In recent years, the movie business has become increasingly global, with China and its growing middle class taking on a huge importance in box office results.
Major studios cannot release a big budget film without at least considering how it will play in China and other international markets, and now, just one company will potentially control the biggest theater chains in the all-important U.S. and Chinese markets: the Wanda Group, backed by Chinese billionaire Wang Jianlin. Motley Fool analysts Vincent Shen and Sean O'Reilly look at Wanda's aggressive expansion into entertainment and how theaters are innovating in the face of declining ticket sales in this edition of Industry Focus: Consumer Goods.
A transcript follows the video.
This podcast was recorded on March 8, 2016.
Vincent Shen: I think it's really good here to have some background, an industry color in terms of where the theater industry ... the theater sector, or the operators have been, overall.
First of all, you got to recall that China's Dalian Wanda Group, so it's run by the richest man in China, his name is Wang Jianlin. He acquired AMC (NYSE:AMC) in 2012 for $2.6 billion and since then it's been pretty clear he's trying to expand his influence over entertainment worldwide, because Wanda is already the largest theater operator worldwide, they already own the largest theater chain in China. So this now gives him the largest theater chain in the U.S. as well. They got this nice filled out portfolio there.
They're moving really aggressively with more consolidation so they bought, they announced a deal to acquire Legendary Entertainment a few months ago for $3.5 billion. Keep in mind AMC also acquired Starplex Cinemas last year for about $170 million. Tons of consolidation in the industry and that's probably just because of some like higher level trends I think with consumers in entertainment. The fact of the matter is, there's a lot of these new options, streaming services. And just taking, I think ... in terms of entertainment options from movie theaters. People have a lot of choices now on a Friday night for what they want to do.
For industry wide, the number of screens and ticket sales have fluctuated significantly over the past decade or two, they've been stagnant or declining too. I feel like within the U.S. these theater chains and this industry, it's like a perfect example of a saturated market. So these companies have been forced ... the only way they can achieve better scale is either through some of these consolidating deals or they've been trying to boost their results with a lot of these new amenities. Think what's come up in the past 10 to 15 years: IMAX, 3D ...
Sean O'Reilly: Lounge chairs.
Shen: Lounge chairs, and then I see way bigger menus now, I feel like at the concession stand. It used to be popcorn, candy, soda. Now you have also have much more substantial food. Think like wings, chicken tenders, I see fries, even like burgers sometimes at some of these theaters.
O'Reilly: They have bars sometimes.
Shen: Exactly. So bar service too.
O'Reilly: What ... I had known this for a while but we talked about in ... six, eight months ago when we did our original theater show. What percentage of revenues and profits for theaters comes from the concession stands? Cause it's like all their money basically.
Shen: We mentioned the revenue sharing deals that they have with these major studios, so the thing is, the margins that they get from their concessions, I think at least double what they get from the ticket sales.
O'Reilly: They're charging $8 for popcorn that costs 10 cents.
Shen: You can see how important that is and you can see how they've ... how they're innovating, by expanding this menu. I personally, as a movie goer, in terms of the viewing experience, don't necessarily appreciate when somebody walks in and it smells like fried chicken in the theater, and I can hear them eating. But at the same time I can understand that with this kind of saturated market they're pushing with these lounge chairs and these other offerings to try and boost attendance.
This deal itself in my view, also not necessarily certain, just because there is going to be a lot of oversight and review by regulatory authorities and the fact that we now have from 4 to 3 bigger players and just the size of it, I think a lot of investors are expecting the combined entity to have to shed some theaters in order for the deal to go through.
O'Reilly: Got it.