Added Movie Screens Tend to Dim Theaters’ Profit Pictures

With box-office receipts fatter than ever and big summer films being released, these should be glory days for the nation’s movie theater operators.

But peek inside Century Stadium 25 in Orange. In one mega-plex on a recent Tuesday evening, Tom Cruise fights, shoots and grins his way across a movie screen as the blockbuster “Mission: Impossible 2” plays to a completely empty hall of 137 seats. Elsewhere at the posh cinema, two couples watch “Shanghai Noon” in one auditorium while six viewers see “Big Momma’s House” in another.

Rather than reaping hefty profits, many of the nation’s exhibitors are struggling under severe financial strain. The main culprit is a five-year building binge that has left theater chains with too many screens, too much debt and way too much competition. During the construction frenzy, movie exhibitors poured money into new plush properties while absorbing losses from older theaters, which customers quickly shunned as fancier cinemas opened. Earnings evaporated, losses mounted and stock prices sank.

The crisis is rippling through the industry--and to customers.

Exhibitors, trying to shore up the bottom line, have pushed up ticket prices, which have now hit $9.50 in some metropolitan areas and could reach $10 by Christmas. When the price of all discount tickets is included, the average ticket price nationwide rose to $5.08 last year, topping $5 for the first time.

Analysts say the lure of mega-plexes has made it easier to raise ticket prices, even though many movie houses are short on customers and chains are shuttering hundreds of smaller theaters.

“I think it’s atrocious,” said Anita Quanstrom, an Aliso Viejo resident who has curtailed her moviegoing because she’s fed up with the rising ticket prices. “I enjoy going to the movie, but I’m not going to pay $8.50. I could buy something on pay-per-view for a lot less.”

Overall Sales Up, Admissions Down

Overall, U.S. box-office sales topped $7 billion last year for the first time in history. The increase reflects the higher prices, as the number of admissions actually dropped slightly last year.

Moviegoers are also paying more at the concession stand, doling out $8.25 for a bucket of popcorn and a large Coke. Food and drink purchases account for about 28% of a theater operator’s revenue.

“You’d think things would be rosy,” said John Helms, an analyst with APS Financial Corp.

But they’re not.

Each of the nation’s four largest movie chains--Regal Cinemas Inc., Loews Cineplex Entertainment Corp., Carmike Cinemas Inc. and AMC Entertainment Inc.--lost money in the last two years, more than $340 million combined. The 2,000-screen United Artists Theatre Co. is burdened with debt and auditors have questioned whether it will survive. Silver Cinemas International Inc., the largest art house chain and parent of Landmark Theatres, has filed for bankruptcy protection.

“It’s pretty critical,” said Christopher Harris, an analyst with Banc of America Securities. “Over the course of the next 12 to 18 months, we’ll likely see a restructuring of the industry as the less able fall out.”

Already, theater construction, which reached a fever pitch in 1997, has slowed sharply this year and should contract further in 2001. And when theaters are built, they will more probably have fewer screens--16 to 20, rather than 25 or 30, industry insiders say.

A slowdown in theater construction also could have wider economic implications, putting a damper on plans for new retail developments, said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp.

“The problem with the theater chains is going to have a big impact on the whole retail development scene,” he said. “This could definitely put a wet blanket on a lot of projects.”

Knoxville, Tenn.-based Regal, the nation’s largest chain with 4,400 screens, built aggressively over the last two years. But it plans to close up to 200 screens this year and a similar number in 2001. AMC, based in Kansas City, Mo., shut down 279 screens in the last fiscal year and wants to close 175 this year.

Two regional chains, Edwards Theatre Circuit Inc. and Sanborn Theatres Inc. are making similar moves.

“The old theaters are down,” said James Edwards III, president of the privately held Newport Beach company, Southern California’s biggest theater operator. “They have fallen like a rock.”

Expansion Plans Going Forward

Movie companies that try to extricate themselves from costly leases are running into stiff resistance from landowners, many of whom count on the theaters to attract customers to shopping centers.

“It’s absolute death for a center to have a big space like a movie theater go dark,” said Gregory Stoffel, owner of Gregory Stoffel & Associates consulting firm in Irvine.

Little wonder then, that Edwards--which has closed a dozen theaters in the last year and plans to dump 20 more--is already embroiled in legal disputes with three landlords.

James Edwards acknowledged in a recent interview that some of the older theaters have created financial strains and that there have been “modest cutbacks” in the number of employees during the last year.

But the chain is proceeding with expansion plans, he said, noting that sales moved up last year to a record and are up 8% so far this year.

Despite heavy losses, Loews also plans to keep expanding.

“While some people say the industry has built too much, that’s what’s really driven the growth in the film business,” said Mindy Tucker, corporate vice president.

Analysts trace the industry’s current problems to the “re-screening of America,” which began in 1995 when AMC opened the first 24-screen mega-plex in Dallas. The bold move prompted other companies to rev their expansion plans, and the race was on.

While moviegoers flocked to the fancy new theaters with cushy stadium seating and ear-piercing sound systems, building eventually outpaced demand. From 1995 to 1999, the number of movie screens mushroomed by 34% while the number of theater admissions grew by only 17%.

The impact of the industry’s self-inflicted wounds finally became evident last year, when revenues per screen slumped for the first time since 1995.

In some cases, mega-plexes sprouted a popcorn toss from one another.

When AMC edged Edwards out of the bidding to become the anchor theater at the Ontario Mills shopping center three years ago, Edwards retaliated, erecting a 22-screen movie house across the parking lot. This gave moviegoers a head-spinning 52 screens to chose from, and highlighted the blistering competition between Edwards and AMC.

“We were both competing for the same location, AMC got it,” Edwards said. “And it sort of made us mad enough to want to build across the street from them.”

AMC was less than pleased. “It’s certainly not the ideal situation to have two theaters of that magnitude so close to each other,” AMC spokesman Rick King said.

But both companies say their Ontario theaters are performing well.

In Orange, AMC built a 30-screen mega-plex a couple of miles from the 25-screen Century Stadium. While business sagged at Century, the AMC complex at the Block at Orange shopping and entertainment center has become the chain’s busiest in Southern California.

Fewer Films Made to Fill More Screens

Although scores of screens give exhibitors scheduling flexibility, some say the mega-plex trend is fizzling because there aren’t enough films for all the screens, or enough customers for all the seats. In fact, last year 9% fewer films were released than in 1998. So 30 screens may be an asset on Saturday night, but a headache by Monday afternoon.

“I think the general consensus is that the mega-plex isn’t very successful,” said Francesca Dinglasan senior editor for Box Office magazine in Pasadena. “Something around 16 [screens] seems to be the favorite for future ventures.”

To drum up more business, some exhibitors are offering a broader selection of food options as well as other services and attractions, including baby-sitting and even skating rinks.

“We have to continually reinvent ourselves as an entertainment destination,” said Marc Pascucci spokesman for New York-based Loews. “If we just continue to be little boxes and flickering lights on the wall, we’d be dinosaurs.”

But even with revenue increases and spending cutbacks, it will probably take the industry two or three years to right itself, analysts say.

“People built too much and they borrowed to do it,” said Michael Plancey, an analyst with Merrill Lynch Global Securities. “It’s not an easy trend to reverse.”

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The Big Picture

Despite strong box-office sales, losses are mounting for large theater chains that are saddled with heavy debt from building megaplexes.

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Box-Office Sales (in billions)

*

1999: $7.4 billion

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U.S. Movie Screens (in thousands)

1999: 37,185 screens

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Net income for the nation’s largest theater chains:

(in millions, by fiscal year)

*--*

1996 1997 1998 1999 AMC Entertainment* $19.00 -$24.50 -$16.00 -$55.20 Carmike Cinemas -7.30 20.20 -30.70 -18.90 Loews Cineplex Entmt.** -0.18 -0.14 -5.90 -51.40 Regal Cinemas 25.10 25.20 -73.60 -88.60

*--*

*Fiscal years ended March

**Fiscal years ended February

Source: National Assn. of Theatre Owners, Bloomberg News