We are not amused - the economics of amusement parks

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Recently, I had the experience of seeing two related events in the business of amusement parks.

First, The Wall Street Journal, one the front page of its Tuesday, August 5, 2008, edition, had an interesting article on the financial troubles of Six Flags and the turnaround plan of its CEO and CFO. The short form is as follows:

  1. Six Flags is in trouble. Without going into too much depth, over the last three years, it lost $105MM, $203MM and $234MM, in 2005, 2006 and 2007, respectively. Although a large chunk of that loss is due to losses from some of its minority interest in other investments (approximately $40MM) and its huge debt load (payments of about $200MM per year), its revenues have hovered between $945MM and $973MM, i.e. not growing significantly, while its operating income has shrunk from $148MM (15%) to $33MM (3.4%). SixFlags has way too much debt, growing expenses and stagnant revenues.  
  2. In order to fix this, the management team is shifting away from its classical customer - the high-octane teenager who wants ever greater thrills - and towards families - smaller rides, lots of kiddie rides, tighter dress codes, etc. The theory is that families will spend more, and more in one shot, than a single teenager. Additionally, the big rides teenagers want cost about $20MM to build (and much more to operate); family-friendly rides are significantly cheaper, and lower-end roller coasters average about $7.5MM. 
  3. Six Flags tried raising prices about $5-10 per person and saw a drop in attendance. The management team was quite surprised to find that attendees are price-sensitive, or that there really is significant price elasticity. 

Second, last week, I was one of those families going to amusement parks, taking my family to HersheyPark, owned and operated by the privately held Hershey Entertainment and Resorts (which, of course, does not provide financial statements to the public). Interestingly, I spoke with several local season pass holders (those who spend $1,000 or more per year to bring the family as often as they like). Apparently, Hershey has been attempting to reduce expenses by cutting back on service where it can, as well as using less-experienced (and hence lower-paid) employees. The season pass holders - who are the bread and butter of the business as they are local and provide reliable cash flow - immediately noticed the differences, and several are considering cancelling their season passes. It is likely they will still come, but if you pay for each visit, you come a lot less frequently and spend less. Interestingly, Hershey is already on the family-friendly model that Six Flags is striving towards: bathing suits are banned outside of the "Boardwalk" water area; there is a huge number of children's rides; etc. 

The key question is, will the Six Flags management plan, such as it appears to be, work? Only the future will tell for sure, but here are some predictions:

  1. Keeping the costs of constructing rides down is the right way to go. Roller-coasters have some element of keeping up with the Joneses ("my ride is bigger than yours"), but unless there is intense competition nearby, there is less of a need. Maintain what you have, build new as necessary, but a new $20MM ride is not going to bring in the masses. No one will pay $40 to go ride the new Space Coaster or Fahrenheit once or twice. 
  2. Family-friendly is theoretically a great idea... but families are far less likely to spend $200 on a day at an amusement park than a single teenager spend $30-40. If they do, it is a once per summer, perhaps twice per summer, event.
  3. Make the parks more appealing to families not just by environment, but by economics. Most families are strained - gas is around $4/gallon (much more in high-tax states like New York, California and Illinois), food prices are multiples of just a few years ago, clothing is more expensive and families have kids to clothe - while $200 for a day at an amusement park is discretionary. Provide ways to make it economically sound for families by tying into their needs, not just their wants, and make their wants better fulfilled. These provide additional revenue and cash-flow management opportunities.

What sort of opportunities arise? Any family with children has constraints on them in terms of food, child-care, rides, etc.

  • Make better line-management (Disney is an excellent example of this); nothing turns a family away more than half an hour on line in the hot sun with a cranky, impatient child. 
  • Provide limited at-ride child-care. Yes, child-care. Parents with two little kids actually want to ride the coaster or the flume, but someone has to stay with the kids. Parents will pay a premium for this, because they get a family day *and* time alone, even if only for 15 minutes. 
  • Provide stroller and bag parking at rides. Parents with kids might want to go, but someone has to watch the bag. Adults online or teenagers don't carry the same massive baggage.
  • Allow food into the park. Yes, it will cut into some of the food sales and the high margins those provide. But families with kids are non-stop hungry, and if the cost is $100 in food on top of $200 in admissions, they are not coming. On the other hand, every family wants to buy some food in the park and will probably spend all day. Let them bring food in, and they will bring one meal and some snacks while buying another.
  • Many many more ideas... 

And last, but not least, retire the debt. This is a crushing debt burden, with monthly payments equal to greater than 20% of revenues. If Six Flags cannot find a way, then Chapter 7 may be the only way to go.

Good luck to them.