Return
Of The Glut?
There are more
cinema auditoria in the United States today than there were
in the pre-bankruptcy 1990s.
Is exhibition headed for another bout of oversaturation?
by Anne Gilbert
With the screen-count
explosion came the dark times.
Between 1995
and 1999 America saw a precedent-shattering 35-percent
increase in cinema auditoria.
Trouble followed.
The increase fed rampant market-oversaturation. Competition
grew so fierce the majority of the nation’s
largest chains were forced into bankruptcy protection. Hundreds
of venues had no choice but to shutter. The stage was set
for an industry-transforming series of mergers and acquisitions.
Five years later, stability has been restored. All the
cinema companies in Chapter 11 came back out, most in
the space
of a year. Restructured cinema chains ramped up sound-and-motion
pre-show advertising programs, providing an economic
cushion with which unpredictable attendance could be
weathered.
And the national screen count stayed below 37,000.
Until last
year.
New screens
are again opening faster than old ones are closing, and
2005 saw the active U.S. auditorium count
rise above
37,000 for first time since exhibition’s much-publicized
bankruptcies. By the end of last year, the screen count had
swollen to an unprecedented level. Does this new and rising
ceiling portend another crisis for exhibition? Those within
the industry wonder.
“I don’t see a lot of modern overbuilding occurring,
where somebody puts a stadium on top of a stadium that is
adequately serving the market,” observes Bill Stembler,
CEO of the St. Simons Island, Ga.-based Georgia Theatre Company
(GTC). “But I do see a lot of new megaplexes still
being built.”
Why Now?
The aggressive programs of construction that greeted the
late 1990s were spurred considerably by the successful
1995 launch of what was then the nation’s largest
multi, AMC Theatres’ Dallas Grand 24-plex. The origins
of 2005’s sudden 1,000-screen upswing are murkier.
“Most of the building occurring in our
industry is necessary as some of the older locations become
outdated,” contends
Mike Wilson, director of design and construction of Muvico
Theatres. His Ft. Lauderdale, Fla.-based circuit currently
has six new multiplexes in various stages of development,
all slated to open from the end of 2006 through 2008.
GTC’s Stembler concurs. During the firestorm of late-‘90s
construction, he says, circuits concentrated on bringing
megaplexes to major market areas. “The single-run markets,
where you had one theatre playing all the product and no
competing theatres within 10 miles or more, were left behind.” Current
construction projects, then, frequently represent efforts
to bring state-of-the-art cinemas to suburban and rural communities.
It is an effort, Stembler asserts, “we have just about
completed, on a national scale.”
He does note, however, that GTC currently – and for
the first time in 15 years – has nothing under construction.
With the March completion of a 5-screen expansion of a facility
in central Georgia, GTC marked the end of its recent phase
of modernizing and upgrading existing facilities.
One “practical reason” for the growing screen
totals, points out Jeremy Devine, vice president of marketing
for Dallas-based Rave Motion Pictures, “is the re-emergence
of many circuits from Chapter 11 and the overall more hospitable
environment for exhibition to garner capital to now build
again.”
For its part, Rave just completed three new
plexes in 2005, ending the year with a total circuit screen
count of 334.
They have several more under construction across five states,
which will add an additional 93 screens by the end of 2006.
Dan Harkins, chairman and president of Phoenix-based
Harkins Theatres, is overseeing what is perhaps the most
aggressive
expansion in exhibition. His circuit plans to add no fewer
than 10 new multis the Phoenix area, and currently has six
new plexes under construction in California, Colorado and
Texas. If all goes according to schedule, 521 new Harkins
screens will bow between now and the end of 2008.
But the unusual speed with which Harkins is
erecting new facilities is in large part just a byproduct
of how fast
Arizona itself is expanding. On a percentage basis, Nevada
is the only U.S. state outranking Arizona in terms of population
growth. The circuit’s growth, says Harkins, is “in
coincidence with our development partners developing more
projects that are ideal for movie theatre locations. Not
every new shopping center gets a movie theatre; there may
already be one nearby. But as these developers are building
to accommodate growth, at the same time it creates the opportunity
for theatres to be built in their centers.”
| “The problem is,
the older locations are not shutting down at the expected
rates,” says Muvico’s Mike Wilson. “I
expect over time we will see more of the older locations
shutting down, thus correcting the market.” |
Booming with the Population
Many of the other fast-growing circuits are, like Harkins,
regional companies building heavily in some of the fastest-growing
metropolitan markets in the country.
GTC’s Stembler cites a rough formula for building to
population growth: “If you have 10,000 people then
you can probably have one screen that you think should dominate
that market.” By this rule of thumb, a metro area that
grows by 100,000 people every year would need one brand-new
10-plex every year – not counting any construction
going to the expansion, updating or replacing of existing,
older sites.
Cinema operators also frequently try to stay
ahead of the competition by building where rapid growth is
merely anticipated. “We
have smaller theatres planned in growing markets as we see
opportunities in that segment,” notes Muvico’s
Wilson.
“Occasionally, we may be a bit ahead of the overall population curve,” says
Rave’s Devine, “but look forward to being well-situated in areas
that are growing rapidly.”
“I would say that, for the first time in our entire 72-year history, we
have more theatres on the drawing board that are going into high-growth areas
that will have not just years, but decades of growth remaining in their future,” says
Harkins.
MJR Theatres, based in Oak Park, Mich., similarly
allows population growth and market patterns to dictate expansions
and new construction. “Because
of frequent sellouts,” says circuit chairman Mike Mihalich, “it
was obvious we could increase our revenues as well as better accommodate our
customers with more screens.”
Site Selection
Cinema operators have long sought to avoid falling victim
to gluts by looking beyond simple population growth when
considering a potential site.
Because cinemas are prized by retail developers
for their ability to lure consumers, exhibitors are always
keen to
situate their new cinemas near complimentary establishments. “I’m
looking for restaurants that serve sit-down dinners and serve
at least beer and wine, so that there’s a nightlife
scene in the immediate area,” says Stembler.
For Harkins, visibility and accessibility
are key. “We
want to make sure that our theatre is located in the epicenter
of commerce for that area … at a freeway access that
is convenient for moviegoers to reach us,” he explains.
Other indicators for desirable locations range
from demographic make-up (young, well-educated, high-earning
populations tend
to be the most frequent movie patrons) to local services.
Stembler cites the presence of a local newspaper as a positive
indicator of activity in the area, and the presence of regional
services, such as hospitals, which will allow a new build
to potentially draw from a region wider than the incorporated
city. MJR’s Mihalich also looks for a strong school
district.
Rave’s Devine mentions that his circuit specifically
looks to areas that are currently served only by outdated
theatres that are not in a strong position to compete with
newer, more innovative structures.
| “If our business doesn’t improve at the
box office in 2006 or should it drop below 2005 levels,” says
MJR’s Mike Mihalich, “I would not be surprised
to see some more Chapter 11s.” |
Optimism with Caution
Despite the considerable care exhibitors now take when pursuing
new sites, the specter of overbuilding continues to loom
over the industry. “It’s always one of my primary
considerations,” concedes Stembler.
While building an entirely new site in an
area would ideally call for each screen to draw from a population
of 10,000,
the actual person-per-auditorium ratio in the United States
is actually lower than that, and shrinking. In 1995, there
were approximately 9,733 people for every cinema screen in
the country; 10 years later that ratio had dropped to 7,865
per screen.
“The problem is, the older locations
are not shutting down at the expected rates,” says Muvico’s Wilson. “I
expect over time we will see more of the older locations
shutting down, thus correcting the market.”
Devine sees a similar process of natural selection
primed to reshape the industry. “The ‘shelf life’ of
many existing theatres,” he says, “continues
to constrict in a rapidly changing moviegoing environment.” He
adds that only those sites with “the latest and most
innovative designs” can survive it.
Mihalich is not necessarily as optimistic.
He maintains that developers of large commercial projects – lifestyle
centers and regional power centers – are currently
indulging the same building frenzy that vexed the cinema
industry a decade ago.
“Developers need theatres in these developments
and some are doing very aggressive deals to lure theatres
in,” he
laments. “I believe many of these will fail. If our
business doesn’t improve at the box office in 2006
or should it drop below 2005 levels, I would not be surprised
to see some more Chapter 11s.”
Stembler similarly looks at the slowing of
box office receipts with caution. “The big question for me is, why would
the building continue, if it has … with total disregard
to the drop in ticket sales over the last three years?”
Harkins believes he is situated to avoid the
pitfalls of rapid growth. “We do not go into areas where we feel
we are going to cannibalize from our own theatres, and we
don’t build theatres that are totally dependent on
cannibalizing from our competitors,” he explains. “We
make sure these locations can operate on their own and have
enough local moviegoer support for that theatre to be successful
on its own, without stealing from others.”
He says Harkins is concerned with making each
theatre “profitable
in its own right. Instead of looking at screen count or a
total revenue figure, we look for having … locations
that are all profitable individually.”
“Our theatres tend to be more regional
in nature and draw from larger radiuses in comparison to
other models we have
seen in our industry,” notes Wilson. By drawing on
a larger, more widespread population, he says, “most
of our major market and regional locations tend to suffer
very little impact from existing or new competition.”
Mihalich attributes potential problems in
the exhibition industry to the mistakes of overeager novices: “I think
that the overbuilding is a result of either ignorance in
the marketplace or people who are new to the industry using
other people’s money. I do not know of any way to protect
yourself other than keeping your facilities clean, modern
and well-maintained and providing your customers with a consistent
positive experience at a reasonable price.”
He adds, “In this climate, I am a big believer in large
auditoriums.”
One message came up with nearly every circuit
owner with whom In Focus spoke:
The way to building more without building
excess is through research. A carefully-researched site
can easily make the difference between a profitable new facility
and one that is quick to shutter. 
