Business Review: Regal Cinemas

Have you ever wondered why your popcorn and diet soda cost $9 when you visit the movie theater? It is probably because that is the only way that a movie theater can stay in business. A simple review of Regal Cinemas SEC filing for 2005 illustrates the problems facing movie theaters these days. Let's MineThatData, and understand how expensive concessions contribute to the profitability of this organization.

Regal Cinemas operates 6,463 screens in 555 theaters across 40 states, representing a significant portion of the movie industry. During 2005, here is how their financials break down:

Revenue (Sales Numbers in Millions):

Admissions $1,662.2

Concessions $659.8

Other Operating Revenue $194.7

Total Revenue $2,516.7

Two-thirds of their revenue comes from ticket sales. The average ticket sold at a Regal Cinemas is $6.80.

Twenty-six percent of their revenue comes from concessions, with the average customer spending $2.70.

The fastest growing source of revenue is in other operating revenue. This category represents the advertising you see before a movie, as well as business meetings held in the theatre during off-hours.

A movie theater is expensive to run. Let's break down some of the expenses at Regal Cinemas.

Fifty-three percent of admissions revenue is gobbled up in film rental and advertising costs. This means $3.62 of your movie ticket are gobbled up by the movie industry.

Of the $2.70 you spent on concessions, Regal Cinemas pays $0.39 for the product, pocketing $2.31 of your expenditure. The product you purchase at the concession stands costs about seven times as much for you to purchase as it cost Regal Cinemas to purchase. Wow.

The remainder of your movie ticket is gobbled up by other expenses. Remember that $3.62 of your movie ticket goes to cover film rental and advertising costs. Another $1.27 goes to cover the rental expenses of the actual theater. Another $3.90 cover general and administrative expenses, depreciation, and an assortment of other costs.

So, you spend $6.80 on your movie ticket. Regal Cinemas pays $3.62 + $1.27 + $3.90 = $8.79 per ticket to cover their expenses. See the problem? The theater has already lost $1.99 on you, the customer, the minute you purchase your ticket.

This explains why the theater needs the $2.31 profit generated by concessions, and why the theater needs an average of $0.80 advertising revenue per customer, in order to survive.

With movie traffic decreasing year-over-year, Regal Cinemas generates all of its profit from concessions and advertising. And as traffic continues to decrease, Regal Cinemas continues to ask its most loyal customers, the ones still going to theaters, to pay more and more money on food, and to watch more and more advertisements. This is the way Regal Cinemas is trying to remain profitable.

It should also be noted that almost half of the profit Regal Cinemas generates is gobbled up by interest expense. $0.19 of your $6.80 ticket go to cover the interest on debt that Regal Cinemas has.

This is a business model that is tough to profitably manage. The next time you decide to boycott the $9 you will be charged for popcorn and a diet soda, consider the alternative --- that one day in the not-so-distant future, the theater industry just won't exist.