The Movie House Massacre

Swelling monsterplexes. Bankrupt chains. Cutthroat competition. A glut of screens leaves the national and local movie-theater business reeling.

When Minneapolis Mayor Sharon Sayles Belton broke ground for a new 17-screen cineplex on downtown's long-dormant Block E last fall, it appeared that our fair city had picked absolutely the worst time to get into the movie business. Throughout the summer, the country's film exhibitors had stumbled gloomily, one after another, into bankruptcy court. The first to go was Dallas-based Silver Cinemas International, which owns the leading art-house chain, Landmark Theatres. In short order, Carmike Cinemas and United Artists Theater Co. followed. Finally, and to the chagrin of Wall Street investors, General Cinema Corporation declared bankruptcy, and industry-leading Regal Cinemas confirmed that it, too, was considering Chapter 11. The cineplex bubble had, by most accounts, burst spectacularly. The August 24 issue of Variety wondered along with many observers whether "a whole industry [can] declare bankruptcy."

The cause, those observers agreed, was overexpansion: A glut of theaters, combined with a depressed box office, meant that exhibitors were competing for increasingly meager shares of a shrinking market. Not surprisingly, the nation's theater chains began closing their less profitable outlets almost at once. Within the next few months, local venues like United Artists' four-screen Burnsville Center theater and General Cinema's Shelard Park theater followed downtown's last picture show, the Skyway, into oblivion. Despite Block E's $134 million worth of bells and whistles, the prospect for a new downtown cinema looked decidedly unrosy: A first-class and a coach ticket on a sinking ship get one to the same destination.

How did the film exhibition industry, once the darling of Wall Street, fall into this financial quicksand? And, perhaps more to the point, what do cutthroat capitalism, corporate myopia, and the commercial real estate market have to do with the average Twin Cities theatergoer's yearning for an Adam Sandler flick and a barrel of popcorn on a given Friday night?

The answer, as is often the case, depends largely on whom you ask. Russ McGinty, who watches the industry locally for the Illinois-based real estate firm of Grubb & Ellis, sees the current tumult as a period of retrenchment. "The big megaplexes are actually doing pretty well," he says. "But they're also siphoning business from older, smaller theaters. Those are the theaters that are going to get weeded out."

Like many analysts, McGinty suspects that the weeding is not yet finished. Of the major local players--Carmike, Marcus Theatres, United Artists, General Cinema, Loews Cineplex, Mann Theatres, and Muller Family Theatres--United Artists and General Cinema may be especially hard hit in the coming shakeout. The problem, McGinty explains, is a surplus of suburban theaters--especially in Maple Grove, Oakdale, Woodbury, and Brooklyn Center. Consequently, the first casualties, he suspects, will be the smaller, older theaters in these locales: The four remaining screens of UA's Eden Prairie theater, the four-screen Burnsville theater, and the six-screen Maplewood Mall theater are all oft-mentioned candidates for demolition.

Size may not be a defense for some older multiplexes. UA's 11-screen Woodbury theater could be eclipsed by a new Carmike 20-screen operation nearby. In Maple Grove, Mann's 10-screen theater could be hurt by an amenity-laden 16-screen megaplex, built by the aptly named MegaStar Cinema and scheduled to open this spring. Meanwhile, a new facility planned near Southdale could siphon business from General Cinema's eight-screen Centennial Lakes site. And, last week, rumors circulated that Loews would be closing its nine-screen Willow Creek cineplex and three-screen Westwind theater (though Willow Creek's manager, denies it). As a general rule, McGinty speculates, any small venue within five miles of a megaplex may soon meet the same fate.

What's happening is, in essence, economic Darwinism. And if the natural selection continues, the low end of the food chain--neighborhood theaters around the Twin Cities--will likely soon be extinct.

 

Stormy as the current climate may be, the turmoil doesn't surprise those familiar with the exhibition business. According to Stan McCulloch, a local film booker and former theater operator in River Falls, Wisconsin, with 50 years of experience in the industry, the latest spate of closings is standard operating procedure. "It's a business like any other. There's so much greed," McCulloch says. "But the competition's gotten more killer. The way it is now, the big guys get bigger and the little guys go to hell."

That mentality, McCulloch continues, is typical of the hypercompetitive film industry and may indeed date all the way back to the 1940s. In those days the majestic palaces that lined Hennepin Avenue in downtown Minneapolis dominated the local film business. Some of those, like the Gopher and Lyric, have since faded into memory. But the State, Orpheum, and migratory Shubert hint at the grandeur of Hennepin's "gilded ladies."

Because these theaters had long been owned or controlled by studio monopolies, McCulloch explains, they were insulated from competition by distribution deals that gave them exclusive access to first-run films 28 days before other area theaters. MGM, for instance, might release The Philadelphia Story at one or two theaters weeks before it appeared elsewhere, and audiences would be forced to congregate downtown to see the film.

Then, in the late 1940s, the U.S. Department of Justice dismantled the studio monopolies. Downtown's stately pleasure domes, stripped of their advantage, were now forced to compete with former second-run houses, including the Parkway Theatre, and now-defunct venues like the Terrace, the Nile, and St. Louis Park's Cooper Theatre. These were, by and large, magnificent places to see a film: Jack Liebenberg's Riverview Theater and Uptown Theater testify to the art-deco elegance of their ilk.

In 1963 the industry changed again when a Kansas City, Missouri, company called AMC Entertainment Inc. introduced the first multiscreen theater. The idea was to give theater patrons more choice: Instead of seeing only whatever film Warner Bros. happened to have released that month, audiences could now choose from six different films playing simultaneously. There was an economic benefit for theater operators, as well. Economies of scale dictated that centrally located multiplexes could be more easily stocked and staffed than those scattered, single-screen theaters. Within a few years, the latter variety was losing business to the ascendant multiplex. Some local theaters, such as the Parkway, turned into discount or adult movie houses; others simply closed. AMC, meanwhile, hung its fortune on the new standard, eventually becoming the industry's King Kong.

Driven by a bullish film economy, multiplexes with four to six screens per theater began to sprout in suburban shopping malls and small towns, sometimes within a few miles of competitors. The logic was simple: Land in the suburbs was cheap, and malls, which were also sprouting like weeds, were searching for stable anchor tenants. The theaters were equally simple: concrete cubes, mostly, with flag-sized screens and no more attention to comfort than a dentist's waiting room (e.g., the recently closed Shelard Park cineplex). They were, in other words, a relatively low-risk venture for theater chains. But in their eagerness to expand, major theater operators often committed to long-term leases on those cheap, available locations rather than buying the properties outright. It was a ruinous mistake.

By the Nineties, the economics of the movie business were again in flux. Deregulated Hollywood was more profitable than ever, and theater chains responded in kind, adding dozens of new theaters. Between 1995 and 1999, industry analysts estimate, the number of movie screens in the U.S. increased almost 35 percent, for a current total of more than 36,400 nationwide. Wall Street also got in on the game: A number of exhibition companies were bought by investment groups whose demand for high profits dictated rapid expansion. Meanwhile, demand for new movies was leveling off. Attendance increased only 18 percent during the same period. And movie theaters themselves were evolving. Starting with AMC's Grand in Dallas, the megaplex was born.

In contrast to older "sloped-floor" multiplex theaters, which generally had fewer than 10 screens, this new breed boasted 12 to 16 screens, with staggered schedules and added accouterments, such as larger chairs, raked "stadium-style" seating for better sightlines, and sophisticated sound systems. Carmike was especially aggressive locally: The chain now owns two of the largest suburban megaplexes in the Twin Cities, Mounds View's Wynnsong 15 and Apple Valley's Carmike 15.

The capital outlay was impressive: Each new megaplex costs the chains between $12 million and $20 million. And, in building these new supervenues, the chains often drew business from nearby, now-outmoded multiplexes. They were, in effect, cannibalizing themselves in the rush to swallow their competition. "It was like the airline industry," observes Bill Irvine, owner of the Parkway Theatre in Minneapolis. "They were trying to crowd each other out."

According to McCulloch, "Plitt was trying to crush Loews, who was trying to crush United Artists, who was trying to crush Carmike." The effect of all this crushing, though, was to oversaturate certain areas, especially prosperous suburbs, while leaving other areas--where neighborhood movie houses had once reigned--underserved. "They cut off their noses to spite their faces," McCulloch says.

A case in point is the Southtown Theater, once located south of I-494 in Bloomington. When the local Mann family built the Southtown in the 1960s, it was the height of luxury: a cavernous 1,200-seat auditorium swaddled in plush carpeting and art moderne ambiance. After General Cinema bought the theater in the 1980s, the chain tried to keep pace with the multiplex trend by subdividing the theater into two auditoriums. And then, in the 1990s, GC essentially killed its own theater by building state-of-the-art megaplexes at Centennial Lakes and the Mall of America. The mall's theater remains one of the 20 most profitable in the country; the Southtown shut its doors in 1995.

According to Irvine, the building boom left the chains financially exposed. "Everybody wants a Mercedes," he explains by way of analogy. "Some people should be driving a Chevrolet. Some of us should just buy a new pair of shoes every six months."

 

Mike Muller, president of local Muller Family Theatres, started selling popcorn in his grandfather's Monticello movie house more than 50 years ago, and has, in the course of the intervening half-century, seen the business ebb and flow. The multiplex bust, he contends, is largely the result of egotism on the part of national chains. "They'd come in, look at the other guy, and say, 'I'll close you up. I'll build right next to you.'"

Muller explains that his own chain, which includes four small-town theaters and megaplexes in Lakeville and White Bear Lake, has survived by staying one step ahead of each building frenzy. Muller's 18-screen Lakeville theater, for instance, which opened in 1998, was one of the first local venues to offer stadium seating. (All of the chain's theaters, excepting the original Monticello house, have now been similarly retrofitted.) Yet the industry's current woes, Muller adds, represent more than the result of aggressive business tactics.

"I blame the film companies to a large degree," he says, noting that before the boom there was an unwritten rule among theaters that only one venue in a five-mile "zone" would play a given movie. Star Wars, for instance, might play at only one or two theaters in a given five-mile radius. Supply was cooperatively curtailed to increase demand.

Unlike the Hollywood studios that produce movies, Muller explains, the theaters that show them have always been relatively narrow-margin propositions. Indeed, the fortunes of exhibitors rise and fall less on the number of people who pay for admission than the number of people who buy popcorn (which costs approximately 10 cents per pound, and brings a 5,100 percent profit). In the late Nineties, the economics of film distribution began to turn against theater operators. Film rental costs, the money paid to distributors by exhibitors to show a given film, climbed steadily. Soon many of the major theater chains were deeply indebted to the film studios that had once owned them outright.

In a long-accepted practice--which, according to McCulloch, started with the release of the blockbuster Gone With the Wind--the studios also took a larger cut of the box-office take during the opening weeks of a film run. Generally, contracts are now staggered so that the lion's share of revenue for the first four or five weeks goes back to the studio. The theater begins to turn a profit only when a movie runs for more than six weeks--a point at which the theater's take increases greatly.

Yet films that in the past might have remained in theaters for months are now moving quickly to VHS and DVD. With the profusion of screens showing the same movie, no eager fan need wait in line to see a show on the opening weekend--not to mention wait till week three of a movie's release. The shorter runs that have resulted from this pattern have led to a decline in the share of ticket sales that go to the theaters.

"It used to be that a film like Gladiator would last an entire summer," Irvine explains. "Now nothing lasts. There's no staying power in the films." (This same phenomenon has had the added effect of virtually starving the discount-theater business.)

And with profit margins already prosciutto-thin, blockbuster-obsessed Hollywood film companies keep finding new ways to financially kneecap struggling theaters. In the case of Star Wars: Episode I--The Phantom Menace, which grossed $400 million for George Lucas and 20th Century Fox, the filmmaker stipulated that exhibitors had to play the movie throughout the summer of 1999, and only in theaters equipped with the latest digital sound systems--which in older multiplexes, might be the venue's only showcase screen. (While this demand was extreme, it is suggestive of the contractual demands now routinely made for predicted blockbusters.) The goal was ostensibly to maintain the technical integrity of the film. And, intuitively, such a cash cow should have delighted theater owners.

The effect, however, was disastrous. Because wide release meant that Episode I was playing on screens at virtually every movie theater in the country, anyone who cared to see it could easily do so in the opening week. What theaters were left with was The Phantom Menace playing to empty theaters through the prime months of the summer. "It was playing on so many theaters that every man, woman, and child in town could see it," Muller explains. "If I had to do it again, I'd probably pass on the picture altogether." Somewhere between 1977's Star Wars and 1999's Star Wars: Episode I, it has seemingly become nearly impossible for movie theaters to stay in the black.

Theaters not beholden to national industry trends--Muller's chain and locally owned Mann Theatres, which is the major exhibitor in the Twin Cities with nearly 70 screens--may weather the tempest without undue strain. The difference is in modus operandi: Mann and Muller, both privately held companies, have neither the debt load nor the voracious demand for profits that drives national chains. Mike Muller, for one, contends that his theaters are "holding their own." (His Lakeville megaplex seems to be doing better than that: Since its 1998 opening, two nearby competitors in Burnsville have shut their doors.)

Michael Williams, director of publicity for Los Angeles-based Landmark Theatres, also maintains that both of his chain's Uptown Minneapolis venues are flourishing. "We're actually growing when [major chains] are saying, 'No more,'" he says. "Our business is in it for a completely different reason. We have a loyal clientele who don't want to fight with thousands of teenagers at the mall. They'd rather go to Lagoon. It's a different atmosphere."

According to Williams, the bankruptcy of Landmark's corporate parent has nothing to do with the art-house chain's performance. It was Silver Cinemas' other major holding, a national discount-theater chain, that got the company into trouble. He adds, though, that the year just past has been slow for everyone in the industry, largely because Hollywood produced nothing like Star Wars: Episode I or Titanic to buoy theater chains through the critical summer months. For Landmark, it was a year without a Blair Witch Project or Run Lola Run. (Though How the Grinch Stole Christmas and Crouching Tiger, Hidden Dragon may herald better days for mainstream and mini-major exhibitors, respectively.)

"I won't lie to you," Williams says. "It's been a rough year everywhere. People just aren't running out to see new movies." Though the box-office doldrums may prove only temporary, it was enough to send overextended theater chains spiraling in the general direction of ruin.

 

But is the situation really so bleak? The short answer is no. "Financially the chains are fine," contends John Grubb, a local film publicist with Grubb-Cleland. "Let me put it this way: We're still getting paid."

The long answer, according to Grubb, is that the spate of bankruptcies is actually part of an industrywide shell game. By declaring Chapter 11, theaters are able to defer some of their debt, as well as squeeze out from beneath leases on cineplexes now rendered obsolete by the megaplex evolution. For the chains, it is simply more efficient to close down older theaters than retrofit them with stadium seating and the latest projection and sound fixtures.

"The question is, Does Joe Public want to see a movie at a theater that's been retrofitted or a new one?" Grubb says. "The chains could retrofit, but it costs a ton of money and they have to shut down anyway.

"The question chains are asking now is: Are these theaters doing business? Regal thought they could put a theater in a beat-down part of town and people were going to come. I mean, in Dallas they went in and put a theater by the railroad tracks in the middle of nowhere and expected it to be successful."

While Grubb expects that nationally the chains will have to trim as many as 10,000 screens, the collateral damage may not be as heavy in the Twin Cities because multiplex overbuilding was not as heavy here. "This is something that's happening nationally. Luckily, fewer mistakes were made here. The reality for the average moviegoer is, it's a win-win situation: You can see any movie you want to see, anytime you want to see it, and you can see it anywhere."

Jim McComb, a Minneapolis real estate analyst who studied the feasibility of a new downtown cineplex for the Block E project, also contends that the crash is less severe than it seems. Yet he is circumspect on the prospects for the industry. "Somebody was giving them a lot of money to expand," he says. "The change in the early Nineties was that Wall Street buyout groups came in and started raising capital to build. They thought they were going to make a killing. So far, they've just shot themselves in the foot. Whether it will lead to gangrene, we don't know yet."

McComb explains that the major problem with the boom is that the expansion went forward with little regard for local demographics: Theaters built state-of-the-art megaplexes whether there were audiences to fill them or not. Until recently, for instance, there were more than 58 screens within 10 miles of Maplewood. Even if every area resident went to the movies every day, the chains could hardly hope to fill that many seats.

"The people running these chains are some of the smartest and most astute in the world," McComb contends. "But they made a bad mistake, and they and their investors lost a lot of money. I guess that's life in the world of high finance. That's sort of a cavalier approach to it, but one thing I always say is: Whenever Wall Street thinks it's reinvented itself, you'd better stand back so you don't get hurt in the crash."

McComb compares the situation to the explosion of retail space in the early Nineties, when malls opened across the country in close proximity to one another (the overdevelopment of retail space in downtown Minneapolis during the late 1980s is an instructive example). Eventually, less profitable malls--St. Anthony Main in downtown Minneapolis, for instance--languished, while established retail outlets consolidated. "We had 30 percent more space than we needed nationwide," McComb says. "All of a sudden, shopping centers started getting bulldozed."

For national theater chains, though, bankruptcy is more a restructuring tool than a death knell. Chapter 11, observers agree, gives the theater chains a loophole: While protecting revenues from creditors, the chains can invest capital in larger, newer megaplexes. All of which means, according to Grubb, that while smaller theaters will certainly close in the Twin Cities, new megaplexes may well spring from their ashes. Already, planned local luxury theaters with bells and whistles like concierge service and private boxes may signal a new trend: gilded lilies growing from the industry's compost.

Indeed, McComb contends that there is room for theater expansion locally, and especially in the downtown Minneapolis core. Because industry analysts estimate that it takes approximately 10,000 people to support one movie screen, he argues, there is actually a deficit of 31 screens in Minneapolis. (While African-American viewers make up an estimated quarter of all movie audiences, black neighborhoods have been mostly neglected by theater chains. The potential for growth in Phillips or the North Side might be suggested by Magic Johnson's successful partnership with the Loews chain in predominantly black areas of Los Angeles, New York City, Atlanta, Houston, and Cleveland. All have gross sales that place them among the top 50 theaters nationwide.) Currently, the only downtown theater is Reading Cinemas' rather shabby five-screen St. Anthony Main venue, which, according to at least one insider, remains viable despite the surrounding shopping area's decadelong atrophy.

Jeff Patterson, an analyst with the real estate company Colliers/Towle who has tracked the exhibition industry since the early Nineties, also suspects that a downtown movie house could fill an unmet demand. He is far from certain, however, that the Block E cineplex, to be built by the small Connecticut-based Crown Theatres, will do so. "There's still demand in downtown, and there are now a lot of people living on the edge of downtown. The big question is, Is Block E going to be developed in such a way as to make all people, including suburban immigrants, come downtown?"

Patterson contends that the recent and little-lamented demise of the Skyway Theater was caused by a failure to attract this target demographic. "The Skyway was just a bad situation," he says. "I'd rather not get into the specifics of it, but the kind of people they attracted and the films they showed just wouldn't mix well with a suburban audience."

The new Block E theater will almost certainly be more attractive than the long-deteriorating Skyway, Patterson says. But, unlike McComb, he notes that amenities alone may not guarantee it will draw a large enough audience to break even. "Out of the whole Block E project, I'm most concerned about the theater. There just isn't enough of a population downtown in the evening to support it, so the whole success of the project is going to hinge on attracting suburban audiences."

Irvine, meanwhile, believes the current trend--building new megaplexes while letting neighborhood theaters atrophy into oblivion--adds up to the same old foolhardiness. "Who heads these companies? Don't they have any foresight?" he says. "It's like, 'Just go ahead and do it anyway, even if it's not feasible.' Don't they bother to study these things? It's nuts! These people are crazy. If you're in the restaurant business, and you see a successful Mexican restaurant, you don't then go in and build three more Mexican restaurants around it, do you?"

"I cannot honestly imagine how Block E is going to survive," Irvine says. "Who's going to want to go downtown to see a movie? Guess what? The same movie is playing right next door. I just think it's an ill-fated waste of money."

The logic behind the new downtown theater, Irvine argues, boils down to a line from a bad movie: Build it, and they will come. And that, he notes, is what got the industry into this mess in the first place.

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