The Business Of

Movies | Cineworld | How Do They Make Money?

Morning All!

A lot to pack in today, but I’m excited about what’s ahead so let’s dive right in!

As we can see below, there are 3 ways Cineworld makes money:

• Movie ticket sales,

• Food and drink sales, and

• Advertising revenue.

I’m not sure about you, but I was pretty surprised to see that cinemas only make about half of their revenue from ticket sales. But maybe that’s just me! Anyway, without further ado, let’s analyse each of these revenue streams below.

Volumes Down, Pricing Up!

So let’s start with the main revenue stream - movie ticket sales. And fortunately for us, the equation to calculate revenue from this segment is fairly straightforward…

The number of admissions x The average ticket price

And below, we see a chart of how Cineworld’s movie ticket revenue has changed over the last decade.

Hold on, what on Earth happened in 2018?! How did revenues go from $713m in 2017 to $2.5bn in 2018? Well, this jump is down to Cineworld acquiring Regal Cinemas in the US. And this acquisition does make it harder to analyse things from an overall group level. So because of that, we’ll look at the UK and the US separately.

First, let’s start with the UK. The chart below shows how attendance and average ticket prices have changed over time. The yellow bar shows admissions (measured by the left hand axis). And we can see admissions stayed very flat from 2012-2019. And the red/brown line shows the average ticket price (measured by the right hand axis). And we’re seeing much more growth here! With average ticket prices increasing from £5.50 in 2012 to £8.50 in 2021.

Of course, the impacts of the pandemic can be seen in the admissions fall in 2020. But first let’s talk about pricing. Because some of you may be thinking - ‘hold on, that can’t be right’. The last time I went to see a film, it was definitely more than £8.50 for the ticket! And if you look at the screenshot below, you’d be right. The price to go see John Wick: Chapter 4 tomorrow at my local Cineworld is £12.94 (including booking fee)!

So why did that previous chart say the average ticket price is £8.50? Well, that’s because of membership. Cineworld’s Unlimited Membership means that die-hard cinema goers can watch unlimited films for £17.99/month.

But let’s look at how the membership changes average ticket prices. If an Unlimited Membership customer watches 3 movies in a month, they would have paid £17.99 that month for 3 admissions. That works out to £6/ticket. Far below the £13-15 someone without the Unlimited Membership pays. But yes, whilst the membership plan lowers the average ticket price, it benefits Cineworld massively by bringing in stable, recurring income every month.

Now let’s look at the US. And the trends here are very similar. But let’s talk about admissions. As we all know, the pandemic destroyed admissions. Cinemas in the UK and US weren’t open for several months during 2020-21. And as we can see below, in H1 2022, Regal Cinemas’ admissions were still 43% lower than the 2019 level (on an annual basis).

Since COVID has died down, cinemas have done their best to make up for the lost volumes (admissions) through increased pricing (average ticket prices). In the US, we can see that Regal’s average ticket price has increased 10% vs 2019. And in the UK, ticket prices are up 20% vs 2019. However, whilst these increases in ticket prices are pretty sizeable, they clearly don’t cover the massive fall (~40%) in admissions.

So what can operators like Cineworld do? Well a lot of operators are also looking at the second main revenue generator to help them out…

Food and Drinks to the Rescue?

Okay, so there’s less people going to the cinema. (And we’ll really dive into why that is on Friday). Cinema operators have increased ticket prices to make up for some of that lost revenue. But what about food and drink prices? Have Cineworld been bumping up the prices on our popcorn too?!

Again, because of the Regal acquisition in 2018, it’s tough to see historical comparisons from a group perspective. So we’ll break it down into UK and US. First the UK! And the chart above shows us how the amount spent per person on food and drink has changed over the last 10 years.

And what we see is super interesting. The food and drink spend per person increased a very consistent 6% per year from 2012-2019. How did this happen? Sure, we’ve seen a trend where more people eat at the cinema now instead of before at a restaurant. And cinemas have introduced more alcoholic options at their venues (which are more expensive).

But the main thing to note here is that Cineworld has incredibly strong pricing power when it comes to their food and drink. It’s a little bit like what we saw at Tesco. If Tesco increased the price of your toilet roll by 6% every year, would you stop buying toilet roll? Hopefully not! It’s a part of your life.

Similarly, if Cineworld increased the price of your popcorn by 6% next year, would parents deny their kids their beloved popcorn? Or would you tell your date to starve?! Probably not. It’s a part of your cinema experience. And because of this pricing power, we saw food and drink spend per person rise by an extraordinary 41% in 2021! 41%! That is massive.

What about in the US? Well, it was a similar story. In 2021, the food and drink spend per person in Regal cinemas grew 30% vs 2020.

The final thing to note here is how much more the average movie-goer spends on food and drink in the US vs the UK. As we’ve seen above, the average US movie-goer spent $7.08 on food and drink last year. Whereas the amount spent by the average UK movie-goer was only £3.43.

Are the Regal cinemas better at selling more food and drink to their movie-goers than Cineworld? Or are Americans just keener on their coke and popcorn? I’ll let you decide…!

‘Let’s Go Late To Avoid The Trailers’…

Let’s talk about the final way cinemas make money. And yes, those trailers we see before a film (or many of us avoid seeing by coming to the cinema late) have a purpose!

Sorry Mr Stark, they’re not going away…!

And this revenue stream is like what we saw with Man United and their sponsorship income. Millions of viewers watch United’s games. Millions of fans buy United’s shirts. And with all that attention, companies that plaster their logos on the United shirt, and all over Old Trafford get a lot of recognition. Hence United receives millions of pounds from advertisers.

Similarly, Cineworld also attracts eyeballs. With millions of movie-goers in their theatres, Cineworld gives companies the opportunity to advertise to these people. And these ads come in the form of the trailers we see before the films! The chart below shows how Cineworld’s revenue from advertising has trended over the years. And the growth from 2012-2019 has been truly incredible. Advertising revenues in the UK have grown at 16% per year over that period! From £23m in 2012 to £68m in 2019.

Whilst we can see that advertising revenue is clearly down in the first half of 2022. The 22% shortfall vs 2019 is still markedly better than the ~40% fall in admissions vs 2019. This shows that cinema operators like Cineworld have done remarkably well at convincing advertisers to give them money despite less people seeing the ads.

4th Apr 2023

Nigel Jacob CFA