Regal Entertainment Group (NYSE:RGC) manages the largest movie theater chain in the US. At the end of fiscal 2009, Regal Entertainment operated 6,768 movie screens in 548 theaters in 39 states and the District of Columbia. It had over 244 million attendees, and has theaters in all of the top 30 U.S. designated market areas.
The movie theater industry is highly competitive due to the large number of players and the lack of control theater companies have on suppliers. In addition, Regal Entertainment's movie theaters must compete with in-home theater services, television movie providers and other forms of entertainment such as sporting events and music concerts.
To combat such competition, Regal Entertainment and other theater chains, such as AMC Entertainment and Cinemark USA have moved to the megaplex theater format. Today, Regal Entertainment has an average screen/theater ratio of 12.1, which is about twice the industry average. By providing a centralized location for multiple screens, Regal capitalizes on economies of scale by minimizing labor and concession costs.
Regal Entertainment’s revenues are directly tied to the success of the films that its theaters show. Regal Entertainment’s value is also contingent upon the financial wellbeing of National CineMedia, Inc., the largest digital in-theater advertising network in the US. Regal holds a 22.6% interest in the advertising firm, and NCM’s IPO in 2007 provided Regal Entertainment with $447.4 million in net cash flow.
Regal Entertainment operates in 39 states and Washington, DC. The company has locations in the top 30 US designated markets and 44 of the top 50. Regal specifically targets mid-sized metropolitan areas and high-growth suburbs of large metropolitan areas as locations for acquisition or development.
Theater chains have compensated for declining movie attendance in recent years by increasing ticket and concession prices. This has been successful in keeping revenues steady, as Regal Entertainment's revenues have continued to climb in the 2-3% range over the past 4 years.
Revenues come predominantly from ticket and concession sales, and in 2009 Regal posted total revenues of $2.89 billion, compared to its 2008 revenue of $2.77 billion. As a result of this increase in revenues, Regal's net income increased as well. For 2009, Regal had total net income of $95 million, compared to the previous year's $73 million.
A movie theater company's success is tied closely to the quality of the films that it shows. For example, in 2009 the movie film industry produced multiple hits including Avatar, Transformers: Revenge of the Fallen, Harry Potter and the Half-Blood Prince, Up, Twilight Saga: New Moon, The Hangover among others. As a result, for the first time ever U.S. box office revenues were more than $10 billion. As a result, 2009 attendance volume increased by over 10%, resulting in gains in revenue as well as net income.
Regal Entertainment has a 22.6% interest in National CineMedia, Inc., the largest digital in-theater advertising network in the US. NCM IPO'ed in 2007, selling 38 million shares of common stock for $21 per share. Despite the selling of shares to the public, Regal Entertainment retained its position as the largest corporate investor in NCM (more than AMC Entertainment and Cinemark USA).
Regal Entertainment has contractual agreements with NCM that will impact Regal Entertainment's revenues in the future. For instance, NCM pays Regal Entertainment an $800 per digital theater and $0.07 per patron access fee.
The prices of movie tickets and concession items have been rising dramatically. This may be to compensate for declining ticket sales and other revenue-generating factors. The price increases are also due to higher transportation costs (due to rising oil prices), pressure to remain competitive in the industry, and rising inflationary pressures. Ticket price increases have offset revenue-losses due to declining attendance. However, too much of a price increase will cause attendance to decline to the point of revenue losses.
One of the primary ways that Regal Entertainment and other industry leaders are attempting to corner larger market share is through investment in digital projection theaters. Regal Entertainment will begin digitizing its theaters in the second quarter of 2008. Two new theaters have already successfully been built with digital projection capabilities and Regal Entertainment hopes to be finished upgrading to digital technology within three to four years. To finance this investment, Regal Entertainment, AMC Entertainment, and Cinemark USA have set up a joint venture called Digital Cinema Implementation Partners, LLC. DCIP is still in the process of finalizing finance plans. Regal Entertainment sees the upgrade to digital projection theaters as a growth opportunity through both increased quality and the compatibility of digital projection with 3D and IMAX format movies. Since both AMC Entertainment and Cinemark are also upgrading theaters, installing digital theaters is a capital expense that will not differentiate Regal Entertainment's brand from others. Though the investment will not provide additional value from an enhanced product, it will keep Regal Entertainment competitive, thus protecting against a deterioration of market value.
Regal Entertainment, along with other theater chains, faces substantial competition from other theater chains, in-home movie services, television movie providers and from other forms of entertainment. Because the theater industry is so competitive, individual theater companies have little influence over suppliers. The movie theater industry is top-heavy: the largest 5 companies (Regal Entertainment, AMC Entertainment, Cinemark USA, Carmike Cinemas, and National Amusements) control 45% of the market share while the next 5 only control 8%. National Amusements is a private company.
As the largest theater chain, Regal Entertainment operates with the greatest economies of scale and thus the highest operating margins of any theater company.
Below the largest companies, the movie theater industry is fragmented and highly competitive. Few barriers to entry exist and studies have shown that consumers are not loyal to a particular company; instead, moviegoers base their decisions off of proximity, the films showing, and amenities. For this reason, the movie theater industry lacks expansion opportunities, especially in the growth of internal operations. Regal Entertainment's growth potential lies primarily through acquisition, which will allow it to tap new markets.