Challenging Climate for Chinese Cinemas

Having fuelled demand for Hollywood film, IMAX and cinema equipment for years, China’s cinema market is entering a challenging phase. Patrick von Sychowski looks at the forecast in the east.

In 2018 China’s cinema market grew to CNY60.65bn (£6.97bn) — that’s an 8.6% growth rate year-on-year (or 7.8% without the service fee), officially dropping to single digit growth and way down from 13.5% growth in 2017. Domestic films accounted for 62% of BO, up 45% year-on-year, making authorities and domestic film studios happy. Imported films were down -4.9%, though big hits such as “Venom” and “Aquaman” helped to rescue Q4. 

Screen growth declined slightly less to 15.48% and continues to outpace the overall box office, meaning that the per-screen average is declining to just CNY925,800 (£106,467) per screen, representing a year-on-year decrease of 6.9%. There were 61,071 cinema screens in China at the end of 2018. Worryingly, average attendance in a major city like Qingdao dropped 11% from 20 to 18 admissions.  The biggest BO growth in 2018 came from Tier Four and Five cities (14.11% and 15.48% respectively), while Tier One cities grew just +4.30%. Screen growth is still fastest in Tier One and Two cities, compared to Tier Three and Four (see charts). 

Dark clouds on the horizon?

Yet there were growing numbers pointing to trouble ahead, with China cinema closures accelerating. In 2017 that figure rose to 245, an increase of 131% compared to 2016. In the first three-quarters of 2018 alone, cinema closures reached 380, the highest in 17 years, representing a closure rate of 3.8%. While BO growth is set to continue, with single digit numbers that would still be the envy of US and European markets, there is declining optimism about the future prospects for the Chinese cinema industry. Looking ahead this year, the refrain amongst domestic Chinese industry watchers is that “2019 may be the worst year in the past decade, but will be the best year in the next decade.” 

Authorities are cracking down on ticket subsidies and fraudulent efforts by distributors to increase the BO takings of films artificially (usually to boost share prices). This has a knock-on effect in a maturing market, where consolidation has left just two third-party ticketing operators. Meanwhile consumers are increasingly drawn to short-form videos and lavish costume dramas such as “The Story of Yanxi Palace”. Yet China’s audiences are also demonstrating increasingly sophisticated tastes, producing surprise hits like “Dying to Survive” (a Chinese “Dallas Buyers Club”) and “A Cool Fish”. The top three hits accounted for 17% of the year’s full BO, the Top 20 were 41%, yet of the top 50 film in 2018, only 12 made a profit, six broke even and 32 made a loss. 

Producer Zhiyuan Zhang predicts that in 2019 China’s BO will grow to just CNY65bn, a growth of just +6.18%, mainly thanks to foreign hits such as “Avengers 4” while domestic films’ takings will be flat. The top 12 films will account for half of the total 2019 BO, though it may also be the year that Chinese science fiction films arrive. There will be further industry consolidation within film production, distribution and exhibition. With the 70th anniversary of the founding of the People’s Republic of China, we can predict that there will also be a great deal of nationalism. All this against the backdrop of a slowdown in the wider Chinese economy and the threat of a trade war with the US. 

Analysts believe the key to future growth will be to increase the quality of domestic films produced, coupled with better cinema membership schemes, technology and incentives to attract regular visits. Customer ranking of Chinese films were up a little last year to a weighted average of 8.98 for the Top 10 films (up 0.04 points), though the Top 30 average of 8.74 was down 0.03 points.

This year is also likely to see consolidation of China’s 48 official cinema operators. Of these, 26 had income less than CNY500m (£58M) last year. With tougher anticipated cinema licences, many small- and medium-size operators are likely to sell out to the majors. There is also a push for diversification of content in cinemas, rather than 50% of all screens in the country playing the same Chinese or Hollywood blockbuster in its opening week. The Year of the Pig is an opportunity for China’s cinema industry to streamline and adapt better for a future without break-neck speed growth. 

Go central and west

Despite the slowing box office, authorities are promoting acceleration of cinema building. In December last year, China’s Film Bureau released “Opinions on Accelerating the Construction of Cinemas to Promote the Prosperity and Development of the Film Market.” This edict, sent to all provinces, autonomous regions and municipalities directly under the Central Government, as well as to private cinema operators, seeks to “promote Chinese film to a new level in the new era,” as part of meeting “people’s growing needs for a better life.” It notes an imbalance in cinema building, with central and western regions not keeping pace with more populous coastal and northern areas.  

“Only by accelerating the construction of cinemas and greatly increasing the number of screens can we adapt to the new era and new requirements, enhance people’s sense of cultural acquisition and happiness, promote continued prosperity of the film market, and provide solid support for the realisation of film powers in order to implement urban and rural development requirements. Let the development of Chinese film more benefit the broad masses of the people,” it reads. It envisions that, by 2020, there will be 80,000 cinema screens across China, more evenly spread and better matching levels of urbanisation and population distribution. Several funding, subsidy and grant schemes are proposed to enable this growth. The number of county-level and township cinemas will have to form the majority of future cinema growth in order for this vision of a ‘balanced’ Chinese cinema market to be realised. A crackdown on piracy and box office fraud is also touted. 

The magic of milk tea… and more

With single-figure box office growth the new normal in China, operators are looking at ancillary revenue streams. This involves everything from setting up cinemas as logistics hubs for e-commerce deliveries to VR arcades and mini-karaoke booths in the lobby. Exhibitors like Wanda, Dadi, Jinyi and Hengdian Cinema are increasingly putting an emphasis on non-box office business for further growth. 

Wanda alone grew its non-box office business by 118% in the first half of 2018 to CNY2.531bn (£291m). Jinyi Cinemas is promoting massage chairs, jukeboxes, doll machines, VR and more. Hengdian Cinemas has created a ‘Feng Teng’ high-end brand, promoting coffee and cocktail bars, VIP lounges, themed bars, Chinese and Western restaurants. Yet while US cinemas are increasingly promoting the in-theatre dining concept, popularised by chains such as Alamo Draft House, Chinese cinemas are not able to follow the path of offering hot food all the way to the luxury recliner for various reasons. The concept of branded coffee bars in cinemas has meanwhile been profitable for the likes of Cineworld and Odeon in Europe, partnering Starbucks and Costa respectively. So Chinese are cinemas are looking to tea as a rescue, specifically milk tea.

Since it was launched in 1996, milk tea has surpassed coffee consumption fivefold in China. What is remarkable is that this growth took place in the past 20 years, whereas coffee has been in China for 130 years. Milk tea consumption is still growing. Milk tea (and its cousin Bubble tea)  is usually produced with milk and added fruit powder and is increasingly an aspirational, affordable luxury item. 

Most recently, Dadi Cinemas launched its ‘10-step fresh fruit tea drink’ as part of its “Movie+” strategic plan that pulls together catering, retail and internet to make it a lifestyle destination. Ent Group observes that if IKEA can attract consumers just to buy a hot dog, so too can cinemas snare tea drinkers, even if they don’t plan on watching a film.

Wanda vs. Dadi

With the outlook for the sector toughening, the rivalry between the two leading cinema operators, Wanda and Dadi, is likely to intensify. Last year, Wanda sold its Wanda Cultural Management unit for its hotels and theme parks, including the Qingdao Oriental Movie Metropolis that was meant to rival Disneyland. Wanda also sold a 12.7% stake in its film unit to Alibaba and state-owned Cultural Investment Holdings Co, with proceeds from both sales used to pay down debt and double down on its cinema empire. 

Wanda remains the largest cinema operator both in China and internationally, where it controls both AMC, Hoyts and the Odeon Cinemas Group. Yet having incurred the disapproval of Chinese authorities for its debt-fuelled overseas expansion, Wanda and its Chairman Wang Jianlin are increasingly challenged at home by Dadi Cinemas, led by its visionary General Manager Yu Xin (Donna Yu). Both chains have adopted different approaches for expanding in China, which has resulted in different fortunes and outlooks. 

Of cinemas that have operated for over two years, 80% of Wanda’s saw a decline in box office in 2017, compared to 63%, 70% and 65% respectively for UME, Jinyi and Hengdian Cinemas. Wanda has expanded in parallel with Wanda Properties building malls, with its focus on Tier 1 and 2 cities meaning it’s been the leading exhibitor in China for the past 9 years. But major urban centres like Shanghai and Beijing have reached multiplex saturation. From 2017, Wanda said it would focus increasingly on Tier 3, 4 and 5 cities. 

Yet Dadi started targeting the Tier 2-and-below market earlier, with its “urban encircling the city” strategy. This was helped by the acquisition of 76 cinemas and 531 screens belonging to Hong Kong’s Orange Sky Golden Harvest, primarily located in Tier 1 and 2 cities. At the end of 2018 Dadi had 1,094 theatres with a total 6,366 screens according to Yi En Consulting. In addition, Dadi has focused on developing its own movie ticketing system and other core technology relating to exhibition, as well as developing partnerships with small and medium sized cinema chains, through its sister company Viceta films, as well as large Chinese film studios. This means that Dadi indirectly is responsible for 30% of China’s total BO, on top of the contributions of its own theatres.

Significantly, Wanda had a total BO of CNY5bn (£575m) in the first half of 2018, compared to CNY3.2bn (£368m) for Dadi in the same period. Yet no.1 Wanda only grew 15.8% year-on-year, compared to 37.7% for the no.2 Dadi, which is also below the average growth rate for China’s cinema market as a whole. As Wanda sells off non-core assets and tries to complete restructuring of Wanda Films, Dadi is doubling down on its “Movie+” and “new retail” strategy to win loyalty of consumers in smaller towns, its ‘secret weapon’ against Wanda. As “Mirror Times” recently observed in comparing the two slugging it out for supremacy in the world’s largest cinema market by screen count, “The tide of the times is rolling forward, and only the trenders can win the world.” Dadi seems confidant that it will lead that trend.