Safe and Sound

"Soon there will be nothing: no theaters, no movies, no books, only television," once exclaimed a well-known Russia`s domestic actor in an Oscar winning film. Frankly, not so many of us really believed a word he was saying even those days. Now it is obvious that rumors concerning the death of "the most important of the arts" were exaggerated. Today, we see that television is in trouble while one has to think ahead to book a ticket to see a blockbuster premiere. For example, tickets for Avatar were sold in cinemas many days prior to the opening night.

Screens all over the country

The triumph of the multiplex blue giants with tails clearly demonstrated that the cinema industry is not at all frustrated by the ongoing crisis. Revenues generated by James Cameron`s Avatar in Russia amounted to $114,086,273. During the first weekend, the film generated $21 million in Russia, which was the third result in the world after the U.S. and Canada.

"Resuscitation" of the domestic cinema started in Moscow in 1996, when the first modern Kodak movie theatre with 570 seats opened on Nastasyinsky Lane. The cinema was equipped with modern stereo Dolby sound systems. Over the next 14 years, we saw a real breakthrough in the field of film distribution. In many Russian cities, hundreds of new modern cinemas and multiplexes with huge screens have opened. All of them were of excellent sound quality, equipped with comfortable seats, air conditioning and popcorn on sale. According to Nevafilm Research, as of June 1, 2010 a total number of modern cinemas in Russia reached 815 (2,216 auditoriums). Of them, 362 were digital cinemas, 501- digital auditoriums and 496 3D auditoriums. Today, there are 111 modern cinemas and 478 auditoriums in the Moscow region. Of them, 66 digital cinemas, 113 digital theaters (all in 3D) and 58 multiplexes (cinemas with 8 or more auditoriums) with a total of 533 screens. Of these, 53 multiplexes have 125 digital theaters (also in 3D). A major part of the movie theaters are now accommodated in shopping and entertainment centers.

A growing number of multiplex cinemas in shopping malls is a natural process. In this case, cinema operators solve many problems that relate to administrative and economic issues, namely garbage removal, territorial cleaning, safety and guards, etc. Another positive thing is that if a cinema is located in a shopping center, both parties can organize joint PR and advertising campaigns.

Rental rates for operators of movie theaters in shopping centers, according to GVA Sawyer, are $115-150/sqm/year (triple net). Maintenance charges of cinema operators in shopping centers, according to Cushman & Wakefield Stiles & Riabokobylko, vary from $40 to $70/sq m/year, depending on location. If we talk about general operating expenses of cinemas, they can reach up to 75% of total revenues.

The leading Russia`s cinema operators in 2009 were Karo Film, Cinemapark and Kinomax. These companies account for 21.6% of the total number of tickets sold and 26.3% of revenues. To date, Karo Film owns 32 movie theaters, of which 19 cinemas are in Moscow and the region, 8 cinemas are in St. Petersburg, and 5 cinemas are in other regions. The total number of seats now reaches 29,077. "In 2009, the multiplex Karo Film opened in Spectrum shopping center located near Teply Stan metro station in Moscow," says Igor Ilchuk, CEO of Karo Film. "The cinema has eight auditoriums for 1,280 seats. One of them is equipped with digital cinema, which allows viewers watching movies in 3D.

In early March of 2009, another Karo Film cinema opened in St. Petersburg on Nevsky in one of the city`s largest hotels – the Moskva. It has the only cinema with 393 seats.

Does Russia need cinema giants?

The opening of a new multiplex cinema is not cheap. According to Astera, investment in the construction of the only room in a multiplex can range from $150,000 to $500,000. Therefore, the economic crisis could not but affect the multiplex cinema business. Since the beginning of 2010, 11 new modern multiplex cinemas with 46 auditoriums have opened in Russia. For comparison, during the first three months of 2009, according to Nevafilm Research data, 71 auditoriums opened in 9 multiplex cinemas. Apparently, mall developers are now trying to save on movie theaters. On the other hand, no shopping and entertainment center owner would create problems for a multiplex cinema because the latter is usually its anchor tenant. "Multiplexes are mall anchors that generate a stream of visitors and build customer loyalty to the benefit of the whole shopping center," reminds Vyacheslav Korkin, Senior Consultant at Magazin Magazinov in association with CB Richard Ellis. "At the same time, multiplexes increase visitor streams at all shopping galleries. It is unlikely that buying a ticket to a movie theater, a shopping center visitor would go to a hypermarket, but he can easily visit a next-door bookstore or a boutique selling movies and music. Also, on the way to a multiplex, a visitor can see shop windows where he would find some interesting goods and go back to the mall the next day." The Gortis company conducted a very interesting study in 2008. It turned out that only 9% of thosewho visit shopping and entertainment centers initially go there just for shopping, 22% of visitors go to the mall just to have fun, while 69% of visitors come to buy something and have fun at the same time. Thus, two thirds of visitors go to malls to satisfy both needs, so they would not come if you take away one of their needs.

Only time will tell if today`s trend to reduce a number of cinemas in Russia`s shopping malls was the right decision. Based on the International practice, cinemas are usually classified by a number of auditoriums: one-room cinemas, mini-complexes (2-7 rooms), multiplexes (8-15 rooms), megaplexes (16 rooms and above). The megaplex format in Russia is represented by the only theatre Titanic-Cinema located in WayPark shopping center (MKAD, 71 km). It consists of 16 rooms. The list of other large cinemas contains Kinostar De Luxe (11 auditoriums, 3,100 seats), Kinostar Khimki (12 auditoriums, 3,500 seats), Formula Kino-1 next to Auchan-Marfino (12 auditoriums, 2,106 seats), and KARO Film October (11 auditoriums, the premiere hall with 1,518 seats; the total number of seats exceeds 3,000).

Does Russia need such giant cinemas? "There are many megaplexes in the U.S. that consist of 20-25 auditoriums," comments Vyacheslav Korkin. "Russia is moving in the same direction, but it is too early to tell when the country will have a comparable with the U.S. number of cinemas. In the U.S., it is a common thing to visit every premiere. Moreover, not only teenagers of 15-17 years do so, but also representatives of older generations, let us say 50-60 year-old people. We do not have such a tradition in Russia yet."

No cinema at all?

Nowadays, it is a rare case when a cinema is closed down in Russia. Even during the crisis. Since construction of a multiplex is pretty expensive, a required number of auditoriums is carefully calculated before the project starts.

"During the crisis, we saw some cases when reconstruction of movie theaters was suspended because of a lack of funds," recalls Vyacheslav Korkin.

According to Nevafilm Research, in January-March of 2009, 31 auditoriums in 9 movie theaters were closed. Some of them later on continued to work under the control of other operators.

"Unfortunately, in 2009 we had to close a movie theater in Orekhovo-Zuyevo. It happened because of modified terms of rent," says Igor Ilchuk, CEO of Karo Film. "The global financial crisis has created a difficult situation in the country. In this particular case we were offered higher rental rates in dollar terms that seemed unacceptable for us. Therefore, Karo Film decided to close the cinema. In addition, this movie theater in Orekhovo-Zuyevo did not meet our expectations in profitability terms."

In the first quarter of 2010, four movie theaters (8 auditoriums) were closed; half of them was closed for routine upgrades and will become operational this summer.

"A number of new movies has decreased during the crisis. Nevertheless, we cannot say that people are rarely going to movie theaters. For example, Ice Age has generated record revenues," continues Vyacheslav Korkin. "We know that many shopping centers during the crisis made concessions to movie theaters. However, both parties prefer not to disclose the cases and details of lowered rental rates."

According to Igor Ilchuk, the cinema market was least affected by the crisis, as going to the cinema remains the most accessible way of outer entertainment for many. We see new movies shown the same way as we see the same number of spectators filling movie theaters as before. Prior to the crisis, the cinema audience had an ample choice of movies, so they were very selective when thinking about which film to go to watch. Therefore, a total number of tickets sold and total cash generated have only been increasing.

One-room movie theaters were hit by the crisis most of all. "If we talk about one-room cinemas, they are currently facing significant problems," Igor Ilchuk estimates. "The current cost-based model and concept of movie theaters demonstrate that one-room cinemas have little prospects to develop from the profitability standpoint. That is the reason why their number is generally decreasing. As we can estimate, the future belongs to multiplex cinemas."

Multiplex cinemas offer more options than regular cinemas. There is no need to wait for a movie to start. The Avatar movie, for example, was displayed every 20-30 minutes. Therefore, the future of one-room cinemas seems obscure. Some time later, they will probably cease to exist giving way to modern multiplex cinemas. However, a few freestanding single-screen cinemas will remain as museum exhibits.

Going digital

A trend of 2010 clearly shows that many cinemas are updated to show digital format movies.

Digital movie theaters first appeared in Russia in October of 2006 when the first DCI opened its doors in St. Petersburg. As of July of 2009, there were already 161 digital cinemas in the country, which accounted for 8% of the total number of movie theaters, of which 25% were based in Moscow.

By the time of the Shrek Forever After release in late May of 2010, according to Nevafilm Research, there were approximately 490 digital cinemas in Russia, 99% of which were equipped with 3D displays. As of May 27 of this year, digital screens were in nearly 360 Russian cinemas, representing 44% of the modern cinema market.

Since the beginning of 2010, a number of digital cinemas in Russia has increased by 60% (a total of 38 cinemas). Thus, the digital network is growing 3.5 times faster than the total number of cinemas.

Federal cinema chains are now directing more resources to "digitalize" their cinemas. "A number of 3D movies is growing, so we continue to upgrade our cinemas with appropriate equipment," comments Igor Ilchuk. "As of today, Karo Film has 23 digital auditoriums that are part of our movie theater chain counting 19 outlets."

We know that Cinemapark has a special program to equip two or three more auditoriums in each of its multiplex cinemas to correspond to the 3D format. All Kinostar movie theaters (four per each multiplex) have digital screens, the Luxor has 1.7 3D screens, Five Stars has two rooms equipped with 3D. Kinomax and Kronwerk Cinema have only 30% and 50% (respectively) of their cinemas equipped with 3D facilities.

"The main motivator of digital cinemas is a growing number of 3D releases; nearly all blockbusters are now available in the digital format. The same concerns a so-called alternative content (opera, concerts, sports) that is gradually moving towards digital cinemas," comments Ksenya Leontieva, Senior Analyst at Nevafilm Research. "Major cinema chains open one-two 3D auditoriums per each of their movie theaters. Independent cinema operators are buying digital projectors to display 3D movies in order to gain access to the "first screen" films." The analyst says that the main obstacle to proceed with 3D technologies in the country is the lack of state support. Other problems are that a VPF-model does not work and there are no intermediary companies involved in the integration of digital film equipment.

Автор: Tatyana Demidova

Commercial Real Estate №13 (142), July, 1-15 2010