Wednesday, January 17, 2018

Regional Theme Park Revenue: How The Industry Makes Money

For many years, I heard a common refrain from industry folks and those on the internet who felt they had been sufficiently smartened up. They claimed that a core reason behind the bankruptcy of Six Flags (SIX) in the late 2000s was that they had "given away the gate": in effect, they had allowed admission at a loss to try and pick up revenue from food and drink sales only to come up desperately short. They fundamentally misunderstood how the theme park industry worked, unlike Cedar Fair (FUN) and others. Considering the number of people who told me this and my respect for them, I generally mimicked it. Why wouldn't it? It made all the sense in the world. But I've gotten older, and gained a lot of real world experience. I've started to come to distrust those in positions of authority. As I worked on my piece related to the theme park labor market, "giving away the gate" came into my mind. Is that true, or just more BS?

So I did what any rational almost-35 year old should presented with such a question: I sought out FEC 10-K filings. 10-K filings are the annual report corporations are to present the Feds to prove that they aren't up to any malfeasance. First up - Six Flags. Low and behold, what appeared to be truth to the claims, as only 54.2% of their revenue in FY 2016 came from admission. But I've been in academia around scientists: you have to repeat that experiment to prove it. So off to Cedar Fair's 10-K to see what they were doing. The answer? 55.6%. A whopping 1.4% difference as a percentage of revenue. The gross admission revenue at Cedar Fair was almost equal to that of Six Flags: it was about a tenth of a percentage short. Neither chain is anywhere near having admission revenue cover operating expenses. I looked at SeaWorld (SEAS) too: 60% of revenue is admission, and they're in the same situation as far as operating expenses. Maybe that's the way things are now. What about in 2001 when Six Flags was steaming full speed towards collapse?

In FY 2004, as SIX had entered its death spiral, they still beat FUN's percentage of revenue derived from admission as a percentage of their overall revenue. Even with notes about discount tickets being distributed in the annual reports, that didn't explain the split being what it was. I was convinced then that the truth was much more obvious: they had abused their clientele until they stopped coming. With the cost of capital expenditures and park purchases being their customer acquisition costs, they had failed to retain anywhere near enough of them cover the interest on the money SIX had borrowed. In 2004, SIX's operations at the park level actually made $149 million dollars. The problem was that they owed $191 million in just loan interest - by the time everything else they owed got added up, SIX's losses totaled almost a half billion dollars, or -$5.23 a share in 2004. What's really amazing is that after all these years and a bankruptcy, the percentages have barely changed. It was time to put down what was real and stop repeating other's feels.


First off, we need to define some core aspects of the regional theme park industry before we can go about killing strawmen and mythology. Admission, or "the gate", is the key component of the pay-one-price (POP) system Sea Lion Park in Coney Island invented and which Six Flags effectively made the industry standard over "pay-as-you-go" systems like the old Disneyland tickets. Often times product is conflated as the theme park, but the theme park rides actually a service one obtains access to by purchasing "the product": admission tickets and annual/season passes. Six Flags and Cedar Fair make it extremely clear on their financial reports and quarterly earnings calls (read the transcripts of literally any of them the last 3-4 years) that pass holders are the lifeblood of their revenue. They claim pass holders possess value far exceeding that of their single day guests. Both have season pass options for individuals planning to visit only their "home" park which are lower in price than that of a single day admission to Magic Kingdom, allowing for frequent visits.

Repeat visitation by pass holders who pay a nominal cost above the price of a one day admission depresses the per capita (often shorted to "per cap") revenue: the amount each guest spends during a visit. A lot of amateur analysis of per cap spending tends to look at per caps as the most significant number for theme park financials, as increases in per capita spending can consequently make up for the loss of attendance. What's the easiest way to increase per cap spending? Increase the price of the gate. The person who might be most strongly influential when it comes to this perception is Mark Shapiro, who was briefly the CEO of Six Flags before bankruptcy. Keith Miller of FunWorld Magazine also pushed the idea back in 2005, suggesting parks aim for "profitability". Interestingly, while per cap spending is indeed up in both adjusted and unadjusted numbers for Six Flags, Shapiro's concepts of park operation at the regional level have basically been abandoned. We'll get more into the why later.

So what do these companies actually do? Regional operators have looked to increase their season pass base as a percentage of visitation rather than increase single day unique admissions. As the pass holder base has become an increasingly larger percentage of the overall attendance (and is now the majority of attendance at Six Flags), the chains have in turn chosen to leverage deals towards that base to both increase revenue from them and encourage conversion of one day ticket holders to passes. These have come in the form of many season long "perks" for sale: food, parking, games, photos, and even express admission to rides.

(Park used: Six Flags Over Georgia)

To illustrate this, consider this: A season pass holder in 2001 would have acquired a Six Flags Great Adventure pass for the price of $54.99. If the pass holder averaged 3 visits, paid $10 for parking each time, but only ate at the park once for $11 because he felt it was a bad value, that pass holder's per visit spend was $32. In 2017, if that same pass holder buys a $64.99 season pass with parking, attends the park 8 times, buys a season dining plan for $95, and gets a season photo pass for $35, the per visit spend is only $24.38. However, Six Flags made twice as much money from the same individual.

As the pass holder base has been rebuilt and expanded, regional parks are still looking for untapped ways to not only increase revenue both via admission and non-admission costs, but to spread out admission spending throughout the year. Six Flags has pioneered this via the use of "memberships" (think of them as season passes on layaway), and they have a desired secondary effect of providing consistent cash flow throughout the fiscal year (including down periods like the 1st Quarter when most parks are closed). Six Flags' memberships are, on a 12 month average, also about 13% more expensive than the straight ahead purchase of a season pass. Cedar Point alternately aims to increase family visitation by providing a "Pre-K" season pass for free; young children get in for nothing, but the accompanying parent will need to get themselves a pass and perhaps dining and photo plans to go with.

If you're smart, you'll catch onto a major limitation of this business plan. In order to base your revenue around season pass holders, you need a sufficient number of people living near the park to act as the season pass holder base for the size of the facility. Individual day versions of dining and photo plans were soon rolled out to deal with exactly this issue. For example, Cedar Point offers All Day Dining at a price of $32/person. While it is possible for a person to eat as many as 8 meals during the day using the All Day Dining product, realistically most people will not do so. $32 may be less money than if the individual paid out of pocket for 3 meals in the park, but it is also more money than if the individual paid $0 for food and beverage, choosing instead eat outside the gate. Cedar Point has also sold a promotional "all inclusive" ticket which at $150/person included admission, Fast Lane express ride access, a meal plan, drink bottle, parking, and Photo Pass. The perception of value with such products may drive high dollar purchases from people who otherwise would be comfortable with a $5 off Coke can promotion.

Regional park operators tend to follow successful trends in the industry, and that's reflected in tiered Season Pass pricing ("Summer" to "Diamond") rolling out to Palace Entertainment's US facilities in 2018, as well as bundled "value" items at the EPR Properties managed by Premier Parks. Dining plans are ubiquitous at pay-one-price parks at this stage; SeaWorld Orlando offered its local pass holders an annual dining plan for just $99. And there's some success there: Parque Reunidos reported a 5% increase year over year in 2017 and is hoping to expand season pass bases not only in the US, but in Europe as well.


It's easy to make declarations about what is or is not true. I chose to separate out the background here because honestly, it takes a while to slog through. However, it is important in life to never take the word of people who won't or can't explain how they got to their conclusions. For that reason, let's get into how we know what's true is true.

Since per cap spending receives such a huge amount of attention, let's first go back to the history books and see how everything developed. In 2001, Six Flags' per capita revenue was $30.99 per person. It crept up to $33.35 by 2005. The takeover of the company by Dan Snyder in 2005 made increasing per cap spending a significant focus to keep the company from entering bankruptcy. Mark Shapiro, the CEO Snyder installed, pushed hard for increases in ticket and food/merchandise pricing and managed to increase per capita spending 14% between 2005 to 2007. His plan also included a very different methodology to capital expenditures at parks: he spent money on intellectual properties and opted to primarily build rides with lower height requirements and children's section to encourage family visitation, while repackaging existing headlining attractions to promote them as new. His rationale was simple: market research suggested that families were worth on average 25% more in per cap spending than teenagers, thus making them much more desirable. During this, Six Flags  also divested of a number of properties, leaving them almost exclusively in large markets. This depressed their attendance at a rate roughly equivalent to the per cap spending rise, while the sales took place in the midst of a serious shock to the real estate market. Sans attendance gains and a lack of revenue diversity, Six Flags wound up hopelessly behind in trying to make its payments. A last ditch effort to exchange equity for refinancing debt fell through, and Al Weber found his way into the interim CEO role.

At a very basic level, many people look at what Shapiro did in terms of repackaging rides and increasing per cap spending as being little different than what the current strategy is. I'll admit that I too previously believed that. That couldn't be further from the truth. Shapiro never grasped the value of repeat season pass holder visitation as a strategy to increase revenue, only that it could torpedo per cap spending. In many ways, Shapiro fell victim to a belief that is endemic in theme park fan circles: the idea that frequent visiting pass holders represent what economists call "rent seekers." Rent seeking is defined as "the use of the resources of a company, an organization or an individual to...gain from others without reciprocating any benefits to society through wealth creation." People unfamiliar with the term but who want to still put the idea forward often talk of one set of consumers subsidizing value oriented products the "bad" customers consume by buying more expensive things. This is a fundamental error in understanding how any product is priced or sold.

Everyone understands that the usual goal of any business is to make a profit. Profit oriented businesses are in turn perceived as (and historically are) more likely to make improvements in search of additional profit. Ask any libertarian or ordo/neo/classical liberal why their societal system is supposed to work best and they specifically discuss this. No one in business, especially with relation to publicly traded companies, is doing anything but seeking to make a profit, and publicly traded companies are responsible for providing return on investment to shareholders. Season passes, dining plans, et al. are products which have been produced for the market not as a charity, but because they drive revenue by appealing to varying market segment's conceptions of value. It would basically be illegal for SEAS, SIX, or FUN to do otherwise. The operators also intend to price appropriately not on the basis of mean usage vs. profit, but by conversion of customers vs. non-revenue.

(Dining plans met minimum requirement of 2 meals per day, 4 hour spacing between meals.)

For example: if an individual meal averages $15 in a theme park, and a season dining plan averages 8 usages, pricing the dining plan to "break even" vs. the mean is inappropriate. Why is this? The cost of a meal at a theme park is already inflated drastically (likely in excess of 1000% of the cost of labor and supplies) because it exists in a closed market where competition has been eliminated. By pricing the dining plan at $80 instead of the $120 break even point, you encourage the person to buy the dining plan product. Even if each meal is worth less in revenue than one sold in isolation, it is more than the $0 that would have been obtained had the individual simply left the park the first day, gone to McDonald's, and never returned.

Shapiro's ultimate successor, Jim Reid-Anderson, might not have had an entertainment background, but he did have an outstanding corporate background. Rather than attempt to eliminate the people already going to the park, he quickly recognized that the parks being a "daycare" as was often discussed by Shapiro in his overhaul was overblown. The reality was that families were the primary consumer of season pass products, not just cheap parents. Anderson also picked up on another all too important truth: Six Flags wasn't Disney, and no amount of cheap kid rides would ever get people to confuse the two. He went back to appeal to the core consumer for the company that wanted a mix of family and big thrills at a reasonable price point.

The results of Reid-Anderson's restructuring at Six Flags are staggering, and have never been put in adequate context anywhere I know of online. Considering that they are literally the most revolutionary change in theme park management since the widespread adoption of POP, it is unbelievable how little they've been reviewed. Just look at this chart:

Six Flags' season pass holders accounted for 27.8% of visits in 2001 when they were first tracked, and would account for 28% of visits in 2008, Mark Shapiro's last full year at the helm of Six Flags. Anderson literally doubled that number. What's also notable is the decline of reliance on group sales. Group sales have been seen as the foundational bedrock of the amusement industry for over a century. Parks like Kennywood relied on group sales to get through the Depression; virtually every GM in the industry has heard similar stories. In some ways, this shift was extremely forward thinking; consolidation of many industries has led to fewer large corporations and tighter belts, and some parks which depended on this have gone out of business entirely (Fun Spot in Indiana is a recent example). Rather than seeing company and church outings as the protection against recessions and reduced guest spending, Six Flags simply priced itself directly at consumers with reduced/stagnant incomes. Further: advance sale admission of these sorts stayed between 57% and 60% of attendance from 2003 until 2010. Running a polynomial trend line to find a likely sum for the unreported group sales number in 2016, that would now have increased advanced sales to somewhere north of 77%. It is not merely possible, but likely that less than a quarter of attendance comes from standard one day admits.

Anderson's success might be silent on theme park fan sites, but it has been copied everywhere. SIX's largest competitor, Cedar Fair, has duplicated a great deal of this, but with a twist. Long time CEO Dick Kinzel left the company in 2011 with per cap spending having dipped below levels 4 years prior. Replaced by ex-Disneyland president and cruise line chief Matt Ouimet. Ouimet also aggressively pursued increasing guest spending, seeing a 5% increase in his first year. Equally clear was his focus on expanding and improving revenue from Cedar Fair's lodging. Unlike Six Flags, Cedar Fair possessed approximately over 2,000 hotel rooms, RV spaces, cabins, and cottages: the bulk of thes attached to its premier facility, Cedar Point. In 2012, Cedar Fair's revenue from lodging increased 37% year over year, and by 2016 had effectively doubled the revenue of 2011.

(Based on lowest cost Season Pass made available by park, Jan. 16 2018. Six Flags Season Passes include entrance to all other Six Flags branded theme parks.)

Repeat visitation was another major target for Ouimet: Cedar Fair's per cap spending in 2004 was $38.41/person. In 2016, it was $46.90. Run the per cap number in 2004 through an inflation calculator, and you'll see that in adjusted terms they've lost about 5% of real per capita revenue. That hasn't stopped the company from posting record profits or attendance. If the 2016 attendance numbers produced by TEA were accurate, it would mean Cedar Point matched its all time annual attendance record of 1994 while Canada's Wonderland hit an all time high. Knott's Berry Farm and Knott's Soak City was reported in a 2016 shareholder call as having reached over 5 million in attendance combined, exceeding any past performance under Ouimet's predecessor Dick Kinzel.

Kinzel had never publicly put as strong an emphasis on season pass sales as Ouimet did. Maybe it's because Kinzel started at Cedar Point, a park with a limited pass base that earnings calls report only generate 10% of visitation. The parks acquired during the 90s and 2000s were generally much, much stronger options for pass sales due to proximity to urban areas, and Ouimet knew this first hand having shared a market with Knott's. Kinzel's traditionalist view led him to cut prices to retain visitors during the recession, which resulted in significant losses in spend. Ouimet opted for a vastly different strategy.

Instead of looking to value as the primary motivator, festivals, food, and spectacular new attractions were how Ouimet would move passes. Whether it's Brew and BBQ, the Boysenberry Festival, the Festival of Music, the Taste of Greece, or any number of other regional variations, institution of festivals gave parks a consistent "new" thing to see or do throughout the year with minimal expense. Executive chefs were hired at Knott's and Canada's Wonderland to help roll out more exciting food options to guests. Lodging was improved drastically at their hotels, and recent reports from the company show a clear desire to build on-site rooms at both Carowinds and Canada's Wonderland.

Capital expenditures have also been appreciably larger than Six Flags. Six Flags runs under a rule of utilizing 9% of revenue for capital expenditures the following year, which usually limits the entire chain to somewhere in the 100-110 million dollar range. Cedar Fair, by comparison, has not been averse to $25 million dollars in expansion funds for a single park in one year. Both chains have also invested heavily in transforming or heavily renovating existing attractions; Rocky Mountain Coasters became a major player by first providing a series of hybridization projects turning wood coasters to steel for Six Flags, and has since been hired by Cedar Fair to do the same. Dark ride tech was also reintroduced with Triotech's projects in Canada and Knott's, and Sally's change of the Scooby Doo ride at St. Louis into Justice League.

In effect, Cedar Fair's season pass push comes from making the park and resorts better and more attractive for the higher price rather than making value the selling point. While they've never released numbers as to the percentage of admissions that season passes make up their attendance mix, earnings calls during the Ouimet era consistently discuss record sales and utilization, with the most recent share figure being given as 45%. That's pretty high, but still significantly lower than SIX.

Some might ask how this compares to the destination players of Disney and Universal. One considerable difference is the value of income generated by accommodations and lodging. Based on the last Disney annual financial report, it is safe to state that their lodging generates in excess of 3 billion dollars globally. The sum is nearly equivalent to the market value of all of Cedar Fair. For destination parks, conversion to resort stays provides the highest level of income, and with the exception of Disneyland in California, pass holders are not believed to be a dominant driver of attendance. However, it is worth noting also that this cannot be said with any certainty, as neither operator discusses attendance trends from the perspective of ticket vs. pass usage.

Disneyland's strong infrastructure for non-pass holders and parallel high local appeal pushes them to not price their pass products for value. Rather, they are priced closer to utilization given that demand for the park is so great. Pass holders still provide excellent spend on midweek or other non-peak periods for the company and thus are necessary to make the levels of revenue desired in Anaheim, but are also very much capable of seriously testing resort and city infrastructure when they turn out during peak periods along with resort/local tourists. For this reason, both Disney and Universal often include lower tier passes with substantial periods of time "blacked out" at which pass holders will be denied entry. As the article has previously reviewed -  pass holders provide lower per cap spending than other guests. As such, if there's a sizable number of guests who would spend more in the absence of pass holders, it is reasonable to not cater nearly as strongly.

Disney and Universal also do not offer anything similar to annual dining plans: Disney World's Tables in Wonderland is the closest thing to it, but offers only a 20% discount at participating restaurants. And only Disney offers a pass option that allows entry into all of their parks via the Premier Passport. Price? $1,349. You could buy premier level passes at Six Flags, Cedar Fair, SeaWorld, Dollywood, Silver Dollar City, Hersheypark, Holiday World, and a Merlin US pass good at every Legoland, Sea Life Aquarium, and Madame Tussaud's branded attraction in the US and still have $19 left over.

1 comment:

  1. Fantastic article! Would love to see more like this one.