Box Office Smashed?


Travel and leisure stocks look like they went 12 rounds with Mike Tyson during March, and that’s just the beginning. Examining the sector closer, cinema chains across the world have seen their share prices slashed and some have even questioned the future viability of the big screens. With that in mind, we want to take a closer look at cinemas, are they down and out? Or could they surprise investors with a Rocky style fight back (queue music)….

The bleak reality during these unprecedented times is that it’s nigh-on impossible for anyone, or any business to avoid being negatively impacted to some degree. Focusing on businesses, simply being able to continue in some capacity is fortunate, as the majority cling to life through online arms. Of these there’s a small handful that have seen little or no material impact to trading. Saying some are benefitting from this situation would be inappropriate. No business was hardly geared for such a time, it is such an anomalistic event that no business can or would plan for such. Businesses that generate relatively good results during this time will feel akin to a snooker player fluking a pot or a player advancing at Wimbledon due to their opponent’s injury. It’s not the way you want to win, but at the same time what can you do?

Assessing the current scenario is difficult if not impossible and assessing the future of cinemas in the same context is a task on the same level as those self-destructing ones delivered to Tom Cruise. The truth is we have no idea how the rest of this will pan-out, there’s no past event to provide reference and we’re in unchartered waters.  Success when investing is usually determined by how well you can see things playing out before they do, and as we’ve said, that’s harder than ever right now. We won’t pretend to know more than we do. Our lives have been turned upside down but many changes to our daily routines are temporary. Yet at the same time such huge events do prompt changes that will stick. Society norms, cultures and legislation will all be given a shake, and just like that knee injury you or your mate has, it will never be quite the same again.

So, looking at the share price movements of the world’s largest cinema chains, investors aren’t planning any happy endings or Rocky style comebacks just yet. Cineworld shares turned the year the right side of £2 and now continue to fall below 50p. Forget Coronavirus, markets judged cinemas to be struggling well before any of this. The perception is hardly surprising, given the rise of streaming services and increasing expense of cinema trips, the industry has arguably been up against it for years. 

Surprisingly though, UK cinema audiences peaked in 1946 at 1.63 billion and then consistently declined to an all-time low of 54 million in 1984. Since numbers have gently recovered and stabilized, albeit nowhere near records with UK admissions last year around 176 million.

Beginning on a bearish  note, the fact is as a society we all crave convenience and speed more than ever as time is deemed more scarce and valuable than ever (the more free time = more quality time spent aimlessly scrolling through social media of course). This is one of the main reasons why cinemas are losing younger and more lucrative viewers. An ageing profile of audience members isn’t a good trend.  

Then we have the main supposed villains, streaming giants like Netflix, Amazon and Disney. You simply can’t compete when you look at the cost of cinema tickets nowadays, add that to the cost of getting there, parking, concessions and so on, not to mention the 6 days of adverts you endure before the film starts. Tough competition with sitting in your front room a few clicks away from what feels like infinite hours of content, of which more and more is becoming exclusive to the streaming providers themselves. On top of this the likes of Netflix have begun producing films and reducing the window of time in which cinemas can show them, which again all works against cinema houses rather than with them.

And this was all without COVID-19. Unfortunately, a cinema is hardly the first destination people will rush to after lockdown restrictions across the globe are eased. People who have been isolated at home, likely watching TV for months are hardly going to rush back inside, to watch more films only this time surrounded by more strangers. Remember we’re all germaphobes now. Sitting in a seat that has been blessed by countless strangers exhibiting the skeletons of their chosen popcorn and pick ‘n mix has never sounded less appealing. Haven’t seen your friends properly in months? Go catch up at the one place you can’t see them nor have a conversation. Then consider even if cinemas re-open on a best-case scenario timeframe, studios have cancelled all major releases with most postponed until 2021, what will they show? You get the picture; cinemas are going to be as appealing as an away day at Stoke for a long time.

Despite all this, the credits haven’t started rolling on cinema screens just yet. Firstly, cinemas have faced competition from in-home entertainment for over 50 years now, it’s nothing new and they’re still here. More than that, they’re not just surviving, 2019 saw global box office records beaten, with an all-time high of $42.5 billion taken in revenues. Overall global audience figures have plateaued and we’re spending more when we go. Also, it is those customers who have memberships with the streaming giants who are the same customers visiting the cinema more than anyone else. Plus, cinema chains now operate subscription offers themselves such as yearly membership for unlimited visits. Given that the US is the slowest market to adapt to this model provides even more hope, in 2018 75% of Americans saw at least one film at the cinema, that’s a huge amount to work with. On top of this remember cinemas also have 3D and IMAX options that simply can’t be closely replicated at home yet.

The CEO of Motion Picture Association of America simply puts it ‘’everyone has a kitchen, but everyone still goes out to eat’’. In the same way a Deliveroo from your favourite restaurant is good, it’s not quite the same is it? Put simply, the future is rife with uncertainty, but, if they can manage to survive this chapter, cinemas aren’t perhaps going anywhere. Consolidation is bound to happen, and we will continue to see cinemas up their game from boutique offerings like Everyman to showing more than just the latest blockbusters. Overall, cinemas were probably doing better than you thought and certainly weren’t on their knees. So, if you’re worried that you’ll have nowhere to perfect the art of turning a yawn into a hug, don’t lose sleep over it just yet.

(not quite) The End.

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