Cinemas Are Back, but the Road to Recovery Is Long

Theaters started reopening their doors around the U.S. in the beginning of August, propelled by new Hollywood releases such as Tenet and Unhinged. But business isn’t exactly thriving. Cinemas still have to adhere to strict sanitary rules to prevent the spread of COVID-19, and convincing audiences to come out hasn’t been easy.

GLG spoke with Ron Krueger, GLG Network Member and President and COO of VSS Southern Theatres, to discuss these challenges and what the film industry can expect in the months ahead. Following are a few select excerpts from our broader discussion.

How have theaters fared in the past few weeks with opening for releases?

Unhinged opened to four million on August 21, and dropped only 35% its second weekend. That 35% drop is encouraging because typically this type of movie might drop 50% to 60%. New Mutants, for a movie that had been literally in the can for a couple of years, opened to seven million on the 28th. That was pretty solid as well. Bill and Ted Face the Music opened at approximately a million, but that was a PVOD release. That wasn’t successful, per se.

Tenet opened in North America to about 20 million in its first weekend. It is tough really to judge those numbers, given that only 70% of the nation’s screens are open. And those that are open, are open with anywhere from 25% to 50% capacity constraints. Internationally, the reported second-week decline for Tenet was only 36%, which is, again, good. When you compare pre-COVID drops of this type of movie, it would definitely be in the 50s.

We’re feeling pretty good about the openings. I think we were expecting maybe a bit more out of Tenet. But with most of California and all of New York closed, it did well.

Based on the openings you’ve seen, are other scheduled releases likely to be held or pushed out? Particularly major releases, such as Wonder Woman and James Bond.

There are some rumblings that Wonder Woman could in fact move from October to November or December [Ed. note: now scheduled for Christmas Day]. And I think given that Tenet was also released by Warner Brothers, they want to have that title have a longer play out as more markets open.

But we won’t lose it from 2020, which is a good thing. United Artists has confirmed, too, that No Time to Die is solid for the 20th of November [Ed. note: now scheduled for April 2, 2021], and actually could very well move up if something else moves out of its way.

What impact will Disney’s Mulan’s PVOD release performance have on the industry? Does it change the viability of PVOD?

I haven’t heard anything officially in terms of what their downloads are, but Disney needs 20% of their subscriber base to download it to have it equal expected theatrical run for that type of movie. That’s a tall order.

PVOD is going to have its place on smaller titles. There will be a shrinking window, but the tent pole movies will still be to theatrical playtime to maximize the overall revenue stream for that particular title. We have proven studies from top five accounting firms demonstrating that, to maximize the ROI, you need a reasonable theatrical window, and then the streaming window, and a PVOD window as well.

What are the implications of reopening on costs and expenses, particularly implications of cinema safe parameters and social distancing on cost and expenses?

For additional PPE, signage, electrostatic foggers, things like that, start-up costs per site prior to opening for those sorts of things was probably about $5,000 to $6,000. And ongoing costs for cleaning and upgraded MERV filters, PPE supplies is about $3,000 per site, per month.

To be compliant with the Cinema Safe parameters, we need a dedicated staff member staying on top of the sanitation standards. For the average size 14-plex, that should run $2,000 to $3,000 a month. On the social distancing side, it really impacts us on two fronts. We’re staggering our showtimes to ensure that we don’t have large crowds in our lobbies and restrooms. And we are 25% to 50% capacity limits in the auditorium on average.

How are circuits such as AMC and Cineworld doing in terms of trying to hit a break-even?

We’re not selling out auditoriums right now, even with reduced capacities, and I think two factors are really impacting grosses. One, the industry has been shut down for five and a half months, and we need to better educate our guests that we have reopened. Some recent surveys showed only 35% of guests realized theaters were back open in their markets.

Secondly, we really need to continue to communicate that we’re consistent with the Cinema Safe operating standards. As people come into theaters and see what we’re doing, they’ll feel more comfortable. We have the social distancing, mask wearing enforcement, and sanitization all in place.

How have exhibitors fared with rent expenses by restructuring lease agreements in the wake of the crisis?

Publicly traded REITs have accepted rent deferrals through all of summer. I expect AMC and Cineworld are in the same boat. They’ve just got to start paying that back probably starting next year, over a two- to three-year time period. There’s no free rent per se; it’s just deferred. But now that we’re opening up, the landlords are going to expect rent to resume.

What is the current state of federal relief for exhibitors through PPP or the CARES Act?

It’s a big failure at this point. Republicans and Democrats aren’t motivated to get together to pass an additional relief package. Main Street loans have been very difficult to get with very few exhibitors. PPP loans have received some updates and clarifications. In many cases, those loans that were granted beginning of summer with the CARES Act will end up being 100% forgivable, which is great. Potential new legislation contemplated a second PPP loan or a second round of PPP loans. Also, there was a contemplated RESTART loan program. Right now, both of those are dead in the water.

What are the fixed and variable costs to theaters reopening?

The primary variable costs are going to be hourly payroll and film rent. Film rent runs 55% to 65%, depending on the circuit and the tent poles that are out there. Hourly payroll is going to run 8% to 12% as a percentage of revenue. Janitorial services, about 2%. Security, half of 1%. Supplies, 1%. Digital maintenance, half of 1%. Utilities, bank charges, maintenance costs — those are in the 2% to 3% range, depending on the location. Rent, of course, is a huge one as well. AMC has among the highest occupancy costs that are out there. Cineworld, a bit behind them.

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About Ron Krueger II

Ron has been in the movie theater exhibition industry for over 30 years. Since 2013, Ron has been President and COO at VSS Southern Theatres LLC, which operates 18 locations in 11 states. As President and COO, Ron’s role encompasses business development, theater and food and beverage operations, full P&L management, media relations, strategic planning, project management, marketing, purchasing, and multi-unit management. Prior to Southern, Ron was president for 14 years of Wehrenberg Theatres, a regional theater exhibitor based in Saint Louis with 200 screens across four states. Ron is also an Advisory Board Member at National Association of Theatre Owners, the largest exhibition trade organization in the world, representing roughly 32,000 movie screens in all 50 states, and additional cinemas in 100 countries worldwide.

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This theater industry article is adapted from the September 9, 2020, GLG teleconference “AMC and Cineworld: Exhibitor Vantage on Lockdown Emergence.” If you would like access to the full teleconference transcript or would like to speak with theater industry expert Ron Krueger, or any of our more than 700,000 industry experts, contact us.