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Addressing Industry Dependency Essay

Regal Entertainment Groups is the parent company of Regal Cinemas, which is made up of Regal Cinemas, the United Artists Theaters, and the Edwards Theater. It runs the largest theater circuit in the U.S., and uses the multiplex cinema model in metropolitan and metropolitan growth areas.

The movie theater industry is highly competitive, both within the film entertainment industry (as with Netflix and pirated films) and with substitute goods, such as live performances, restaurants, and sporting events. In addition, industry competitors have an extremely low level differentiation from one another, which is partially due to the reactive nature of the industry. It is also due to the considerable dependency on major film production companies.

Regal’s dependency on the film production companies for profitable films and film advertising contributes to its lack of differentiation from its major competitors, which hinders its profitability potential in a market of ambivalent consumers.

This report recommends that Regal pursue both an active advertisement campaign team to deliver the message of Regal’s value directly to the consumer (a practice not traditionally observed in the movie theater industry) to create brand recognition, and forge partnerships and agreements with live performance venues, utilizing Regal’s existing digital technology. By doing so, Regal could increase its profit margins, decrease its dependency on quantity and quality of mainstream film companies, create greater value to consumers and stakeholders, and provide new entertainment possibilities and community experiences that have not been available on this scale before.

Position

Company Overview

Regal Entertainment Group was created out of a consolidation of the Regal Cinemas, the United Artists Theaters, and the Edwards Theaters in 2002 (“Regal Entertainment Group Company History”). Regal Cinemas are primarily a line of multiplex, first-run theaters in urban, metropolitan, and suburban growth areas. It currently operates the largest theater circuit in the United States, with 520 theaters, averaging 12.6 screens per location, with a total of 6,558 screens. (Form 10-K 4) It is currently one of the ‘big three’ competitors in this industry.

Mission, Vision, and Values

Regal Entertainment does not currently have a mission or vision statement. It would be advisable to create such statements in order to improve investor and employee understanding of what Regal hopes to be, and better focus its efforts and attempts to solve current and future problems (Yuthas 9-10). However, their business strategies listed on the Regal Investor Relations webpage provide some insight into the company’s values. The four strategies listed are maximizing stockholder value, pursuing selective growth opportunities, pursuing premium experiences opportunities, and pursuing strategic acquisitions and partnerships. Combining these strategies with their metropolitan multiplex approach, their business landscape shows a drive to expand, using economies of scale to create value for the viewer, as well as their partners and suppliers. Their activities will better reflect their values, and will be discussed in greater length in this report, under the Current Activities section.

Key Stakeholders

Regal’s key stakeholders include the usual categories: stockholders, suppliers, employees, and business partners. Regal’s main suppliers are their food and beverage suppliers and the major movie production companies that Regal depends on for their first-run films. The food and beverage suppliers include beverage companies like the Coca-Cola Company, and confectionary companies like Tootsie Roll Industries, Cadbury Schweppes, and the American Licorice Company. Regal’s sheer size makes it a desirable client, and the economies of scale benefit both parties. Partners of note include AMC, one of its major competitors, with whom Regal jointly owns Open Road Films, a film distribution company.

This will be discussed in more detail under the Current Activities section. AMC could conceivably take over if Regal were to go under, but splitting the cost and the risk of a new venture is a benefit to AMC. Regal also maintains an investment in National CineMedia (NCM), as does AMC and Cinemark (Form 10-K 74). NCM is an advertising service that acts through cinemas to reach the consumer. While this allows for more advertising within Regal Cinemas, Regal currently does not advertise itself outside of its theaters and website. NCM and Regal have a mutually beneficial relationship, in which Regal’s geographic expanse and numbers of theaters give NCM greater exposure, while Regal benefits from the money from the advertisers. However, Regal does little outside advertising for its cinemas.

Regal Entertainment Group created the Regal Foundation, which is a non-profit charitable organization “committed to [improving] the quality of life in the communities in which [Regal operates] by providing funds and other resources to aid the initiatives of national and local charitable entities (“Community Affairs”)…” Some of it beneficiaries include the Will Rogers Institute, and their partners include the Boys & Girls Club of America, the American Red Cross, and the Make-A-Wish Foundation (“Community Affairs”). All of these stakeholders rely on Regal’s profitability to continue successfully, in order to maintain their charitable support.

Current Financial State

Regal reports a total of 211 million cinema viewers in at the end of the fiscal year December 2011, and recently reported dividends of $0.21,declared for Class A and B common share. These dividends have been distributed for the past four quarters (Form 10-K 97). Regal anticipates continued dividends in the foreseeable future, but note that dividends are considered quarterly and are only paid when their Board of Directions approves them. From May of 2002 to the end of December of 2011, Regal has returned $3.3 billion in cash dividends to their stockholders (Form 10-K 5).

The movie theater industry as a whole has a fairly low profit margin to dip into, and Regal has the same approximate costs and revenues as its competitors (Mintel – Leading Companies). Regal’s 2011 10-K states a net income of $40 million dollars, and cash and cash equivalents of $253 million, with $174 million in accounts payable (54); Regal appears confident in its ability to met its obligations.

Current Activities

In 2003, a year after its consolidation, Regal removed video games showing “graphic depictions of sexual behavior or nudity,” “graphically violent character deaths” or “human-like characters suffering bloodshed and/or dismemberment.” It also removed games depicting “violence toward law enforcement officers or other figures of authority or the ‘glorification of illegal activity (Earnest).’” A potential reason for this decision may be Regal’s major shareholder, Philip Anschutz, who is heavily involved in Conservative and fundamentalist Christian politics, and actively supports Christian and family-friendly cinema (Haber). The aim appears to be to gear the public areas of the theaters towards a more family-friendly approach, although this has had no effect on the MPAA film ratings that the theaters would normally show. This may be relevant to any changes they wish to make to the business in the future. Regal appears to be fairly reactive to market changes rather than being proactive.

They, as have their competitors, turned a great deal of attention to digital, 3-D, and IMAX technologies (“Market Size and Trends”). Regal has been investing a considerable amount of time and effort into IMAX technology, as well as their own version of IMAX, called RPX (Regal Premium Experience), which emphasizes improved uncompressed surround sound. Another trend that Regal has followed is creating a dining experience in-theatre with its subsidiary, Cinebarre. There are 28 locations that are experimenting with various menu items, pricing strategies, and serving styles, such as the traditional restaurant versus being able to order directly from the audience seating. A few locations have beer and wine availability, and a total of 5 are testing the direct-to-seating Cinebarre method (Form 10-K 14).

One of the major audience draws to the multiplex structure is the all-encompassing experience that involves “the consumption of the space as well as the visual consumption of the movie” (Hubbard). Open Road Films is jointly owned by Regal and AMC. According to Regal’s 2011 Annual Report, they believe that “Open Road Films has a unique opportunity to fill a gap in the marketplace created by the major studios’ big-budget franchise film strategy by marketing smaller budget films in a cost-effective manner which [Regal] believe[s] will drive additional patrons to [sic] theaters and generate a return on [sic] capital investment” (12). They are approximating that they will eventually be distributing eight to ten films per year, effectively filling any dead space left by the major film production companies.

Industry Overview
Key Players and Market Share

The major competitors that Regal currently contends with are Cinemark and AMC. Both of these companies have overseas markets, which Regal does not. Both also prefer geographical locations similar to those preferred by Regal. This is to be expected, as the multiplex structure is most profitable in such metropolitan and growing suburban areas that these first-run, multiplex theatres prefer to locate themselves in. Regal currently holds 21% of the market share, with AMC and Cinemark holding 20% and 18% respectively (“ Leading Companies”).

Current Practices

Currently Cinemark and AMC are pursuing trial runs in improved and expanded concession ventures, which appear to be successful, judging by their continued implementation (“Leading Companies”). AMC and Cinemark currently have a potential advantage over Regal in their foreign markets. Not only have they expanded the number of people who will see first-run Hollywood films, but they have good relationships with foreign movie production companies and currently show their films in other countries. As previously mentioned, the industry and major competitors have made the move to digital, 3-D and IMAX technologies.

Sense
Industry Challenges and Causes
Piracy and Alternative Goods

The industry’s battle with pirated films is well known, costing the entertainment business as a whole roughly $20.6 billion (Plumer). It also competes with such legitimate entertainment businesses as DVD rental services, Pay-per-View, cable television, and similar entertainments. Not only this, but since most of the movie theaters are in areas of high population, there are multitudes of other activities to compete with, such as live theater, restaurants, sports bars, pubs, concerts, and sporting events, to name a few.

Fewer Total Annual Viewers

It is no surprise that the current recession has had a significant impact on consumer’s spending habits. A night at the movies is an affordable luxury, but a third of the total respondents reported going to movies less in 2009, and again in 2011, than the previous year. Although there was a small increase in total revenue in 2010, it declined by 1.2% in 2011, with the lowest number of tickets sold since 1995 (“Segment Performance: Box Office Admissions”). The most profitable age group (18-34) are attending live performances more often than in the past, and as unemployment continues, their numbers are decreasing at the box office, although they still are going more frequently than any other age group (“Family Entertainment on a Budget”).

Ambivalent Audiences

Not only is the number of attendees declining, but consumers do not have a strong brand loyalty to their cinemas. A Mintel report showed that the major criterion for selecting a movie theater was the proximity to home (66% of respondents of all ages cited this as an important factor in their decision), the availability of the desired time (53%), and how comfortable the seats were (56%) (“Consumer Trends”). The brand of the cinema appears completely irrelevant for the average consumer. Branding has considerable value for any industry, yet movie theaters do not appear to have made a lasting connection with the average consumer.

Reliance on Film Production Companies

The industry depends heavily on the film production companies. Movie theaters depend on good relationships with the firms to get a contract, and must pay a premium for the use of big-name productions. The pricing has improved since the transition to digital, but to equip thousands of screens with the most profitable movies is still expensive. There are been accounts from the film companies that because releasing to DVD is more profitable for the studio, there may be fewer films released and theater running times may decrease farther (Szalai). The movie theater industry historically has a low profit margin, and having empty theaters will only decrease it further.

Regal Challenges and Causes
Market Saturation

There are a limited number of profitable places to create the multiplex experience that Regal specializes in. In light of the prevalence of competing first-run theaters that also occupy the same profitable locations, it seems that Regal is running out of places to go within the U.S. Its films are primarily first-run big-name productions, which are the biggest draw to the box office, but since the other major competitors specialize in showing these films as well, this is only a minor point in Regal’s favor. Regal could conceivably open theaters in more remote locations, but while big-name films are popular everywhere, they are also the most costly to rent (Morgan).

Opening in less densely populated areas could mean higher costs than revenues, if the attending numbers aren’t high enough. Another option could be expanding Regal Cinemas overseas, but expanding overseas is a highly risky and costly venture. It should also be noted that AMC and Cinemark have already established themselves in the most convenient overseas locations (namely Central and Latin America), and have been closing theaters in recent years (“Leading Companies”), indicating Regal may have a difficult time finding a marketing foothold.

Fewer Total Annual Viewers

Despite the optimistic announcement of Regal’s 2011 attending numbers, movie theater attendance for the industry has been declining (“Family Entertainment”), and Regal’s viewership went down by 5.5% (“Segment Performance: Box Office Admission”). The economy has had a significant impact on the buying power of Regal’s main audience: middle to upper-middle class families and young adults (18-25). These are currently becoming more price-sensitive groups, and movie prices are nearly the highest they’ve ever been (Morgan). While Regal cannot turn the economy into a bull market, it could create some consumer incentives to attend Regal Cinemas.

They have a customer rewards program; restructuring the rewards program to create a better value may help incentivize an increasingly price-sensitive market. Some have suggested a return to staggered pricing, which fluctuates depending on the movie title and show time, typically having higher prices for popular movies at peak viewing hours (Zeitchik). However, pricing rarely regresses, and if Regal is the only movie theater to attempt it, consumers may resist and direct their attentions to movie theaters with more familiar pricing.

Viewers are turning towards other methods of movie entertainment, such as Netflix and On Demand (Form 10-K 7), as they are more affordable and convenient. As mentioned in the industry challenges, the key age group18-34 are attending more live performances than before, indicating some experience value that Regal is not providing them. Regal must find a way to remain competitive and to market greater value to these consumers to coax them out of their homes and away from live venues.

Dependency on Film Production Companies

As noted in the Industry Challenges, Regal is dependent on the major film production companies. Because of the film production companies’ release times, theater business is seasonal, peaking during the summer months and during the holidays. This is occasionally broken up by a fluke film release, but this is again the choice of the film production company. Not only is Regal dependent on the timing of the releases, but also on the quality and draw of the films. Regal notes in its 2011 Annual Report that the decline in viewers during 2010 may have been due to the poor product offerings those years (Form 10-K 37). If the film production companies do decide to reduce the number of films produced and reduce the run times of these films in favor of earlier DVD production, Regal stands to lose profitability in the future. The production companies take a significant portion of ticket sales, anywhere from 35% to 100% for a specified amount of time, on a film-by-film basis (Morgan).

More popular movies will have a larger percentage taken from their ticket sales for a longer period of time. This effectively decimates Regal’s earnings. Most theater-viewers see the film within the first six weeks of its opening, and the highest volume is within the first two to three weeks, when the production companies are taking their cut. Also, the younger, profitable age groups tend to go during the first few weeks, and older viewers, who are notoriously more price-sensitive, tend to wait until the crowds die out. Having a shorter timespan to show the films, knowing that the best part of those profits will be going to the production companies, and having fewer films to pack the multiplex seats: it is clear these issues will create profit gaps for Regal if left unaddressed.

Regal’s Open Road Films venture is perhaps an attempt to alleviate the stress from that dependency, but it is not a full solution to the problem. ORF is a distribution company. While Regal must enjoy some income and savings from its involvement, they are not (and are not legally able to) actively creating their own films to guarantee quantity and quality of films. However, its first films distributed met with success, with Killer Elite starring Clive Owen and Robert De Niro, and The Grey starring Liam Neeson. It is a good addition to the company, but it is not enough to fully address Regal’s dependence.

Lack of Differentiation From Competitors

First-run movie multiplex theaters are the most profitable in the motion picture theater industry. However, there is very little differentiation between major movie theaters. They all show the same big-name films, they provide the same concessions, they have very similar prices, and their layouts and locations are similar. The industry shift to digital and IMAX technology is also widespread, so it despite Regal’s investment in it, it does not create a sustainable advantage. As discussed earlier in this report, consumers are fairly ambivalent about which cinema they attend to see a particular movie, which is understandable, considering the striking similarities of major movie facilities. Again, the two highest deciding factors in a consumer’s cinema selection are the cinema’s proximity and the availability of the desired viewing time.

Movie theaters depend on movie production companies to advertise their films, and do not create significant advertising outside of their facilities and website, with the exception of local newspapers (Segment Performance: Advertising). The production companies do not advertise specific theaters, and so Regal must depend on its location and available viewing time to entice audience members. Since there is little to make Regal stand out from the crowd this way, creating an active marketing campaign designed to show advertisements outside of the newspapers and company website could be a divisive next step to better differentiate itself from other theaters.

Problem Statement

Upon the given information of the industry and business environment and challenges: Regal’s lack of differentiation from its competitors and its dependency on film production companies is negatively impacting its profitability.

Uncover

Problem Focus and Potential Solutions

In creating the fishbone diagram (Appendix A), I present the problem as a two-pronged issue that stems from dependency and lack of differentiation. I chose to present it this way because both problems are intertwined, and can be solved by similar means.

Dependency on Film Production Companies

Again, film companies claim a large percentage of the ticket sales for the first few weeks. After that period, Regal gets the majority of the ticket sales. However, the profitable market groups (tweens, families, and the 18-25 age range) tend to see movies in the first few weeks, which means Regal is left with fewer tickets, and thus lower total profits. Regal could attempt to renegotiate with film production companies regarding the percentage of ticket sales, in an effort to buffer against the lessened and shortened theater runs that the production companies are currently discussing. Regal could increase production with Open Road Films, or extend negotiation to other film distributors to include indie films. Using Open Roads Films not only fills a void and generates some cash flow that is significantly less garnered than Regal typical ticket sales, it also creates the potential to gain revenue from the showings of Regal’s film creation at other cinemas.

In creating fresh relationships with outside artists, Regal could create a more beneficial set of terms than it currently has with the mainstream film production companies, and would be creating greater exposure for fledgling or small-time artists. Another option may be to create a whole new cinematic experience with Cinecasting. Cinecasting is digital, sometimes live, streaming of a remote event. In Santa Rosa, California, a small local theater was able to use a local movie theater’s digital projection system to show a live Broadway run of The Importance of Being Earnest, performed by the Roundabout Theater Company, which had been nominated for three Tony Awards. They charged a premium for tickets, which were not available until one hour before curtains.

They sold out every show and created a huge demand that led to an on-going, mutually beneficial relationship between the theater and the local movie theater company (Fuller). Cinecasting is slowly catching on, but no major cinema chain has done much with it. Cinecasting could be applied to theater performances around the world, concerts, major sporting events, and potentially minor sporting events such as Friday Night Fights. It would make the special events seem larger than life, and make the smaller events seem special.

Lack of Differentiation

The ORF and Cinecasting solution mentioned previously would also attack the problem of lack of differentiation directly. If Regal could get exclusive agreements with various entertainment providers before its competitors follow in its footsteps, they could potentially create a sustainable advantage for some time. Regal is in the process of creating a premium adult dining experience, as shown by their investment in Cinebarre and menu expansion, and ventures into wine and beer provision. Because Regal will be charging higher ticker prices for these experiences, there is more of a call to add something extra-special to the experience. Regal locations in metropolitan and urban areas could invite local artists and business to entertain in the theater during times when the theater is in low use, usually late at night. Other theaters are making the same push with their menu expansion as they did with digital, 3-D, and IMAX technologies. Not only would Regal be creating additional value for the customer, but gaining community bonds and goodwill. These connections are extremely valuable to a company (Grewal and Levy 190).

However, simply taking the small step of actively advertising the Regal experience to the public would be a beginning to making Regal stand out from its competitors, and increase profits (Pitelos 39). Movie theaters, as previously mentioned, rely on the film production companies to advertise the movies to drum up interest, but this does not specifically help audiences select a particular theater. The advertising campaign would have several parts to it. There could be one for the traditional movie-going experience, but with an emphasis on the superior Regal experience. In the event that Regal does begin to differentiate its offerings beyond blockbuster films, the advertisements might show what entertainments are available on a regular basis, or simply to show the variety of experiences it is capable of bringing to the consumer, thus getting the attention and creating consumer interest. Another advertising effort might be to create advertisements that are more specific to the regions they are in.

This would help to integrate Regal into the community further, as a way of showing that they are a part of the community and are paying attention. For example, T-Mobile ran an ad on a Manhattan billboard, proclaiming that their service connection moved faster than new families moving to Park Slope. It was almost immediately reposted and written about on a dozen New York City blogs, written by New Yorkers, who love making fun of other New Yorkers (Arak). The humor is highly selective, but it was successfully implemented, creating the feeling of an in-joke with their consumers and their region.

Making the significant changes necessary to alleviate the problems of dependency and differentiation could additionally address some of the other problems discussed previously, such as creating interest in ambivalent consumers and offset market saturation. By expanding potential cash inflow ventures outside the major production companies and forming those alternative options, Regal would be addressing saturation and ambivalence through the differentiation projects, and so those will not be the main problems addressed in the remainder of the paper.

Potential Stakeholder Effects

The majority of Regal’s stakeholders would most likely benefit from these changes. If the changes are successfully implemented and Regal’s profit margin rises, the majority of its stakeholders stand to benefit, including stockholders, charitable organizations, and employees. Regal would be following its normal business strategies that rest on its current strengths, so it wouldn’t depart from the company’s culture and “mission”. In creating strategic alliances and partnerships with additional entertainment groups, Regal would be fulfilling its goal to create greater worth to its stockholders and following its current business strategy.

Breaking from the dependency on the film production companies should not cause a great gap in Regal’s usual operations. Regal’s bread and butter is first-run films, so those will continue to take precedence in the theaters, so the changes should not damage Regal’s relationships with the major production companies. The changes would be intended to supplement those films once the hype dies away and audiences are looking for new entertainment between peak film release times, rather than replacing blockbusters.


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