Funworld June 2008

With the media speculating about who’ll lose their scalps as a result of the credit crunch, attraction operators could be forgiven for wanting to head for the hills.

“We cannot escape the clutter of noise about impending doom and gloom coming off the credit crunch,” says Andrew Carr, chief financial officer at Merlin Entertainments Group. “We all feel frustrated because it seems to be one of those things that everyone wants to happen and it can be a self-fulfilling prophesy.”

Parks and attraction companies like Merlin are concerned that customers will be spooked. Says Carr: “Every-body’s jumping on the bandwagon— saying that the banks have lost out on subprime mortgages and that’s rippling through the financial markets, and suddenly we’re all worse off.”

The tricky part is predicting how consumers are going to respond when it comes to their discretionary spending. “Right now, people are reacting to what is probably talk about the lack of confidence rather than feeling it in reality,” says Carr.

Sense of Perspective
It is important to put the current economic conditions into context, according to John Robinett, senior vice president at Economics Research Associates. Businesses worldwide are watching the United States economy, where a gross domestic product increase of 0.6 percent in the fourth quarter of 2007— compared to 4.9 percent in the third quarter—confirmed fears of a slow-down. “We’re on the cusp of a recessionary environment,” says Robinett.

Nevertheless, historical precedents should reassure parks and attractions companies, he says. “If you look at the business cycle for the last 50 years or so, the recessions that we’ve had have lasted on average for six to nine months. Afterward, there’s a strong rebound and a sustained expansion for years.

“The attractions sector isn’t subject to radical swings,” he continues. “It mildly moves up and down. But what you do see when you come out of a recession is a pent-up demand for durable goods such as cars and televisions. That tends to depress people’s spending on attractions.”

Blame Game
While the economy is getting plenty of press, it is difficult for attractions to isolate the impact of a single factor on business performance. Other elements can often exert a stronger pull on consumers. “Weather is probably the number-one determinant, and there’s a strong relationship between reinvestment and attendance,” says Robinett. Add in the U.S. elections and the Beijing Olympics and there’s a rich mix of variables in 2008.

The danger is people will latch onto the factor they feel they can’t control, rather than the ones they can, to justify the poor performance of a business, says Carr: “Was a weaker market really to blame, or did they have a weaker marketing strategy? Were they facing stiffer competition, or didn’t they spend enough money on making their attraction appealing to consumers?”

Smaller attractions are the most likely to feel the bite of an economic slowdown, he believes. “Robust and diversified businesses generate better cash flow, which enables you to plough more investment back into them—it’s a virtuous circle. As soon as smaller businesses start to struggle, there’s often no longer the cash to invest. There’s nothing new for the visitor and the park can look a little substandard, which affects attendance—it becomes a vicious circle.

“Don’t assume that you have to cut costs to the bone. The key thing is not to get carried away with every ripple in performance because short-term issues can often resolve themselves during the course of a trading cycle.”

Ripley Entertainment is another diversified company well placed to handle an economic downturn, according to President Jim Pattison Jr: “We don’t mind an adjustment in the economy because it can create opportunities for tightly managed attractions companies. The beauty of our business is that we’re in 10 countries presently, and we’ll be in 13 before the end of 2008. On balance, we’ll have some markets that will be affected negatively, but we’ll have a variety of markets, including India, Thailand, Mexico, and Europe, that will do well. We add new businesses every year, so that helps us with the revenue side.”

Recession Resistant?
Traditionally, parks and attractions have been better insulated than other industries during lean periods, and Pattison believes consumers are keen to preserve their leisure spending. “Because people’s lives are so busy they realize the importance of leisure time,” he says. “I think brands like Universal, SeaWorld, and Disney will continue to do well because people will make sacrifices for their families to go to exceptional places like Orlando.”

So far, that’s the story on the ground. “We haven’t seen any impact on current attendance or forward bookings,” says Duncan Wardle, vice president for global PR integration for The Walt Disney Company. In fact, Disney defied the bears’ expectations in February, reporting a 9 percent increase in revenues for its first fiscal quarter. Parks’ and resorts’ revenues increased by 11 percent to $2.8 billion, while operating income increased 25 percent to $505 million.

“While people will look to tighten their belts in hard times, we believe consumers increasingly see a vacation and time together with families as one of life’s necessities. A trip to Disney helps provide an escape from the realities of the outside world,” says Wardle.

Regional parks are usually less affected by recessions than destination parks, adds Robinett. They can even benefit as greater numbers of local residents, day-trippers, and long weekenders treat themselves to a theme park visit rather than an overseas vacation. “When we had the slowdown in 1989-1991, the Six Flags parks grew at 5 percent annually in revenues. They just ploughed right through it,” says Robinett. And a cheaper dollar means more international tourists will head for the United States, says Pattison.

Debt Levels
But as the banking sector’s woes continue, some attraction directors are waking up to a world with a shortage of cash. Given the recent consolidation activity in the industry, what effect will that have? “We can already see the impact,” says Carr. “We’re owned by private equity, as are a number of other leisure businesses. Private equity needs well-priced and regularly available bank finance, so there’s a lot less business taking place. It means there’s a little less pressure on businesses changing hands.”

Carr, who has seen Merlin through three years of rapid expansion, says the group benefited hugely from completing transactions pre-July 2007. “It’s fortunate that we’re not embarking on any further significant acquisition strategies now because in today’s market we’d struggle to find bank finance terms that would make those deals as attractive.” In the current climate, businesses that are forced to raise financing are going to find themselves jumping through hoops. “It’s going to get a lot tighter, because money is not available either in the same volume or at the same pricing as it was 12 months ago,” says Carr.

Positive Thinking
As a result, consolidators like Compagnie des Alpes (CDA) are anticipating a period of organic growth rather than a rush of new acquisitions, says Serge Naïm, head of CDA’s leisure parks division. “We want to be able to financially self-sustain our growth by leveraging our existing brands and assets.” For Naïm, that means generating fresh content and exposure for the Walibi parks, investing in new attractions at Parc Astérix, talking to potential hotel partners, and carrying out a merchandise review at CDA’s leisure parks.

Ultimately, one of the best ways to recession proof your business, says Pattison, is to give value to your guests: “Perceived value is enormously important. When you’re walking out the door after spending money with a business, particularly on the consumer side, seldom do you feel they appreciate that you’ve bought something there. Folks who work hard for their money and spend it with us should be treated differently and feel very appreciated.”