18 July 2018 14:49:04 IST

Will outside food cause heartburn for multiplexes?

Maharashtra’s move to allow outside food into theatres could destroy the multiplex business model

The Maharashtra government’s direction that allows movie-goers to carry their own food to multiplexes and ensures that vendors don’t charge more than the maximum retail price (MRP) for food items sold at theatres, deals a heavy blow to the business model of the exhibitors.

Apart from ticket collection, multiplexes earn revenue from sale of food and beverages (F&B) and advertisements. Earnings from the F&Bsegment form a significant portion of revenues for players such as Inox Leisure and PVR. Unsurprisingly, the stocks of these companies are down 18-20 per cent for a week — ever since the government made the announcement.

In this article we analyse the challenges multiplex operators will face, especially if other States follow in the footsteps of Maharashtra, and the complexities in charging MRP for food sold at the counters. At a time when multiplexes face stiff competition from over-the-top (OTT) platforms such as Amazon Prime, Netflix and Eros Now, this diktat could mean real trouble.

Taking away a chunk

Collections from F&B accounted for about 27 per cent of PVR’s revenue in FY18, 23 per cent for Inox, and 25-30 per cent for Mukta A2 Cinemas. In fact, revenue from the segment has been growing in double digits for these companies. F&B sales are a high-margin business, given that products are sold at fairly expensive rates.

PVR is present at 37 locations in Maharashtra, while Inox’s portfolio has 27 in that State. This forms 22-27 per cent of the total properties in which these multiplexes have a presence across the country. Thus, these companies will lose a fair chunk of their revenue if most or all people opt to carry outside food to movies.

Although no other State has said anything yet, others may follow suit given the populist overtones of the move. The entire business model these companies stand on could crumble, what with a fourth of their revenues at risk.

Expensive eating

The other direction, which asks multiplex operators to sell food — popcorn, nachos, bakery items, and the like — at MRP rate, is also problematic as many items at the food counters are not directly procured from outside.

For example, popcorn and nachos are ‘cooked’ at the counters, and the raw materials are procured elsewhere. That is, these are not branded products procured from outside and directly sold at the stalls.

So, deciding the MRP is a fairly difficult thing to do. In the case of branded products such as aerated drinks, it is possible to stick to the MRP without much trouble.

What to do

How can multiplexes potentially neutralise the effect of this order, especially if outside food is allowed in theatres across the country?

The obvious option would be to increase ticket prices. In several States, prices are already dynamically fixed by exhibitors depending on, among other factors, the expected footfalls, day of the week, and popularity of the movies being screened. Thus, the burden falls on the movie-goer.

However, hiking ticket prices is not an easy task. In Tamil Nadu, for example, there is a cap on the ticket price (₹160 in Chennai) when booking offline. If the State decides to follow Maharashtra, multiplex operators will not be able to make up the loss in revenue from sales of tickets. They may, instead, choose to increase the convenience fees for online booking, though it may not be enough to compensate for loss of F&B revenue.

The likes of Netflix and Amazon Prime are increasingly hosting recent releases on their platforms. And many movies are created exclusively for these channels as it is highly cost-effective. Given such competition, drawing in an audience with high ticket prices may be a challenge.

Though Maharashtra’s decision is likely to be challenged in the courts, the uncertainty on a critical revenue segment for multiplexes remains.