Not All Projections Bad for Overgrown Theater Chains

Movie theater chains have a lot more to worry about than whether patrons will buy stale popcorn, and that’s not likely to change for at least a couple of years.

The continued shakeout gripping exhibitors caused largely by gross overbuilding will get worse before it gets better. The financial strains on the circuits could well lead to more bankruptcy filings. Already skittish lenders have tightened the spigot on funds.

This summer, United Artists, Carmike Cinemas, Edwards Cinemas and Silver Cinemas, which owns the Landmark art house theaters, have filed Chapter 11 bankruptcy petitions. A slew of other major circuits, including Regal Cinemas, Sony Corp.-controlled Loews Cineplex and AMC have seen widening losses. Movie theater stocks are about as popular with investors as “The Adventures of Rocky and Bullwinkle” was with summer moviegoers.

The result of the upheaval isn’t all bad news, however. Industry leaders expect a much-needed consolidation to create a healthier business for the survivors.

Some major chains might merge, perhaps even the long-rumored combination of AMC and Loews. Expensive leases will be renegotiated, and obsolete, unprofitable theaters will be shuttered.

“All this turmoil is going to save the business,” says Tom Sherak, chairman of 20th Century Fox’s Domestic Film Group. “Exhibitors are not going out of business; they’re looking for protection under the law to redesign their businesses.”

Already, savvy investors such as Denver billionaire Philip Anschutz, whose investment group is taking control of the UA circuit, are seizing the opportunity.

Despite this summer’s downturn in box-office revenues and attendance, people haven’t stopped driving to theaters to see movies on the big screen.

“I think in the long term, exhibition is a very viable business because there is nothing more fundamental to the world of entertainment than going to the movies,” says Shari Redstone, president of the closely held Boston-based circuit National Amusements, parent of Viacom Inc.

The rash of bankruptcy filings is in part a legal maneuver by exhibitors to break leases on unprofitable theaters they want to close. A spruced-up operation opens the door for suitors such as Anschutz to resurrect the company.

“He’s the guy in white tie and tails at the fire sale,” says Ted Shugrue, president of Loews Cineplex International.

Not all chains are on the ropes financially. National Amusements and Century Theatres in Northern California--both old-line, family-run businesses--say they are highly profitable, having avoided the pitfalls that tripped up many of their competitors.

These circuits were able to expand their businesses in the last five years without getting caught up in the megaplex building frenzy that began in the mid-1990s and left many theater operators saddled with massive debt and mounting losses.

“We have taken a very long-term strategic approach to the business,” says Redstone, the 46-year-old daughter of Viacom’s high-profile chief, Sumner Redstone. In 1936, her grandfather Michael Redstone founded the theater company, which today operates more than 1,350 screens in the United States, Britain and Latin America.

“When we looked at new markets, we always built in superior locations where we had access to all the product . . . and if it didn’t make sense to build, we didn’t build,” Redstone says.

By building multiplexes too close together, aggressive exhibitors have cannibalized their own and one another’s businesses. They also took on a lot of debt to build, putting themselves in precarious financial positions.

National Amusements, unlike most exhibitors, has the advantage of owning most of the real estate under its theaters, so it’s not bound by burdensome leases. A lot of the troubled theater chains locked themselves into high rents in fancy new malls the last few years as landlords played competing exhibitors against each other.

This summer, admissions and box office were down from a year ago, largely because Hollywood didn’t produce the same number of megahits it did during last summer’s record-setting season.

And, even in the best of times, movie theaters are a slow-growth, mature business. There’s only so much you can charge for a movie ticket or a box of Milk Duds. Studios get a bigger cut of the box office in the first weeks of a film’s run. So, in an era when a lot of movies do the bulk of their business in the first two or three weeks and often don’t have the “legs” to play longer, exhibitors get hurt.

So, what makes the movie theater business worth the risk?

Conservatively run, it’s a cash cow. Century has doubled its business in the last five years, says Raymond Syufy, chief executive of the San Rafael-based company, which has more than 700 screens primarily concentrated in Northern California and other Western states.

Syufy declined to divulge the privately held company’s margins, but noted, “I’d say 95% of our theaters are making money.”

The exhibitors who got into trouble, suggests Syufy, are those who put all their efforts into building rather than operating and managing their existing theaters.

Syufy and Redstone concur that exhibition is fundamentally sound, and although it’s a slow-growth business, it can be a cash cow.

“If you build the right number of theaters in the right locations for the right amount of money and operate them properly, you can make a lot of money,” says Syufy.

Some exhibitors point a finger at Hollywood, blaming a lackluster box office and decreased attendance for their financial woes. Loews’ Shugrue, a former studio executive himself, says Hollywood’s strategy of releasing huge numbers of film prints to generate instant box-office results means more money for Hollywood and less for movie theaters.

But Syufy says that’s a cop-out.

“Hollywood is not to blame. Over the last 15 years, the business has neither declined nor increased more than about 5%. If exhibitors cannot find a way to be profitable when the business is flat or down 5%, that is not Hollywood’s problem. We need to look at our cost structures and balance sheet and have to protect our downside in a mature market.”

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Too Many

Theaters

Moviegoing has failed to keep up with the frenzied building of movie theaters across the nation. To survive, exhibitors are forced to close older, unprofitable theaters and increasingly run for bankruptcy cover.

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Since 1980, U.S. movie ticket sales have increased only 43% ...

Ticket sales in billions

1980: 1.02 billion tickets sold

1999: 1.47 billion tickets sold

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. . . while the number of screens in the country has more than doubled.

1980: 17,675 U.S. screens

1999: 37,185 U.S. screens

Sources: National Assn. of Theater Owners, Motion Picture Assn. of America