Horror Show at the Cineplex

Perform a comprehensive analysis of the five competitive forces. Discuss what level of competition can be anticipated amongst industry rivals.

Attaining only modest to flat growth of .8% from 2006 to 2011 and a projected growth rate of 1.5% from 2011 to 2016, the Cineplex area of the entertainment value chain is considered to be in decline (Ibrahim, Wee, 2002). This just accentuates the pressure however on making the best possible competitive strategies transform struggling Cineplex-based businesses into profitable ones. The framework that will be used for analyzing the competitive dynamics of this market is the Determinants of Competitive Advantage or Five Forces Model as defined by Dr. Michael Porter (Porter, 2008) . The Five Forces Model takes into account the most critical factors that influence a company’s ability to withstand competitive pressure and thrive based on its innate strengths (Porter, Millar,1985). The five forces included in the model include Buyer Power, Threat of New Entry, Supplier Power, Threat of Substitution and Competitive Rivalry. Figure 1 shows the Porter Five Forces Model. Starting clockwise from the top of the model and progressing around each area, this paper will analyze the case study pertaining to the Cineplex market.

Threat of New Entry

There is an abundance of competitive threats that are impacting the financial performance of the traditional cineplex business model. The greatest threat of new entry is digital projection cineplexes that offer an enhanced viewing experience, complete with larger, more dispersed chairs, quieter theatre layouts and an expanded menu of concessions, all of which are aimed at creating a more pleasurable viewing experience (Overfelt, 2007). Also included in these higher-end theatres, which include IMAX technologies for digital projection, is a concerted marketing strategy of showing only 3D movies, which is a defensive strategy relative to the developing threat of 3D television in home theaters (Grimani, 2010).

Buyer Power

The buyer or consumer is in control of this industry and its value chain more than any other of the factors included in this Five Forces Model analysis. With just 12 hours spent on in-theater entertainment relative to 3,500 hours spent in total entertainment yearly, cineplexes are just a fraction of how people choose to be entertained. Add in the highly competitive area of in-home theatre systems, 3D television (Grimani, 2010), and streaming videos online, and the buyer has more power than any other factor in the competitive structure of this industry.

Threat of Substitution

The threat of substitution is also significant in this industry. The Cineplex faces competition not only from home entertainment systems and the rapidly developing level of performance of technologies specifically designed for that market, they also face competition from shopping experiences that ironically enough the Cineplex was designed to strengthen and accentuate (Ooi, Sim, 2007). There is also the threat of personal video viewing on Apple iPods, iPads and digitally enabled tablets, all of which have the storage capacity to support feature-length films on them today (Grimani, 2010).

Supplier Power

The suppliers in the value chain of this industry are the production firms that spend millions of dollars per picture to create them, with no assurance of a return on their investment. Suppliers have significant budgetary flexibility in how they manage the production, post-production, distribution and exhibition aspects of the value chain. They also are required to create the most alluring and interesting aspects of the film projects to maximize their monetary value, which includes recruiting the best direction, production and acting talent affordable. Suppliers have significant impact on the film yet have increasingly lower levels of control over the actual viewing experience, as the competitors included in this case study have that aspect of the value chain as the main part of their business model.

Competitive Rivalry

As the factor analysis included in this Five Forces Model illustrates, this is a very competitive, turbulent industry in the midst of significant transformation. The Cineplex industry will consolidate over time as consumers will increasingly opt to redefine this aspect of entertainment to their unique needs and requirements with 3D television in the home just being the beginning (Grimani, 2010). The consolidation of this industry based on customer experience is ironically being accelerated with the heavier reliance on in-theatre advertising which many see as obtrusive and a waste of time when coming to see a movie (Rotfeld, 2006).

2. Describe the advantages and disadvantages of each of the top four competitors’ situations and strategic approaches.

The four competitors mentioned in the case study include AMC, Carmike, Cinemark and Regal. Each of these competitors has advantages, disadvantages, and vary in their strategic approach to the market. AMC’s strengths include its reliance on urban markets for the majority of its revenue, more screens than any other competitors in metro markets, and a heavy reliance on megaplex service strategies. The disadvantages include a higher ticket price, high levels of investment in digital and 3D theatre technologies and in-theater dining which has yet to deliver significant profit (Overfelt, 2007). Carmike’s strengths include its strong mid-market position relative to competitors who are in metro areas of 100,000 people or less, the lowest cost per screen at $206,000 and strong market share throughout the smaller cities of the U.S. The disadvantages Carmike has are that is strategy of converting non-digital theaters and cineplexes to digital has proven to be very costly and behind schedule (Grimani, 2010). Cinemark has the lowest ticket price of any of the competitors mentioned in the case study, with an average price of $5.11. They also have the third-most number of screens in the group of competitors provided. Their disadvantages include one of the highest costs per screen at $367,000 and the second-smallest number of total screens in the competitors being analyzed with 3,606. Regal has the most number of theatre locations in the U.S. with 526, which gives them the greatest number of screens with 6,355. Their ticket price is the highest however at $7.43 and the cost per screen also is the highest at $430,000. Their latest investments into digital technologies continue to differentiate the specialty theatres they have at the high end of the market, which further differentiates them relative to smaller competitors.

Each of these competitors is taking a slightly different approach to their strategies, with the smaller cineplex chains concentrating on regional markets. AMC and Carmike specifically are concentrating on this regionalization strategy very successfully. Cinemark and Regal are focused on urban markets and have been more aggressive in investing to deliver exceptional customer experiences. The focus in these cineplex businesses is on high definition 3D entertainment and in-theatre dining, all of which are designed to differentiate at the experience level of purchasing a ticket to the cineplex, not just in viewing a film (Ibrahim, Wee, 2002). Differentiating the customer experience and the financing of digital and 3D technologies will define the future of this industry over the long-term.

3. Describe the financial considerations that affect the profitability of major movie theater businesses.

According to IBIS World, 47.3% of the total movie-going public in the U.S. are occasional moviegoers who by definition see a movie less than once a month on average (Grimani, 2010). Only 10.3% are frequent moviegoers, seeing movies more than once a month on average. There is also 32.2% of the total U.S. population that are not moviegoers at all (Grimani, 2010). Why these statistics are important is that they highlight how critical it is for cineplexes to concentrate on customer loyalty and increasing the frequency with which customers see movies with them. There is significant churn in this industry between cineplexes and theatres as well (Ooi, Sim, 2007). The churn is often based on experiences customers have in cineplexes not measuring up to their expectations (Ibrahim, Wee, 2002).

Due to these factors, the first and most significant financial consideration is how to minimize the level of customer churn and increase lifetime customer profitability. As the cineplex as an entertainment category is going to consolidate and eventually be represented by only a small number of companies, minimizing churn while concentrating on increasing profit-per-visit is going to be the path to profitability for many vendors in this market. The second major financial consideration is creating a more exciting, fun entertainment experience of going to the cineplex. The efforts to date of creating dining experiences have only been somewhat successful (Overfelt, 2007). The focus needs to be more on a personalized approach to creating a unique customer experience. The third factor is how capital-intensive the conversion process is of traditional cineplexes to the new digital and 3D technologies (Grimani, 2010). This is a strategy many of the competitors in this market are pursuing to the extent their financial strength and capability will allow them to. The struggles of Carmike for example in converting to 100% digital and 3D technologies have led to financial losses earlier and the need for raising their ticket prices rapidly to compensate for the unforeseen costs (Overfelt, 2007). The financial considerations of minimizing customer churn while increasing the level of technology used is critical for cineplexes to stay in step with the needs of their customers over time. All of these factors taken together are creating significant financial strain on the industry however, which will eventually lead to a shakeout of this industry.

4. Describe what strategic options are feasible given the situation facing industry participants.

The most effective path these companies can take is to define an alliance and create a merged organization, where the strengths of each from a geographic standpoint support the operations of the entire business. This approach could also allow those businesses with the greatest expertise in digital media and 3D imaging to concentrate on outfitting the older theatres with these technologies. A merger of AMC and Regal would lead to control of about 46% of the market according to the latest market share estimates from IBIS World (Grimani, 2010). While there are antitrust implications of this strategy, it would serve to create a more efficient industry structure overall. The secondary strategic option is to define much more focused and targeted experiences for the movie-going public, allowing for greater customization of the experience. This would drive up prices and hopefully also lead to greater profitability over the long-term.

5. Describe what recommendations would help to improve their likelihood of future success.

The most critical factor of all that these cineplexes need to concentrate on is customer profitability and reducing customer churn. The need for creating greater stability in revenue streams and greater profits-per-visit is also essential for this industry to stabilize (Overfelt, 2007). Making the cineplex experience unique and highly profitable is critical for future growth.

References

Grimani, A. (2010, February). 3D Is for Real This Time. Residential Systems, 11(2), 18-19.

Muhammad F. Ibrahim, & Ng C. Wee. (2002). The importance of entertainment in the shopping center experience: Evidence from Singapore. Journal of Real Estate Portfolio Management, 8(3), 239-254.

Joseph T.L. Ooi, & Loo-Lee Sim. (2007). The magnetism of suburban shopping centers: do size and Cineplex matter? Journal of Property Investment & Finance, 25(2), 111-135.

Maggie Overfelt. (2007, June). Saving the Cineplex. FSB: Fortune Small Business, 17(5), 72.

Porter, Michael E., Millar, Victor E..(1985). How Information Gives You Competitive Advantage. Harvard Business Review, July 1, 149.

Michael E. Porter. (2008, January). THE FIVE COMPETITIVE FORCES THAT SHAPE STRATEGY. Harvard Business Review: Special HBS Centennial Issue, 86(1), 78-93.

Herbert Jack Rotfeld. (2006). Movie theaters’ suicide-by-advertising with income from abusing customers. The Journal of Consumer Marketing, 23(7), 480-482.

Figure 1:

Porters’ Five Forces Model

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