition, compared to other businesses. Six Flags keeps new entrants out because of high entry and exit barriers, while SeaWorld's strong brands give it a huge advantage over competitors with consumer mind share.