How to start a cinema

10 The economics of the operation

Cinemas have operated along largely the same business lines for many decades, but these are starting to change as the industry adopts new ways of presenting films. This chapter looks at the key income streams and costs that need to be managed effectively to make the cinema viable.

Income

Cinemas derive their income from several sources, the most important being:

  • Ticket sales (and membership income if applicable)
  • Food, drink and merchandising sales
  • Advertising revenue (screen and brochure)
  • Public funding

The majority of their income though, is from screening new release films and selling confectionery, food and ice cream to the audiences who attend. A hit film results in high ticket income and high concession sales. And vice versa. There is comparatively little that a cinema can do if there is a poor run of film releases, as the large cinema circuits in the US and UK found during the disappointing summers of 2000 and 2010. Income is calculated as total admissions x average ticket price, while concession revenues are based on average spend per admission.

Illustrative income projection (all figures exclude VAT)

Estimated annual admissions 80,000 for a 3 screen cinema

Average ticket revenue £6.00

Annual ticket income £480,000

Film rentals (@38%) (£182,400)

Net ticket income £297,600

Concession income (£1.25 x 80,000) £100,000

Concession cost of sales (£40,000)

Net concession income £60,000

Screen advertising £20,000

Brochure advertising £5,000

Bar & Cafe net profit £30,000

Total annual net income £412,600

Demand forecasting

Unless you are taking over a going concern, trying to estimate how many people might visit your venue can be a bit of a shot in the dark. There are however, industry average occupancy ratios to help which, alongside some benchmarking against existing cinemas, can help you develop a more accurate estimate. You will also need to undertake some careful market research to verify that there are in fact a sufficiently large number of cinemagoers living within a reasonable catchment area. Average occupancy rates decline as screen numbers increase. A single screen cinema of say, 250 seats which was exceptionally successful might achieve an occupancy rate of 30-40%. However, average rates for a 2, 3 or more screen venue are more likely to be in the 15-20% range. Calculating your potential box office revenue is then a relatively simple matter once you have pinned down an average ticket yield.

Example

A 3 screen cinema configured as 250:150:90 seats, a 15% average occupancy rate and average ticket prices of £6 would take £409,968 per annum in box office revenue based on a total of 44 screenings per week (a seven day operation with two evening performances in each screen and a Sunday matinee double bill).

44 weekly performances spread as follows:

Screen 1 – 16 x 250 = 4,000

Screen 2 – 14 x 250 = 3,500

Screen 3 – 14 x 90 = 1,260

Total capacity = 8,760 seats per week x 52

Weeks = 455,520 per annum

15% x 455,520 = 68,328 seats sold @ £6 each = £409,968

Another useful ‘rule of thumb’ is to look at average admissions per screen in the UK, at present around 50,000. This figure includes multiplexes as well as independent operators, and as the multiplexes have many more screens the figure is skewed downwards. Stand-alone and independent cinemas often perform significantly better than this although it is unusual to average much more than 60,000 per screen.

The figure you should not use is the average per capita visits to cinema (currently 2.6) and multiply this by your catchment population. A huge proportion of UK box office, circa 30%, comes from the capital’s West End and so this average is heavily skewed away from the rest of the country.

Working out how many people might pass through your doors using industry standard ratios is only a rough guide. You need to provide evidence that your assumptions are realistic by conducting some kind of market research. If you are taking on a ‘going concern’ there will already be some indication about the venue’s potential audience size. However, if the venue is new or has been closed for some time, you need to find out if there is enough of the right kind of people (i.e. people who go regularly to the cinema) living within a realistic catchment area. Your catchment area is probably defined by drive time but you also need to take into account local competition (see Chapter 3 – Establishing a catchment area).

Ticket pricing

Ticket pricing should take account of a number of factors. First and foremost, local competition is likely to dictate what people will be prepared to pay for a cinema ticket. If your nearest multiplex charges £7.50, you are unlikely to be able to charge much more than this unless you are offering something very exceptional, and if your technical facilities are inferior to theirs you should probably charge less. That said, you could use pricing imaginatively as a marketing tool to try and iron out peaks and troughs in demand or to reach particular audiences. Invariably, Friday and Saturday night tickets attract premium prices but you might want to make Monday or Tuesday evenings a more attractive proposition by discounting heavily. It is also common practice to have special prices for children’s matinee performances on Saturday (sometimes as little as £1), or a pensioner special on Monday afternoons. Special promotions (e.g. two for the price of one) can also be used to raise profile and secure short term increases in admissions. However, when discounting you need to tread very carefully with distributors and let them know what you are proposing to do. Don’t forget, they are taking a cut of the box office! The same applies to free screenings or complimentary tickets.

Direct costs

The only direct costs for film exhibition are film hire costs (including transport). These are highly variable depending on a number of factors including the number of screens you have, the length of run you can offer, your bargaining power with distributors and the projected popularity of the film. In the UK it is distributors who have most of the power in the supply chain. They decide which cinemas get which films and when, their objective being to maximise revenues from the box office in the opening fortnight.

The percentage film hire figure can be anywhere between 25% and 60% of box office (after deducting VAT from the ticket sales).  In addition each distributor will have a minimum guarantee, which they would receive from the exhibitor regardless of the admissions i.e. if no one came to the screening it is the amount you would still have to pay to the distributor, these range from £75 – £150.  However, for the purposes of planning, an average anywhere between 35% and 45% of box office can be used. If you plan to do your own film booking as a stand-alone operation you should budget at the higher end of this scale. In general, small operators have to pay higher rates.

Other costs (overheads)

Principal areas of expenditure

  • Staff costs: manager, deputy/relief manager, projection staff, box office and ushering staff, cleaners, etc.
  • Marketing and publicity
  • Premises costs: rates, insurance, maintenance, heat and light, cleaning, security
  • Office costs and licences (Performing Rights Society, etc.)
  • Programme enhancement/education costs (may be supported by public funding)
  • Finance costs, interest, audit fees

It is less easy to describe the amounts to be allocated in the overhead expenditure section since it is highly dependent on the way the cinema is organised and operated. For example some services may be provided under a management contract by third parties or some overhead costs might be shared with a larger organisation (if the cinema is part of an arts centre for example). There are a number of independent specialised cinemas in the UK which receive revenue subsidy from regional and local public bodies to enable them to programme culturally significant films and carry out educational work. However, in real terms the value of this subsidy has declined significantly since the 1970s when many of these venues were established and most now offer a mixed programme and are much more heavily reliant on box office income than they used to be.

It is unlikely in the current political and economic climate that a new cinema would attract public subsidy for operation except perhaps at local level with some investment (often in kind – for example through charging nominal or no rent for a building) from a local authority.

The BFI have some funding available but these tend to be project based or require some previous exhibition delivery so may not support start-up cinema operations but they are still worth having a look at – Programming Development FundFilm Festival Fund and Neighbourhood Cinema Fund. However, in general, budgets should be built on the assumption that box office and ancillary trading income (bars, restaurants and screen advertising) will be required to cover all costs.

Figure: average income and expenditure account

  • Total annual net income £412,600 (i.e. net of direct costs: gross profit) based on 80,000 admissions as in example above
  • Wages £192,000 (8 ft equivalents @ £24,000 pa average)
  • National insurance @10.45% £20,064
  • Rent £70,000
  • Rates £12,000
  • Heat and Light £12,000
  • Insurance £8,000
  • Repairs and renewals £20,000
  • Audit/accountancy £4,000
  • Telephone £2,000
  • IT £20,000
  • Printing and stationery £4,000
  • Depreciation £6,000
  • Advertising £6,000
  • Bank interest £10,000
  • Total Overheads £386,064
  • Net Profit (before tax) £26,536

Summary of key points from Chapter 10

  • Cinemas derive their income primarily from ticket sales and from selling confectionery, food and ice cream to audiences
  • Calculating projected box office revenues can be tricky. You need to undertake careful market research to back up your estimates
  • As a rule of thumb, a small 2/3 screen independent cinema operating without any subsidy of any kind (including voluntary labour, cheap rents and soft loans) will need to generate annual admissions of at least 120,000
  • Average per screen admissions in the UK are around 50,000 per year but this declines as venue screen numbers increase
  • Ticket prices will typically be based on local competition. The market is unlikely to bear much more than your local multiplex and you may need to charge less if your technical facilities are inferior. Don’t let this stop you using pricing more flexibly as a marketing tool
  • The only direct costs for film exhibition are film hire and transport costs. These vary considerably according to what you can offer distributors. For planning purposes work on the basis of 35-45% of box office
  • The major fixed costs for a cinema operation apart from rent will be staffing. Staffing levels will be dictated by legislation and the layout of your building

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