Analytics

Tuesday, 22.05.2012

According to Yulia Dalnova, Director of Retail Real Estate at Knight Frank, an increasing number of cinemas and movie theaters in Moscow matches an increasing number of their visitors. As more and more multiplex cinemas open within a walking distance from home, many people finally become their regular customers. The point is that a number of potential spectators did not attend cinemas in the past because of their remote location.
According to Jones Lang LaSalle, Russia now has approximately 19 cinemas per 1,000 residents. For comparison, in developed countries this ratio is much higher: 130 cinemas per 1,000 residents in the USA, 86 cinemas in France, 59 in the UK, 38 in Finland, 25 in Poland.
As of today, both Russia and Moscow lack modern movie theaters, which are spread very irregularly. "At the moment, there are cities and towns where there is a shortage of quality modern cinemas. There are areas lacking cinemas even in Moscow. For example, South Butovo. This neighborhood is large enough, but not a single movie theater has been built there so far," comments Nikita Shumaylov, Director of Development and Construction, Karo Group of Companies.
Partially, this situation can be explained by a limited number of shopping and entertainment centers in the country.
 
Supply
According to Nevafilm Research, 62 cinemas and 19 movie theaters opened in the Moscow region in 2010. The most famous of them are 5-room Kronwerk Cinema Lefortovo, 10-room Cinema-Star Rio in Reutov, and 9-room Luxor in Vegas mall. Also in 2010, a number of single-screen cinemas entered the domestic theater market (Vladivostok and Fakel under the Moscow Cinema management). At the same time, two cinemas were closed in Moscow in 2010: Pervomaysky (one hall seating 1,090, with three bars on the ground floor, currently under reconstruction), and Baltica cinema, which was demolished in late 2010. According to plan, Baltica cinema will be put into operation as an 8-screen multiplex movie theater in a newly built Tushino Plaza shopping mall.
According to Cushman & Wakefield, only a few new cinemas will open in Moscow in 2011. One of them – the AFImall City multiplex cinema. If other retail real estate projects enter the market in time, there will be a few more cinemas in them as well. Meanwhile, the Kinomax-October cinema was closed in Lyubertsy in H1 2011. Kinomax-October consisted of two cinema halls with 210 and 588 seats respectively, pizzeria, summer cafe, billiards, and two bars. According to Sergey Sizenov, Deputy CEO of Kinomax, the project was gradually losing its profitability in recent years. "On the one hand, we were facing increasing competition; on the other – outdated equipment and interior decoration of the cinema building that required a lot of investment. Given that, the rental rates there were not acceptable."
Kinostar New York is currently the biggest megaplex in Moscow. It is located in MEGA Belaya Dacha shopping center, and consists of 16 rooms. The last 16th room opened in Kinostar New York in March 2009 in a digital cinema IMAX format.
Based on Jones Lang LaSalle research data, 94% of cinemas in Moscow are managed by chain operators, another 6% are operated by shopping centers' owners. There are non-chain independent operators that are present in just one or two shopping centers.
 
Market players
As Neva Research analysts estimate, the largest film distribution chain operators in Moscow are Karo Film that occupies 17% of the market (18 movie theaters and 90 screens), Formula Kino with an 11.7% market share (11 theaters, 62 screens), and KinoStar – the most brilliant representative of Megaplex with its chain of 4 cinemas and 51 screens (9.6% market share). Luxor chain is also in the Top-4 market leaders with its 7 movie theaters and 43 screens (its market share is 8.1%).
Other market players in Moscow and the region are such well-known cinema chains as Cinema Park (6.2%), Cinema Star (5.8%), Kronwerk Cinema (5.7%), West (4.3%) Centrafilm (3.6%), and Paradise (3.2%).
As of today, 10 big cinema chains operate in Russia. Until recently, Karo-Film was the market leader having the largest number of cinemas. However, according to the latest research done by Film Alliance, the situation has changed dramatically a few weeks ago. In late June, the Cinema Park chain owned by Vladimir Potanin's holding Prof-Media acquired a 75-screen cinema chain Kinostar de Luxe. After the merger, Vladimir Potanin became the owner of the largest cinema chain in Russia (244 cinemas).
 
About formats
Typically, experts classify cinemas by screen numbers: 1-screen cinemas, miniplex cinemas (2 to 7 screens), multiplex (8 to 15 screens), and Megaplex (16 screens and more). Each hall normally has 100 to 300 seats. According to RRG, the most common format in Moscow is miniplex cinemas. "Currently, operators are focused on cinemas with at least 5-6 screens or about 2,000-2,500 sqm of the total floor space. Cinemas of smaller sizes are not attractive to the operators economically," comments Denis Kolokolnikov, CEO of RRG consulting firm. According to Kirill Khudyakov, Head of Marketing and PR at Film Alliance, the term "multiplex" is incorrectly interpreted in Russia. "Literally, multiplex is a combination of English "multiple" and "pleasures", which mean a variety of fun. In other words, the multiplex format is a symbiosis of several cinema halls and screens, gaming and entertainment areas, as well as cafes and bars. We are interested in developing this particular format."
Vagan Egoyan, Board Member at Paradise Group of Companies, in turn, says he is interested in developing his own cinemas in line with the existing conservative strategy. "Our format is a cinema with a number of rooms along with corresponding entertainment areas (bowling, restaurant, billiard clubs, childcare centers) located in shopping centers of 40,000 – 80,000 sqm," Mr. Egoyan comments.
Another trend is common to all operators – the introduction of digital projection in cinemas. According to Nevafilm Research analysts, in April 2010 – March 2011, the Russian digital network has more than doubled (139%). Today, more than 70% of cinemas in Moscow have digital rooms.
In order to increase the interest of visitors, many operators improve and diversify their business, offering a 3D format. The existing technical limitations and requirements have their impact on those choosing a site for a new cinema. According to experts at Astera in alliance with BNP Paribas Real Estate, 3D cinemas require high ceilings and other technical specifications. One needs to have 4-meter-high ceilings in order to place 3-meter-high screens on the cinema room walls.
Another innovative format is used in the world today – namely IMAX. A number of Moscow-based cinemas started using it: Kinostar New York in Mega Belaya Dacha SEC, Nescafe IMAX in Auchan City – Leningradsky, as well as Hall IMAX in October (Karo Film) that opened in late 2010. "However, the existing technical requirements for this format (the key issue is the ceiling height of 9-11 meters) significantly limit the development of this type of cinemas in our shopping centers. This format may become popular in new retail real estate projects that we can now see in Eastern Europe," says Olesya Cherdantseva, Director of Retail Real Estate Market Analytics at Jones Lang LaSalle.
Thus, any cinema using the IMAX technology can be quartered mainly in large projects – shopping malls or freestanding buildings. Most experts agree that it is too early to start building separate cinema complexes in Moscow. "We can see IMAX cinemas located in separate buildings in other countries, but these projects are typically found in the world's major tourist cities having a constant rotation of visitors. They are mostly single-branded projects, rather than commercial ones," says Denis Kolokolnikov.
 
Old and new movie theaters
Today, it is difficult to divide cinemas based on their class or format, including the specifics of film distribution. Nearly all of them are focused on the mass market. "Almost every modern cinema is equipped with 3D displays and offers additional services. It is simpler to classify the existing cinemas as new and old ones," says Vladislav Kamaev, Manager of DVI Holding cinema chain.
The old movie theaters that were built during the Soviet era and partially reconstructed in recent years, usually have modern equipment but a small number of cinema rooms (normally 1-2) that cannot run many films at once.  
According to Jones Lang LaSalle, to date, Moscow has about 110 movie theaters in detached buildings. Despite the fact that many such movie theaters were converted from one-room to two-room cinemas, they are less cost-effective if compared with cinemas that operate in modern shopping centers. "Today, operators are interested in movie theaters located in shopping centers. The existing independent cinemas found in standalone buildings are generally less profitable. Another reason is purely architectural: they are typically accommodated in old buildings with uncomfortable entrances and exit doors that are nearly impossible to reconstruct in accordance with modern-day concepts," comments Vagan Egoyan. "At the same time, many of those old-days movie theaters are still popular, especially those located in bedroom districts of the city near metro stations (for example, Kirgizia in Novogireevo). This happens because many bedroom communities lack alternative movie theaters," continues Denis Kolokolnikov.
Meanwhile, some experts believe that standalone cinemas can become very popular with time as they can easily host a large number of cinema screens (i.e. 20), as well as more entertainment zones. On the other hand, none of the developers today wants to proceed with such projects for various reasons. "I guess that this format will be in demand by consumers one day. Especially this concerns major cities. Many developers understand this today, but are afraid to proceed with such projects because there are no good examples of that kind in Russia yet," argues Vagan Egoyan.
The key reasons why this type of buildings is not popular in the country are high costs of land and communications. Any large format movie theater in a separate building should be perfectly located. No developer in Moscow can afford this luxury nowadays. An average payback period of such projects may reach 12-15 years, while cinema chain owners target projects that can pay for themselves in 5-7 years. "Given the cost of land, necessary approvals, and search for quality land plots in Moscow, nobody would invest in such technologically complicated projects. If we talk about those market players who want to increase their working capacity, they would definitely prefer cinemas placed in large mixed-use centers," says Olga Antonova, Director of Leasing, Crocus Group.
 
Cinemas in shopping malls
Cinema operators as tenants pay relatively low rental rates. Experts agree that this happens because owners of shopping malls en masse consider movie theaters beneficial for them, as they attract a large number of visitors. According to DVI Group, rental rates for cinema operators now range from $30 to $250/sqm/year, depending on location, the size of a shopping mall, as well as methods of payment. Those enjoying minimum rental rates usually pay extra money as a percentage of their turnover (8-11% on average). However, nearly all movie theaters pay fixed rental rates. Based on Cushman & Wakefield estimates, the most successful cinema chains typically pay rents of $150 to $170/sqm/year. This concerns those operators who want to establish 4 cinema screens with 200 seats each, as well as a coffee bar and billiards club. The rental rates are $80-150/sqm/year for those with 8 screens, 200 seats in each, as well as a set of additional components. "There are not so many operators of movie theaters on the Russian market. In principle, all of them deliver high quality projects. In most cases, property owners select this or that operator based on rental rates and technical requirements. Normally, operators do finishing works in leased premises and buy necessary equipment to run their business," says Victor Rosenberg, Senior Advisor on Retail Real Estate, Cushman & Wakefield.
According to Crocus Group, entertainment zones like cinemas generate up to 30% of the total shopping center's income. On the other hand, 7-10% of cinema viewers are regular customers of the same malls. "Many mall owners organize food courts next to multiplex cinemas. A synergetic effect of such a neighborhood boosts the income of cinema operators, and hence, their rental payments," comments Galina Maliborskaya, Director of Retail Real Estate at Colliers International.
As analysts of Astera estimate, multiplex movie theaters typically aim at having about 4,000-5,000 people daily, which is quite realistic to achieve in shopping centers of 45,000 – 70,000 sqm. This size of a shopping center fully meets the needs of the cinema operators. However, it is next to impossible to build large shopping centers in Moscow today, because the market is almost saturated in this particular retail segment. In this regard, experts say that in the next three years, we will see no more than 3 – 5 new multiplexes in Moscow.
That is the reason why many cinema chain operators prefer to expand their business to Russia's regions. "As of today, we are interested in regional development of our business in cities having 700,000 residents and more. We prefer to locate our facilities in city centers or other popular areas. We focus on large shopping centers with a total area of not less than 50,000 sqm. As for rents, we prefer a percentage of turnover scheme with a minimum fixed rate," says Nikita Shumaylov, Director of Development and Construction, Karo Group of Companies.
Kirill Khudyakov, Head of Marketing and PR at Film Alliance, explains that all cinema operators understand their importance to shopping mall owners, as their chains bring them indirect benefits. That is why cinema operators usually pay low rents. Moreover, the cinema chains now select the shopping malls they want to work with, not vise versa. As a result, about 60% of existing shopping centers operate without movie theaters inside. "Based on these market needs, we have established our company – Film Alliance – in April this year. Our mission is to assist owners of shopping centers in finding their own movie theater operators. We were the first in the market in this segment. Working all over Russia for just 2.5 months, our company has already received 12 projects in Russia, and 4 projects in Moscow," Kirill Khudyakov adds.

Demand
According to experts, the attendance rate at cinemas has been increasing by 15% annually. Even in the crisis year of 2009, according to DVI Group, the cinema visitor flow rose by 12%. Most cinema chains have a smooth pricing policy trying to keep their audience by offering affordable ticket prices.
Nikita Shumaylov remembers that during the crisis, people were spending less money on extra entertainment in cinemas, such as food & beverage sold directly in the cinemas. For example, many cinema viewers were buying cheaper drinks and smaller portions of popcorn.
According to Crocus Group, retail areas, as well as food & beverage areas generate as much as 30-60% income for the cinema chains. Ticket sales bring about 30-40%, approximately 10% of income comes from advertisement and cross-promotion. Gambling zones generate the rest. "In general, profitability of this industry is quite high – about 25%. Given the projected growth prospects of the Russian market, the share of ticket sales will keep increasing," says Olga Antonova, Director of Leasing, Crocus Group.
As experts from Nevafilm Research estimate, an aggregated income of the Russian cinema bars in 2008 totaled $175 million. During the crisis in 2009, this figure was $143.3 million or 18% less y-o-y. As for 2010, the income was $266.1 million, which is 85.7% more than in 2009, and 52.1% more than in 2008. If we analyze the data of Delovaya Rus (Business Russia), Russia's leading cinema chains expect their industry to fully recover from the crisis not earlier than in late 2011.
Generally, the visitor load in the Russian cinemas is currently estimated at 10-20% depending on a cinema format, time, and of course, the film. The maximum load happens on Fridays, Saturdays and Sundays. A seasonal factor is also important. "Public holidays and vacations bring more viewers to movie theaters. The seasonal peak is the New Year holidays. The weather is important as well. Strange or not, but if the weather is nice people typically prefer outdoor recreation, not cinemas. We have more benefits from the rainy weather. On rainy days, a number of visitors increases significantly," comments Nikita Shumaylov.
 
Forecast
Stand-alone cinemas are slowly leaving the market, as they are unable to compete with modern facilities. We should not expect many multiplexes to enter the market in the next three years, as there will be fewer large shopping centers built in Moscow. Given that trend, the most successful cinema chains will actively explore other Russian cities.
The Moscow cinema market will keep growing as well, as many owners of shopping centers below 40,000 sqm will develop this segment themselves or together with movie theater management companies.
Public demand for cinemas will continue to grow, mostly in the fall and winter. If we have more sunny days, the attendance rate may further fall.