revenue diversification: the example of movie theaters

Movie (motion picture) theaters are not just in the business of showing movies.   In the U.S. in 2007, 29% of movie theater revenue came from food and beverage sales (concession sales).  Another 6% of revenue came from advertising services, rental of retail space, revenue from coin-operated games and rides, and other revenue.[1]

Shares of concession sales in total movie theater revenue are similarly large in other high-income countries.  In Spain from 2003 to 2005, concession sales amounted to about 25% of movie theater revenue.  In the U.K. in 2005, concessions sales also amounted to 25% of movie theater revenue.  Soda and popcorn made up nearly two-thirds of U.K. theaters’ concession revenue.[2]

At least in the U.S., the movie theater business was relatively slow to recognize and exploit concession sales.   In the 1930s, concession sales amounted to only 2% of theaters’ total revenues.   A factor contributing to theaters’ focus on movie admissions revenue was probably the Hollywood studio system.  Vertically integrating production, distribution, and exhibition, five studios controlled about 50% of theater seats.[3]  Integrated studios managed the vertical value chain for movies.  Concession sales meant looking in an orthogonal direction at a geographically dispersed, retail business more complicated to control and monitor than the film exhibition business.

Competition from drive-in movie theaters may have promoted conventional movie theaters to expand concession sales.  Drive-in theaters numbered about 60 in 1945, but expanded rapidly to about 1,500 in 1949 and 3,611 in 1954.[4]   In an article published in 1951, a business professor noted:

drive-in theaters have experimented and pioneered in providing either restaurant facilities or almost complete snack bars, serving in the latter a wide range of hot and cold sandwiches, pastries, and ice cream specialties, as well as candy, popcorn, and soft drinks.  In some cases, these are served at booths or tables facing the theater screen so that the picture may be watched at the same time.  In other cases many of the commissary items are served directly to car patrons from small commissary wagons.  In all cases, the patrons are urged to utilize these services to the fullest extent, and most drive-in theaters prolong intermission periods for just this purpose.[5]

The professor reported estimates that drive-ins have concession sales “30 or 40 per cent (and sometimes as high as 75 per cent) of total admissions receipts”,  “four times as much as the average conventional theater.”[6]   Census data for 1954 show concessions sales as 28% of admissions receipts for drive-ins  and 12% of admissions for conventional theaters (both figures excluding admissions taxes).   While the professor may have somewhat exaggerated the contrast, drive-ins unquestionably did lead conventional theaters in expanding non-admissions revenue.

The movie industry changed significantly in post-war decades.  The share of U.S. households owning television sets rose from 9% in 1950 to 87% in 1960.   Along with the spread of television, average weekly movie attendance fell from 60 million per week in 1950 to 40 million per week in 1960. [7]  In addition, in 1948 the Paramount Decrees required the Big-Five studios to divest ownership in theaters.   From 1948 to 1972, the number of conventional movie theaters fell by half.

Despite these changes, concession sales as a share of movie theaters’ total revenue remained about 12% from 1954 to 1972.    Because movie distributors take roughly 50% of admissions revenue, but movie theater owners keep 100% of concession sales, the Big-Five’s divestiture of movie theaters increased newly independent theaters’ incentive to pursue concession revenue.[8]  Perhaps movie theaters sought to differentiate themselves from television with high-value productions exhibited in a more formal, controlled setting.  Such a setting might disfavor the noise and disorder of food and beverage consumption.  Organizational inertia may also have been a factor.  In 1972, 44% of conventional theaters had been established prior to 1942.[9]   For whatever reasons, with major changes occurring about them, theater owners did not change their revenue structure.

Movie theaters’ non-admissions revenue share began to rise about 1972.   From 12% in 1972, the non-admissions share rose continually to 28% in 1992 and 34% in 2007.  Judging by the Arlington Cinema ‘N’ Drafthouse, located in a historic art deco theater built in 1940, I expect non-admissions revenue to continue to rise in the future.

Movie theaters’ revenue diversification  is an example that doesn’t bode well for newspapers and television broadcasters.  Both newspapers and television broadcasters are well-established businesses.  They now need to diversify their revenue streams in order to survive in the new media environment.   Most importantly, they must do so much faster than movie theaters increased their revenue by selling soda, popcorn, and other refreshments.

Notes:

[1] Based on the U.S. Census Bureau’s 2007 Services Annual Survey.  I’ve compiled Census data on movie theater revenue sources from 1935 to 2007.  Subsequent cited figures, unless otherwise noted, are from that compilation.

[2] Gil and Hartmann (2007), p. 335, gives the Spanish figure, which is based on a dataset described in detail in that paper.  Id., p. 330, cites the U.K. figure, which comes from Screen Digest.  Across Europe, 78% to 87% of movie patrons purchase soft drinks in theaters, and 59% to 78% purchase popcorn.  Id. p. 327, citing Research Business International, Food and beverage usage in cinema, report prepared for Coca Cola (London: 2000).

[3] The Wikipedia entry on the Paramount case cites an authoritative figure: “By 1945, the studios owned either partially or outright 17% of the theaters in the country, accounting for 45% of the film-rental revenue.”  United States v. Paramount Pictures Inc., 334 U.S. 141, 167.  Various other, undoubtedly not independent, secondary sources on the Internet suggest the theater-seat figure cited above.  These sources also indicate that the Big Five controlled 80% of first-run theaters in major cities.  If you have good data pertaining to this issue, please let me know.

[4]  The figures for 1945 (“at the end of the war”) and 1949 (“late 1949″) are from Luther (1950) p. 42.   Id. notes that drive-ins began operating in 1933 and increased in number initially about 8 a year.  The 1954 figure is from the compilation of Census data on movie theaters.

[5] Luther (1951) p. 407.

[6] Id. p. 408, 401.

[7] Bicentennial Edition: Historical Statistics of the United States, Colonial Times to 1970, Social Statistics, p. 400, Series H873.

[8] Gil and Hartmann (2007) pp. 329-330, describe the different incentives of a movie distributor and the independently owned theater.

[9] 1972 Census of Selected Service Industries, Vol. 1, Summary and Subject Statistics, p. 3-17, Table 4.

References:

Gil, Ricard and Wesley R. Hartmann (2007), “The Role and Determinants of Concessions Sales in Movie Theaters: Evidence from the Spanish Exhibition Industry,” Review of Industrial Organization, v. 30, pp. 325-347, DOI 10.1007/s11151-007-9139-7.

Luther, Rodney (1950), “Marketing Aspects of Drive-In Theaters,” Journal of Marketing, v. 15, n. 1 (July) pp. 41-7.

Luther, Rodney (1951), “Drive-in Theaters: Rags to Riches in Five Years,” Hollywood Quarterly, v. 5, n. 4 (Summer) pp. 401-411.

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