Cineplex Inc. (TSX: CGX) is one of my favourite companies because it is a constant reminder that there is always more to a company than meets the eye. For the first six months I wrote for Fool, I was convinced that Cineplex would fail. How could a movie-theatre business compete against technology?
And yet it’s doing better than ever. The reason is simple: Cineplex diversified. It’s still using the legacy business model, but it’s not as dependent on it as it used to be.
That’s not to say that the movie business is bad. In December 2015, Star Wars: The Force Awakens was released, and it quickly became the highest grossing movie in North America. This past December, Rogue One was released, which also generated significant revenue. There’s no denying that the movie-theatre business is lucrative; however, the problem is its dependency on Hollywood to create great content. And being dependent on someone else for your success is dangerous.
But the movie-theatre business model is straightforward: get people in the front door and have them buy food. While movie tickets generate some revenue, the bulk of the ticket price actually goes to the studio. That’s why a bag of popcorn costs as much it does; the theatre has a lot of upkeep. But what if Cineplex wasn’t dependent on Hollywood?
Cineplex asked that question and found two solutions.
The first is through eSports, or competitive video games. In 2015, Cineplex spent US$10 million to acquire 80% of WorldGaming, a platform used for video game tournaments around the world. It further invested US$5 million to create a new league. This gets people into the movie theatre to watch the tournaments. Cineplex gets to keep the ticket price, and it gets to sell food, allowing it to increase its revenue per attendee.
The other solution is through its Rec Room initiative, which I’ve been bullish on since I first learned about it. Like I said above, the theatre business is really about selling concessions. So, rather than relying on a movie to sell concessions, why not make the concession the main attraction? The Rec Room is a large, multi-purpose location with multiple restaurants, activities, and other attractions meant to bring people in and keep them there.
This is great for two reasons. During the day, businesses can send their employees there for meetings or as a reward for successful sales quarters. And then at night, families can play games, watch sports, eat, and drink. It allows the business to generate cash on a regular basis rather than when there’s a great movie.
Both of these initiatives put the company in a solid position, and if we look at the numbers, Cineplex is becoming more diversified. In the fourth quarter, the box office generated 46% of the company’s revenue. Food service generated an additional 27.4%. Finally, Cineplex’s other businesses (Rec Room, gaming, and Cineplex media) generated 26.6%.
In other words, a quarter of its business is not dependent on Hollywood at all. It’s an old-school business model in a new-world economy. That makes this company worth considering.
