Sometimes you have to scratch your head. In an article posted to The Disney Blog website, a writer asks the question: “If you run a pie shop where you have 8 slices of pie and a line outside the door with 10 people in it. What do you do?” What the author was referring to was the ever-increasing demand for Walt Disney World theme parks and the strategy behind increasing prices to try and keep crowd levels reasonable on peek days.
The article goes on to say, “You can see where I’m going with this, Disney is the pie-maker who sees 10 people lined up outside and decides to raise prices so only 8 can afford to come in. In fact, after four people quit the queue, they decided to stop baking pies with 8 slices and now use a smaller tin that only provides 6 slices. But they charge more per slice, and have added extras that also cost more, so they’re making more money, but selling to fewer customers.”
We are going to take this comparison and run with it a bit to see if it makes sense. Let’s take into account that “pie” in this instance is essentially new rides/attractions or could even mean a new theme park. First, it’s important to know the difference between baking pies and making theme park attractions. If you’re a bakery, the process of baking more pies isn’t too difficult assuming you can easily ramp up ingredients, staffing and you’ve got enough oven space to do so. Worst case scenario, you may have to add square footage on to your kitchen and buy new oven equipment. In reality, baking more pie is fairly simple and generally isn’t a huge constraint to a baker. Plus, if as a baker you determine that you end up baking too much pie, you can cut back fairly quickly and get back to sustainable levels.
Now let’s look at what adding “pie” (new rides/attraction/park) to a place like Walt Disney World looks like. In this case, you’d be hard-pressed to add new attractions to any Disney park for less than $100 million. As a very expensive benchmark, Pandora at Animal Kingdom cost an estimated $500 million, but that was naturally on the higher side. No doubt, the new Star Wars additions being added to Disney’s Hollywood Studios will likely be in that price range, if not more, not counting the hotel which technically isn’t a part of the park experience.
The real issue here is ROI or Return on Investment. Disney and Universal both spend over ten times the amount nearly any other theme park does on new projects. Why? Because they can. And it works. Considering the amount spent takes years to complete and literally hundreds of millions of dollars, getting an ROI can take years.
Which is fine because companies like Disney and Universal are in it for the long haul. Not only do new additions drive ticket sales (because of increased capacity), they also drive merchandise and food and beverage sales as well. Not to mention, a solid attraction, land or park can spur an entire vacation to Walt Disney World that may have decided to take their vacation dollars elsewhere. Meaning that you can also justify new additions in that it causes more families to stay in a Walt Disney World Resort hotel.
If that’s the case, and people are clamoring to constantly “eat more pie”, why not spend a billion a year in new offerings? Why not make it two billion at Walt Disney World alone? The answer lies in making calculated moves based on spending habits, vacation trends, and the economy.
Just because a Star Wars Land opens at Disney’s Hollywood Studios, doesn’t mean Walt Disney World as a whole will continue to grow exponentially as a result. People can only take X amount of time off of work, and their budget still remains limited. Meaning that a three-day vacation to Walt Disney World might have cut out Disney’s Hollywood Studios if they went in January 2018 because of the lack of new appealing offerings. However, if that same family went for a three-day vacation in the summer of 2019, it doesn’t mean they will necessarily add a new day to their experience. It very well could mean they cut Epcot out of their vacation instead.
Most importantly, for easy math, let’s assume that Galaxy’s Edge at Disney’s Hollywood Studios costs $500 million to make. Again, easy math, let’s just say tickets are $100 year round (I know, they’re not, just indulge me). At that rate, if you only justified the cost to break even in ticket sales alone, you’d have to sell 5 MILLION more tickets than what you’re selling now just to break even. That’s right: more. If the purpose of opening a new attraction, land or park is to make more money, you’d have to assume that you’d only have a slight depreciation by offering next to nothing new over the course of several years.
To put this into perspective, according to the Themed Entertainment Association, Disney’s Hollywood Studios brought in approximately 10.7 million people in 2016. In order to his that 5 million ticket mark, the park has to gain approximately 10% consistently over the course of the next five years. Granted, even those numbers are somewhat exaggerated.
Granted, we all know that per caps are going to go way up when Galaxy’s Edge opens. Fans will be snatching up souvenirs and blue milk left and right. So let’s say that justifies half of the cost. You’re still looking at 2.5 million extra tickets. And even that is ridiculously far from justifying $500 million.
The price of a ticket, despite popular belief, is not pure profit. You’ve got operating costs like labor that didn’t exist before. You’ve got to market this via commercials, billboards, internet ads and more to markets all around the world. In addition, there is maintenance and support staff that you’ll never see who have to keep new attractions running smoothly.
What I’m getting at is, opening a new ride, land or theme park at Disney or Universal is a beast. Spending $100 million takes a long time to get an ROI. While Disney will eventually most assuredly get that return, it will take years to reach that number. How many depends on a lot of factors including the economy, public perception and of course, competition. The reality is, no matter how badass Galaxy’s Edge (or any new offering) might be, if the economy takes a slide, people won’t show up in droves. We have seen it over and over again after 9/11 and again in 2008 when the housing market collapsed.
Finally, I don’t believe anyone reading this (including myself) knows how much money Disney has in reserve. To just say that you should quadruple your capital spending on new products is extremely risky and it also locks up capital that can be spent elsewhere. Granted, that is really NOT how Disney (or any company) decides to spend capital. Parks and Resorts are separate from the Studios, which is separate from consumer products, etc. But that’s a different story for a different time. Next time we will address why offering upcharge experiences actually make a lot of sense for Walt Disney World versus catering to guests who spend less. Thoughts?
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