(P.70) Cinemas need a blockbuster

The Sunday Telegraph - 7 January 2001

Luke Johnson is chairman of Belgo Group and founder of Intrinsic Value

A few weeks ago a newspaper headline read: "The year Hollywood lost the plot". The article described how 2000 was the worst year in memory for the movies according to both critics and audiences.

The film studios have apparently lost their nerve and failed to come up with almost any blockbusters or really memorable features. Inevitably this crop of poor films has seen a slump in box office admissions, both in the United States and Great Britain. In both countries, it has come at a bad time for the exhibition houses.

During the 1980s and 1990s, a multiplex boom saw the building of a huge number of new multi-screen cinemas mostly in out-of-town leisure parks. In the UK, over two-thirds of the UK's 3,000-odd screens are in multiplexes. All these 200 sites have been opened since 1985, and they have fuelled the doubling of cinema admissions in the past 15 years.

More than £500m has been invested in multiplex cinemas since their arrival in the UK. Even in the past year new multiplex developments have seen an addition of 13 per cent more screens to an already over-supplied market. But in the US admissions are down 17 per cent on the year and the UK is unlikely to have fared much better.

Foreign groups own about 70 per cent of all multiplexes, and none are in the hands of quoted British owners. The French are the largest UK cinema screen owners, as Vivendi now owns Universal, which itself owns UCI with Paramount. French group UGC bought Virgin cinemas for £215m. The Americans are next, with Sumner Redstone of Viacom owning National Amusements, while Warner owns Warner Theatres.

Even the more confident UK multiplex operators are praying that Hollywood gets its act together

Almost the only major UK group is Odeon, which was bought for £280m earlier this year by Cinven from Rank, and merged with ABC. The remaining substantial multiplex company is Cine UK, which runs the Cineworld complexes, and is owned by UK and US financial backers.

There were 140m cinema admissions in 1999, which generated about £800m of revenue for the industry, if £150m for concessions and £100m for advertising income are included.

Unfortunately, the revival in cinema going is under threat from a number of sources. In particular satellite and cable television are relentless competition, with a nightly host of movies being shown, many of them pretty recent. Video and broadcast television remain a constant rival, especially when major events such as the Olympics are being shown.

Streaming material on the internet is yet another way to give the public moving pictures in the home. The fuel crisis, miserable weather and train problems cannot have encouraged filmgoers in the past few months.

Unfortunately the cinema business has high fixed expenses. It costs about £3m to build a 12-screen multiplex on a rented site. Rates, rent, labour and film rentals have all been rising but it is difficult to increase admission prices in such a competitive climate.

A number of locations now have too many multiplexes. The exhibitors need popular product from the studios to persuade the public to leave their homes and filmmakers have failed to deliver.

Cinema owners will always be at the mercy of Hollywood output. The resurgence in British movies is irrelevant to the mainstream cinema&emdash; most domestic product is only distributed to art house cinemas.

Like all industries, in a tough environment the strong will get stronger while the weak will suffer. Out-of-town multiplexes will take more market share and old high street cinemas will continue to shut and find alternative uses as pubs, bingo halls, residential developments and the like.

The well-sited multiplexes need only fill a quarter of all seats at every showing to make decent returns. They are better at selling popcorn and the like and can charge more for tickets, and have lower maintenance costs. Some of the more adventurous have even introduced bars and video game arcades into their sites in an effort to grow revenues.

But even the more confident UK multiplex operators must be praying that this year that Hollywood gets its act together and releases some really popular entertainment.

In the US high levels of debt and severe competition have led to chronic losses across the entire movie theatre industry. During the past six months, Carmike Cinemas, Edwards Theatre Circuits and GC Companies have filed for Chapter 11 bankruptcy, while Loews Cineplex and Regal Cinemas have defaulted on their debt. Together these operators account for more than 12,000 cinema screens &emdash; a fair chunk of the whole trade. The big players in the British cinema business will be looking nervously across the Atlantic, and hoping the same carnage is not repeated here.

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