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The Popcorn War Has Just Begun. What Will Happen to PVR and Inox?

Jul 24, 2018

Sarvajeet Bodas, Research analyst, The 5 Minute Wrapup

Do you remember Mastercard's famous 'priceless' commercial?

It goes something like this...

Most popular toy for toddler: US $500.

Most popular stuffed animal: US $350.

Most popular picture book: US $60.

Watching her play with a cardboard box: Priceless.

If multiplex companies use a similar version, then it would be something like this...

Movie Ticket - Rs 250.

A tub of Popcorn - Rs 320.

A glass of Pepsi - Rs 220.

A bottle of water - Rs 60.

Experience - Priceless.

Yes, popcorn is more expensive than movie tickets. But people don't question it and end up buying whatever is quoted.

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Just look at the margins.

Samosa of Rs 30 is sold at Rs 120.

Regular Pepsi of Rs 50 is sold at Rs 220.

A tub of popcorn of Rs 30 is sold at Rs 300. That's a margin of 10x!

Coffee, burgers, pizza, and even mineral water are sold at huge mark-ups.

In fact, from an investor's perspective, such businesses are gold mines.

Think about it...

Nowadays, the multiplex is all about 'the experience'.

They are not selling movie tickets and popcorn, but an overall experience.

This means fat margins, high revenue growth, and high profits.

But in economics, they say when a company earns supernormal profit, competitors enter the market.

When this happens, profits are shared, as the market is shared. So supernormal profits won't last in the long-run.

Now, in the case of multiplexes, the threat of competition is low because of consolidation in the industry.

Similarly, single-screen theatres are almost on the verge of extinction. Not to mention, the business is capital intensive. So, the threat of new entrants is low.

Since outside food isn't allowed, multiplexes are free to charge any rate suitable for food and entertainment.

So far so good, isn't it?

But there's one problem: the unforeseen regulatory risk.

It could be in the form of the government passing new rules or orders which could severely impact the overall business.

The case in point is the recent Bombay High Court order. It has asked the Maharashtra government to regulate prices of expensive food items in multiplexes.

Here is exactly what the bench had to say:

  • The prices of food and beverages sold in multiplexes are exorbitant. Sometimes, some food articles there are more expensive than even the movie tickets. A product costing Rs 10 outside is sold for Rs 250 inside the multiplexes. We understand if the state can't permit the public to carry food from home. But, then why can't it step in and regulate the prices of food sold inside the cinema theatres?

So far this has happened just one state, Maharashtra.

But it could easily spread into other states as well.

In that case, the revenue multiplexes earn by selling everything from samosas and popcorns to colas and milkshakes faces a serious risk.

This brings me to an important question; how should we account for such unforeseen risks?

After all, such risks are not predictable.

According to me, there are two ways to go about it.

First is the margin of safety. It's like a seat belt. Having a seat-belt helps prevent potential misfortune, even disaster.

It also allows for slightly imprecise calculations and even mitigates bad luck.

It might surprise you to know that in Smart Money Secrets, we often reject stocks based on this. Kunal wrote to you earlier about KRBL. A margin of safety was one of the reasons we didn't recommend KRBL is Smart Money Secrets.

The second is diversification. Risks may be reduced by diversifying investments in many different companies, i.e. companies in different industries.

Now coming back to the popcorn war, I believe it has just begun. The court hearing will be held tomorrow.

It's going to get really interesting.

Tell us what you think about the popcorn war. How do you think this will play out? Should the government regulate food prices in multiplexes?

Chart of the Day

The food and beverages (F&B) segment is a high margin business segment for listed multiplex owners such as PVR and Inox Leisure. These companies earn around 25% of the revenue from the F&B segment.

In today's chart, we will look at the revenue from the F&B to overall revenue.

Multiplex Companies Earn a Quarter of Their Revenue from F&B

In the case of PVR, the revenue contribution from F&B is up from 23.4% in FY14 to 26.7% in FY18.

For Inox Leisure the revenue contribution from F&B is up from 18.7% in FY14 to 22.7% in FY18.

Interestingly, the impact on profitability is meaningful as the F&B segment's gross margin is about 74.5%. This is because multiplexes don't make killing by selling movie tickets. A big chunk of revenue goes to distributors and producers.

This month, the Maharashtra government stated in the assembly, there will be no ban on carrying outside food inside the cinema theatres in the state. If implemented, the moviegoers will be free to carry outside food inside the multiplex. This will have a big impact on the revenues of these multiplex chains.

Since this announcement, shares of PVR and Inox Leisure have tanked by about 15% and 22% respectively. Brokerage houses have already downgraded forecasted earnings for these multiplex companies.

As I mentioned earlier, margin of safety is important in such cases.

Take the example of this month's recommendation...

The company which we recommended faces several risks such as stringent regulations, geo-political risks, and volatile earnings.

But that didn't stop us from recommending the stock. We believe, the margin of safety available, is a good enough.

We believe, the upside could be as high as 50%.

If you don't have access to Smart Money Secrets, you can get the report by signing up here.


Sarvajeet Bodas
Sarvajeet Bodas
Research Analyst, Smart Money Secrets

PS: Sarvajeet's colleague, Kunal Thanvi is the Sherlock Holmes of investing. As editor of Smart Money Secrets, he is on a mission to reveal the top picks of India's best investors to you. For clean, high quality stocks that won't put your wealth in peril, subscribe to Smart Money Secrets.

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2 Responses to "The Popcorn War Has Just Begun. What Will Happen to PVR and Inox?"

Kashyap Ray

Jul 24, 2018

It amazes me how the person who bargains with the vegetable vendor pays up for popcorn and drinks at a multiplex.
I guess people want to be seen at the right places and " Keep up with the Joneses


parimal shah

Jul 24, 2018

It is also the greed of the multiplexes.
If they had kept the prices reasonable no one would have complained.
Consolidation in the industry made them more greedy and kept raising prices.
Experience is fine but there is a price tag whether you like to call it priceless or not is a matter of subjectivity.

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