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Movie Theaters Profit from Food, Drink, Ads

While Hollywood is suffering from a box office slump and rapid de-acceleration of video growth, the movie theater business is holding up well despite travails for its suppliers. However, the latest market research indicates that U.S. theater-owner profit has little to do with the sale of movie tickets to consumers.

Kagan Research calculates that cash flow margins for leading theater circuits was a healthy 17.6 percent for the first nine months of 2005. With publicly-traded theater companies still to announce full financials for 2005, the nine-month data through September is the most recent period available.

The 17.6 percent cash flow figure�good for a mature business like exhibition � is better than the 15 percent generated by Hollywood film distributors, although less than cable TV, broadcasters and cell phone operators that top 30 percent, according Kagan data. Cash flow is an indicator of core profitability.

Kagan Research senior analyst Wade Holden says theaters augmented box office revenue with higher takes from sale of food/beverages (also called concessions) and on-screen advertising. For example, the largest U.S. circuit Regal Cinemas � with 6,537 screens � posted a $15.3 million revenue increase in the first nine months of 2005 from food/beverages and $13.1 million more revenue from �other� operations � mainly screen advertising before the featured movie starts.

Historically, theaters earn about three quarters of their profits from the one quarter of their revenue that comes primarily from the high-priced junk food and carbonated beverages they sell -- and to a lesser extent the on-screen advertising. Therefore, the theater business model has apparently moved away from being entertainment-centric, and become more like a typical convenience store.

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