Navigating Through The New Normal
COVID-19 has posed an unprecedented challenge for the theme park industry. From the shutdown of parks beginning in February to operating at a highly restricted capacity this summer and implementing new safety measures, the parks have dealt with a range of issued related to the pandemic. With the recent reopenings of theme parks around the world following the onset the pandemic, we believe that it is timely to discuss the industry and the obstacles it faces as they navigate through this new normal.
Our primary focus in this white paper will be on the two large global theme park companies, The Walt Disney Company (DIS, Financial) (herein "Disney"), and Comcast Corporation's (CMCSA, Financial) NBCUniversal unit. We will also provide some detail on the other US publicly traded amusement park operators: Six Flags (SIX, Financial), Cedar Fair (FUN, Financial), and SeaWorld (SEAS, Financial) to highlight the differentiation among the types of parks.
HISTORY
Modern amusement parks evolved out of temporary fairs and carnivals in the 1800s. The oldest known amusement park in the US is Lake Compounce, which opened in Bristol, CT in 1846. The theme park concept was first realized by the opening of Santa Claus Land in Santa Claus, IL in 1946, and further developed by Walt Disney, with the opening of Disneyland in 1955. An amusement park is simply a park with various attractions, while a theme park has a central theme that unifies the structures and attractions through storytelling. Examples of this include Magic Kingdom, Epcot, and Universal Studios Florida. A further distinction is made between destination parks and regional parks. Destination parks offer on-property overnight accommodations, attract vacationers from longer distances, and are open year-round. Over the last few decades, the theme park industry has grown internationally, with major attractions built in China, Japan and Europe. Asia continues to be an area of growth, with new parks in Japan and China under construction and set to open in the coming years.
INDUSTRY DYNAMICS
Prior to the spread of COVID-19, the theme park industry had a bright outlook. Global theme park spending was estimated to be $52 billion in 2019, and expected to grow at an annual CAGR of 6.3% through 2023 to reach $66 billion, according to the International Association of Amusement Parks and Attractions (IAAPA), an industry trade group. Attendance for 2020 was estimated to be about 1.2 billion globally, and growing at a 3.6% CAGR. Now, the outlook through 2020 and beyond remains highly uncertain. While we believe that it will take time, the industry will recover. The trends before the pandemic are not likely to change: growth in Asia Pacific and Latin America, as new parks come on line and the middle class emerges, as well as increased spending in North America.
Exhibit 1 IAAPA Global Theme and Amusement Park Market By Category 2019 Pre-COVID Forecast
Source: IAAPA Global Theme and Amusement Park Outlook
Exhibit 2 Coney Island Amusement Park
Source: CNN.com
The amusement park industry largely breaks down between two groups: regional amusement parks and destination theme parks. Regional amusement parks generally have a collection of fixed attractions with no central theme uniting the structures of the park. In addition, the majority of park guests live within driving distance and come for a day, and these parks are often seasonal operations. Examples of regional amusement and theme parks include Coney Island and Six Flags.
By contrast, destination theme parks have an overarching theme that connects the various attractions and structures. Visitors often come to the theme park as a destination vacation, stay at a resort owned by or associated with the park, and spend a significant portion of their vacation budget on park property. Disney and NBCUniversal's parks fall into this category. All else being equal, guests coming from outside of the local market are more profitable as they spend more on accommodations, food, and merchandise throughout their visit.
Internationally, there are companies like Merlin Entertainment, which operates properties like Legoland theme parks and Madame Tussauds wax museums, and Parques Reunidos, which operates two dozen amusement parks and zoos globally. China has also been a source of growth in the amusement park business, with three of the top ten amusement park companies focusing on the large addressable market there. In addition, Disney and NBCUniversal have made China (and Asia more broadly) a priority.
The industry has faced issues with high debt levels in the past. In June 2009, Six Flags filed for Chapter 11 bankruptcy protection after a decline in cash flow made the highly levered company unable to service the debt used to finance several decades of acquisitions. More recently, private equity buyers have been rolling up regional amusement parks assets. A group backed by EQT acquired Parques Reunidos, and Merlin Entertainments was acquired by Kirkbi. In April of this year, Apex Parks Group, owned by Carlyle and Edgewater, filed for bankruptcy. While a small park operator relative to the industry, it shows the perils of negative operating leverage from a decline in attendance, and highlights the risk COVID-19 poses to the industry.
BUSINESS MODEL
Theme parks generate revenue across a variety of streams. This includes tickets for admission, merchandise, food, beverage, resorts and hotels, and licensing, sponsorships and royalties. Significant operating expenses include labor, cost of goods sold, infrastructure costs like maintenance, insurance and fuel, supplies, commissions and entertainment. Generally, parks admission model comes in one of two forms: pay-as-you-go and pay-one-price.
Destination theme parks are designed to keep visitors on the property for the entirety of the stay, which is why Disney and Comcast have invested billions of dollars in thousands of onsite hotel rooms. Historically, Disney dominated the Orlando theme park business, and Universal would try to take customers away for a day or two during their Disney vacation. Now that Universal has invested so much in new attractions and resorts in Orlando, competition has increased in the region. This has driven both companies to do their best to keep visitors on their properties during the duration of their stay.
Theme parks generally have strong competitive moats. They require large tracts of land and significant capital investment to develop that land. Across all of Disney's businesses, 75% of their capital spend in recent years has been on the Parks & Experiences segment, principally for theme parks and resorts. Building a theme park also requires an extensive amount of red tape and bureaucracy, as a broad range of state and local government laws, regulations and zoning requirements must be met. For Disney and NBCUniversal, the parks are also a part of their intellectual property fly wheel, which allows them to monetize their film and television content through additional channels.
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