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

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.

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.