The movie theater business has been under pressure all year. The stocks of all major exhibitors have taken a hit due to a weaker box office, feeding fears people will stay home more often to enjoy entertainment alternatives like Netflix. The wildly popular streaming service has many companies considering a subscription offering.
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This summer, start-up MoviePass -- owned by Helios & Nathanson -- dropped its nearly unlimited service to just $9.95 per month (and only $89.95 for a year-long commitment), which is only slightly higher than the current industry average ticket price of $8.93. Most theater operators seemed unsure of whether to embrace or fight the unproven upstart. But earlier this month, Cinemark (NYSE: CNK) unveiled its Cinemark Movie Club offering, with its own set of features and benefits.
The Cinemark Movie Club
The Cinemark Movie Club costs $8.99 per month and offers:
- One 2D ticket to any movie you want per month
- Unused tickets will roll over to the next month, so if you don't attend a movie one month, next month you can bring a date
- Ability to reserve seats in advance with no fees
- 20% discount on concessions
CEO Mark Zoradi touted the program as the result of extensive consumer research into subscription services, "both in and outside of the entertainment industry".
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At first glance, $8.99 for one movie per month doesn't exactly seem comparable to MoviePass, which gives subscribers access to one movie every day. The discount on concessions is a nice twist, but anyone can see that the value of Cinemark Movie Club doesn't even come close to matching the competition ...
... but I think it actually does.
More competitive than you think
Before you shrug off Cinemark's offering, consider these points: First, the average ticket price in 80% of Cinemark's footprint is higher than $8.99 (even though the company's average domestic ticket was $7.71 over the past nine months), so on that basis, you're getting a deal, especially since you can carry over unused credits. Second, the average moviegoer only sees 5.3 movies per year. In order to get value out of an unlimited subscription like MoviePass, it would require the average moviegoer to more than double their normal movie attendance.
The business rationale for subscription services, such as gym memberships, is that people eventually normalize their behavior, decreasing their usage of a service over time. So unless you're a movie nut and see more than 12 movies per year, Movie Club's value is actually on par with MoviePass, especially with the 20% discount on concessions. In fact, if you aren't going to go more than once per month, it's a better deal than MoviePass' monthly rate.
But is it better for Cinemark?
Cinemark can definitely benefit from Movie Club, but as far as I can tell, only if it meaningfully increases traffic. While Cinemark's average ticket was $7.71 for the first nine months this year, I would assume most Movie Club members would mostly attend peak price showtimes (higher than $8.99), so let's call the effect on ticket revenue a wash.
However, chains generate the bulk of their profits from concessions, which are extremely high-margin. Cinemark's concession gross margin was 84% last quarter, with average domestic concession revenue of $4.48 per patron. A 20% discount at the popcorn stand would decrease gross margin dollars about 25%, from $3.76 per patron to $2.87.
However, this doesn't account for the fact that a) Cinemark may attract moviegoers that would have otherwise attended another local theater; b) it can gather valuable customer data which it can leverage for future discounts and offers; and c) since customers pre-pay, Cinemark can use the money earlier to buy back stock or invest in growth.
Will it work?
Cinemark's Movie Club release seems like a smart strategy. There's just one thing that bothers me -- I don't see why the other major theater chains can't replicate this service. That means one of the company's goals -- to take market share away from other chains -- would have zero effect. If all of the chains end up offering some sort of subscription plan, the ultimate result will be lower prices across the industry. That means theater chains must hope that subscriptions increase box office attendance overall, and with each trip to the theater, a corresponding purchase at the concession stand to boost profits.
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