The cinema sector in the UK

The emerging trend is that acquisition is still a priority for the majority of operators.

27 February 2015, Words by Mat Oakley

 

Quite literally all eyes are on the big screen for 2015. Cinema operators are watching attendance figures with baited breath for what is anticipated to be a blockbuster year for film and promises a turn around in fortunes, following two consecutive years of poor product and resulting falling attendance figures.

From a property perspective, the impact of a lack lustre 2013-14 is being felt by way of a divergence in strategy for new acquisitions going forward and developers have been caught unawares by changes in appetite and requirements from the ‘big three’.

 
"Quite literally all eyes are on the big screen for 2015"
 

Gone are the heady days of 2012-14, where Vue, Odeon and Cineworld frantically raced to grow their estates, with competitive bidding driving rents up and incentive packages down in the most sought after markets. Now, each of the operators are more discerning in their selection of new sites and the types of market they are targeting.

The big three

Odeon, who saw earnings fall for five consecutive quarters to October 2014, are still on the face of it cautiously expanding, however a tumultuous 18 months corporately has resulted in a recent downgrade in their covenant and question marks remain over when Terra Firma will off load the brand, to what value and what will happen to Odeon’s extensive existing estate. Odeon are also the most vulnerable to ‘over-screening’ in certain markets, which threatens many of the older first generation cinemas and consolidation in the short term is likely.

Cineworld has fared better financially, however have had their fingers burnt in smaller markets, with recent openings in St Neot’s, for example, not proving as fruitful as they would like. This, coupled with a change of the guard at board level has led to a significant sea change in their acquisition programme going forward. Cineworld are now only focussing on large markets, where they can dominate the catchment with cinemas of 10 screens or more in circa 40,000 sq ft + of space.

In much the same vain, Showcase, who have been relatively inactive in the market, have recently agreed terms on two ground-breaking cinema developments in Southampton (West Quay) and Glasgow (Buchanan Galleries), where they will open their high-end format, Cinema De Lux, without the fear of cannibalising any of their existing formats.

Like their competitors, Vue have felt the pressure of competition opening up in previously unchallenged markets and as a consequence are more cautious in relation to new acquisitions; only looking to acquire space in markets where there is little or no competition. At a corporate level Vue have focussed on acquiring existing companies, predominantly outside of the UK, in order to achieve growth in market share.

In the past three years Vue has more than doubled the number of cinemas and screens in its ownership from 70 to 187 and from 678 to 1,727 screens; acquiring Apollo in the UK in May 2012, CinemaxX in Germany in August 2012, Multikino in Poland in October 2013 and The Space Entertainment in Italy in 2014.

These corporate acquisitions have been key in driving the group’s growth and consequentially, has distracted them from growing their UK portfolio organically. Where they are appraising sites, these have predominantly been for 20,000 – 25,000 sq ft units, which is almost half of what Cineworld are now looking to secure.

The Light Cinema, a relative newcomer to the sector, currently with only two offers in Wisbech and New Brighton, have been the talk of the sector in the last 12 – 18 months. The group, run by cinema veteran, John Sullivan, have taken a strategic approach to expansion, focussing on achieving buy-in and funding from Local Authorities/developers in markets where the ‘big three’ have shunned the proposals.

As the self proclaimed ‘operator of last resort’ The Light operate on a turn-key arrangement; paying an artificially high rent on the basis of unit handed over to a ‘hot shell’ specification; thus minimising the risk and the up front capital required from the tenant. The Light have recently signed deals in markets such as Bolton, Walsall, Dundee and Sheffield, where the existing operators in the town are feeling the pressure and are taken aback by the confidence of The Light and their ability to achieve such highly incentivised deals.

Tier-two operators

This ‘second tier’ of multiplex operators has recently expanded to include operators including Reel, Savoy and Premiere, who have recently acquired sites in Clacton-on-Sea, Corby and Romford respectively. In addition, the boutique operators, such as Everyman and Curzon have secured new sites, challenging existing multiplex offers with a diversified film offering appealing to different audiences.

In summary, the emerging trend is very much that acquisition is still a priority for the majority of operators, however there is a divergence in view towards which markets to target and their ideal size requirements. Now, more than ever, there is a greater number of options for developers in terms of the cinema end-user, given the emergence of the second tier multiplex and boutique operators. That being said, the level of the deal that can be struck, if at all, is equally as varied, depending on the market size and existing competition.

 

 
 

Key Contacts

Mat Oakley

Mat Oakley

Director
Commercial Research

Savills Margaret Street

+44 (0) 20 7409 8781

 

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