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Investment in the Theme Park Business: Predicting the Unpredictable?

The theme park business is notoriously challenging. It demands near constant reinvestment and is at the mercy of a whole raft of variables (most entirely out of the operator’s control). There are far easier ways to make money than running a theme park.

A shrewed investor might be well advised to take his or her money elsewhere. So how should one make sense of a fiendishly complicated business? Where  should potential Dr. Pieter C.M. Cornelis Fontys Academy for Creative Industries investors look for guidance?

Dr. Pieter C.M. Cornelis (right) is a Lecturer in Theme Park Concepting & – Economics at Fontys Academy for Creative Industries in The Netherlands. He has a PhD. from Tilburg University in Theme Park Management. He has written a book specifically about the theme park business and its return on investment (ROI), aiming to shed light on this tricky subject: Investment Thrills: Managing Risk and Return for the Amusement parks & Attractions Industry

Here, he introduces his book and outlines some of the challenges it addresses.

In 2013 it was decided to transform Toverland (Sevenum, the Netherlands) from an amusement park for small kids into an all weather theme park for the whole family.

By Dr. Pieter C.M. CornelisFontys Academy for Creative Industries

With an capex/revenue ratio of 125%, meaning a €14 million investment in those days, the park invested heavily in a new outdoor area called the Magical Valley.

toverland logo
Toverland logo

Such a high capex/revenue-ratio is a rare and risky strategy, as a result of which there was little benchmark data available. If it were to fail, the park would have gone out of business in one fell swoop. This is a problem confronting most amusement parks. We happen to be dealing with very high fixed and sunk costs. The levels of investment are increasing, competition is increasing, the consumer is becoming more critical and thus the uncertainty surrounding investment is steadily growing.

Although we had faith in the effectiveness of the investment, we had not expected the outcome matching our prediction so closely. Attendance grew from 500,000 in 2012 to near 700,000 in 2015.

So now here I am several years after the appearance of my dissertation and the Toverland experience. Now I actually have more questions than answers. Was it a lucky shot? Or can one strip the so-called X-factor of its myth and uncertainties and arrive at certain regularities or patterns in the area of theme park investments?

I therefore decided to persevere in my quest for the effects of investments in the theme park industry by publishing a second book on the subject: Investment Thrills: Managing investment thrills book coverRisk and Return for the Amusement Parks & Attractions Industry.

Predicting the Unpredictable 

The investment issues in the theme park industry relate to a highly complex interplay of mutually correlated factors and decisions in which the so-called subject matter X-factor – unpredictability – plays a major role.

Decisions are almost never made in a fully controllable context, and that means that a change in a given unforeseeable factor can have a direct impact on the outcome of the decision. Major unforeseeable events such as earthquakes, terrorist attacks, and bank scandals in the macro environment can literally turn the theme park world on its head. In such an event, any pattern degenerates into a random phenomenon.

But even factors in the meso environment, such as the response of competitors and/or fickle consumers can severely upset the cause-and-effect relationship between the investment and its expected outcome. While many of these factors can be played out in scenarios in order that they may be accounted for beforehand, the inflexibility of investments (arising in part from their long lead times and large number of stakeholders) make it difficult to adequately respond to a sudden change in the environment.

A Good Dialogue with the Outside World

Although the above-mentioned factors and situations can have major consequences for the effect of an investment, I believe at the same time that most investments suffer little from the extremes in the above-mentioned influencing factors.

Many things can be properly foreseen and we don’t always have to be completely thrown off balance by, for instance, a competitor who suddenly lowers his price in response to the threat he perceives from your investment, or by a local authority which decides to refurbish the road network around the park. Proper monitoring of the market and a good dialogue with the surrounding world should ensure that the above-mentioned factors have a minimal impact on the expected outcome of the investment. These factors would then be already foreseen and accounted for beforehand.

This is not to say that one can reduce the issue of investment to a simple calculation, because that it is decidedly not. In this way I hope to have made clear that not all factors previously thought to be wholly unpredictable are truly so. This is just as well, since in the absence of all of these unpredictable factors, predicting the effects of investment is itself unpredictable enough.

A Yield Model for Theme Park Investment

I consider the Return on Investment (ROI) from theme park investments to be the resultant of budgeting decisions made in the light of the context and (processing of the) content. Cast in a simplified yield model, it is as follows:

theme park ROI return on investment

We can express the Return on Investment in various ways. However, it fundamentally amounts to stating that the additional revenue (during a certain period) must be higher than the additional costs associated with the investment to speak ultimately of a good investment.

Additional revenues mainly come from extra attendance times the spending per cap of these attendance plus the extra revenues of existing visitors (f.i. because of an increase in admission due to the new investment). The main additional costs related with the investment are depreciation, costs of financing the investment and additional operational costs associated with the investment.

Budget decisions ultimately constitute the basis for the effects. Given the same context and (processing of the) content, the magnitude and frequency of the investment will in the end determine the magnitude and duration of the effects. All other things being equal, an investment thrillsinvestment of €1 million (magnitude) every two years (frequency) has more effect than an investment of €100,000 every three years.

The X-Factor of Content

I split the context in which budget decisions should be made into two types as follows, growth potential and miscellaneous context factors. By growth potential I mean how the current attendance to the park relates to the market potential, given the nature of the catchment area and existing competition.

The difference between the current attendance and the market potential is the ultimate growth potential of the investment.  By miscellaneous context factors I mean the complex of factors which influence the effects of investment, but lie outside of the immediate sphere of influence of budget decisions. These miscellaneous context factors can be split in controllable and uncontrollable miscellaneous context factors.

By content I mean the same as the (on-site) staged theme park experience. An important question in the industry is: what is the relative weight of content with respect to context? In other words, is the effect of the budget decision primarily determined by the X-factor of the content of the investment? (Such as the choice and quality of the type of attraction, the amount of storytelling, theming, eye for detail, use of Intellectual Property, quality of the show control, etc.). Or do the context factors determine the bandwidth within which the content can be effective?

Another important aspect of the content factor is how effectively it is processed. In the simplified theme park investment yield model I incorporated three factors, namely Motivation, Ability, and Opportunity (MAO). For optimal processing of the content, all these three factors must be optimally applied.

The Importance of the Growth Potential

Depending on the growth potential (the first context factor), the investment can lead to:

• A permanent growth in attendance (PG-investment)

• A temporary growth in attendance (TG-investment)

• A slowdown in the growth of attendance (SG-investment)

In the first case (PG-investment) the attendance increases to a new equilibrium value. The investment ensures that the attendance reaches a new, higher level. This can, for instance, happen at the start of the product life cycle of the park, when the investment provides for a higher penetration rate in the catchment area. Based on the capex/revenue-ratio different scenarios can exist, like permanent growth par-investment (PGpar) or investment thrills insidepermanent growth accelerate investment (PGacc). With the first variant, a market-based (par) capex/revenue is invested with the aim of pushing the attendance to a new, higher equilibrium point.

Bounce Backs and Equilibrium

With the second variant, the park makes an above average capex/revenue investment. This is in order to more quickly boost the attendance to a new and higher equilibrium point. The permanent growth can have two variants, complete permanent growth or limited permanent growth (with bounce back effect).

In the first case, the attendance increases as a result of the investment and subsequently remains at the higher level. In the second case, the attendance increases as well. However, after the first and second-year effect a slight bounce back can be observed. After an initial increase in the attendance, this number will subsequently slightly drop, eventually reaching a new equilibrium point higher than the original pre-investment starting point.

This latter situation occurs in parks undergoing a transition from the PG to the TG investment form, and the situation therefore gradually approaches the attendance asymptote. The degree of bounce back is especially dependent on the proximity to this asymptote. The closer the attendance approaches the asymptote, the larger the bounce back effect, and thus the smaller the permanent effect of the investment. See figure 1 below for a graphical depiction of the different situations.

theme park roi
Figure 1 Graphical depiction of the effect of investments in different situations

Avoiding Extinction in the Theme Park Business

In the case of a temporary increase (TG-investment), the attendance will increase for one or more years and then fall back to the previous level. That previous level is the park’s so-called equilibrium asymptote point. This is meant as an asymptote in a modern way, which means that the attendance curve may cross the line, but in the end the curve will get ‘close’ to the line.

For TG-investments the asymptote is the equilibrium. For PG-investments the equilibrium is (still) lower than the asymptote. Long lasting parks in a saturated market will typically exhibit this pattern. Towards the end of the PLC it is possible that an investment no longer results in visible growth, but will instead extend the lifetime of the park somewhat; this is the third scenario (SG-investment).

In all cases these effects only lead to a temporary increase in the attendance, after which the investment has been literally extinguished. Figure 2 (below) makes this graphically clear for a situation where only a 1-year extinction effect applies. The effect is thus extinguished after two years. The ultimate effect of the investment is, at any rate, the temporary difference between the waves and the blue dotted line below them. We must in addition realize that not investing would lead to a gradual drop of the equilibrium point, and that new investments in later years would have a delayed effect.

The occurrence of these effects, is also attributable to the investment, so that the actual effect is greater than the immediately visible effect. I made that clear with the shading in figure 2b.

theme park roi
Figure 2 Graphical depiction of TG and SG investments extinction patterns

Predictability within Certain Margins

Under normal circumstances we should be able to assume that the effect of a given investment should amount to x% plus or minus a (relatively small) standard deviation. Under abnormal circumstances the bandwidth will broaden considerably and therefore the effect will be x% plus or minus a multiple of the standard deviation.

The questions that are relevant here are of course:

(1) what are normal PG/TG/SG-circumstances

(2) what is the magnitude of x%,

(3) what is the standard deviation and

(4) what is meant by ‘several times the standard deviation’?

The book is primarily intended to provide answers to the questions aforementioned. However, it will also raise many new questions. After all, the more we know, the more we are aware of what we do not yet know. I hope this book stimulates further exploration of the question of investments in the theme park industry. I welcome the reader to engage in discussion with me and others.

The knowledge we gain together shall lead to better business decisions in our industry. As a result these will form the basis for a long term success of the best industry in the world.

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Lalla Merlin

Lead Features Writer Lalla studied English at St. Hugh’s College, Oxford University. A writer and film-maker, she lives in rural Devon with husband, children, and an assortment of badly-behaved animals, including an enormous but friendly wolf.

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