Executive Summary

Regal Entertainment Group is one of the leading companies in the motion picture theatre industry and consists of the Regal, United Artists, and Edwards Theatres brands. In 2002, they were consolidated under Regal Entertainment Group by Phillip Anschutz.

There are several direct competitors to Regal Entertainment including AMC, Cinemark, and Harkins, among other smaller direct competitors. Indirect competitors include theaters that are targeting a narrower customer segment through offering unique movies for higher prices, such as Landmark theaters. The movie theater industry is known for its high threats. For example, the threat of substitutes, such as home theaters and DVD, is high as the number of quality home entertainment systems have grown.

The overall industry rivalry is high, illustrated by the competition for highly desirable new build locations. As a result, a recommendation for Regal Entertainment is to differentiate itself from competitors and enhance the customer experience through a dinner and movie offering. Furthermore, Regal has developed its own resources and capabilities, which include scale economies, superior management, and acquisition and integration experience. However, Regal Entertainment does not have a clear vision or mission statement. Therefore, another recommendation for Regal is to develop and communicate its vision and mission statements. Finally, Regal is facing serious financial risks due to its high leverage and high dividends per share. Therefore, the final recommendation for Regal Entertainment is to reconstruct its financial position and lower its dividends.

Industry

Regal Entertainment Group competes in the Motion Picture Theatre (except Drive-Ins) (NAICS, 2007) industry with fellow industry rivals AMC, Carmike, Loews Cineplex Entertainment, Cinemark (Hoovers, 2007) as well as other regional competitors like Harkins (Murphy, 2007). It does not directly compete with art house theatres, amphitheatres, or drive-ins. Its strategic group, as seen in Figure A, is national-chain, indoor megaplexes. Key Success Factors for the industry include location because convenience is important for drawing in high volumes of customers, low cost structure since the industry is low-cost and low margin driven, and friendly and capable guest services representatives.

Figure A – Strategic Groups

Market

The consumers who make up Regal’s market tend to be people who want to enjoy entertainment (in this case—movies) outside of their homes (Hazel, 2007) and/or those who just want to gain access to movies that have just been released from the film studios (Tan, 2007).

Industry Forces

Figure B – Porter’s Five Forces

Threat of Substitutes: High

The threat of substitutes for this industry was determined to be high and includes many alternatives for the target market. These include pay-per-view (particularly “first-release” films), DVDs, VHS, cable movie channels, internet movie sites, and the traditional movie rental retail outlet. Substitutes also include different forms of entertainment including sporting events and performing arts (musicals, operas, theatre). When comparing Regal’s offering to substitutes, it lacks convenience over many of the highly similar substitutes like pay-per-view, but has a price advantage of dissimilar substitutes like sporting events and performing arts (Regal, 2006).

Strength of Suppliers: High

We have classified the strength of suppliers as high because of limited number of major motion picture studios and the high level of differentiation in the product. It should be noted, however, that Regal has the greatest consumer reach of any motion picture theatre company, thereby balancing out the strength of suppliers. The major studios need large theatre chains like Regal and Regal relies on the product of a limited number of major studios (Regal, 2006).

Strength of Buyers: High

The strength of buying power that firms face from their customers depends on two sets
of factors: buyers’ price sensitivity and relative bargaining power. Seeing as ticket prices remain relatively similar among competitors, theatres conclude that a vast difference in price could only by viable if the theatre’s offering was differentiated from those of competitors, which is not the case in the chain industry so they rely on lowest-cost admissions and buyers are not afraid of going to get an inexpensive lunch or dinner instead of seeing a movie if the selection is not attractive (NATO, 2007).

Industry Rivalry: High

Industry Rivalry is high due to the small number of major competitors, only a few movie studios producing “blockbuster” movies, the nature of the business requiring a high cost structure, and barriers to exist because of expensive and difficult to sell facilities. The cost structure is an area which Regal should look at streamlining anyway possible that is profitable and sustainable since they are forced to focus on a small profit margin for short-term success; they must eventually start developing a strategy for differentiation.

Threat of Entry: Low

The only viable way to enter this industry is through vertical integration because the cost of capital is extremely high and the profit margins are small leaving this to be an unattractive industry to enter.

Availability of Complements: Medium

The availability of complements is moderate because essentially any entertainment experience outside of the home can lend itself to a trip to the movies from dining to shopping to leisurely walks. The theatres themselves mostly just offer concessions or arcades which are not highly bundled to the cinematic experience.

Resources, Capabilities, and Mission

Regal Entertainment Group, as the largest competitor in the motion picture industry, has tremendous tangible resources. Regal’s self-proclaimed strengths consist of its size, superior management, and proven acquisition and integration experience. Figure D illustrates the breadth of Regal’s resources and how they contribute to the organization’s capabilities, strategy, and competitive advantage. Regal’s overall competitive advantage is scale economies due to their size and asset base, supported by their number of theatres and the highest average screens per location in the US motion theatre industry.
Regal’s strategy includes new builds that provide enough theatres to allow for long runs of popular movies, but not so large as to create inappropriate risk from financing its new theatres. With the revenue structure of box office receipts, Regal receives a small percentage of the total revenue during the opening weeks of a motion picture. However, the percentage of box office revenue retained by Regal grows to 60% during weeks six through eight of a movie run. Large theatres allow Regal to maximize box office revenue by playing popular movies longer and retaining the majority of ticket revenue. (personal interview, Lisa Kajiwara July 20, 2007)

In addition to maximizing box office revenue through a high number of screens per location, Regal has generated new revenue streams through creative use of its existing tangible resources. Figure C illustrates the evolution of the use of Regal’s existing physical resources have been transformed to create new sources of revenue. This appendix illustrates how Regal has taken on a broader view over time of their same core assets. This evolving approach has created new sources of revenue and increased the revenue generated for its existing fixed assets.  Regal’s human resources are another significant resource on which the company relies. Front line employees must be friendly and knowledgeable, as this is a key success factor of the industry. However, friendly and knowledgeable front line staff is an order qualifier in the industry rather than a point of differentiation. Regal’s human resource focus seems to be on development and retention of managerial talent that oversee front line employees and the overall theatre operations. Regal has developed an extensive management training program and has proven successful at retaining management staff.

Figure C – Evolution of Capabilities

Figure D – Resources and Capabilities

Recommendation: Vision/Values That Inspire All Team Members

When Lisa Kajiwara, the General Manager of the United Artists at the Denver Pavilions who was interviewed for this project, was asked what Regal’s mission or vision statement was, she did not know offhand. Further research also did not uncover a vision statement, mission statement, or the values of the company. Regal would benefit from investment in articulation of the vision/values of the company by selecting a cross-section of employees that include management and hourly employees to develop an inspiring vision/mission statement and a succinct set of values that will help all employees, hourly and management alike, achieve the goals of the company.
Values and Vision statements that are well communicated within an organization play an important role in building commitment within an organization and give all employees a shared purpose. (Grant, pg. 59). By selecting a cross-section of employees to renew the organization’s focus on its vision and values, buy-in and commitment will come more easily as all employees will feel represented in the process. Hourly employees cannot be ignored in this process as they are the majority of the Regal team and have almost all direct contact with the customer.

Implementation of this recommendation will not result in a recognizable difference overnight but Regal’s leadership will see an improvement in all employees commitment and clarity on what actions contribute to the company’s vision and values in the long-term. This recommendation is a fundamental concept of high-performing organizations but should be a priority and opportunity for a quick win when implemented effectively.

Value Chain

The number of convenient locations is the most prominent factor in Regal’s competitive advantage as well as a key success factor within the industry. The amount of screens and locations Regal has are 6,403 screens in 539 theatres, respectively, in 39 states. These numbers surpass AMC by more than 1,000 screen, 162 theatres, and 9 states leaving Regal with the location competitive advantage. This advantage generates economies of scale, which create a better position in Regal’s purchasing and marketing functions. Large scale purchasing and an efficient supply chain allow the company to generate favorable margins on its in-theatre concession business (Regal, 2006).
An in-depth look at Regal’s value chain can be seen in Appendices E and F, which show how value is added in the organization. For example, its inbound logistics are about negotiating with movie studios and purchasing movie contents. The service value factor includes accessibility to theatres, availability of tickets, and various amenities. Due to the largest screen numbers, the company enables itself to have a more favorable position when negotiating with film distributors.

Although AMC is considered the pioneer of the megaplex concept, Regal is now the most modern theatre chain in US since it features stadium seating in 73% of its theatres, which also enforces the service value factor in its value chain (Regal, 2006).

Currently, the movie industry is in the early stages of converting film media to digital media. Transitioning into digital projection affects many aspects of the business such as content providers, distributors, equipment providers and the movie theatres themselves. Also, the technological advances in projection quality allow the company to maintain a better cost efficiency in logistics and operations. Regal also operates extra value added services, which utilize digital projections, such as CineMeeting, but the initial sunk cost has to be incurred when facilitating new equipment (Regal, 2006).

Other than the ordinary back office support, Regal’s IT system has close relationships with the marketing & sales factors. The IT system supports implementations of marketing & sales activities like Gift Card redemption and managing loyalty program membership (Regal, 2006).

Recommendation: Dinner and a Movie Strategic Alliance

Regal has improved its performance in recent years by developing new sources of revenue, beyond those traditionally associated with motion picture theaters. These new revenue streams have been derived from looking at the firm’s existing assets in new and creative ways to promote in-theater advertising and corporate meetings and events.

Regal’s current strategy focuses primarily on acquisition and growth but the gains from this strategy will remain incremental and are highly susceptible to traditional cycles in the industry. According to Robert Grant, “The suppliers of complementary products play an important role in most firms” and increase the value of a firm’s offering (2005, p. 103). Through its strategically located network of large theatres, Regal has an opportunity to transform the industry through an innovative approach to dining as a complement that adds value to its cinematic product.

There are a moderate number of theaters in the US currently offering food and drink in the theater, beyond the traditional concessions available. However, the quality of the “dining experience” offered with this strategy suffers from a lack of capabilities related to the undertaking. Rather than integrating food service directly into Regal’s theaters, we recommend that the firm develop strategic alliances with a handful of premium brands in the casual dining sector and strategically remodel Regal’s theaters in a way that will create a close tie in the minds of consumers yet maintain the individuality of the offerings and firms. The success of this initiative lies in the details as Regal seeks to create value for customers by closely aligning restaurants with strong brand recognition yet avoid impacting the perception of the restaurant by fully integrating it into the theatres. Meticulous planning of this alliance, including integration of the physical site, will be important in realizing the intended impact of leveraging the dining experience as a complement that will add value to the movie-going experience. The value to the consumers will be a Dinner and a Movie experience that is highly convenient and integrated. Through an integrated lobby or rotunda, customers will be able to put their name in for a table at their favorite restaurant and get tickets for opening night of the Hollywood blockbuster release hours before it begins; all within a few steps.

Potential partners for this initiative could include Johnny Carrabba’s, P.F. Chang’s, or Applebee’s- among others. These companies offer brand recognition that will be an important facet of building value through conveniently combining these offerings.

Financial

To assess Regal’s financial stature, we have compared the firm with two direct competitors (AMC and Cinemark) in terms of key financial ratios that address profitability, liquidity, and leverage in 2006.

Profitability

Gross Profit Margin

The Gross Profit Margin (GPM) ratio serves as the source for paying additional expenses and future savings. As gross profit margin represents the difference between sales and the cost of goods sold, it provides an indicator of how much revenue is available to cover indirect costs then generate a net profit. The GPM of Regal is .35, while as AMC’s is .34 and CineMark’s is .50. The most powerful competitor, AMC, has a GPM that is similar to Regal’s while CineMark has the highest proportion of revenue available among these primary competitors, indicating superior management of cost of goods sold.

Net Profit Margin

Net Profit Margin (NPM) tells us how much profit a company makes for every $1 it generates in revenue. Net profit margin indicates, when compared with GPM, how well a firm is managing its indirect costs in addition to cost of goods sold. Similar to Gross Profit Margin, Regal’s NPM is similar to AMC’s, while CineMark’s net margin is about five times greater. Cinemark’s NPM puts it them in the most desirable position among competitors as it relates to financing growth and/or increasing their dividend to shareholders.

Return On Assets

Return on Assets (ROA) provides a view of how efficient management is at using its assets to generate earnings. ROA for all three primary competitors is virtually the same. Therefore, we can say that all three companies are generating similar revenue per dollar of assets.

Return On Equity

ROE is a measure of a corporation’s profitability that reveals how much profit a company generates with the money shareholders have invested. This is useful for comparing the profitability of a company to that of other firms in the same industry. Here, we can find a peculiarity that ROE of Regal, a negative 66.1 is extremely low compared to the other two companies’. This was caused by the fact that Regal’s total stockholder’s equity is negative which is due to negative additional paid-in capital and ultimately driven by the extraordinary cash dividend’s Regal has paid to its shareholders.

We can summarize the overall profitability of these primary competitors by saying that Cinemark is most effective at generating a profit. Cinemark showed the most desirable results for all profitability ratios we calculated.

Liquidity

Current Ratio

The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. Regal’s current ratio is relatively low, at .43, while AMC and CineMark have ratios of .92 and .70 respectively. Here, we find that AMC has the most available resources to service its debt over the next 12 months.

Quick Ratio

The Quick ratio measures the ability of a company to use its cash equivalents, cash assets and assets that can be immediately converted into cash, to pay current liabilities. This ratio indicates a firm’s capacity to maintain operations as usual with current cash and cash equivalents during downturns in the industry. As such, this ratio implies a liquidation approach and does not recognize the revolving nature of current assets and liabilities. The ratio compares a company’s cash and short-term investments to the financial liabilities the company is expected to incur within a year’s time. In general, a quick ratio of 1 or more is accepted by most creditors; however, quick ratios vary greatly from industry to industry. In this case, Regal’s quick ratio, being .42 is also lower than other two’s, respectively .91 and .68.

Inventory to net working capital

This ratio tells how much of a company’s funds are tied up in inventory. It is preferable to run a business with as little inventory as possible on hand, while not affecting potential sales opportunities. If this number is high compared to the average for your industry, it could mean your business is carrying too much inventory. Here, all three companies’ ratios are negative, respectively -.03,-.10, and -.07. However, these numbers don’t have crucial meaning because this ratio is not so important in a motion picture industry.

In the liquidity point of view, AMC is the best because its ratios are the best among them.

Leverage

Debt-to-assets ratio

Debt to assets is a solvency ratio that measures the percentage of a company’s assets that is being financed by debt. Since debt issues require contractual payments, higher amounts of debt reduce a firm’s flexibility to take on new projects. Comparing Regal’s debt-to-asset ratio with other two companies’ ratios, Regal’s, being 1.01 is higher than others, respectively .66 and .74. Based on this comparison, the companies’ flexibility to take on new projects is likely to be almost similar.

Debt-to-equity ratio

This ratio measures how much money a company should safely be able to borrow over long periods of time. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. Here, Debt-to-equity ratio of Regal, being a negative 113.14 is extremely low compared to other two companies’, respectively 1.95 and 2.83. It is due to the negative stockholder’s equity.

Long-term debt-to-equity ratio

This ratio is also referred to as the gearing ratio. A high gearing ratio is unfavorable because it indicates possible difficulty in meeting long term debt obligations.

Here is same phenomenon as the Debt-to-equity ratio due to the negative stockholder’s equity. However, other two companies’ long-term debt-to-equity ratios are 1.46 and 2.47 respectively.

We can say that CineMark’s leverage is the best among them. However, something very unusual here is about Regal’s. Regal’s Debt-to-Equity ratio and Long-term Debt-to-Equity ratio are extremely negative because of negative total stockholder’s equity.

Asset Management

Inventory turnover

Inventory turnover ratio shows how many times a company’s inventory is sold and replaced over a period. This should be compared against industry averages. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying. High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall. Here are unreasonable Inventory turnover ratios of each company. However, the inventory in the motion picture industry is not so important compared to other manufacturing companies.

Fixed-asset turnover

The Fixed Asset Turnover is similar to Total Asset Turnover, which both measure a company’s effectiveness in generating Net Sales revenues from investments back into the company. However, the Fixed Asset Turnover ratio evaluates only the Net Property, Plant, and Equipment investments. Manufacturing and other industries requiring major-investments will often spend heavily on properties, manufacturing plants, and equipment to push themselves ahead of the competition. The higher the Fixed Asset Turnover ratio, the more effective the company’s investments in Net Property, Plant, and Equipment have become. In this case, Regal’s fixed asset turnover is the highest among them. It is 1.18 while as other two companies’ are .64 and .13 respectively. We can say that Regal utilized its fixed assets better than other two companies.

AMC is the best in the Inventory turnover ratio, and Regal is the best in the Fixed-asset turnover ratio. However, these two ratios are not so crucial in the theater circuit industry because inventory in this industry does have very small portion in evaluating companies’ financial states.

Financial Summary

Finally, the main point of this financial analysis is that Regal’s negative stockholder’s equity affected on many ratios related to equity and made its capital structure very weak. When we researched Regal’s 10-K, we found that these things has happened since 2003. In 2003 and 2004, Regal’s cash dividend was extraordinarily high, $5 per share. Even though Regal declared its cash dividend as about 30 cents per share at each quarter in 2005 and 2006, however, the extraordinary thing happened again this year, 2007. Regal declared 2 dollars per share at this first quarter as a cash dividend in 2007. The range of stock price was from $18 to $25 for past 5 years. Compared to Regal’s stock price, the cash dividend is too high. For other company’s example, even if the range of Microsoft’s stock price was from $21 to 32, however, its cash dividend per year was overally from 8cents to 40 cents for 5 years except for $3.40 in 2005.

Recommendation: Financial Restructuring

Therefore, we would like to recommend Regal’s management to restructue the capital structure in order to avoid a high financial risk. In detail, issuing new stocks can be good for making total stockholder’s equity positive, and reducing the cash dividend can be the best solution to remedy the current weak capital structure. Definitely, providing much profits to stockholders is the best dividend policy for inducing more investments for the company. However, we think that the dividend policy that takes a risk that capital structure can be weak is not good for the company’s future.

Therefore, we would like to recommend Regal’s management to restructue the capital structure in order to avoid a high financial risk. In detail, issuing new stocks can be good for making total stockholder’s equity positive, and reducing the cash dividend can be the best solution to remedy the current weak capital structure. Definitely, providing much profits to stockholders is the best dividend policy for inducing more investments for the company. However, we think that the dividend policy that takes a risk that capital structure can be weak is not good for the company’s future.

Another realistic recommendation for Regal is that it should dispose of its fixed assets, which especially, are buildings and lands. Compared to other two competitors, Regal’s total property and equipment is relatively very high, which Regal’s total property and equioment is $ 2,720 million, AMC’s property, net is $ 1,298.8 million, and CineMark’s Theater property and equipment is $1,333.99 million. Disposal of these fixed assets would make Regal get better capital structure by increasing retained earnings even if Regal would give the position of the first largest theater circuit company in U.S. to AMC.

Corporate Strategy

Global Operations

Regal Entertainment Groups’ current operations are limited to the United States. Regal is concentrating on achieving and maintaining superiority in the domestic market before thinking of going global. In addition, the movie theater industry requires major capital allocations, which may negatively impact the national chains, if a global expansion occurs (Gale, 2007).

Diversification

Besides vertical integration, Regal Entertainment Group does not have a highly diversified product mix. The main products they offer are movies, concessions, in-theater advertisement, and video conferencing (Gale, 2007).

Strategic Positioning and Strategic Map

Looking at the strategic map in Appendix G, Regal and its major competitors are pursuing a differentiation strategy while maintaining relatively low prices, which is a very difficult task (Gale, 2007). Regal, however, has the greatest competitive advantage. As seen in Appendix G, Regal, being the biggest in the industry, has cost advantages in terms of economies of scale ad input costs. In addition, Regal has a differentiation factor in terms of unique locations. This differentiation factor may be shared by other competitors as each company targets a different area. There are slow changes in industry competition since this is an industry where market leaders are able to maintain their leadership and counter any move done by competitors. There is not a threat of new entrants, and the existing leadership positions change slowly (Gale, 2007). Therefore, Regal Entertainment should maintain its market leadership by blocking avenues open to competitors. Since a single area can have only so many megaplexes, Regal should expand into new locations before its competitors. Another strategic move for Regal is to develop new ways to differentiate from its competitors. One way to do this is to enhance the customer experience, which has been previously discussed in the “Dinner and a Movie” recommendation.

Summary

In conclusion, Regal Entertainment Group is operating in a very difficult industry. This industry has high threats in terms of substitutes, buyer power, and supplier power. Therefore, this paper has provided Regal Entertainment Group with strategic moves and recommendations that will assure that it maintains its current leading position and enhance its competitive advantage. These recommendations are improving its mission and mission statement, differentiating through the dinner and movie experience, and lowering the debt through financial restructuring. All in all, these recommendations will take Regal Entertainment Group to the next level in terms of competing in and leading the movie theater industry in the United States.

References

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© August 17, 2007 Meshari Alnusf, Jay Choi, Wonho Chung, Bryan A. Harmsen, Tessa Romero

Tags: entertainment, movies, regal