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The ethanol program is even worse than you think
Thanks to the inflating cost of popcorn, the price of movie tickets is expected to skyrocket by as much as 30% this year, according to Ricard Gil, a University of Santa Cruz economist who studies the business. "You're going to see a one- to two-dollar increase in the price of a movie ticket," he said. "And that's being conservative."
Here is the link. So what model is required for this to be true? If movies and popcorn are complements, you might think that higher popcorn prices would imply lower movie prices, to partially restore the cheapness of the overall bundle. But more realistically, the movie is a loss leader to attract buyers of high-margin popcorn. If popcorn gets priced out of buyers' range, movie prices will rise to make up the difference since cheap tickets no longer bring in so much extra revenue at the concession stand.
Thanks to John de Palma for the pointer.
Posted by Tyler Cowen on May 26, 2008 at 08:23 AM in Film | Permalink
Comments
At the risk of stating the obvious, just because you need to raise prices to avoid losing money doesn't mean you can. The airline industry is a prominent example. A bit more surprising: nowadays even oil refiners like Sunoco are losing money, because as high as gasoline prices are, they haven't risen far enough to make up for the spectacular ($135/barrel and counting) increases in oil prices.
It's tough enough these days just to convince consumers to spend the money on gas just to drive to the movie theater. Higher ticket prices? I doubt very much they could make it stick.
Posted by: at May 26, 2008 8:32:46 AM
It seems to me we just need to politicians to stop pandering to vested business interests and promote the obvious.
Algae can be grown to make bio-diesel. It's massively more efficient than corn.
Grow it in tubes to reduced contamination issues.
Put tubes in desert so we don't compete with food crops.
Run your SUV's forever; cheaper; CO2 neutral.
Give the technology away to the entire world.
Stop fighting wars over the flammable stuff.
Have cheaper popcorn/movies.
Not my URL below, but it's relevant.
Posted by: Andrew Downing at May 26, 2008 8:52:23 AM
Are movies really a loss leader at $9?
Posted by: josh at May 26, 2008 9:01:43 AM
I didn't register (so I couldn't read the link) but this doesn't pass the laugh test. Even if I buy it at retail store, the (no-name brand) corn needed for a giant container of popcorn doesn't cost more than ten cents. If that went up to twenty cents, I could see that it could cut profit margins a bit, but not by enough to make ticket prices rise by dollars to offset it--everyone who buys a ticket doesn't buy popcorn now for one thing.
I'm sure lots of theatre costs are rising, and I won't be surprised to see ticket prices rise either, but any analysis that attributes it to popcorn has to be deeply flawed.
Posted by: matt wilbert at May 26, 2008 9:05:26 AM
As a veteran of the movie biz and someone who knows little about economics, I should ask: doesn't it make a difference that concession revenue and ticket revenue head to two completely different sources? Theaters pull maybe 2% from the box office, and that's generous.
That's why, if you like drive-ins, do yourself a favor and buy your snacks there.
Posted by: Brandon at May 26, 2008 9:08:34 AM
I agree with matt wilbert. The actual price of the corn for popping is a trivial part of costs. The labor, the butter maybe (?), the fixed costs, are the main costs for serving popcorn.. But, I don't think doubling or even tripling wholesale popcorn prices is going to cut into the bottom line by enough to notice.
Posted by: liberty at May 26, 2008 10:08:41 AM
"But more realistically, the movie is a loss leader to attract buyers of high-margin popcorn."
That just sounds like an awful business model.
Posted by: Vincent Clement at May 26, 2008 10:33:01 AM
matt,
What you say makes sense, but how to reconcile it with SheetWise's comment in the other recent thread about movie popcorn. After all, increasing kernel "expansion ratios" and lowering the cost per kernel seems to amount to more or less the same thing, and concession operators certainly seem to care a great deal about the former.
Or perhaps they're not the same thing after all... maybe customers are psychologically more willing to pay higher prices for objects of large volume, so a big snack that's mostly air fits the bill, because it's not so filling that customers would opt instead for the medium or small sizes, which exist primarily to make the big format look like a better value for the money.
Posted by: at May 26, 2008 10:44:05 AM
Vincent,
Big Macs are a loss leader to attract buyers of high-margin fries (and not quite so high-margin brand-name sodas). According to Fast Food Nation, fast food chains buy frozen fries for about 30 cents a pound, reheat them in oil and resell them for about $6 a pound (as of about six years ago anyways, pre- food-price bubble).
The only thing wrong with the business model is that not enough people buy the popcorn. Fries are kind of an inseparable part of a McDonalds meal, while popcorn is very much an optional purchase.
Sometimes I wonder why theaters don't try harder to sell tie-in merchandise to theater goers on their way out. On their way in, there isn't enough time, because the movie's about to start; but on their way out, the flow of people leaving the cinema can be directed through a retail gallery with T-shirts, toys, soundtrack CDs, book novelizations, opportunities to pre-order the DVD, or buy the DVD of the movie that the current movie was a sequel to. Or DVDs of other movies that the lead actors were in: Amazon.com does well with "people who bought this item also bought X, Y, and Z", so perhaps brick-and-mortar establishments could give it a try. Add some upscale coffee shops or restaurants or bars where couples can continue their date, since there's not much opportunity to chat in a darkened room where you have to keep quiet. A child care center, so theaters could collect the money that would have been spent anyway on a third-party babysitter? A quick-turnaround laundromat or dry cleaner, so you pass the time watching a movie while errands are done? I guess the margins on concessions are high enough that anything else is just not worth bothering with. Either that, or all these ideas are simply unworkable :)
Posted by: at May 26, 2008 11:18:35 AM
The one major downside of that is the unpredictability of how long a film would stay in theaters. For a theater to invest in all that merchandise (not to mention the cost of the film) to show a flop that goes to the dollar theater in three weeks seems more than a bit risky.
Concerts can likely follow this model because demand for goods and services while at the show is probably fairly inelastic (this show only comes around once every six months to a year, better have the most fun you can while you're there!), just witness the price of beer and T shirts.
Posted by: jn at May 26, 2008 11:26:57 AM
jn,
Yes of course there's the risk that any given movie will bomb and its tie-in merchandise will rot on the shelves. On the other hand, movie tie-in merchandise is a relatively big business, so somebody out there is taking the risk and selling the stuff... just not movie theater operators, at a time and place where consumers seemingly would be psychologically primed to buy. That seems a bit curious.
Posted by: at May 26, 2008 12:29:40 PM
As Brandon said, I find this unlikely since the vast majority of box office revenues go to the studios who make and distribute the films. The theatre owners make money on the concessions, almost exclusively.
-d
Posted by: Dan V at May 26, 2008 2:40:41 PM
It makes a huge difference on the run of the show. First runs pack in the people. but the theatre only makes a few pennies per ticket. That is why you will see a first run disappear to come back for an extended second (and more profitable run).
However, popcorn is a specialty crop that is not like field corn. Popcorn is much more valuable than field corn, it doesn't make sense to change to a crop that pays half as much.
Ethanol bashing is getting crazy! One report has said that gas would be over a dollar per gallon higher if it were not for ethanol. No wonder big oil is mounting an attack on ethanol.
Posted by: Dale at May 26, 2008 6:31:10 PM
I worked for a movie theater in 2000, and was told by one of the long time managers for the company that a large bag of popcorn cost us 25¢ to make, including labor.
We sold that bag for $6.25 at the time.
Posted by: Booklegger at May 26, 2008 7:55:50 PM
Because the marginal profit on a bag of popcorn costing $8 isn't high enough? The biggest component of the cost of a bag of popcorn is probably the real estate the theater sits on and the minimum wage they pay some usher to walk around sweeping that crap off the floor.
Posted by: TH at May 27, 2008 9:33:35 AM
Shout this from the roof-tops Tyler: Field corn is different from sweet corn! Field corn is used as an input for meat production, not feeding humans.
Also, the refuse from corn-based ethanol production - distiller's grain - is a high quality feed. Think about it - what does the conversion of corn into ethanol take from the corn? Starch. Not much valuable to pigs, cows, or chickens.
Everyone loves to jump on ethanol - and I'm certainly no fan - but as with the false arguments against the minimum wage (it hurts small businesses!) just ending up in the right place is not enough. You need to have accurate arguments.
Posted by: Jake at May 27, 2008 11:06:33 AM
how can a movie, at $8+ per person, with no marginal cost to the theater other than a little piece of paper for the 'ticket' possibly be a loss leader?
Posted by: brucem at May 27, 2008 1:59:51 PM
I went to the movies a couple weeks back and saw this guy filling his popcorn bag about a third full with butter! At first I thought the poor man was just asking for a coronary right then and there. Now that I've had time to think about it, maybe he was just collecting some biodiesel for the ride home...
Posted by: BobN at May 27, 2008 2:10:29 PM
I also agreee with Wilbert that this doesn't pass the laugh test. It is yet another ad-hoc attempt to explain by "fundamentals" what is really happening, namely dollar inflation and the resulting "speculation" and "hoarding" in commodities. In the case of the ethanol explanation, there is also more than a whiff of oil company propaganda: for the first time, oil companies feel seriously threatened by ethanol.
Posted by: nick at May 27, 2008 2:31:28 PM
Um, why don't the movie theatres just raise the price of popcorn?
Posted by: RZ at May 27, 2008 5:15:08 PM
What a bunch of bad information out there on ethano. Does anyone know that a third of that bushel of corn remains as protein. A highly valued by product of ethanol. As for the price increase of popcorn, I used the $3.50 price increase quoted from 2 differant articles for a 35 pound bag of popcorn and visited our local movie theater. It comes out to less then 2 cents increase per large tub of popcorn. Oh, and by the way, they charge 50 cents for a squirt of butter. You nay sayers of ethanol must think everything you read in the media must be true.
Posted by: 4 ethanol at May 27, 2008 8:42:01 PM
brucem,
The (overwhelming) lion's share of the ticket price goes to the movie studio that made the film, not to the movie theater operator.
Posted by: at May 28, 2008 8:50:24 AM
Also, the cost to the theater associated with the movie includes paying the salaries of the people who sell you your ticket and check your ticket, and the projectionists. Arguably the floor sweepers too, since eating and drinking in the dark with your eyes directed elsewhere is much messier than usual.
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