As inflation inches closer to the 12% mark, impacting spends across all essential items, the entertainment sector, particularly the film industry, is in wait-and-watch mode. Most production houses, distributors and exhibitors that FE spoke to insist rising ?inflation has not really made any difference as of now?. But almost everyone agrees that if this phase continues, then moviemaking, distribution and marketing costs will take a hit and impact margins in a substantial way.
Several entertainment companies have said that traditionally, an inflationary phase has shown that spends on entertainment go up. Says Reliance Entertainment chairman Amit Khanna: ?Right from the days of the Depression era in America, it has been seen that if inflation is high, the expense on entertainment goes up. Even now, in India, we are noticing that costs may go up but returns do not drop.?
Ranjan Singh, general manager, PVR, says one cannot really ?co-relate inflation and entertainment?. But having said that, it?s a fact that in terms of making movies, production budgets have been affected. And at least in some major urban centres, there has been a fall in multiplex attendance. Now, that may not be only due to inflation. Says Ram Patnaik, research analyst and associate VP, Religare Securities: ?Besides inflation, the other challenges that the entertainment sector faces are quality content, difficulty in increasing ticket prices and contracting people?s costs.?
Another analyst points at the fact that Bollywood too has not delivered too many hits this year, barring Race and small-budget films like Jannat and Aamir, and the Aamir Khan-PVR production Jaane Tu? Ya Jaane Na, thus impacting box-office collections. With prices so high, multiplex spends have taken a hit and there has been a drop in ticket sales across multiplexes in India. Says Patnaik: ?There definitely has been a reduction in the occupancy rate and the footfalls have gone down adding to the woes of distributors and exhibitors.?
According to PVR?s Singh, there have been a lot of other reasons for the drop in audiences in the last quarter like the Indian Premier League of cricket, the content and the absence of a hit film. ?Therefore, to attribute the slack to inflation will be slightly incorrect,? he adds.
?The past six months have been slow for the film industry but it will be premature to attribute that to inflation,? admits Alok Tandon, COO, INOX Leisure Ltd. ?The last two quarters have been bad because of the lack of quality content. There have been just three hits out of the 33 films released compared to last year, when the number of films released in the first half was 21 and the number of hits was six.?
But, points out Tandon, if the current inflationary trend continues then ?as we all know, households respond to a price increase by first cutting back on discretionary spending like visits to movies, eating out and the purchase of branded products.?
At Inox multiplexes around the country, footfalls for Q1FY 09 are 29,38,755, ?not as high as we expected them to be?. The Rs 900-crore plus-Pyramid Saimira group, which is betting big on its food and beverage business at multiplexes, has already had to make some adjustments. Says PS Saminathan, CMD, Pyramid Samaira Theatres Ltd: ?For companies like ours, we have to target little lower capacity utilisation and we should not assume that the average revenue per user could go up significantly. We in Pyramid Saimira are focused on cost control, consolidation and also keeping the growth intact but reducing the margins.?
Saminathan says Pyramid Samaira Theatres anticipated a capacity utilisation of above 40% in the first quarter of 2008-09. ?We achieved 32% in this quarter. There has been a 20% reduction in occupancy, due to inflation as well as IPL. There has been a reduction in average spends on food and beverage in theatres.?
Pyramid cannot even raise prices heavily in the F&B sector. ?Only some amount of price rise can be done.? Some like PVR have not hiked ticket prices, while others like Cinemax have increased prices.
Says Devang Sampat, Sr VP, Cinemax India: ?Every year, we expect a 7% increment, so we hike the ticket rates accordingly.?
Inflationary pressures have pushed up fixed costs too. Although movie costs are the same, variable costs on the upkeep and food have gone up by roughly 10% of the costs incurred earlier. For instance, electricity prices in Gujarat and Maharashtra have been hiked ?by almost 100% in the last six months?, says Vishal Kapur, COO, Fun Multiplex Pvt Ltd, pointing out that since ?electricity costs are almost 20% of our total costs and cannot be compromised with, it has a direct impact on profits?.
The good news is that movie-making costs have not been affected much?not as yet?mainly because these budgets are usually locked a bit in advance. Says Singh: ?Most of the films which are already in production will not be impacted because of inflation, but maybe the ones that are going to be launched will require a bit of reshuffle in the budgeting.?
Singh points out that when you are making a film with a certain budget, there is always a component to take into account the escalated costs. ?This is normally there in all aspects of production, distribution or marketing?. But if the costs escalate, then various kind of solutions like tie-ups, sponsorships or partnerships are brought in to control the costs,? he says.
However, inflation hits all the players in the chain from pre-production to exhibition. The producer bears the burden as he has to bear the costs as well as sell to distributors, as Sampat of Cinemax India points out. ?The producer has to bow to the ever-rising demand of cost of production. He, in turn, expects a good return from the distributor, who asks for more from the exhibitor.?
Ask the players in which regions have inflationary pressures hit the hardest and most say it has impacted urban centres more than the rural. Says Saminathan: ?In urban centres, the inflationary expectation itself creates some kind of a resistance to spending.?
Patnaik believes tier-2 and tier-3 cities or towns are more affected, ?as the pressure on spending on leisure is felt more at that level?.
All this brings us to one key question: will inflation impact growth in the film industry? Says Singh: ?Growth will not really be affected as it?s just a small phase of inflation until now. One or two blockbusters will bring back the crowds and the enthusiasm to the theatres.?
Saminathan is not so optimistic. ?The film industry may not grow at all if inflation continues the way it does.? The Pyramid Samaira MD is already talking about consolidation. ?Small players may not be able to sustain and sell out to bigger players,? he adds.
Patnaik of Religare says the film industry is expected to grow at 13% compounded annual growth rate (CAGR) for the next five years, but admits that any increase in inflation from these levels will marginally impact growth.
Talking about multiplexes, Kapur says the growth is expected to be buoyant this year. ?We will be adding 60-70 screens to our business this year between our different models. This will give us almost 50% growth in terms of number of screens in our company itself. We also see production houses ramping up their products and see a slew of releases in the next six months to a year,? he adds.
