Revenues and Profits in the UK Cinema Industry

UK cinemas have seen rising profits during the recession years.

Cineworld, one of the UK’s largest cinema chains (and owner of Picturehouse cinemas), announced in mid 2013 that profits in the first half of the year were up 10.5% on the same time in 2012, raking in £131m in the first six months of the year thanks to big blockbusters such as Iron Man 3 and Les Miserables. Vue Cinema saw revenues in 2012 top £1bn for the 4th consecutive year, rising by 3.2%. Why are cinemas proving to be so profitable in recent years?

Firstly, there is the issue of market power. The UK cinema sector is gradually becoming more concentrated. In 2013 the leading five cinema chains accounted for over 71% of all ticket sales. The Competition Commission screened the April 2013 merger between Cineworld and Picturehouse, because the OFT feared that the £47.3m deal might raise prices for cinema-goers and reduce choice, especially in Aberdeen, Southampton, Cambridge and Brighton, where Picturehouse has been an alternative to Cineworld. Vue Cinemas bought out the independent Apollo chain in 2012 adding 14 cinemas to its portfolio.

Increasing market power allows firms to increase prices. Given that attendance only rose by 0.3%, the larger increase in revenues certainly suggests that prices have been rising and that the ‘average spend per head’ has gone up. Furthermore, once cinemagoers have their tickets, the cinema has monopoly power over the supply of food and drinks such as popcorn. Regular popcorn and a drink at Vue now cost on average £8.25. A Vue spokesperson said, “Vue’s pricing of retail items is in line with other out-of- home entertainment venues”. The typical mark-up on popcorn made fresh from popcorn kernels is around 2000%, with the mark-up on ready-made popcorn still being an enormous 400%!

Another way in which cinema chains boost their profits is by cutting their costs, and they are well known for being one of the main types of employer employing staff on zero hours contracts. These casual contracts allow cinema chains to employ staff with no guarantee of work, and employees only work as and when they are needed. Typically busy times for cinemas are school-holidays and weekend evenings, so this is when most staff is employed. Younger staff tends not to be unionised, and so wages may be lower. With around 20% of revenue for cinemas being spent on staff, cutting these costs will have a strong effect on profits.

Large chains have seen an increase in some costs as they have installed the technology needed for 3D viewing of films, although opinion is still divided as to whether there remains significant future demand for 3D films. With new digital projectors costing around £85,000 per screen, small independents are at a real disadvantage. Larger chains are also able to benefit from economies of scale in the renting of films from distributors – cinema chains normally spend 40%-60% of their revenue on this area, so economies of scale can make a large impact.

A final way in which cinemas have been able to boost profits is through greater use of product differentiation. More are offering ‘premium’ services, with luxury reclining seating and specialist at-seat’ food services. The mark-up on these offerings is high, and is starting to make an impact on the bottom line for cinemas. The Electric in Birmingham provides waiters that will bring absinth and olives to your seat; at Manchester’s Cornerhouse you can enjoy a slice of pizza to accompany your film quiz.

The UK has less than 1% of the world population yet is the third largest consumer of film, with the average Brit watching 87 films a year (admittedly not all of them at the cinema). Prices seem set to rise for consumers, whether or not mergers between chains continue. The ever-higher fees commanded by movie stars and the escalating cost of production and marketing by distributors means that distributors are keen to extract as much revenue from cinema chains as possible. If these costs continue to rise, then the end user, the cinema-goer, will be the one facing the higher prices as chains pass on these costs in order to maintain their margins (the effect of “sequential oligopolies”). If cinemagoers are prepared to go to independent cinemas to watch alternative films, then they may find that the cost of a night out falls.