The Business of Show Business : The Valuation of Movie Theaters

by Arthur Gimmy, MAI and Mary Gates, MAI
Published by the Appraisal Institute, 1999

Review by Stephen Traub, ASA

Copyright © 2000 Property Valuation Advisors, Newburyport, MA


With 1.50 billion tickets sold annually, 7,500 theaters, and 35,000 screens, the movie exhibition business is a $9 billion industry in the US. In this 96-page handbook, the authors examine the unique aspects of valuing these facilities.

Of 7,500 theaters, 577 are drive-ins. In 1958, however, more than 4,000 drive-ins existed. Now they are an endangered species. Outdoor theaters had land that was more profitable for other uses.

Indoor theaters, on the other hand, are good for surrounding businesses because they can generate traffic. Therefore, indoor urban entertainment centers and mall-based movie venues are proliferating. Theaters can spur retail development in lethargic locations. Theaters can share parking with nearby office buildings since offices need parking during the day. Theaters need parking primarily in the evening.

No Business Like Show Business

Even the number of indoor theaters declined from the early 1960s until 1968. Then, in the early 1970s they reemerged. During the past 10 years, the number of screens has increased by about 1,200 per year. About 34,200 screens exist now compared to 21,600 screens just 10 years ago.

Despite the increase in the number of screens, however, admissions remained steady at 1 billion per year from 1974 to 1988. In 1990, however, the number of admissions grew to 1.2 billion. Now admissions are about 1.5 billion annually. The number of admission per screen, however, has been declining. Admissions now are about 43,000 per screen compared to 67,000 per screen in 1970.

Nevertheless, 11,000 screens are expected to be added during the next ten years although the total tickets sold are not expected to increase proportionately. Overall revenues are expected to grow as they have in the past: revenues grew from $1.3 billion in 1970 to $4.7 billion in 1998. Why? The average ticket price rose from $1.55 to $4.65 -- and this trend is expected to continue.

The Profit's in the Popcorn

Theater operations have many facets: real property, personal property, and business operations. In the US, $7 billion is brought in from admissions. Another $2 billion comes from popcorn, candy, soft drinks, video games, on-screen advertising, and other sales.

Typically, ticket sales account for 67% of a theater's total revenue, but less than 50% of its profits. The big profits come from concession sales and video games. The cost of goods sold from non-admission items averages only 15% of the revenues they produce. Therefore, "the profit's in the popcorn."

When analyzing cinema income, therefore, remember revenues and expenses are attributable to sources other than from admissions and from real property. One good source of operating information is the National Association of Theater Owners (NATO).

Too Many Movies?

Surprisingly, the number of new movies released each year has not grown. The high was in 1988 with 491 releases and the low in 1995 with 370 releases. Neither highs nor lows deviated, however, from the 10-year average of 431 releases.

From 1988 to 1998, US gross revenues per movie increased from $9 million to $16 million. Production costs, however, increased on average to $28 million per picture during the period. Many movies, therefore, lost money if one considers only US cinema revenue. Often, production profitability came only from added foreign sales and video rentals and sales.

Although revenues per screen have been declining, the total tickets and the price per ticket have been increasing. This trend for more screens per theater with fewer seats per screen with fewer admissions per screen is expected to continue.

Big Operators

The largest national operator is Carmike, operating in 34 states at 517 sites with 2,721 screens. Northeast-based operators include General Cinema, National Amusement, and Hoyts Cinema (all from MA), and Loews of NY. General Cinema is the largest, operating in 21 states at 175 sites with 1,170 screens. Next are National Amusement with 978 screens, Loews with 917 screens, and Hoyts with 817 screens.

... more screens, but fewer seats per screen.

Based on a survey of five large national operators, net operating income per screen was $34,000 to $67,000 with the median about $48,000. Seats per screen were 200 to 500 with an average of 350. Newer facilities have more screens, but fewer seats per screen with about 250 seats on average.

Sales and Development Costs

Sale prices of existing facilities doubled from 1988 to 1998. Multi-screen acquisitions are now bringing $312,000 to $900,000 per screen with an average of $580,000. Recent sales show cap rates of 9.50% to 11.80%. Development of new facilities typically costs $131,000 to $660,000 per screen at $36 to $123 per SF.

Last, the authors present an in-depth case study of a proposed megaplex. They include methods of estimating demand. They also include two income valuation methods: 1) an analysis of potential revenues and expenses, assuming an owner operator; and 2) an income analysis of a net lease, assuming a non-owner operator.

If you want to expand your knowledge about the valuation of cinema properties, pop some popcorn and break open this book. Although it does not have everything you will need (and it has not made it to video yet), still, it gets two thumbs up!

The book above, The Business of Show Business : The Valuation of Movie Theaters, is available on-line at Amazon Books.

Stephen Traub, ASA, the reviewer, is chief commercial appraiser for Property Valuation Advisors, 63 Hill St., Newburyport, MA 01950. He is a certified general appraiser in NH, ME, and MA.

To contact the author of this review, e-mail to: [Mailbox] or contact him at the address above, or call 978-462-4347.

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