- How crucial are the number of visits and investments?
- The sources of revenue
- An analysis of the leading international amusement/theme park operators
The amusement park industry is broadly categorised into amusement parks, theme parks and water parks and is a ~43 billion-dollar market presently [Source: International Association of Amusement Parks and Attractions (IAAPA); Global Amusement Park Outlook 2015-20 and Wilkofsky Gruen Associates]. The global leisure and entertainment industry is not complete without amusement park industry. Furthermore, apart from the mechanical rides; water rides and theme attractions, amusement/theme park companies also offer games, shows, refreshment stores and other attractions to visitors and ride enthusiasts. Nonetheless, few theme parks have integral hotels, accommodations, restaurants and other recreational services such as golf courses, swimming pools, stores, etc.
Industry characteristics
- Visitors and per capita spending are key drivers: Growth of the industry is directly dependent on the international and domestic visitors and consumer spending.
- Seasonal Industry: This industry is seasonal and most of its revenues are derived on holidays, resulting in extreme volatility in revenue throughout the year.
- High entry level barrier: Amusement/theme park industry is dominated by few players globally due to the high entry level barriers as developing a new amusement or theme park or adding new attractions and rides in a current set-up require a major capital investment.
- Highly competitive: Amusement/theme parks face major competition as visits solely depends on attendees interest, intellectual property rights of major brands, special rides or park related area modified in accordance with current popular theme or portrayal of popular films and characters. Moreover, other modes of leisure give a tough competition to the industry.
Internationally, there has been a healthy growth in the sector, especially in the past few years. The visits to theme parks in last five years rose at 3.9% compound annual rate (Source: IAAPA; Global Amusement Park Outlook 2015-2020). According to the Themed Entertainment Association’s (TEA) 2016 report, attendees at the top 10 amusement/theme parks group grew from 271.6 million (2006) to 438.3 million (2016), at a CAGR of 5.46%.
The global amusement and theme park industry is currently valued at about USD 43 billion, this is estimated to reach USD 58 billion by 2020 (Source: IAAPA and Wilkofsky Gruen Associates). Although, the United States had the highest number of visitors and held 47% of the share in world’s attractions, the Asia-Pacific market witnessed the fastest growth rate in the past decade (led by China). Further, 42% of the world’s major attractions (35% in 2006) and a 5% CAGR growth of visitors was seen in the Asia-Pacific area, this is shifting the balance towards the region. Asia-Pacific is projected to account for 45% of the global share in terms of the visits by 2019 [Source: The Global Attractions Attendance Report; KPMG in India’s analysis (2016) and IAAPA Global Theme and Amusement Park Outlook 2015-19]. The growth in the area is largely driven by the increase in consumer spending (due to rise in disposable incomes), the rise of middle-class visitors, growth in tourism and use of advanced technology (hydraulics, pneumatics and animatronics adding hi-tech thrills to rides). The per capita spending in the Asia-Pacific theme park market also grew by 1.8% CAGR (2009-14), this is expected to grow by 2% CAGR [(2014- 19), Source: IAAPA and Wilkofsky Gruen Associates].
The visits to parks are vital and determining factor for revenue and profitability of an operator and thus, technology, innovation and branding plays an important role in attracting people to these avenues of entertainment. Although the sector is highly competitive, the leading amusement park operators have used their intellectual property rights through major film franchises and entertainment to their advantage, they have shown famous films and characters in exciting ways and rides to propel revenue and increase profit margins.
The majority of revenue in the industry is generated through park admissions/ticket sales (pay one price or pay as you go model) followed by secondary spending (food, merchandise, etc.). Moreover, a handful of operators also generate licensing and other revenues through intellectual property by means of film and entertainment franchises. Thus, pricing and ticket yield management with membership programs initiatives play a crucial role in the sector.
Televisory evaluated the operational parameters of few of the leading amusement/theme park operators globally. These included Six Flags Entertainment Corporation (‘Six Flags’); Cedar Fair L.P. (‘Cedar’); SeaWorld Entertainment, Inc (‘SeaWorld’) all of which are based out of the United States, Oriental Land Co. Ltd. (‘Oriental’) based in Japan and Merlin Entertainment (‘Merlin’) located in the United Kingdom.
In addition, due to the capital intensive nature of the industry, the number of parks have remained almost constant for the operators in the period of analysis.
Oriental with two amusement/theme parks had a higher number of total visitors as compared to the rest. This was because of its association with the Disney brand, investing in imaginative and innovative ideas through advanced technology and all this led to footfalls for the firm (average 15 million visitors per park in 2016). Similarly, Six Flag also witnessed a healthy growth from FY 2015 onwards (average 1.67 million visitors per park in 2016) owing to the introduction of new coasters, the addition of rides to existing parks and commencement of two new water parks (April 2017). On the contrary, SeaWorld, with an identical number of parks in the past 5 years saw negative trend due to the competitive environment and its failure to deliver new thrills and/or technological innovation to attract more visitors.
Oriental recorded the highest revenue during the analysis period, this was in-line with the maximum visits among all the players. Though this shows declining trend from 2013-15 due to drop in secondary revenue from food and merchandise sales combined with a minor fall in a number of visitors. The situation was further aggravated by the depreciation of Japanese Yen (10.8% CAGR, 2012-15), the domestic currency for Oriental. The revenue increased from FY 2016 as a result of the rise in park admission revenue coupled with the strengthening of Japanese Yen. Merlin, which closed one of its park in 2015, saw a proportionate decline in the revenue as well as visits. However, there was a rise in both the revenue and visits due to the opening of Legoland in Dubai in Oct. 2016.
Additionally, as stated above the amusement/theme park industry is capital intensive, hence, fixed costs and maintenance costs play a major role for conversion of the top line into positive bottom line. The direct cost, which comprises the cost of good sold (majorly cost of food, merchandise and games), employee expenses (largely part-time employees) and other direct expenses form a major portion of the cost structure for all the operators. Although, park admission/ticket revenue are significant sources to cover these costs, the real profits are made on food and merchandise revenue, which have low fixed cost and are sold at a huge premium to visitors.
Consequently, Oriental reported an 89% cost, this was directly attributed to park operations, which was the highest among the operators. While other operators had a comparable cost structure (~78-83%) and these were due to higher COGS relating to food and merchandise sales.
Likewise, the revenue trend, the direct costs of amusement/theme parks positively correlated to the footfall. Oriental saw a decline in cash OPEX (2013-15) which was evident by a drop in direct costs due to low footfall in the same period and depreciation of the Japanese Yen. However, the total cost increased from FY 2016 owing to increase in direct cost (mainly employee cost). Merlin also registered an increase in cash OPEX per ‘000 visitors since FY 2016 due to a new park (Oct. 2016) after a decline in 2015 because of the closure of a park.
Hence, in order to attract more visitors, the operators invest in new and adventurous rides and upgrade parks and attractions. According to the IBISWorld report (March 2017) for every dollar spent on wages (2017), an estimated USD 0.37 will be spent on the use and replacement of capital equipment. In addition, virtual reality and augmented reality technologies, use of simulations, IoT technologies are providing great momentum to redefine these operators and their growth. Addedly, continuous investment is required to retain the brand loyalty and to limit the competition. The practice of building remarkable rides or park areas related to a movie release or other popular themes is the norm of the day.
Notably, all the operators except Oriental invested over 10% of their revenue either for new rides, attractions, themes or asset maintenance. However, Oriental invested a huge capital up to 2009 when it was expanding and thereafter, slowed down and the CAPEX was mostly used for maintenance. But the firm gradually started investing in new attractions and renewed facilities since FY 2016 with ‘OLC in 2023’ in vision. Merlin also invested ~17% of its revenue (LTM June 2017) for CAPEX requirements. It opened Legoland in Dubai and plan to start two new parks in Japan and Korea.
The amusement/theme park operators enjoy healthy EBITDA margins. The operators also possess pricing power and revise their ticket/admission prices at regular intervals to cover their costs related to rising operating expenses. Correspondingly, their margin increases with increase in visitors as well as sales of food and merchandise. SeaWorld had the lowest EBITDA margins amid all the operators due to higher operating expenses per ‘000 visitors.
In conclusion, it can be stated that the global amusement and theme park Industry has grown with a healthy growth rate from all major regions of the world. Whereas the US has always seen the highest number of visitors, Asia is slowly emerging as the fastest growing market than the US and Europe. IAAPA in its Global Amusement Park Outlook (2015-20) report projected that the global theme park market will expand at a 7.5% compound annual rate, exceeding the estimates of 5.2% compound annual increase in nominal GDP. Hence, rising GDP worldwide, increasing tourism spend, growing urban and middle-class population and technological advancements are the major drivers for the further growth of the industry.
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