The aim of this research paper is to analyze the case study of Cinemaplex and their profitability. Cinemaplex is a special case because it presents divergent results. For instance, in 2007 the box office revenues hit a record $9.63 billion which was a 5% increase from 2006. The ticket sales were a record $1.4 billion.
However, on the other hand theatres are declining while screen numbers are going up. This paper seeks to answer five questions. The first is to discuss what level of competition can be anticipated amongst industry rivals. The second is to describe the advantages and disadvantages of each of the top four competitors’ situations and strategic approaches.
The third is to describe the financial considerations that affect the profitability of major movie theater businesses. The fourth is to describe what strategic options are feasible given the situation facing industry participants. The last question is to describe what recommendations you would make to improve their likelihood of future success.
It is a fact that competition is part and parcel of any business. Most companies will be in competition for customers or vendors. Any good businessman or company head will seek to know who his competitors are and gather information on their business. With competition comes the necessary strategy that needs to be developed at the various levels to effectively deal with issues arising.
There are several levels of competition. The first is corporate level which as the name suggest occurs among the corporate organizations. The second is business unit level and the third is functional or departmental level (Hitt, Ireland and Hoskisson, 2011).
The first is corporate level which is a strategy that is geared towards making business selections that the initial company has got to compete with. At this level, a reach is identified that will work as the yardstick on what issues will be dealt with at the corporate management. It is in this same level, that the corporate is charged with the responsibility of identifying the areas where it will compete. Managing practices is also part of the strategy as it will help the corporate decide how its business units will be governed (Hitt, Ireland and Hoskisson, 2011).
The second is identified as the business unit level that as a strategy it focuses on how to develop and sustain that aggressive advantage being experienced by a company on its goods and services. The formulation phase deals with issue of positioning the business against its rivals.
It influences the nature of competition via strategic actions like the vertical integration. It also anticipates change that may occur in demand and technology thus the need to adjust to accommodate these changes. Third is functional level whose strategy involves learning how to operate a company’s divisions and its departments. Here the business level units have to be efficiently and effectively executed (Hitt, Ireland and Hoskisson, 2011).
The four major competitors are Regal, AMC, Cinemark and Carmike who in total operate 1405 theatres which is 19% of the total and do control 40% of screens in the country. As a disadvantage, prices are controlled by the market forces. Second, the same movies are shown and in most cases at the same time.
Also if any chain adopts a change, it is then copied by the rest while food service is nearly identical. The only part where competition can occur is the demographic market that they serve, distance from viewers’ home to the cinema and the security of parking lots.
Also the proximity to restaurants is a key factor. Regal is more focused on middle size market by using multiplexes and megaplexes. Its average ticket price is $7.43 which is the highest in the group. Its cost per screen is a high of $ 430000.This shows that they have an advantage that they can exploit by charging the highest and still not lose customers (Hitt, Ireland and Hoskisson, 2011).
On the other hand, AMC concentrates on urban localities with megaplexes and largely populated centers such as the ones found in Florida, California and Texas. Its cost per screen is thought to be as high as that of Regal or even above it. This exhibitor obviously enjoys the large number of customers that it serves.
Cinemark had an average ticket sale of $5.11 which was the lowest among the top four. It serves in the smaller market by operating as the sole exhibitor in over 80% of its market. It obviously has a clear advantage of monopoly of the market but the small market demographic is not enough to make it realize large returns.
Carmike specializes on small to middle sized markets by targeting populations of less than 100000 who have few entertainment options. Their average ticket sales were $5.89 but their concessions were the highest at $3.05 (Hitt, Ireland and Hoskisson, 2011).
The movie theater business draws revenue from three main sources. They are box office receipts, concessions and advertising. They mostly exhibit a marginal or negative net income, but make profits with the sale of concessions and showing advertisements to the patrons. In the case of box office revenue, ticket sales provide a two third of the revenue collected.
The return on the receipts is sadly rather small. This imbalance in power calls for setting up of contracts that will increase returns. The increase in revenues can be attributed to the increase in ticket prices thus increasing the returns to the operators (Hitt, Ireland and Hoskisson, 2011).
Concessions are pretty much high across the operators and the patrons usually do complain. Concessions do average about 25% to 30% of revenues. Direct costs are at a low of 15% of the selling price, thereby making concessions the biggest source of profits for the operators. However, it is under the influence of attendance patterns, pricing range and the costs of materials. The most important is attendance as if more people do attend then the more sales (Hitt, Ireland and Hoskisson, 2011).
Advertising is used by the exhibitors to generate revenue during the pre-show. Even though it does make up only 5% of revenue it has very high profits. It has been projected that advertisements will increase at an average of 10% in the next decade. However, most patrons do not like the advertisements.
This presents a difficult situation where the operator has to balance the revenue and the satisfaction of the patrons. In the end, the operator has got little control over the revenues and profits. He can however control the adverts but the audience utterly hates them (Hitt, Ireland and Hoskisson, 2011).
As already aforementioned, the three main sources of revenue for operators is box office revenue, concessions and advertising. In the case of box office revenue, it deals with ticket pricing and sales. The operators have to be careful while pricing as when they increase and it gets too high then the patrons will opt for another venue.
Therefore, the pricing has to be according to the current market and economy so that the patrons do not feel overcharged. In the case of those operators in rural or small population markets, they can take advantage of this monopoly and increase their ticket price but just below that of the highest operator in a large market.
The small population operator can take advantage of the fact that he is the only one providing such as service but at the same time should bear in mind not to go overboard (Naficy, 2010).
Concessions have already been established to be directly proportional to the number of patrons who attend the shows. However, this is not one of the revenue sources that the operator has a direct control on.
He may lure the patrons to his premises but it is up to the patrons to choose whether to turn up or not. Advertising generates bigger profits even if it only brings 5% of the revenue. Now this is the one factor that the operator has complete control over.
They can decide how many advertisements run before the show starts. There is a catch rather which is that the audience loath adverts. They view it as time wasting and boring. Some claim that they did not pay to come watch adverts which they left running in their home television sets.
Here the operator has to walk a tight rope in order to balance the feelings of his patrons so as not to anger them while ensuring he maximizes his profits from the advertising. It has been projected that the number of adverts will go up in the years and this is directly proportional to the increase in revenue from them (Naficy, 2010).
In my opinion, the operators are already doing a good job by accepting change and increasing more screens while reducing theatres. The current demographic market indicates that people would rather see a box office hit movie than a play or musical.
This change has been brought about by changes in technology with the introduction of digital screens. The change has been a negative one as the same advancements are also in the home areas. This means that now television screens are made to create a home theatre experience with the current 3-D and sound systems.
More patrons claim that they get the same experience at home like a theatre so they just choose to avoid the hustle of going to one. Patrons also complain of the disturbances during the show at cinemas. They include crying babies, ringing cell phones, sticky seats and floors (Naficy, 2010).
In order to improve future success and avoid total collapse, the operators can provide a movie-going experience that most patrons seek. They can make sure that their services are up to standard and make the experience an adventure that will make them to keep going back for more.
Most people would like to leave the comfort of their homes to experience a change and by attending theatres is one of the ways. Another way of increasing success is by targeting the right group. Young people provide the highest number of patrons. However, they are limited in what they can spend as they are supported by their parents or guardians. Therefore, operators should target adults as they get an income and can afford to spend more at the theatres.
The operators need to attract them by showing adult appropriate movies that will appeal to them thus ensuring that more attend the shows. It a good sign that the operators are embracing change in technology but they should maximize on the movie-going experience as the patrons cannot create this at home (Naficy, 2010).
Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2011). Strategic management: Competitiveness and globalization, concepts and cases: 2011 custom edition (9th ed.). Mason, OH: South-Western Cengage Learning.
Naficy, Hamid. (2010). Multiplicity and multiplexing in today’s cinemas: Diasporic cinema, art cinema, and mainstream cinema. Journal of Media Practice, 11 (1), 11-20.