Theaters find way back into green
Survival goes to those who do best job crunching numbers
By MARGARET WEBB PRESSLER, The Washington PostAugust 26, 2004
There's something special about a night at the movies - it's all about friends, American pop culture and escape. And it's accessible to just about everyone.
So much for the warm and fuzzy. The next time you sit down in a soft, rocking movie seat with built-in cup holder and removable armrests, appreciating your clear line of sight thanks to the tiered stadium seating, consider this: You are just part of a complicated number-crunching formula.
There has been much turmoil in the movie theater business in the past few years, with thousands of older screens going dark, even more screens opening up, bankruptcy filings by nearly every major theater chain, followed by consolidation and buyouts.
But what theater operators have come away with is a much better understanding of how to run a movie theater - and it's about the math, not the magic. Forget the exotic movie palaces from the early days of cinema when the theater was grand and ornate, elevating the stature of the film itself. Forget, even, the neighborhood place with one screen, where the weekend's excitement depended on what title the owner placed on the marquee. Today's movie theater operators have figured out, with incredible accuracy, where a theater needs to be, which amenities it needs to have, how many tickets it must sell, how many screens it requires and how long it has to hang on to the latest release.
And now that they've figured all this out, the big chains are starting to build again: A thousand new screens have opened nationwide in the past year after five years of stagnation, according to the National Association of Theatre Owners, a trade group based in Washington.
"We are kind of at the halftime of the rescreening of America," said David Brain, chief executive and president of Entertainment Properties Trust, a Kansas real estate investment company with a $1.1 billion portfolio of movie theaters.
Since 1997, about a third of the nation's movie theaters have been replaced by megaplexes, generally those with more than 14 screens per location and unobstructed stadium seating, Brain said. But he estimates another third will convert to this new format over the next seven to 10 years. That means another wave of wipeouts among smaller theaters with just a handful of screens, which, for all their comparative inadequacies, continue to anchor neighborhoods, especially in urban areas.
"There could be a town, could be an area, where there's a six-plex and you just can't build a 16-plex," Brain said. "But by and large, they will go away."
Older theaters with fewer screens can easily be hurt by glitzy new megaplexes for a variety of reasons, the most obvious being that they simply offer the audience a better viewing experience. The older sloped-floor theaters, built on a slight incline from front to back, don't prevent someone small, especially a child, from having the view blocked by someone taller. And even the newest sloped-floor theaters are likely to have less cushy seating and sound systems that can't compare to the latest large-format complexes.
These kinds of physical attributes have gained importance among the moviegoing public, largely because of the way movies are distributed today. It used to be that when a new movie came out it would be shown in, perhaps, 1,500 theaters and hang around for six weeks. But with 36,250 screens nationwide now, up from 26,000 a decade ago, a blockbuster movie today can open on 3,000 or more screens and may last just two or three weeks. Because moviegoers have so many choices of where to see a new film, they're quite likely to pick the comfiest seats, the best sound and the clearest view.
"People will travel further to go to stadium seating," said Tal Newhart, president of Theatresforsale.com, a mergers and acquisition firm that deals strictly with movie houses. "That indicates to me that they are looking for the experience through the doors. It's not just what's on the screen."
And once ticket sales begin to fall at an older theater, it starts a dangerous cycle. In the first two weeks a movie is out, the movie studio, not the theater, gets the vast majority of the ticket revenue, so theater owners rely on sales at the concession stand to make their money. If traffic drops off and concession revenue falls, theaters often have no choice but to cut back on staffing and maintenance, industry experts say. Before long, such a complex becomes what one retail broker calls "a sticky-floor six," a slightly run-down, older theater that patrons turn away from even more as it goes downhill.
Meanwhile, the economics of a megaplex is "compelling," Newhart said. With 16, 18 or 24 screens, the traffic in and out is constant and the popcorn sales never stop - yet the staffing costs are only incrementally greater than for an eight- or 10-screen theater. These complexes are also attractive to groups going out together, such as families that might want to break up to see different films and then reconvene afterward. And bigger complexes have enough screens to offer most current releases as well as some second-run movies on smaller screens - another marketing advantage.
But the numbers still have to work. "It's not casual math," Brain said. "It's determined by density of population, transportation infrastructure, the presence of competition."
Between 1997 and 2000, movie theater operators moved blindly into the business of megaplexes without much regard to what would happen to the older theaters they already owned. The industry got stuck with too many screens, which put most of the major theater companies into bankruptcy. On top of that, some new projects the theater companies built turned out to be too large or too small for the markets they served.
But today, Brain said, the industry understands that a single screen needs 10,000 people within a 15- or 20-minute drive, depending on the market (for example, in California people will drive longer). So it would take an accessible market of 160,000 to support a 16-screen theater, which has helped quash the old notion that bigger is necessarily better. A 30-screen theater may work in some places, but it turned out that such large complexes often struggle with a dearth of movie titles to fill all those screens. Balancing the two elements - traffic and titles - is critical.
"Our feeling is the sweet spot may be 18 to 20 screens," Brain said.
Movie theater chains are employing economists to crunch these kinds of numbers and look for more building opportunities, and as they do, the ripple effect will be clearly felt in urban neighborhoods and smaller shopping centers with subpar theaters.