Everyone told Ellis Jacob he was nuts when he decided to get into the theatre business 25 years ago.
The movie industry was brutally competitive and notoriously volatile. And VCRs were a sure sign that moviegoers would stay home to watch their favourite flicks.
Today, though, the president and chief executive officer of Cineplex Inc. is presiding over an unlikely success story.
After a record-breaking 2011, this year looks to be another blockbuster for the movie chain as box office receipts across North America push toward yet another high on the strength of movies such as The Hunger Games and hits such as The Hobbit and Skyfall playing through the important holiday season.
And Cineplex’s business momentum seems impervious to an economy that remains stubbornly stuck in neutral.
“Movies are just a great social experience,” explains Mr. Jacob. “And when times get tough, this is really affordable escapism.”
Profit is flying at the country’s largest theatre chain, which has battled its way to a 70-per-cent market share, an astonishing achievement for an old business that is open to foreign competition. Through a carefully honed strategy to maximize revenue from every customer, Cineplex has made itself the marquee theatre chain in the industry.
Now, Cineplex is entering an evolving era of movie-watching that brings a host of new challenges. The company is about to launch a new online offering called Ultraviolet that will put it on a competitive footing against a whole new slate of global rivals. You can imagine the skeptics raising their eyebrows once again as Mr. Jacob proclaims that there are no companies in the world better placed than Cineplex when it comes to delivering online movies to Canadians – including Apple Inc. and Amazon Inc.
“The concerns people tend to raise are about us competing with some big giants,” says Mr. Jacob, as he picks at a plate of French fries that he guiltily orders with his lunch in a small bistro beside the company’s Toronto headquarters. “The big difference is we are in the movie business. We can communicate with you – if you’re in our loyalty program, we know your likes and dislikes in a way that nobody else does. Apple is excellent, but it’s not their main business. Movies are our main business.”
There’s no doubt business has been good. Operating profits have been on an upward swing for years, as Cineplex masters the art of upselling at the ticket booth by offering customers enhanced services such as reserved seating and VIP lounges, and finds better ways to pull money out of their wallets at concession stands.
The company is certainly capitalizing on a strong slate of films at its 134 theatres with 1,449 screens. A portion of any theatre company’s success (or failure) is engineered by the Hollywood studios, which have a huge effect on ticket sales through the movies they release.
“I like to say we just set the table – the studios serve the steak,” Mr. Jacob says.
But that’s only half of the story – Mr. Jacob has built the company into a multilayered powerhouse by branching into related businesses, and nowhere is that more clear than in the company’s concession lines. One of his main areas of focus in recent years has been improving and speeding up the chain’s service, because when people see long lineups they go to their seats rather than spend money on popcorn, pop and licorice, where profit margins are mouth-watering.
“One of our analysts went to one of our theatres and saw there were no lineups,” Mr. Jacob says. “He said to me ‘things must be really bad if nobody is lining up at the concessions.’ But that was music to my ears – it’s exactly what I wanted to happen. We have incentivized employees, they are motivated to sell. And what’s good is they compete against each other.”
Cineplex introduced a commission system for all of its front-line employees that allows them to earn bonuses based on the number of customers they serve and how quickly they move them through the concessions and into their seats.
The company also employs a “zoning” program that limits the number of steps an employee needs to take in order to get food and drinks into someone’s hands.
Such strategies are working magic. On top of $467-million of box-office revenue, Cineplex pulled in $243-million from concessions in the first nine months of the year, about 9 per cent more than the year-before period. Per-patron concession revenue was a record $4.68 in the third quarter, continuing a steady rise over several years.
Increasingly, Cineplex’s food offerings go beyond traditional theatre fare. Customers can choose calamari over popcorn and will soon be sipping wine instead of soda in some of the company’s VIP theatres.
The soft-spoken Mr. Jacob has a level of understanding that may escape many in his industry. He spent countless hours in disguise – even shaving his trademark mustache – as a front-line employee of his own chain for the television series Undercover Boss Canada. At one point, he was tossed off the popcorn station by a frustrated manager about three decades his junior (he thanked her by sending her to Paris once his identity was revealed and offering her a job in the company’s head office).
“Loyalty,” he says, “is important in any business.”
Concessions aren’t the only sideline. Cineplex (which operates theatres under the Cineplex Odeon, SilverCity, Galaxy Cinemas, Colossus, Coliseum, Scotiabank Theatre, Cineplex VIP Cinemas, Famous Players and Cinema City brands) is also one of the largest digital signage companies in Canada, with its interactive displays providing news and information to hundreds of thousands of people riding up and down in elevators each day or stopping for a sandwich at rest stops along Canada’s biggest highway.
Then there’s the gaming division that is one of the largest providers of arcade games in North America.
If the Ultraviolet rollout is to be a success, it will be on the back of the 4-million-person strong Scene loyalty program that the company has spent the past several years building, with its 50-per-cent partner Scotiabank, but has yet to fully exploit. The loyalty program keeps track of who watches what and rewards participants with discounts.
“When you think about what this company is, it’s nothing short of astounding,” said Jordan Banks, the president of Facebook Canada (and long-time movie aficionado). “It’s a world leader in the consumption of everything that isn’t a ticket – I’m not sure anyone does it better. And their loyalty program is massive – you could almost call them a data company.”
Investors are feeling pretty good, too – with the company’s stock up 25 per cent in 2012 on the strength of a string of strong quarters.
Still, seven of the 13 analysts listed by Bloomberg advise investors to “hold” the shares (six advise “buy”), with some concern that the shares have peaked until the company taps new sources of revenue.
Mr. Jacob thinks he knows where to find that new money.
While Cineplex has been amassing data for several years, it’s only now it feels it is ready to analyze and act on that information in a profitable way.
Ultraviolet is basically an online locker, says vice-president Patricia Marshall, where users can rent or buy movies directly from Cineplex. But when you add in the loyalty program, she says, it becomes a far more powerful business proposition.
“Think of a James Bond movie,” she says. “Wouldn’t it be great to see the movie that came right before the new one? So if you go to our website to buy a ticket, we’ll let you buy any of the other Bond movies at the same time. And give you bonus points, and discounts at the concessions. And when you walk out, we can sell you a copy of that movie that will show up in your digital locker when it’s done showing in theatres. We get you before everyone else.”
While analysts aren’t putting too much stock in digital sales just yet, there’s reason to believe there’s a market for the service. Blockbuster Canada was shut down earlier this year after creditors called in its parent company’s debt, leaving hundreds of neighbourhoods across the country without a nearby video store in which to rent new releases as other, smaller operators also closed their doors in response to cheap online alternatives.
While Mr. Jacob won’t be putting stores back on street corners, he does believe he has something going for him that video-on-demand services and the Internet at large can’t compete with – a relationship with a core group of movie fans who are more interested in quality than they are quantity.
The Motion Picture Association of America has his back – it said in a recent report that frequent movie goers represent only 10 per cent of the population but purchase nearly half of all tickets.
“We can drive you to the hard good in the theatre, to the rental, to a purchase, and then back to the theatre,” Mr. Jacob says. “Nobody else can do that. When you start a business, it’s a scary experience because there are always naysayers who say it won’t work. But you have to stick to your guns. When I started in this business 25 years ago, everyone thought I was nuts. But I tell you – there are so many opportunities in this country, I can’t even believe it.”
There are opportunities in other countries as well. Over the years, Mr. Jacob has been tempted to expand internationally, and once came close to buying an Australian theatre chain only to have the deal fall apart when one of the key owners in that country died of a heart attack
in the midst of negotiations. He’s heading back to the country at the end of December, but that trip was planned as a vacation. Even so, his calendar quickly filled with appointments as it tends to every time he travels.
“The last time I was in Istanbul, I got the idea to name our theatres after companies after meeting a guy,” referring to a partnership that has seen Bank of Nova Scotia brand many of the company’s top-end theatres. “There’s another example of something that analysts said would never work. And you know what? It’s been a success.”
He grabs another French fry and holds it mid-air as he finishes the thought: “I hope in five years, if we are sitting here again, we can say that we managed to create an environment that when you think of movies you think of Cineplex, whether you’re talking bricks or talking clicks.”