SUPPORT FOR STAKEHOLDERS

AAs with many industries over the course of 2020, cinema exhibition has been - and continues to be - faced with significant, existential challenges as a result of the global coronavirus (Covid-19) pandemic. The consequences have been far reaching, particularly for cinema operators, owners and landlords / asset managers, resulting in the industry being in a state of unprecedented distress.

All parts of the business - from film production to distribution to exhibition - are intrinsically linked and so, where relevant, must work together to ensure its collective health. But there is still considerable turbulence to weather and, fundamentally, the market needs to be realigned in ways that ensure a cohesive recovery for all parts of the filmmaking ecosystem. Ultimately, the current marketplace is broken and needs to be re-aligned.

But there are remedies and solutions to the problems facing the market. And these solutions lie amongst studios, investors, shareholders, landlords, bond holders, suppliers and management, as well as national and local government. These parties need to come together to ensure that the recovery of the industry enables the successful screening of the large number of “tentpole” major film releases that have been delayed to this year and beyond.

After multiple global lockdowns and the default popularity of on-demand TV, the current situation should not be viewed as a battle between “Out of Home Entertainment” (ie cinema) and “At Home Entertainment” (ie streaming). Instead, the two should be seen - and approached - as complementary of each other and may well become more aligned over the coming months.

The hard reality of the impact of the virus is that enforced cinema closures around the world over the last year have meant that many operators now have very little liquidity, zero cash flow and on a site by site locational basis some may not open again and others may only be able to open again under revised commercial lease terms.

As described in Celluloid Junkie’s article, “The [cinema] business must first survive the COVID-19 cull. The most vulnerable among the exhibitors will obviously be those with financial leverage issues, but also those with design issues, meaning is an exhibitor able to pivot to flourish in a lower density attendance environment, or are they doomed to a sticky floor bedevilled irrelevance?”

Several cinema operations are now being described as “zombie companies”. They’re indebted businesses that, although they have the capacity to generate cash, can only service the interest on their loans but not the debt itself after covering running costs and fixed costs (wages, rates, rent etc). As such, they generally depend on creditors such as banks (or, indeed, throughout the pandemic the government) for their continued existence, effectively putting them on indefinite life support.

The knock-on effect of the failure of a cinema anchor tenant in a shopping or town centre is far-reaching and has two major impacts. The first is the effect on landlords and investors resulting from the inability to make rent payments. The second is the contagion impact onsurrounding complementary casual dining restaurants which, as a result of reduced footfall, are likely to under-trade, possibly eventually close and subsequently can’t pay rent either.

Because local authorities are the biggest leisure property owners this, in turn, has an impact on all of us as a society, as pension and annuity funds are greatly impacted.

For those that will survive the following three Cs have never been more important:

Cinemas need to be actively managed as an asset by the operator, ensuring that both the exhibition needs are aligned with the development interests. To do this, the relationship between cinema operator and landlord should be based, first and foremost, on open communication. But what’s more is there should be an open channel of discussion between the two parties on an ongoing basis, not just at challenging times. And rather than a landlord assuming the sole role of rent collector - a typically occurring arrangement - the relationship should be built around equal, vested interests in ensuring the success of the cinema.

Communicating more openly, cooperating on issues that arise and reaching a joint consensus is the only viable path forward.

The Big Picture’s team of consultants have many years’ experience in all the different facets of the exhibition industry and are here to help guide you through this period of distress.

Read the full Celluloid Junkie opinion on how cinema operators and landlords must work together to bounce back.

Prior to Covid-19 the cinema industry was in a robust position, with 2019’s global box office taking $42 billion for the first time ever. Comparatively, and for context, even prior to the pandemic the retail industry was already seeing a high degree of distress with increasing high street rents and a significant uptick in online shopping. But the advent of Covid-19 has left the cinema industry in significant turmoil and set to lose $32 billion from this year’s box office records.

Cinema exhibition’s growth and resilience in recent years has come, predominantly, from cinemas constantly upgrading and modernising their offer, either through technology, seating, or service-based improvements. But even the strongest of circuits have had a huge challenge on their hands throughout this last year, without customers able to come through the door in their usual numbers or in some cases at all.

An important point to make is that itis true to say that every cinema company, however successful, has sites that are poor(er) performers. These sites are, usually, carried by the other, stronger, branches of the company but the pandemic has prevented this from continuing and has brought this problem to the fore. A potential silver lining of this is for landlords to use this opportunity to address and plan how to approach those cinemas that are underperforming. But consequences of a site failure are important to bear in mind: the cinema is usually the anchor tenant on the high street or in a shopping centre. And so if the site fails this has a knock on effect on those businesses surrounding it, as well as the local community, with retail and casual dining occupants likely to fail too.

Cash Flow

After months of no steady income, cash flow for most cinemas is currently inexistent. And even when sites have been legally allowed to reopen, another serious problem for exhibitors is that Hollywood studios have not been supplying a steady flow of essential new product (film content). Studios need audiences to return in large enough numbers to recoup the associated significant film production and marketing costs spent on making films - the kind of audience numbers that will attend cinemas to see the big, tentpole films that are currently not being released, creating a “Catch-22” situation.

It is critical for landlords and asset managers to be aware of this “content hurdle” from the position of a cinema operator and the serious consequences this has. With newly negotiated arrangements between studios and exhibitors squeezing the theatrical window and Warner Bros.’ somewhat unexpected plans for their 2021 slate, the situation looks likely to take time to settle into a new way of business.

Another consequence of cinema closures, and one very much linked to consumer confidence, is the effect of the pandemic on screen advertising partnerships and revenue. This issue may have been given less attention but has still had a significant impact. And unfortunately, when cinemas reopen, these effects are likely to continue for some time. The shift to other media channels, that has occurred because of the pandemic, will take a while to come back from.

Consumer Confidence

Another key factor to getting customers back into watching films on the big screen is consumer confidence, given the current apprehension of contracting a virus in enclosed spaces. Cinemas have implemented a wide range of measures to ensure venues are as safe as possible and vaccines now being circulated go some way to reassuring people. But given that the total of Covid-19 cases traced back to a movie theatre is zero, the message that cinemas are safe spaces needs to be effectively communicated and incorporated into a strategic marketing plan.

With cinemas closed in many countries around the world, customers have been physically unable to attend. If admissions numbers dwindled in the past, perhaps due to a run of poorly received films, a successful formula to boost audience numbers would be to programme a major blockbuster supported by a run of solid films. Because of this strategically scheduled content bringing audiences back into cinemas successfully, the film production and exhibition eco-system flow would be sustained. But under these current COVID-19 circumstances this considered approach is unavailable due to the content problems exhibitors have experienced.

However, the lengthy duration and impact of the pandemic has created more than just a loss of content. Over the last few months cinemas have been subjected to an open/closed/open pattern of business, resulting in an erosion of confidence and a disruption of consumer behaviours. Consistency in each one of these areas is critical to ensuring people maintain a cinema-going habit and to achieving robust audience numbers.

In a post-COVID-19 world when content is once more in regular supply, how will leisure destinations actually look? A cinema itself may be open but if it is surrounded by a half empty mall or street, with limited associated leisure or F&B (food and beverage) options, this creates an unattractive space for customers to spend time in. And if the consumer in question has developed a stay-at-home entertainment habit this latter option may become the more appealing of the two.

Initially, when life returns to a semblance of normalcy the assumption is that people will want to get out of the home and return to activities they enjoyed prior to COVID-19, with visiting the cinema being high on that list. But if that first visit back to the big screen is unsatisfactory it will prevent people from making a return trip in a hurry. Visits to the cinema are usually part of what’s known as a “twin visit”, i.e. they’re usually combined with a shopping trip or a meal at a restaurant. As a result, if cinema attendance falls this has an impact on the surrounding leisure destination, with certain town centres and malls in danger of becoming cultural dead zones.

Another factor to consider is that as fewer people commute in to an office or work-related events and conferences, activity in post-work hours will reduce. How permanent or how big the population drift will be is yet to be seen but working habits will definitely change.

But the reverse of this is also true for smaller towns and communities that have seen a boost to local commerce and leisure during the pandemic. There is a clear opportunity for cinemas in these locations and it’s The Big Picture’s (TBP’s) view that smaller, flexible, community facing venues anchored by cinemas will be the future. And this is one trend that the pandemic may well accelerate.

In both instances, there is a need to re-think what the future consumer/inhabitant will need from their leisure requirements and placemaking will be more important than ever. Regenerating a town centre, for example, by simply creating a newer version of the previous one will not be enough. The full domino effect of the pandemic is still unknown but it has the potential to be far reaching, making it crucial for cinema operators to reassess their offer and role within their communities.

Over the last decade or so cinema operators have, where possible, wisely invested in upgrading their cinema technology, seating or F&B (food and beverage) to modernise the overall experience offered to customers. But the cost of doing so oftentimes comes from the developer’s financial contributions. Over the course of 2020 these funds have been hit hard and this avenue is unlikely to be available for new cinemas for some time. But it may be down to Local Authorities (LAs) to step in and support the upgrading of cinemas where necessary, as is the case in Huddersfield. The Huddersfield LA has stepped into this role because it sees the town’s placemaking redesign as critical to community cohesion and the health of the local economy.

Equally, landlord confidence in the cinema sector has been shaken by the inability of exhibitors to pay rent and the swift evaporation of limited liquidity. Comparing the cinema sector to the office rental sector, the latter has been hit badly but is still making 80% of rent payments.

Aside from the other financial implications discussed, it’s important to be aware that cinema costs will be directly affected. It’s safe to say and expect that a cinema P&L will have to be reset as the cost base - utilities, deferred rent, additional payroll costs, health and safety cost impacts, the need to rebuild the advertising market - all take effect.

The Big Picture understands an operator’s capacity to fulfil rent obligations, pay service charges and other property costs related to their business profile. Weare well placed to be able to advise cinema operators or landlords who may be unsure of how to move forward in this climate. Our services are there to offer guidance and recommendations on a bespoke basis because, quite often, these concerns need looking at on a site-by-site basis.

Streaming platforms have seen great success over the last ten months, while audiences have had to remain at home and consume content from their sofa. And once again, this has led to statements proclaiming the death of cinema, something that, over the last century, has yet to come to pass. But there are a couple of things to note here, the first being: don’t kill the golden goose.

To illustrate this statement more fully, PVoD (Premium Video on Demand) platforms have taken $632 million so far in 2020, compared to 2019’s global box office of $42.5 billion. Of course, the exhibition industry stands to lose $32 billion this year, all due to the pandemic, but the PVoD figure comes after a year of ideal circumstances for online viewing platforms. And yet thereis still a considerable distance between the two revenue totals, with 2019’s exhibition figure notably ahead.

Secondly, if the release of Christopher Nolan’s Tenet made anything clear this year, it was the appetite shown by audiences for the PLF (Premium Large Format) experience. The popularity of this format shows an appreciation of experiential, technological advancements, which bodes well for the future direction of the industry in a post-COVID-19 world.

The combination of Covid-19 and the proliferation of a wide range of streaming options available to viewers at home has, therefore, sped up the need for cinemas to be innovators. Part of this need is to differentiate themselves from just offering a cut-price, budget option; an option that doesn’t appeal to a sense of customer loyalty. Netflix and its peers have fully adopted a subscription model, one that keeps customers coming back repeatedly. The cinema industry, however, has taken a long time to adopt a similar subscription format. But this approach, combined with an overall creative, collaborative strategy is how cinemas will begin to thrive once more.

One thing is clear: cinema cannot become complacent or middle-of-the-road. And one important question to ask, especially considering the Hollywood content pipeline drying up, is: what different revenue strands or products can be incorporated into the business model?

Local content production is key to this. Territories that are far less Hollywood-dependent have seen far more of a bounce back in recent months, particularly in the Asia-Pacific region. China, Japan and South Korea are top performing regions, in large part due to the high-quality local content they produce and their more effective management of the pandemic.

We work with landlords to provide commentary and make suggestions about what can be done to enhance the cinema offer within a retail, shopping centre or precinct setting to improve the outlook.

The Future of the

Theatrical Release Model

2020 has seen significant changes to the usual exhibition practices (aside from the obvious cinema closures): namely, developments to the theatrical window release model. This issue has always been a contentious subject, particularly between studios and operators. But the requirements of each party, combined with the pandemic, demonstrates the need for a higher degree of flexibility in approach.

The shaping of the window will, therefore, hopefully become a more carefully thought-out process, tailored to circumstances. Instead of a one-size-fits-all-films approach, more flexible negotiations should also see more enthusiasm from operators who will be more incentivised to broaden their product and revenue streams and focus on an overall improved experience for guests.

To be frank, the next twelve months will prove to be challenging from a landlord’s perspective. Distressed cinemas will either need to be repurposed or brought up to date and made fit for the current marketplace. TBP can perform a feasibility study into an individual cinema to investigate what the prospects and outlook are for that site.

But thereis plenty of room for creativity if a collaborative approach is adopted. Shopping malls and town centres that house cinemas can cooperate in their efforts and focus on creating a platform that speaks directly to the local community. Campaign messaging, film releases, local events can all be publicised via joint networks, all with the aim of creating a more community-facing endeavour.

The Big Picture’s Involvement

TBP’s team of consultants is here to offer guidance and investigation into the wide range of problems cinema operators or landlords may now find themselves facing after a stressful year.

To achieve stability, and a path to recovery in which the market is realigned, operators and landlords need to develop a more open and honest on-going dialogue. TBP can assist with these conversations, as well as offering board-level guidance about a distressed cinema, or to a landlord needing direction. From rent payments through to content supply, we can be brought in to support on any / all of these issues.

For example, moving forward with rent payment concerns, there needs to be a degree of flexibility and communication between operator and landlord. If rent agreements are to be more malleable - moving to a turnover rent basis, for example - landlords will want to be more informed of the cinema’s progress. This may mean regular sharing of box office streams, revenue updates and reporting effective programming.

Adapting to this new relationship can be difficult for both operators and landlords so we can support and assist with this transition.

Cinema Exhibition FAQs

As a landlord or asset manager currently managing a cinema, concerns about the state of the market and the impact of the pandemic are to be expected. TBP can provide an up-to-date international market overview, or information on a specific territory, to keep you informed of any significant changes as and when they happen. Our team are also constantly monitoring changes to the film release schedule so we can explain how they may affect your business.

The Big Picture’s consultancy team have put together some answers to frequently asked questions. Please get in touch if you have any further questions or if you would like to see how we can help.