The ethanol program is even worse than you think

by on May 26, 2008 at 8:23 am in Film | Permalink

Thanks to the inflating cost of popcorn, the price of movie tickets is
expected to skyrocket by as much as 30% this year, according to Ricard
Gil, a University of Santa Cruz economist who studies the business.
"You’re going to see a one- to two-dollar increase in the price of a
movie ticket," he said. "And that’s being conservative."

Here is the link.  So what model is required for this to be true?  If movies and popcorn are complements, you might think that higher popcorn prices would imply lower movie prices, to partially restore the cheapness of the overall bundle.  But more realistically, the movie is a loss leader to attract buyers of high-margin popcorn.  If popcorn gets priced out of buyers’ range, movie prices will rise to make up the difference since cheap tickets no longer bring in so much extra revenue at the concession stand.

Thanks to John de Palma for the pointer.

Anonymous May 26, 2008 at 8:32 am

At the risk of stating the obvious, just because you need to raise prices to avoid losing money doesn’t mean you can. The airline industry is a prominent example. A bit more surprising: nowadays even oil refiners like Sunoco are losing money, because as high as gasoline prices are, they haven’t risen far enough to make up for the spectacular ($135/barrel and counting) increases in oil prices.

It’s tough enough these days just to convince consumers to spend the money on gas just to drive to the movie theater. Higher ticket prices? I doubt very much they could make it stick.

josh May 26, 2008 at 9:01 am

Are movies really a loss leader at $9?

Brandon May 26, 2008 at 9:08 am

As a veteran of the movie biz and someone who knows little about economics, I should ask: doesn’t it make a difference that concession revenue and ticket revenue head to two completely different sources? Theaters pull maybe 2% from the box office, and that’s generous.

That’s why, if you like drive-ins, do yourself a favor and buy your snacks there.

Vincent Clement May 26, 2008 at 10:33 am

“But more realistically, the movie is a loss leader to attract buyers of high-margin popcorn.”

That just sounds like an awful business model.

Anonymous May 26, 2008 at 11:18 am

Vincent,

Big Macs are a loss leader to attract buyers of high-margin fries (and not quite so high-margin brand-name sodas). According to Fast Food Nation, fast food chains buy frozen fries for about 30 cents a pound, reheat them in oil and resell them for about $6 a pound (as of about six years ago anyways, pre- food-price bubble).

The only thing wrong with the business model is that not enough people buy the popcorn. Fries are kind of an inseparable part of a McDonalds meal, while popcorn is very much an optional purchase.

Sometimes I wonder why theaters don’t try harder to sell tie-in merchandise to theater goers on their way out. On their way in, there isn’t enough time, because the movie’s about to start; but on their way out, the flow of people leaving the cinema can be directed through a retail gallery with T-shirts, toys, soundtrack CDs, book novelizations, opportunities to pre-order the DVD, or buy the DVD of the movie that the current movie was a sequel to. Or DVDs of other movies that the lead actors were in: Amazon.com does well with “people who bought this item also bought X, Y, and Z”, so perhaps brick-and-mortar establishments could give it a try. Add some upscale coffee shops or restaurants or bars where couples can continue their date, since there’s not much opportunity to chat in a darkened room where you have to keep quiet. A child care center, so theaters could collect the money that would have been spent anyway on a third-party babysitter? A quick-turnaround laundromat or dry cleaner, so you pass the time watching a movie while errands are done? I guess the margins on concessions are high enough that anything else is just not worth bothering with. Either that, or all these ideas are simply unworkable :)

Anonymous May 26, 2008 at 12:29 pm

jn,

Yes of course there’s the risk that any given movie will bomb and its tie-in merchandise will rot on the shelves. On the other hand, movie tie-in merchandise is a relatively big business, so somebody out there is taking the risk and selling the stuff… just not movie theater operators, at a time and place where consumers seemingly would be psychologically primed to buy. That seems a bit curious.

Dale May 26, 2008 at 6:31 pm

It makes a huge difference on the run of the show. First runs pack in the people. but the theatre only makes a few pennies per ticket. That is why you will see a first run disappear to come back for an extended second (and more profitable run).
However, popcorn is a specialty crop that is not like field corn. Popcorn is much more valuable than field corn, it doesn’t make sense to change to a crop that pays half as much.

Ethanol bashing is getting crazy! One report has said that gas would be over a dollar per gallon higher if it were not for ethanol. No wonder big oil is mounting an attack on ethanol.

TH May 27, 2008 at 9:33 am

Because the marginal profit on a bag of popcorn costing $8 isn’t high enough? The biggest component of the cost of a bag of popcorn is probably the real estate the theater sits on and the minimum wage they pay some usher to walk around sweeping that crap off the floor.

brucem May 27, 2008 at 1:59 pm

how can a movie, at $8+ per person, with no marginal cost to the theater other than a little piece of paper for the ‘ticket’ possibly be a loss leader?

nick May 27, 2008 at 2:31 pm

I also agreee with Wilbert that this doesn’t pass the laugh test. It is yet another ad-hoc attempt to explain by “fundamentals” what is really happening, namely dollar inflation and the resulting “speculation” and “hoarding” in commodities. In the case of the ethanol explanation, there is also more than a whiff of oil company propaganda: for the first time, oil companies feel seriously threatened by ethanol.

4 ethanol May 27, 2008 at 8:42 pm

What a bunch of bad information out there on ethano. Does anyone know that a third of that bushel of corn remains as protein. A highly valued by product of ethanol. As for the price increase of popcorn, I used the $3.50 price increase quoted from 2 differant articles for a 35 pound bag of popcorn and visited our local movie theater. It comes out to less then 2 cents increase per large tub of popcorn. Oh, and by the way, they charge 50 cents for a squirt of butter. You nay sayers of ethanol must think everything you read in the media must be true.

Anonymous May 28, 2008 at 8:56 am

Also, the cost to the theater associated with the movie includes paying the salaries of the people who sell you your ticket and check your ticket, and the projectionists. Arguably the floor sweepers too, since eating and drinking in the dark with your eyes directed elsewhere is much messier than usual.

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As a veteran of the movie biz and someone who knows little about economics, I should ask: doesn’t it make a difference that concession revenue and ticket revenue head to two completely different sources? Theaters pull maybe 2% from the box office, and that’s generous.

That’s why, if you like drive-ins, do yourself a favor and buy your snacks there.

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