The Business Of
Movies | Cineworld | What Are Their Costs?
Morning All!
So, yesterday we looked at the 3 ways cinema operators like Cineworld make money. As a recap, they were (i) movie ticket sales, (ii) food and drink sales, and (iii) advertising revenue.
Today, we’ve got a super interesting newsletter where we’ll look at how profitable those revenue streams are. Because after all, the ultimate prize isn’t revenues, it’s profits! Don’t be like this guy…
So the way Cineworld reports costs in their annual report is shown below:
But that doesn’t give us much information! We want to know what actually makes up the ‘Cost of Sales’. How much does it cost to run the films? To sell the food and drink?
So with some best estimates, we’ve split up ‘Cost of sales’ into smaller parts. And the above chart becomes this…
Much better! Now there’s plenty to dive into! So without further ado…
Err Who Knew Film Hire Was So Expensive?
So let’s first look at the cost of selling movie tickets. Yesterday we saw that Cineworld’s average ticket price in the UK was ~£8 in 2022. But how much of this £8 does Cineworld keep as profits?
Well, some of you may wonder, why do they have to give away any of that? And the answer is, because they didn’t create any of the films they’re showing. Cineworld needs to hire the movies from the film studios who did create the films. And then Cineworld and the film studios share the ticket prices. The ‘Big Five’ film studios can be seen below…
So Warner Bros, Paramount, Walt Disney Pictures, etc. create the classic films we all love. And the question is - where do cinemas like Cineworld come into the picture? Well, cinemas are the distribution channel for the film studios. A little bit like what we saw in The Business Of Tesco. We buy Coca-Cola from Tesco. But Tesco obviously don’t make the Coca-Cola. Coca-Cola make the products and use Tesco as the distribution channel.
Remember this…
Well now we have this…
The slight difference is that in the case of supermarkets, Tesco will buy the drinks from Coca-Cola for an agreed price. And then mark-up the drinks in their stores to make profit. However, in the case of Cineworld, the cinema operator doesn’t buy the movie from the film studios. Instead, the cinema operator rents the film and then splits the ticket sales with the film studio.
And I’m sure you’re dying to ask… what’s the split?!
And the answer is 53/47. 53% of ticket sales go to the film studio. And 47% is kept by Cineworld. Of course, these values vary for the different studios. The big ones like Warner Bros are likely to take even more than 53% whilst the smaller studios will take less. But on average, Cineworld gives away 53% of their ticket sales to the studios. Meaning their gross margin on movie ticket sales is 47%.
Now, is the 53% that film studios take from cinemas a lot? Well, yes. And many commentators believe film studios should be lowering their share in order to help cinemas out in the current climate. But film studios have the bargaining power. It’s a similar case to what we see with Spotify vs Music Labels. Music labels have the power and so Spotify takes a relatively weak cut from their own revenues. We’ll do a week on Spotify soon but for those who can’t wait, this article explains how revenue is split in the music industry!
But for now, let’s move onto how profitable Food and Drinks are for Cineworld. And you may be pretty stunned by this…
BYOP - Bring Your Own Popcorn!
Right, so yesterday we saw that in 2022, the average movie-goer in the UK spent £3.43 on food and drink. But how much does it cost Cineworld to buy that food and drink in the first place? And hence what kind of profits do they see on this food and drink?
Well, I was astonished to learn that for every £1 we spend on food and drink in a cinema, the cinema operator takes 80p as profit! This means that the Regular Popcorn you buy for £4.95, only cost Cineworld 99p to make! This equates to an 80% gross margin. 80%!
Well, what does that mean for profits in this segment? The chart below shows us that in 2021, Movie Tickets brought in a lot more revenue for Cineworld than Food and Drink. However, as we now know, the gross margin for Food and Drink is 80%. Whereas the gross margin for Movie Ticket sales is 47%. What this means is that the Food and Drink segment brought in about the same profit for Cineworld as Movie Tickets!
And this is what we talked about on Monday with Amazon. Amazon make most of their revenues from their retail business. But most of their profits come from cloud computing. For cinemas, more than half their revenues come from movie tickets. But they make the about same level of profits from selling coke and popcorn!
Fixed Costs - A Gift and A Curse
So the gross margin on Movie Tickets is ~47%. The gross margin of food and drink is ~80%. That means the company’s gross margin must be somewhere between that right? Wrong. Because we’re missing two important costs. People and Buildings!
We’ve covered quite a bit today so I won’t spend too long on these costs. The important thing to note here is how fixed these costs are relative to the costs we saw earlier.
Let’s look at the payments to film studios. Cineworld only pays these costs based on sales activity. If a lot of tickets are sold, Cineworld pay a lot to film studios. If no tickets are sold, Cineworld pay nothing to film studios. So these costs are very variable. Similarly, with the food and drink costs. If lots of coke and popcorn are sold, then Cineworld will need to buy more coke and popcorn to stock up. However, if sales are slow, costs will be low. Again, very variable.
However, with people and buildings… these costs are much more fixed. Cineworld will always need their buildings - to show the films. And they’ll always need people - to serve the food and drink. And these costs don’t change much year on year. The fixed nature of costs can be great for a company when sales are strong. Because companies can achieve strong operating leverage. But when sales are struggling, high fixed costs can be a problem. And that’s the last thing we’ll explore today!
Can The Margin Stage A Comeback Or Is It Curtains?
Okay, so we’ve looked at Cineworld’s main costs. What happens when we put revenues and costs together - what do margins look like for the company?
Well, the chart below shows us that Cineworld’s EBIT margin was incredibly consistent from 2012-2019. Whilst we saw yesterday that admissions growth was weak, the company’s pricing power fuelled topline growth. And the high margins we see in food and drink have helped the company maintain their overall margin levels. At least, that was the case till 2020…
And whilst COVID obviously hurt revenues (because cinemas were shut). The reason the margin was so impacted was because of the fixed costs we talked about earlier! If lots of movie tickets are sold. Or if no movie tickets are sold (like in the pandemic). Cineworld have the same costs for their buildings (lease payments). And if no food or drink is bought (like in the pandemic), Cineworld still have staff to pay! Whilst lease negotiations with landlords and government furlough payments softened the blow, it was still a hugely painful year.
But surely, post-pandemic, we’ll see the margin quickly revert back to the 12-15% we used to see? And we’ll get our rom-com feel good finish? Well, we’ll see in tomorrow’s newsletter that whilst that may be the case for Cineworld… they have even bigger issues to worry about!
5th Apr 2023
But anyway, that’s a wrap for today! Tomorrow’s newsletter promises to be a cracker. Because we’ll really explore why Cineworld is facing bankruptcy and how the company could turn itself around.
Have a cracking day!
The Business Of Team