Strategic Audit U.S. Division May 2013 MGT 496.001 Evan Favors Andrew Chais Chris Clark Rachel Fransen Stephen Jeffers Cory Svean James Wichert
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Table of Contents I. EXECTIVE SUMMARY RACHEL HAS TO BE DONE LAST... 5 II. CINEMARK S PAST AND CURRENT STRATEGIES... 6 PAST STRATEGIES... 6 CURRENT VISION, MISSION, AND STRATEGIES... 6 NEW VISION AND MISSION... 7 III. SWOT AND ENVIRONMENT ANALYSIS... 7 CINEMARK S SWOT ANALYSIS... 7 CINEMARK S SWOT MATRIX... 8 REGAL ENTERTAINMENT GROUP SWOT MATRIX... 8 CARMIKE CINEMAS INCORPORATED SWOT MATRIX... 9 NETFLIX SWOT MATRIX... 9 MACRO-ECONOMIC FACTORS AND CINEMARK... 9 CINEMARK ORGANIZATIONAL STRUCTURE... 10 CURRENT ORGANIZATIONAL STRUCTURE AND REORGANIZATION... 10 CINEMARK UNIQUE POSITION... 11 KEY SUCCESS FACTORS... 11 DISTINCTIVE CORE COMPETENCIES AND CORE COMPETENCIES... 12 VALUE CHAIN ANALYSIS... ERROR! BOOKMARK NOT DEFINED. MARKET AND COMPETITIVE ANALYSIS CHRIS... 13 PORTER S FIVE FORCES MODEL OF COMPETITION... 13 STRATEGIC GROUP MAP... 14 COMPETITIVE STRENGTH ASSESSMENT... 15 COMPANY LIFE CYCLE... 16 SPACE MATRIX... 17 GRAND STRATEGY MATRIX... ERROR! BOOKMARK NOT DEFINED. FINANCIAL ANALYSIS... 17 EDWARD ALTMAN Z-SCORE... 17 TREND ANALYSIS... 17 REVENUES, EXPENSES, AND NET INCOME... 18 EBIT/EPS ANALYSIS... 20 PRO FORMA BEFORE NEW STRATEGY IMPLEMENTATION... 20 PRO FORMA POST NEW STRATEGY IMPLEMENTATION... 20 NET WORTH AND STOCK PRICE ANALYSIS... 21 RECOMMENDATIONS AND IMPLEMENTATION JEFFERS... 21 SHORT-TERM RECOMMENDATIONS... 21 LONG-TERM RECOMMENDATIONS... 22 QSPM... 22 GRAND STRATEGY MATRIX... 22 BALANCED SCORE CARD... 22 OPERATIONAL IMPROVEMENTS... 22 TURNAROUND TIMELINE... 23 CHANGE RESISTANCE... 23 CONTINGENCY PLANS... 23 GANTT CHART... ERROR! BOOKMARK NOT DEFINED. EBIT AND NET WORTH ASSESSMENT... ERROR! BOOKMARK NOT DEFINED. Page 2
EPILOGUE ANDREW... 24 REFERENCES... 24 APPENDIX A: VISION AND MISSION... 24 CURRENT MISSION STATEMENT... 24 NEW VISION STATEMENT... 25 NEW MISSION STATEMENT... 25 APPENDIX B: SWOT MATRICES... 25 APPENDIX C: MACROECONOMIC U.S. CONSUMER STRENGTH INDICATORS... 30 APPENDIX D: CINEMARK ORGANIZATIONAL CHARTS... 31 APPENDIX E: VALUE CHAIN ANALYSIS AND SALES COMPOSITION... 34 APPENDIX F: PORTER S FIVE FORCES MODEL... 36 APPENDIX G: STRATEGIC GROUP MAPS... 36 APPENDIX H: IE MATRICES... 44 APPENDIX I:... 51 APPENDIX J: BCG MATRIX... 52 APPENDIX K: COMPANY LIFE CYCLE... 53 APPENDIX L: SPACE MATRIX... 56 APPENDIX M: GRAND STRATEGY MATRIX... 56 APPENDIX N: EDWARD ALTMAN S Z-SCORE... 57 APPENDIX O: FINANCIAL TABLES... 58 APPENDIX P: FINANCIAL TRENDS... 61 APPENDIX Q: CINEMARK S REVENUE, EXPENSES, AND NET INCOME... 64 Page 3
Figure 1: TABLE OF FIGURES Table 1: Cinemark SWOT Analysis Table 2: Cinemark SWOT Strategy Matrix Table 3: Regal Entertainment Group SWOT Strategy Matrix Table 4: Carmike Cinemas Incorporated SWOT Matrix Page 4
I. EXECTIVE SUMMARY This report critically overviews the U.S. Division of Cinemark Holdings, Incorporated. The purpose of the information is to provide an accurate and current representation of Cinemark through research using a variety of sources, methods, and figures. Any forward thinking statements, recommendations, or opinions offered are only the perspectives of the authors and will not be implemented by Cinemark Holdings, Incorporated. Cinemark Holdings Incorporated is one of the leading companies in the motion picture industry and consists of Century Theaters, CineArts, and Tinseltown brands. The current operations, performance, and policies of Cinemark will most likely lead the company to uncertain future The new mission statement and vision statement that have been developed provide a strong sense of direction and purpose that will allow all employees to stay engaged with Cinemark s future. The SWOT analysis found several opportunities and areas of improvement for Cinemark. Additionally, it identified several key options that will allow Cinemark to be distinguishable in the market place. Sincerely, U.S. Division Research Team Page 5
II. Cinemark s Past and Current Strategies Past Strategies In the past, Cinemark has been focused on a growth strategy for attendance and operations. This included adding locations to their U.S. market and their international market under their brands of Cinemark, Century Theaters, CineArts, and Tinseltown, as well as keeping their film technology up to date and maintaining advanced theaters. In 2009, Cinemark began converting their circuit from film based to digital projection technology, and in 2010, Cinemark began integrating their NextGen concept, featuring floor-to-ceiling screens and XD technology, into their theaters. These advances take a long time to integrate through their 465 theaters and 5,240 screens but the benefits have proven to outweigh the costs. Current Vision, Mission, and Strategies Currently, Cinemark is continuing with their growth strategy and they selectively build or acquire new theaters where they can establish and maintain a strong market position. As of December 2011, 100% of their first-run domestic theaters were fully digital and Cinemark is continuing to convert their international theaters to digital. They are also adding XD technology to their auditoriums, 81 of which were completed by 2011, and integrating IMAX screens to theaters where they feel it will be most beneficial. Current vision and mission statements for Cinemark appear to be non-existent. Refer to Appendix A for the identified mission statement, as a vision statement could not be identified. As there was no record of a mission statement before the Colorado shooting, it appears that the current mission statement was released as a result of the incident, forcing the company to place safety as its top priority for customers. Page 6
New Vision and Mission For the purposes of this project, Appendix A shows the updated vision and mission statements used to create an appropriate strategic plan. The new vision statement provides a defined idea to become the attendance and technology leader in the theater industry. The new mission statement places a strong emphasis on offering high-end technology to all of its customers in every location and ensuring the safety of Cinemark customers every time they enter the theater. The focuses of the strategic plan will guide Cinemark to hit all goals set by the new statements because of its emphasis on safety, employee training, and technology innovation. III. SWOT and Environment Analysis Cinemark s SWOT Analysis Some of Cinemark s strengths include having the third largest circuit in the U.S. with 298 theaters and 3,916 screens in 39 states, ranking #1 or #2 by box office revenues in 25 of their top 30 U.S. markets as of December 31, 2012; being the most geographically diverse circuit in Latin America with 167 theaters and 1,324 screens in 13 countries; and having a presence in 14 of the top 15 metropolitan areas in Latin America as of December 31, 2012. Besides Regal Entertainment and Carmike Cinemas, Cinemark has few theater competitors to worry about. They already have a large customer base, many geographic locations, and access to some of the top technological advances for the theater industry. However, there are threats in other aspects of the industry including streaming videos from home with Netflix, movie pirating, and increasing technology prices, which inherently affects consumers with high-ticket prices. There is also competition in places that offer different theater experiences and theater alternatives, such as drive-in theaters and home viewing, which allow for more movie freedom and ease for families with small children. Movie theater alternatives such as drive-in theaters have not been evaluated Page 7
with the SWOT analysis since most of them are privately held and not connected to a single name. Refer to Appendix B for more details on Cinemark s SWOT. Cinemark s SWOT Matrix A number of strategies were considered to help Cinemark increase revenue and stand out from the competition. One strategy was to purchase our largest competition, Regal Entertainment, since brand loyalty is not common in the theater industry. Another strategy is to heighten our security on all levels to make all customers feel safe the second they enter the theater, which will ultimately improve Cinemark s image and make it stand out as a safer movie theater company compared to the competition. To overcome some key weaknesses, Cinemark should take control of their biggest competition. Cinemark should also continue to be the leader in theater technological innovations while operating in multiple countries. Refer to Appendix B for further details on the SWOT matrix. Regal Entertainment Group SWOT Matrix Regal Entertainment is currently considered the largest and most geographically diverse in the North American theater industry. It has over 7,000 screens in 580 locations in the United States. As of 2013, the company has also expanded internationally to Guam, Saipan, American Samoa, and the District of Columbia. It operates under Regal Cinemas, Edwards Theaters, and United Artists Theaters. Besides its size, the company s major strength is their indoor branding which allows them to set their food and beverage costs while encouraging brand loyalty and recognition for consumers. The company s biggest current weakness is that they are experiencing declining revenues due to rising technology costs. Refer to Appendix B for further details on the SWOT matrix. Page 8
Carmike Cinemas Incorporated SWOT Matrix Carmike Cinemas is also considered to be a leader in the North American theater market with over 2,000 screens in 249 locations. Unlike Cinemark and Regal theaters, Carmike has branded itself as America s hometown theater due to its positioning in rural or suburban areas with populations under 200,000. Due to Carmike s concentrated size, its biggest strength is that all of its theaters are digital and many of them offer 3-D technology. It also specializes in converting weaker, local theaters to discount theaters for the exhibition of films that have been previously shown on a first-run basis, which allows its revenue stream not to become reliant solely on new movie premiers. The company s biggest weakness is its substantial debt obligations. Refer to Appendix B for further details on the SWOT matrix. Netflix SWOT Matrix While Netflix does not seem like a direct competitor since it is offering such a different product, the company actually captures some of Cinemark s customers who are looking to stay home for movie night. Netflix is the leader in the online streaming industry. In the past couple of years, they have changed their business model from DVD services through the mail to instant and streaming video. This has led to many internal issues for the company, but they have still managed to stay a household name and provide a great user experience. Their biggest weakness in the eyes of the consumer is that they are unable to offer newly released television shows and movies. See Appendix B for further details on the SWOT matrix. Macro-Economic Factors and Cinemark In 2011, theater attendance was at the lowest it had been in 25 years as options for home entertainment improved. Due to a 40% decrease in young consumer attendance since 2002 and a loss of attraction towards 3-D films, rumors were spreading through the industry that the end of the theater might be near. With more options than ever, viewers were forgoing the movie theater Page 9
experience and spending the money to bring the experience into their own living rooms with DVDs, streaming internet services, and movies-on-demand straight from their televisions. There had also been a significant decrease in the amount of time between when a movie was released in the theater and when it was released for home viewing, allowing viewers to decide to wait and rent the movie for half of the cost. Against all assumptions, consumers went back to the movies in 2012 and it was considered to be the best year for the industry, bringing in domestic ticket sales of $10.84 billion. This increase was due simply to a selection of movies that consumers were dying to see, so as the blockbuster franchises like Iron Man, The Hobbit, and The Hunger Games continue to be released, there is no sign of the theater industry going anywhere in the future. Cinemark Organizational Structure Current Organizational Structure and Reorganization Currently, Cinemark has a tall organizational structure. Due to the size and scope of Cinemark, their current structure is the best fit for the organization. As a whole, Cinemark has substantially more employees than the industry average, but without the proper amount of executives, it would be impossible for the company to maintain all of its divisions. This large employee base is due to the fact that many of its employees are part-time. 90% of the 13,500 US employees are part time and 37% of the 9,000 international employees are part-time. The first step in restructuring the organization is to cut back at the lower employment levels. While this might cause media backlash, it will ultimately save the company money. The second step in restructuring the organization is to lay-off the Vice President of Construction, Don Harton. His position will be taken over by the Senior Vice President of Real Estate, Tom Owens, by combining the construction operations with real estate and development. Even though Page 10
Cinemark will have to outsource on occasions for prominent construction projects, this slight restructure will combine two similar divisions, serving as a cost-reduction strategy and an improvement to efficiency. If Cinemark is able to acquire Regal Entertainment, we would also recommend incorporating some of their key employees into Cinemark to encourage a smooth transition. The key employees that should be incorporated can be found in Appendix D. It is also important to note that this list does not include Regal s CEO. Cinemark Unique Position Key Success Factors Theatrical exhibition is the primary distribution channel for new motion picture releases. A successful theatrical release which brands a film is one of the major factors in determining its success in downstream markets, such as digital downloads, DVDs, network and syndicated television, video on-demand, pay-per-view television and the Internet. International markets continue to be an increasingly important component of the overall box office revenues generated by Hollywood films, accounting for $22.4 billion, of 2011 total worldwide box office revenues. With the continued growth of the international motion picture industry, it is projected the relative contribution of markets outside North America will become even more significant. It is projected that long-term trends in motion picture attendance in the U.S. will continue to benefit the industry. Even during the recent recessionary period, attendance levels remained stable as consumers selected the theatre as a preferred value for their discretionary income. With the motion picture industry s transition to digital projection technology, the products offered by motion picture exhibitors continue to expand, attracting a broader base of patrons. Page 11
Distinctive Core Competencies and Core Competencies Cinemark s solid operating performance is a result of disciplined operating philosophy that centers on building high quality assets, while negotiating favorable theatre level economics, controlling operating costs and effectively reacting to economic and market changes. Cinemark has a leading market share in the U.S. metropolitan and suburban markets. For the year ended December 31, 2012, they ranked either first or second based on box office revenues in 24 out of our top 30 U.S. markets, Since 1993, Cinemark has invested throughout Latin America in response to the continued growth of the region. They currently operate 167 theatres and 1,324 screens in 13 countries. They have successfully established a significant presence in major cities in the region, with theatres in fourteen of the fifteen largest metropolitan areas. Cinemark is the largest in Brazil and Argentina. They are well-positioned with modern, large-format theatres to take advantage of these factors for further growth and diversification of revenues. Cinemark offers state-of-the-art theatres, which is believed to make the theatres a preferred destination for moviegoers in the markets. Cinemark have installed digital projection technology in 100% of their U.S. first-run auditoriums and approximately 42% of the international auditoriums, with plans to install digital projection technology in 100% of the international auditoriums. Cinemark generates a significant cash flow from operating activities as a result of several factors, including a geographically diverse and modern theatre circuit and management s ability to control costs and effectively react to economic and market changes. Additionally, owning land and buildings for 41 of our theatres is a strategic advantage that enhances cash flows. It is to be expected level of cash flow generation will provide financial flexibility to continue to pursue Page 12
growth opportunities, support debt payments and continue to make dividend payments to stockholders. Led by Chairman and founder Lee Roy Mitchell, Chief Executive Officer and President, Tim Warner, Chief Financial Officer Robert Copple and President-International Valmir Fernandes, the management team has many years of theatre operating experience, ranging from 16 to 54 years, executing a focused strategy that has led to consistent operating results. This management team has successfully navigated through many industry and economic cycles. Value Chain Analysis Film rental rates are generally negotiated on a film-by-film and theatre-by-theatre basis. Their solid operating performance is a result of disciplined operating philosophy that centers on building high quality assets, while negotiating favorable theatre level economics, controlling operating costs and effectively reacting to economic and market changes. The geographic diversity makes them an important distribution channel to the movie studios. Cinemark generates revenues primarily from box office receipts and concession sales advertising costs, which are expensed as incurred, are primarily fixed at the theatre level as daily movie directories placed in newspapers represent the largest component of advertising costs. Cinemark offers state-of-the-art theatres, which is believed to make the theatres a preferred destination for moviegoers. Market and Competitive Analysis Chris Porter s Five Forces Model of Competition The film industry is currently facing pressures they have never experienced before. Through Porter s Five Forces Model in one can see the current dilemmas faced by the film industry and its associates. Not only contending with pressure from fellow rivals like Regal, Carmike, and AMC, Cinemark is now battling with substitutes that have only recently come to light. Home Page 13
media has always taken away from the profits of movie theaters, but the introduction of instant streaming and larger server capacity has become an even larger threat. Piracy is now global; one person with a high-quality camera and a computer can now upload a film, and be spread around to thousands of people who can easily watch for free. This threat of home media consumption is further compiled by companies like Amazon and Netflix. Not only are these companies increasingly pushing for the rights to release movies sooner, they are also developing their own content, both movies and TV series alike. Fortunately for Cinemark, buyer power and new entry threats are minimal. With an average cost of $6.72 per 2D ticket, Cinemark offers a highly competitive price for an equal and/or superior movie-going experience. The cost of new entrants is also very high, minimizing the likelihood that they would be a threat. Thankfully, movie theatres are a highly profitable outlet for newly released films. Allow this allows the supplier to put some pressure on Cinemark in relation to the leasing price of a film, the studio must get the film out, as well as promote it, in order to turn a profit. Strategic Group Map The use of strategic group maps allowed for the comparison of rivals in the highly competitive movie theater industry. By comparing Regal and Cinemark, it is apparent that the two companies are competing fiercely. Despite having 216 million customers and revenues of 2.8 billion dollars, Cinemark was trailing close behind with 263 million customers and revenues of 2.4 billion. Although 400 million dollars behind, Cinemark pulled in higher revenues per screen and per employee; all while having a ticket cost of nearly $2 less. Cinemark also had lower operating costs per theater, as well as a higher overall net income. Carmike can be seen as having little to no threat impact on Regal or Cinemark due to its minimal scope and high operating costs. It does, however, have the highest ROA and ROE by a substantial amount, while Netflix has a negative ROE of around 20%. Page 14
Competitive Strength Assessment IE Matrices In the pre-turnaround IE matrix, Cinemark as well as selected competitors are all hovering near the hold and maintain as well as the grow and build regions. Regal and Cinemark are just on the cusp of the grow and build regions, granting them a prime opportunity to expand. Netflix revenues are naturally growing at an astonishing rate and the given matrix shows that they should hold and maintain their strategies. Carmike s position also shows that it should hold and maintain its current position. Post-turnaround results move Cinemark into a solid grow and build position. The purchase of Regal will take the company out of the post-turnaround IE Matrix and will give Carmike a boost in both internal and external factors, but still keeping them in the hold and maintain. Netflix will also move into the grow and build region due to their strong external factor ratings. For a complete view of the pre and post IE matrices, as well as corresponding tables and scores, please refer to Appendix XX. BCG Growth/Share Matricies Using collected financial data, Netflix has the highest percent of sales in comparison to Cinemark and assessed competitors, holding 38% of compared sales. Cinemark holds the third largest market share, second to Regal. Of compared competitors, Carmike has the smallest RMSP with.06. According to the MPAA, box office growth will remain flat around 2% through 2013, while instant streaming, most notably Netflix, is expected to grow at around 12%. The results of this matrix place Cinemark in the Question mark quadrant. If industry growth declines, Cinemark is not far from entering the Dogs quadrant. One thing of importance should be noted: Netflix is not a direct contender for theater market share, but is a prime competitor for film viewing overall, due to its increase in original content and push for the early Page 15
release of films. Due to high market share based on revenue, it is adversely forcing Regal and Cinemark into quadrant I, whereas they would be in quadrant II if Netflix were not considered. After the turnaround, it is expected that Cinemark will grow and place itself into the Star quadrant, but only if such substantial investments are made. Due its position in the BCG Matrix, Cinemark is capable of many strategies including market penetration, market development, product development, and horizontal integration. GE Nine-Cell Planning Grid Pre-turnaround results of the CSA show that Cinemark is a strong contender in the film industry, primarily due to its relative cost position, customer service, and reputation. That being said, the competition is not very far behind. Cinemark achieved a score of 7.7 while Regal posted a score of 7.68 and Netflix posted a score of 7.52. The purchase of Regal will give Cinemark a postturnaround score of 8.55 and will drop Carmike from 7 to 6.29. Netflix will slightly fall to 7.09. As Netflix is not theater-based competitor, it s hard to determine if this drop will hold true. All of the competitors in this matrix are in the Invest quadrant of the nine-cell matrix. Refer to Appendix XX for complete results of the CSA, ISA, and Nine-Cell Matrix. Company Life Cycle According to the MPAA, the film industry is currently in the maturity stage of the company life cycle. Looking at the graph of the life cycle in Appendix XX, you can see that Regal is entering the maturity stage while Cinemark is in the late growth stage. Netflix and Carmike are currently in the growth stage, being capable of a large amount of growth before maturity. Without a turnaround, Cinemark will enter the decline stage within 14 years. The post-turnaround company life cycle moves Cinemark lower into the growth stage. The technological advances, safety, and other initiatives proposed, as well as the purchase of Regal, will allow the company to develop long-term growth. Page 16
SPACE Matrix The results of the Space Matrix show that Cinemark is best suited for aggressive strategies. Due to this position, it is best that Cinemark enacts strategies that best use is dominating financial strength and constant growth in its industry. Cinemark is also in a position to use its internal strengths to (1) take advantage of external opportunities, (2) overcome internal weaknesses, and (3) avoid external threats. See Appendix XX. Grand Strategy Matrix Cinemark currently operates in highly competitive industry with ample growth. With a placement in Quadrant I, Cinemark is open to market development, market penetration, and related diversification, etc. With the purchase of Regal, as well as further developments in Latina America, Cinemark is in a strategic position to continue its current mission and to take aggressive risks. Due to a strong but constant market growth, the arrow relating to Cinemark s strategic position is in lower quadrant I. Refer to Appendix XX. Financial Analysis Edward Altman Z-Score Cinemark had an Edward Altman Z-Score of 0.5773 for the year 2012, which means they fall into the danger zone for entering into bankruptcy. For the past three straight years, the Z-Score has been declining. It has been 0.5773, 0.7087, and 1.650 for the years 2012, 2011 and 2010 respectively. Based on Cinemark s current Z-Score along with the historic decline a turn-around is in need. Trend Analysis Since 2009, Cinemark has experienced a steady increase in total revenues. The largest revenue increase has come from admissions. This is due to the decline in movie rental companies such as Blockbuster. However, Cinemark s net income has not been as consistent as its revenues. From Page 17
2009 to 2010, they saw an increase in net income, but from 2010 to 2011 they witnessed a decrease. Then from 2011 to 2012, net income increased once again. Competitors in the industry such as Regal Entertainment Group and Carmike Cinemas, Inc. experienced similar trends in revenues and net income. EBITDA margin trends for Cinemark and the industry have fluctuated from year to year since 2009. As the industry leader, Cinemark observed the highest percentages amongst its main competitors from year to year as well. Seeing as Cinemark and Regal have a relatively similar amount of employees, they have battled for revenue per employee since 2009. Similar to the other financial trends, these values have also fluctuated year by year due to economic factors. Cinemark s ROE has fluctuated for the time period but has observed an overall increase from 2009 to 2012. However, Cinemark s primary competitors have struggled with their recent ROE trends. Regal has experienced negative percentages in each of the last four years because they have a higher total of liabilities than assets. Carmike has experienced high ROE over the past two years, but were also negative in the two years before. Cinemark holds a competitive advantage due to their consistent ROE. Cinemark is in a great position to continue to grow market share based on these current trends. Figures for these trends can be found in Appendix X. Revenues, Expenses, and Net Income Over the past seven years Cinemark has seen an increase of revenues of 102.66% or 25.67% per year. Revenues for Cinemark are broken up into three different categories; admissions, concession, and other. During 2012, Cinemark generated 63.9% of revenues from admissions, 31.2% from concession and 4.9% from other. Over the past three years these percentages have remained pretty consistent. The percentage of admissions has remained within 2.5% for the last three years. Concession has remained within 1.2% and the other category within.5%. In 2012 the highest quarter for revenues was the second quarter. The second quarter revenues of Page 18
$649,606,000 increased 12.23%, which was the biggest percentage increase all year. Comparing this to 2011, the third quarter generated the most revenues at $640,013,000. However, this was not the highest quarterly increase, from the first to the second quarter revenues jumped up 28.45%. Movie theaters like Cinemark are heavily dependent on the releases of new movies to draw crowds to the theaters as 63.9% of revenue came from admissions alone. Although movie theaters do not technically suffer from seasonality, many of the most anticipated movies of the year tend to be released during the second quarter, April-June. For example, the highest grossing movie in 2012, Marvel s The Avengers, which grossed $623,357,910 was released on May 04, 2012. This could have affected Cinemark s revenues and helped explain the 12.23% increase in revenues. Over the past five years, net income for Cinemark has increased 91.08%. Besides our net less in 2008 of $44,430,000, the last time our net income decreased was in 2011. In 2011 we still generated an income of $132,582,000, which was an 11.41% decrease from 2010. In 2012 we rebounded this by producing a net income of $171,420,000, which was the highest net income in the history of the company. Total expenses for Cinemark in 2012, was $2,302,111,000 which was a 7.2% increase from 2011. Over the past five years expenses have increased 28.56% or 5.8% per year. This increase in expenses could partly be explained by the increase in theater purchases and acquisitions. In 2012 Cinemark agreed to a purchase agreement with Rave Real Property Holdco, LLC, Rave Cinemas LLC and RC Processing known as Rave to acquire 32 theaters with 483 screens located in 12 states for approximately $240.0 million. Profit margin is an important aspect that is sometimes over looked. In 2012 Cinemark had a profit margin of 6.9%. It s lowest besides 0 when they lost money in 2008 was 5.2% which they Page 19
achieved in 2009. In comparison to one of Cinemark s top competitors Regal had a profit margin of 5.1% while Cinemark s was 6.9%. Even though Cinemark is number among competitors it would always be good to improve profit margin. EBIT/EPS Analysis Checking with professor on Monday. Pro Forma Before New Strategy Implementation According to our Pro Forma of Cinemark s income statement (see Appendix X) it is projected that Cinemark will have a net income of $195 million. However, by the year 2017 we project that net income will drop to $171 million. We suspect that even though revenues will increase from 2012-2017 net income will decrease from 2012 to 2017. Due to the increased competition and increased costs, we expect our net income to decrease steadily to $150 million. Due to the rise in costs Cinemark will be getting closer to going into the red as the years go on without any recommendations. Pro Forma Post New Strategy Implementation Many of our recommendations revolve around an increase in technology. The first of our recommendations is to improve our screens to the Next Generations screens. These screens reach from floor-to-ceiling and wall-to-wall and have higher picture quality. Our price for installing screens into all remaining non-nexgen screen is $6.55 million. We will also allocate $2 million for variable costs. Our next change will also involve an increase in technology. We plan to install automated self-service ticket purchasing kiosks as well as automated turnstile doors at a price of $2.2 million dollars. The savings for implementing these new technologies will have a savings in labor costs of 30% or $74.1 million in savings. This will increase the profitability of ticket sales, thus increasing our net income. Our final recommendation will be to purchase Regal Entertainment at a price of $5 billion dollars. This move will eliminate one of our main Page 20
competitors, increase our market share dramatically, and will allow us to have the largest influence on the theater industry in North America. Net Worth and Stock Price Analysis Waiting to speak with professor on Monday Recommendations and Implementation Jeffers Short-Term Recommendations In order for Cinemark to be the leader in technology we suggest implementing an immediate plan to enhance the overall satisfaction of the customer. The first recommendation we plan on overseeing is the acquisition of Regal Entertainment Group. The budget we have set for purchasing Regal is $5 billion. We plan on doing this through a combination financing plan. Next we will continue to update all theaters with the NextGen screens at an estimated cost of $6.55 million. The next step to improve our technology is to install self-service ticket purchasing kiosks and install automated turnstile doors to check the customer s ticket and direct them to their theater. We will do this by installing this technology in the 14-16 new theaters that are planning to open this year as a trial run. This will cost an estimated $2.2 million. When opening these new theaters we will be hiring 30% less employees because the automated technology will dissolve the jobs of ticket sales and ticket checkers. By implementing this technology in the newest theaters it allows customers to familiarize themselves with this new technology and adjust to the new yet innovative process of movie going. The next action we recommend is the firing of Vice President Don Harton who is in charge of construction. His duties will be absorbed by Senior Vice President Tom Owens and the real estate and development division. These recommendations will be completed within 12 months of beginning. Page 21
Long-Term Recommendations In order to maintain technological competitiveness we recommend upon the successful implementation of the trial run with the automated ticket kiosks and turnstile doors that the remaining 465 theaters be updated with this technology. This will cost an estimated $46.5 million dollars. This will decrease the employee costs of the company across the board by about 30%. This will also help to increase the efficiency of employees and make the customers experience more enjoyable. As technology develops we will closely assess any adjustments to equipment that may need to be installed in the future. QSPM After evaluating all of the recommendations for our strategic audit, we developed a Quantitative Strategic Planning Matrix (QSPM) that compares the attractiveness of our strongest choices. Our first interest was to acquire Regal Entertainment group. Grand Strategy Matrix Based on the Grand Strategy Matrix, we can see that Cinemark is in Quadrant II. Cinemark is looking to expand and solidify market share in the industry. With our recommendation of acquiring Regal we will obtain a large portion of the market and strategically place ourselves as the market leader. (Appendix D) Balanced Score Card A balanced score card has been developed that has metrics in the following primary areas:. Please see Appendix F Operational Improvements Operational improvements include the fluidity of the new technology of purchasing tickets and getting those tickets checked and directed to the theaters in the turnstiles. This improvement will enhance the experience of the customer by giving them the most innovative experience. This Page 22
operational improvement will also reduce operating costs and make the movie going experience seamless. Turnaround Timeline As previously noted, the recommendations are identified into two primary stages: short-term and long-term. Short-term recommendations should be implemented immediately and should result in results within six months. The long-term recommendations are for the continued success of Cinemark beyond a year to five years. Please see Appendix X for a Gantt chart of the recommendations. Change Resistance Cinemark will be going through numerous changes such as acquiring Regal, implementing new technology, and consolidating our real estate and development department. These suggested changes are necessary for Cinemark to become the industry leader. Contingency Plans After reviewing all of our strategy formulation data and leading into the implementation process, it is important to be aware of the worst-case scenario. If our proposed strategy of acquiring Regal falls through, we are confident our other recommendations will help our company increase profits.. Page 23
Epilogue Cinemark currently plans to open 14 to16 new locations. We suggest that these locations are where Cinemark implements our recommendations in order to test and measure the success before implementing them into existing locations. Cinemark has been able to provide convenience and technology unlike any other competitor in the industry. However, there is still plenty of room to grow. With the purchase of Regal, Cinemark will be able to greatly increase market share and become the industry leader in that category. By implementing turnstile doors and ticket kiosks, Cinemark will be able to save on wages by cutting down on the number of part-time employees while providing even more convenience for customers. Within just the first five years of our recommendations Cinemark will see a decrease in costs and a dramatic increase in both revenues and profits. References Cinemark Holdings, Incorporated. Cinemark Annual Report, 2012. Investor relations and corporate profile at www.cinemark.com http://www.dailymail.co.uk/news/article-2178341/hollywood-cinema-attendance-plummets-25- year-low.html http://business.time.com/2013/01/04/reports-of-the-death-of-the-movies-have-been-greatlyexaggerated/ Appendix A: Vision and Mission Current Mission Statement Cinemark Theaters is the organization where safety, respect, care, and concern for employees and customers in unsurpassed. That is why Cinemark Theaters is the preferred international motion picture exhibitor and achieves investor s goals. Page 24
New Vision Statement Cinemark will continue to capture new generations of moviegoers and maintain its current customers with its high emphasis on safety, its incorporation of high technology movie theater materials, and its desire to foster lifetime customer relationships through these competencies. New Mission Statement Cinemark Theaters is the preferred international motion picture exhibitor and prides itself in its advanced and up-to-date technology, excellent customer service, and high priority for safety. Appendix B: SWOT Matrices Table 1: Cinemark SWOT Analysis SWOT Area Key Indicator Description Strengths 1. Strong and well known 1. Cinemark has become a household company brand name name in the US 2. Broad customer base 2. Customers of all age, race, etc. 3. Geographical expansion attend 3. Theaters in North and South 4. Competitive prices America 5. Customer service 4. Offers standard theater prices for 6. Greatest economies of scale high-end experience 5. Provides great customer experience 6. Highest operating margin of any Page 25
Weaknesses 1. Limited control over movie industry 2. Corporate image 3. Revenues rely on popularity of films 4. Unable to cater to the at home experience 5. High costs of 3D Opportunities 1. Safety initiatives 2. Technological innovation 3. Customer loyalty 4. Growth potential 5. Foreign growth Threats 1. Lawsuits 2. Early home viewing 3. Competitive price pressures 4. Existing market competitors 5. New entrants theater company 1. Unable to control what movies come out at what time of year 2. Recent events have affected image in eyes of consumer 3. Customer attendance relies solely on movies offered 4. Missing business from customers who are hosting the movie night at their homes 5. Have to front the high costs of providing 3D movies to keep customers coming 1. Need to make customers feel safe and protected upon entry 2. Continue with technological advances 3. Studies have shown that consumers are not loyal to particular theater companies. They base decision off of proximity, film showing, and amenities. 4. Acquisition will allow Cinemark to tap into new markets. 5. Growth in central and South America will increase revenues 1. Currently facing lawsuits that could damage reputation 2. Early home viewings take away revenues 3. Constantly trying to remain equal with main competitors 4. Consumers are not loyal to a theater brand 5. Few barriers to new entry exist Table 2: Cinemark SWOT Strategy Matrix Strengths 1. Strong and well known company brand name 2. Broad customer base 3. Geographical expansion 4. Competitive prices 5. Customer service 6. Greatest economies of scale Opportunities 1. Safety initiatives 2. Technological innovation SO Strategies 1. Establish the Cinemark name as the leader in Weaknesses 1. Limited control over movie industry 2. Corporate image 3. Revenues rely on popularity of films 4. Unable to cater to the at home experience 5. High costs of 3D WO Strategies 1. Increased size will result in a lower cost of goods Page 26
3. Customer loyalty 4. Growth potential 5. Foreign growth 6. Indoor branding Threats 1. Lawsuits 2. Early home viewing 3. Competitive price pressures 4. Existing market competitors 5. New entrants theater safety (S6, O1) 2. Continue with technological innovations while offering competitive pricing to consumers (S5, 02) 3. Purchase the competitor and continue to grow under all names (S2, O4) 4. Continue growth in South America (S4, O5) ST Strategies 1. Turn the lawsuits around as an opportunity to make positive changes in the company (S1, T1) 2. Use massive size to reduce ticket sales costs, which will ultimately create barriers for new entrants who are unable to meet excellent pricing (S2, T5) sold (W5, O4) 2. Improve corporate image by increasing safety at all levels (W2, O1) 3. Consider offering classics on 1 screen when current movies are not generating revenues as expected (W3, O3) WT Strategies 1. Use massive size to reduce ticket sales costs, which will ultimately create barriers for new entrants who are unable to meet excellent pricing 2. Offer the early home viewing theater experience so the profit is not being taken away from the company completely (W4, T2) Table 3: Regal Entertainment Group SWOT Strategy Matrix Strength 1. Scale economies 2. Indoor branding 3. Digital Technology 4. Well-known company name 5. Broad customer base Opportunities 1. New Technology 2. Customer loyalty 3. Growth potential 4. Safety innovations SO Strategies 1. Integrating top technologies into all theaters (S3, O1) 2. Private label branding for Weaknesses 1. High debt burden 2. Scale economies 3. Declining revenue due to high technology costs 4. Revenue relies on popularity of films 5. International competition WO Strategies 1. Consider backing out of international theater locations and focus strictly on US (W5, O3) Page 27
5. Expanding past the theater industry through merger Threats 1. Competitive price pressures 2. Existing market competitors 3. Lack of customer loyalty 4. New entrants 5. Barriers to new entrants are few all movie indoor products (S2, O3) ST Strategies 1. Create ideal customer experience with indoor branding (S2, T3) 2. Purchase small companies, which will cut competition (S1,T4) 2. Steady revenue stream through merger of photo company (W4, O5) WT Strategies 1. International failure if remain in unfamiliar market (W5, T2) Table 4: Carmike Cinemas Incorporated SWOT Matrix Strengths 1. 3-D Capabilities 2. Screen vision advertising 3. All screens converted to digital technology 4. Discount theaters 5. Customer loyalty Opportunities 1. New technologies 2. Luxury cinemas 3. Growth potential 4. Increased safety SO Strategies 1. Integrate luxury experience into cinemas to entertain guests all night (S5, O2) Weaknesses 1. Substantial debt obligations 2. Small market cap 3. Substantial lease obligations 4. Relations with suppliers 5. High costs of 3D WO Strategies 1. Limited window to maintain 3-D competitive edge (W2, O1) 2. Relations with concession Page 28
5. Supplier contracting suppliers (W4, O2) Threats 1. Early home viewing 2. Industry attendance 3. Decline in motion pictures available 4. Substitutes 5. Night out alternatives ST Strategies 1. Market as whole date night experience with luxury cinemas (S5, T5) WT Strategies 1. Contract with suppliers to reduce costs (W4, T4) Table 5: Netflix SWOT Matrix Opportunities 1. Integration with broadband-enabled devices to allow for recurring revenue streams Strengths 1. Shifting focus from DVDs to online streaming 2. Clear brand identity 3. Large subscriber base 4. Advanced streaming technology 5. Positive user experience SO Strategies 1. Integrating with HBO or other new content provider 2. Consider taking out the competition like Red Box Weaknesses 1. Reliant on postal service for DVD services 2. Damaged reputation 3. Limited selection 4. Demographic issues 5. Poor management WO Strategies 1. Rising costs to consumers to raise income and reduce costs 2. Reduce DVD use to only Page 29
2. Internal expansion 3. Internet TV 4. Original product 5. New content Threats 1. Multichannel video programming distributors 2. Internet movie and TV content providers 3. DVD rental outlets and kiosk services 4. Entertainment video retailers 5. Rising cost of content 6. Bandwidth limitations 7. Expenses are colliding with revenues or adopting them into your company ST Strategies 1. Discontinue DVD services to reduce costs and begin to offer all customers streaming video only. 2. Contract with content providers to set established prices customers who currently use it. 3. New management WT Strategies 1. Allocating funds to integrate with HBO 2. Develop checks and balances system to improve management Appendix C: Macroeconomic U.S. Consumer Strength Indicators Page 30
Appendix D: Cinemark Organizational Charts Cinemark Pre-Recommendation Organizational Chart Page 31
Cinemark Post-Recommendation Organizational Chart Page 32
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Appendix E: Value Chain Analysis and Sales Composition Regal Cinemas Supply Chain Operations Distribution Sales/Marketing Customer Service Profit Margin 4 6 7 5 7 3 Administrative Human Resources Legal Etc. Pre-Recommendations Value Chain Analysis Diagram Page 34
Supply Chain Operations Distribution Sales/Marketing Customer Service Profit Margin 4 7 6 5 6 4 Administrative Humam Resources Legal etc. Post-Recommendations Value Chain Analysis Diagram Supply Chain Operatons Distribution Sales/Marketing Customer Sevice Profit Magrin 7 9 8 8 8 6 Administrative Humam Resources Legal etc. Page 35
Appendix F: Porter s Five Forces Model Appendix G: Strategic Group Maps PRE Page 36
Revenue per Screen (in 000s) Revenue per Screen Vs Revenue per Employee $600 $500 $400 $300 Regal Cinemark Carmike $200 $100 $- $- $50 $100 $150 $200 $250 Revenue per Employee (in 000s) Page 37
Revenue per Theater (in 000s) Rev per Theater Vs Operating Costs per Theater $7,000 $6,000 $5,000 $4,000 $3,000 Regal Cinemark Carmike $2,000 $1,000 $- $- $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 Operating Costs per Theater (in 000s) Page 38
Operating Costs (in 000s) Op Costs Vs Net Income $3,500,000.00 $3,000,000.00 $2,500,000.00 $2,000,000.00 Regal Cinemark $1,500,000.00 Carmike Netflix $1,000,000.00 $500,000.00 $- $- $25,000 $50,000 $75,000$100,000$125,000$150,000$175,000$200,000 Net Income (in 000s) Page 39
Number of Employees # Employees Vs Revenue per Employee 30,000 25,000 20,000 15,000 10,000 Regal Cinemark Carmike Netflix 5,000 0 $- $500.00 $1,000.00 $1,500.00 $2,000.00 Revenue per Employee (in 000s) Page 40
Operating Income/Revenue Operating Income/Rev Vs Operating Cost/Rev $0.20 $0.18 $0.16 $0.14 $0.12 $0.10 $0.08 $0.06 Cinemark Regal Carmike Netflix $0.04 $0.02 $- $- $0.20 $0.40 $0.60 $0.80 $1.00 $1.20 $(0.02) Operating Cost/Revenue Page 41
Operating Income/Revenue Operating Income/Rev Vs Operating Cost/Rev $0.20 $0.18 $0.16 $0.14 $0.12 $0.10 $0.08 $0.06 Cinemark Regal Carmike Netflix $0.04 $0.02 $- $- $0.20 $0.40 $0.60 $0.80 $1.00 $1.20 $(0.02) Operating Cost/Revenue Page 42
ROE ROA Vs ROE 80.00% 60.00% 40.00% 20.00% Regal Cinemark Carmike Netflix 0.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00% -20.00% -40.00% ROA Page 43
Operating Income ROA Vs Operating Income $450,000 $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 Regal Cinemark Carmike Netflix $100,000 $50,000 $- 0.00% 5.00% 10.00% 15.00% 20.00% $(50,000) ROA Appendix H: IE Matrices PRE Page 44
The EFE Total Weighted Score The EFE Total Weighted Score 4 4 3 Pre IE Matrix 2 1 3 Cinemark Carmike Netflix Regal 2 1 The IFE Total Weighted Score POST Post IE Matrix 4.00 4 3.00 2.00 1.00 3 Cinemark Carmike Netflix 2 1 The IFE Total Weighted Score CINEMARK IFE/EFE Page 45
Rati ng Weighted Score Post- Weight Strengths Pre-weight 1. Strong/Well known company brand name 0.07 4 0.28 0.07 4 0.28 2. Broad Customer Base 0.08 3 0.24 0.08 3 0.24 3. Geographical Expansion 0.09 2 0.18 0.09 3 0.27 4. Competitive prices 0.09 4 0.36 0.09 4 0.36 5. Customer Service 0.12 2 0.24 0.12 2 0.24 6. Great Economies of Scale 0.08 3 0.24 0.08 4 0.32 Rati ng Weighted Score Post- Weight Rati ng Rati ng Weighted Score Weighted Score Weaknesses Pre-weight 7. Limited control over movie industry 0.11 2 0.22 0.11 3 0.33 8. Corporate Image 0.08 4 0.32 0.08 4 0.32 9. Revenues based on film popularity 0.1 3 0.3 0.1 3 0.3 10. Unable to cater to the at home experience 0.08 1 0.08 0.08 2 0.16 11. High costs of 3D 0.1 2 0.2 0.1 3 0.3 Total 1.00 2.66 1.10 3.12 Opportunities Pre-weight Rati ng Weighted Score Post- Weight Rati ng Weighted Score 1. Safety Initiatives 0.06 3 0.18 0.06 3 0.18 2.Technological Innovation 0.16 4 0.64 0.16 4 0.64 3. Customer Loyalty 0.12 3 0.36 0.12 3 0.36 4. Growth potential 0.10 4 0.40 0.10 4 0.4 5. Foreign growth 0.08 3 0.24 0.08 4 0.32 Page 46